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Example BCG 2-35 provides an example of the general application of the acquisition method in a business combination.
EXAMPLE BCG 2-35
Applying the acquisition method
Company A acquires all of the equity of Company B in a business combination. Company A applied the acquisition method based on the following information on the acquisition date:
  • Company A pays $100 million in cash to acquire all outstanding equity of Company B.
  • Company A incurs $15 million of expenses related to the acquisition. The expenses incurred include legal, accounting, and other professional fees.
  • Company A agreed to pay $6 million in cash if the acquiree’s first year’s postcombination revenues are more than $200 million. The fair value of this contingent consideration arrangement at the acquisition date is $2 million.
  • The fair value of tangible assets and assumed liabilities on the acquisition date is $70 million and $35 million, respectively.
  • The fair value of identifiable intangible assets is $25 million.
  • Company A intends to incur $18 million of restructuring costs by severing employees and closing various facilities of Company B shortly after the acquisition.
  • There are no measurement period adjustments.
  • Company A obtains control of Company B on the closing date.
How should the acquisition be recorded?
Analysis
The following analysis excludes the accounting for any tax effects of the transaction.
Identifying the acquirer (BCG 2.3)
Company A is identified as the acquirer because it acquired all of Company B’s equity interests for cash. The acquirer can be identified based on the guidance in ASC 810-10.
Determining the acquisition date (BCG 2.4)
The acquisition date is the closing date.
Recognition and measurement on the acquisition date (BCG 2.5)
Company A would recognize and measure all identifiable assets acquired and liabilities assumed at the acquisition date. There is no noncontrolling interest because Company A acquired all of the equity of Company B. Company A would record the acquired net assets of Company B in the amount of $60 million ($95 million of assets less $35 million of liabilities), excluding goodwill, as follows (in millions):
Tangible assets
$70
(plus) Intangible assets
25
(less) Liabilities
35
Acquired net assets
$60
Company A would not record any amounts related to its expected restructuring activities as of the acquisition date because Company A did not meet the relevant criteria. The recognition of exit/restructuring costs would be recognized in postcombination periods.
Recognizing and measuring goodwill (BCG 2.6)
Acquisition costs are not part of the business combination and will be expensed as incurred. Company A would make the following entry (in millions):
Dr. Expense - acquisition costs
$15
Cr. Cash
$15
The consideration transferred is $102 million, which is calculated as follows (in millions):
Cash
$100
Contingent consideration—liability
2
Total consideration transferred
$102
The acquisition results in goodwill because the $102 million consideration transferred is in excess of the $60 million identifiable net assets acquired, excluding goodwill, of Company B. Goodwill resulting from the acquisition of Company B is $42 million and is measured as follows (in millions):
Total consideration transferred
$102
Less: acquired net assets of Company B
(60)
Goodwill to be recognized
$42

1 The contingent consideration liability will continue to be measured at fair value in the postcombination period with changes in its value reflected in earnings.
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