In the fourth quarter of the current year, Mega-KnowlesEnterprises (âCompanyâ) announced its plan to acquire 85% of theoutstanding 100,000 shares of El Blanco de España (âTargetâ) commonstock in a business combination. Targetâs financial statements arereported in accordance with IFRS, while Companyâs financialstatements are reported in accordance with US GAAP. Company willaccount for the transaction in accordance with ASC 805, âBusinessCombinations.â On the acquisition date, Company paid $50 million incash and issued 50,000 shares of Company common stock to theselling shareholders of Target. Companyâs share price was $135 onthe announcement date and $125 on the acquisition date. Targetâsremaining 15,000 shares of common stock had been purchased for $6million by a small number of original investors. These shares havenever been actively traded. Using other valuation techniques(comparable firms, discounted cash flow analysis, etc.), Companyestimated the fair value of Targetâs non-controlling shares at$10,000,000. The parties agree that Company would issue to theselling shareholders an additional 50,000 shares contingent uponthe achievement of certain performance goals during the first 24months following the acquisition. The acquisition date fair valueof the contingent stock issue was estimated at $3,750,000. Targethas a research and development (R&D) project underway todevelop a cure for neck cancer. Company estimates that thetechnology has a fair value of $1.5 million dollars. Companyconsiders this R&D as in process because it has not yet reachedtechnological feasibility and additional R&D expenditures areneeded to bring the project to completion. No assets have beenrecorded in Targetâs financial records for the R&D costs todate. Targetâs other assets and liabilities (at fair values)include the following:
Current Assets 1,500,000
Investments 2,000,000
Property, Plant & Equipment 45,000,000
Intangible Assets 3,000,000
Accounts Payable 1,000,000
Neither the receivables nor the payables involve Company. Answerthe following questions citing relevant support from the ASC andIFRS. 1. What is the fair value of the consideration paid byCompany to acquire its controlling interest in Target? Itemize eachcomponent separately.
In the fourth quarter of the current year, Mega-KnowlesEnterprises (âCompanyâ) announced its plan to acquire 85% of theoutstanding 100,000 shares of El Blanco de España (âTargetâ) commonstock in a business combination. Targetâs financial statements arereported in accordance with IFRS, while Companyâs financialstatements are reported in accordance with US GAAP. Company willaccount for the transaction in accordance with ASC 805, âBusinessCombinations.â On the acquisition date, Company paid $50 million incash and issued 50,000 shares of Company common stock to theselling shareholders of Target. Companyâs share price was $135 onthe announcement date and $125 on the acquisition date. Targetâsremaining 15,000 shares of common stock had been purchased for $6million by a small number of original investors. These shares havenever been actively traded. Using other valuation techniques(comparable firms, discounted cash flow analysis, etc.), Companyestimated the fair value of Targetâs non-controlling shares at$10,000,000. The parties agree that Company would issue to theselling shareholders an additional 50,000 shares contingent uponthe achievement of certain performance goals during the first 24months following the acquisition. The acquisition date fair valueof the contingent stock issue was estimated at $3,750,000. Targethas a research and development (R&D) project underway todevelop a cure for neck cancer. Company estimates that thetechnology has a fair value of $1.5 million dollars. Companyconsiders this R&D as in process because it has not yet reachedtechnological feasibility and additional R&D expenditures areneeded to bring the project to completion. No assets have beenrecorded in Targetâs financial records for the R&D costs todate. Targetâs other assets and liabilities (at fair values)include the following:
Current Assets 1,500,000
Investments 2,000,000
Property, Plant & Equipment 45,000,000
Intangible Assets 3,000,000
Accounts Payable 1,000,000
Neither the receivables nor the payables involve Company. Answerthe following questions citing relevant support from the ASC andIFRS. 1. What is the fair value of the consideration paid byCompany to acquire its controlling interest in Target? Itemize eachcomponent separately.
