Business combinations and goodwill impairment treatment
Use the Internet to research two (2) publically traded U.S. companies, and download their financial
statements. Assume you are the CEO of a major corporation. You are
Responsible for expanding the corporation through the acquisition of another company. Assume that the
acquisition involved $15 million in goodwill.
Write a three to four (3-4) page paper in which you:
- Provide an explanation for the business combination method you selected in expanding the corporation
by acquiring another firm, your reason for selecting that business combination method, and how the
purchase will grow the business.
Identify at least five (5) possible synergies that could occur as a result of the proposed acquisition.
- Analyze the accounting requirements for the business combination method you selected. Prepare
consolidated financial statements for the date of acquisition.
- Assume that, in year two (2) of operations, goodwill has been impaired. Explain to management how
you determined goodwill was impaired and the financial impact of
such impaired goodwill. Prepare the necessary accounting entries to recognize goodwill impairment.
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An explanation for the chosen business combination method selected in expanding General
Motors Company by acquiring Ford Motor Company
Business combinations are events or occurrences in which a corporation obtains control
of another firm or firms through binding contracts in transactions referred to as “true mergers” or
“merger of equals”. A business can be defined as an integrated set of assets and activities that are
capable of being managed for the sole aim of making a return to shareholders (Baker, Biondi &
Zhang, 2012). In business combinations, the acquirer is the most important party that needs to be
identified first. Business combinations occur when one or more firms through an agreed joint
ownership strategy join together to form a new business entity with or without a new name.
Through a business combination a corporation can expand externally through acquisition of
assets or a merger with another company to form a new entity that could enable it to generate
more revenues and record more profits at the end of the financial year (Weiss, 2014; Baker,
Biondi & Zhang, 2012).
Business Combination Method Selected
There are basically two types of mergers namely: acquisition of another company’s assets
or acquisition of a company’s controlling share capital stake by another company normally
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referred to as an acquirer. In this assignment I have assumed the role of General Motors
Company’s Chief Executive Officer. General Motors Company is a public company that has
entered into an agreement to acquire Ford Motor Company which is also a public company. The
business combination method that has been agreed on is the acquisition method (Weiss, 2014). In
this method, General Motors Company will acquire the assets and assume the liabilities of Ford
Motor Company. Acquisition method procedures require that the acquirer’s CEO identifies the
acquisition date and identifies the acquirer who in this case is General Motor Company. The
General Motor Company’s CEO is also supposed to identify and determine the fair value of the
identifiable assets of Ford Motor Company and the fair value of the liabilities that will be
assumed. This also includes measuring any non-controlling interest in Ford Motor Company
(Weiss, 2014).
Reasons for selecting acquisition method in the Business Combination
The main reason for choosing this business combination method is that it is systematic
and well planned as opposed to other methods. This method benefits both the acquirer and the
company to be acquired in a large way. It involves recognizing and measuring goodwill or a gain
from bargain purchase which will ensure each party in the transaction gets the best deal out of its
assets (Baker, Biondi & Zhang, 2012). This method will ensure General Motors Company buys
the identifiable assets of Ford Motor Company at the fair value price to be determined on the
acquisition date by qualified professionals. General Motors company will only purchase Ford
Motor Company’s assets at their fair value which is determined by getting their going prices in
the open market. The company will also measure the non-controlling interest at the fair value of
the shares held or at the percentage of ownership in the net assets of Ford Motor Company. This
method ensures that all potential dissenting shareholders are pacified by offering them the fair
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value of their stake in the company. The method ensures goodwill is measured separately from
net assets and this enables the company to reflect the correct value goodwill (Dorata, &Badawi,
2008).
How the purchase will grow the new General Motors Company
The acquisition will make General Motors Company one of the largest automobiles
manufacturer and dealer in the globe. General Motors Company will gain from the advantages
of economies of scale and scope which will enable it to grow revenues and minimize costs even
further. The automaker will make use of the large and well-developed combined distribution
channels to sell more automobiles than before (Weiss, 2014). The combined asset base will
create a large collateral base that will enable the company to obtain credit facilities from
financiers at favorable terms to expand further in future. The acquirer will draw from a large
pool of professional managers who have built their skills in the industry while working for the
two entities that were previously competitors. The acquirer will also gain from combined
Research and Development capacity and innovation which will enable it to gain cutting edge
technology which will enable it to produce new and better automobiles that will enable the
company to gain sustainable competitive advantage (Dorata, &Badawi, 2008).
Analysis of the accounting requirements in the method chosen
The acquirer will need to be identified as a prerequisite to entering into the business
combination and in this case it is General Motors Company. The next step is that the acquisition
date should be identified (Weiss, 2014). The method also requires that the parties in the
transaction identify and measure the fair value of the identifiable assets to be acquired and the
liabilities to be assumed and any non-controlling interest in Ford Motor Company. Good will
should also be recognized and measured during the purchase. Intangible assets will only be
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recognized and measured if they can be separately identified by the two companies entering
into the business combination
( http://www.gm.com/content/gmcom/home/toolbar/search.html?q=annual+reports ).
Extracts from the consolidated financial statements of the two corporations as at December
2013 and after the business combination is as shown below;
Business Combination
As at 31 st December 2013
(In $ Millions)
GM FORD NEW GM (after
acquisition)
Total Assets 166344 202026 368370
Total Liabilities 123170 175279 298449
Total Equity 42607 26416 69023
Non-Controlling Interest 567 364 931
Good will 15
The above analysis assumed that all the assets acquired and liabilities assumed are
recorded at fair value price as at the acquisition date of 2013, 31st December. Good will is given
as $15 Million and the fair value of the assets at the acquisition date is assumed to be equal to the
value of assets and liabilities quoted in the audited accounts as at 31 st December, 2013. Goodwill
is calculated as the difference between the fair values of the total assets less total liabilities plus
the non-controlling interest of Ford Motor Company as determined at acquisition date (Dorata,
&Badawi, 2008). According to the table above General Motors Company will acquire Ford
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Motor Company at a price of $377669 Million plus $15 Million which is the sum total of the
total assets plus total liabilities plus the non-controlling interest ( http://corporate.ford.com/our-
company/investors/reports-financial-information/annual-reports?releaseId=1244753689627 ).
Determination of goodwill impairment and financial impact on the new General Motors
Company
In many business combinations involving an acquisition, the price paid to the company to
be acquired often exceeds the total fair value of the acquired firm’s net identifiable assets less
total liabilities assumed. The amount that is in excess is what is referred to in accounting terms as
goodwill. Goodwill is subjected to periodical impairment test to make sure that it is not
overstated in the acquirer’s balance sheet. The method that was used to determine that goodwill
was impaired after year two is called an impairment test. An impairment test requires that the
accountant concerned determines the fair value of the assets, liabilities and the non-controlling
interest component in the open market and then compare the value obtained with the carrying
value in the balance sheet of General Motors Company (Jahmani, Dowling & Torres, 2010). The
difference is the impaired value. After the impairment taste was conducted it was found out that
Goodwill was overstated and necessary adjustments needed to be done to ensure the balance
sheet reflected the true value of Goodwill. The financial impact of the impaired goodwill is that
the value of General Motors Company assets in the market has depreciated with a value
equivalent to the impaired value of goodwill. Impairment of Goodwill points to underlying
internal weaknesses and /or external forces that negatively affected the company’s business in
the financial year. General Motors Company should carry out SWOT and PESTEL analysis to
determine the cause and design strategies to guard against further depreciation of its value. The
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impaired goodwill amount is expensed in the profit and loss account which reduces the net profit
for the year (Jahmani, Dowling & Torres, 2010).
The accounting adjustment in reflected in the following journal entry;
DR CR
Impairment Expense XX
Good will XX
In the above journal entry, goodwill is debited by XX amount and credited by XX amount. This
journal entry will see XX amount entered in the income statement as an expense which will
reduce the company’s net profit and then the recorded be impairment value amortized in the
Goodwill value in the asset schedule. This will see the value of goodwill in the balance sheet
reduced by XX amount. This will result in a reduction in the net worth of the company (Devalle
&Rizzato, 2012).
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References
Baker, C. R., Biondi, Y., & Zhang, Q. (2012).Should merger accounting be reconsidered?: A
discussion based on the chinese approach to accounting for business combinations.
Rochester: Social Science Research Network.
Devalle, A., PhD.,&Rizzato, F., PhD. (2012). The impairment test of goodwill and the quality of
mandatory disclosure required by IAS 36.: An empirical analysis of european listed
companies. GSTF Business Review (GBR), 2(1), 1-6. e of accounting for
business combinations. The CPA Journal, 78(4), 36-38.
