Business Economics: Questions and Answers

Referred to as business combinations, these combined operations may be integrated, or each firm may be left to operate intact. 2. Four advantages of business combinations as compared to internal expansion are: (1) Management is provided with an established operating unit with its own experienced personnel, regular suppliers, productive facilities and distribution channels. (2) Expanding by combination does not create new competition. (3) Permits rapid diversification into new markets. (4) Income tax benefits. 9.

In an asset acquisition, the firm must acquire 100% of the assets of the other firm, while in a stock acquisition, a firm may gain control by purchasing 50% or more of the voting stock. Also, in a stock acquisition, formal negotiations with the target’s management can sometimes be avoided. Further, in a stock acquisition, there might be advantages in keeping the firms as separate legal entities such as for tax purposes. 10. Does the merger increase or decrease expected earnings performance of the acquiring institution? From a financial and shareholder perspective, the price paid for a firm is hard to justify if earnings per share declines.

When this happens, the acquisition is considered dilative. Conversely, if the earnings per share increases as a result of the acquisition, it is referred to as an creative acquisition. 11. Under the parent company concept, the write-up or written of the net assets of the subsidiary in the consolidated financial statements is restricted to the amount by which the cost of the investment is more or less than the book value of the net assets acquired. Noncontributing interest in net assets is unaffected by such rites or wrongdoers.

The economic unit concept supports the write-up or written of the net assets of the subsidiary by an amount equal to the entire difference between the fair value and the book value of the net assets on the date of acquisition. In this case, noncontributing interest in consolidated net assets is adjusted write-up or written of the net assets of the subsidiary. 12. Tort its snare to a) Under the parent company concept, noncontributing interest is considered a liability of the consolidated entity whereas under the economic unit concept, incorporation interest is considered a separate equity interest in consolidated net assets. ) The parent company concept supports partial elimination of interception profit whereas the economic unit concept supports 100 percent elimination of interception profit. C) The parent company concept supports valuation of subsidiary net assets in the consolidated financial statements at book value plus an amount equal to the parent company’s percentage interest in the difference between fair value and book value. The economic unit concept supports valuation of subsidiary net assets in the unconsolidated financial statements at their fair value on the date of acquisition without regard to the parent company’s percentage ownership interest. ) Under the parent company concept, consolidated net income measures the interest of the shareholders of the parent company in the operating results of the consolidated entity. Under the economic unit concept, consolidated net income measures the operating results of the consolidated entity which is then allocated between the controlling and noncontributing interests. 13. The implied fair value based on the price may not be relevant or reliable since he price paid is a negotiated price which may be impacted by considerations other than or in addition to the fair value of the net assets of the acquired company.

There may be practical difficulties in determining the fair value of the consideration given and in allocating the total implied fair value to specific assets and liabilities. In the case to a less than wholly owned company, valuation to net assets at implied fair value violates the cost principle of conventional accounting and results in the reporting of subsidiary assets and liabilities using a different valuation procedure Han that used to report the assets and liabilities of the parent company. 14. The economic entity is more consistent with the principles addressed in the Abs’s conceptual framework.

It is an integral part of the Abs’s conceptual framework and is named specifically in SFA No. 5 as one of the basic assumptions in accounting. The economic entity assumption views economic activity as being related to a particular unit of accountability, and the standard indicates that a parent and its subsidiaries represent one economic entity even though they may include several legal entities. 5. The Abs’s conceptual framework provides the guidance for new standards. The quality of comparability was very much at stake in Abs’s decision in 2001 to eliminate the pooling of interests method for business combinations.

This method was also argued to violate the historical cost principle as it essentially ignored the value of the consideration (stock) issued for the acquisition of another company. The issue of consistency plays a role in the recent proposal to shift from the parent concept to the economic entity concept, as the former method valued a portion (the incorporation interest) of a given asset at prior book values and another portion (the controlling interest) of that same asset at exchange-date market value. 6. Comprehensive income is a broader concept, and it includes some gains and losses explicitly stated by FAST to bypass earnings. The examples of such gains that bypass earnings are some changes in market values of investments, some foreign currency translation adjustments and certain gains and losses, related to minimum pension liability. In the absence of gains or losses designated to bypass earnings, earnings and comprehensive income are the same.

Business Economics: Questions and Answers

Internal expansion Involves a normal Increase In business resulting from Increased demand for products and services, achieved without calculation of preexisting firms. Some companies expand internally by undertaking new product research to expand their total market, or by attempting to obtain a greater share of a given market through advertising and other promotional activities. Marketing can also be expanded into new geographical areas.

External expansion Is the bringing together of two or more firms under common intro by acquisition. Referred to as business combinations, these combined operations may be integrated, or each firm may be left to operate intact. 2. Four advantages of business combinations as compared to internal expansion are: (1) Management is provided with an established operating unit with Its own experienced personnel, regular suppliers, productive faceless and distribution channels. (2) Expanding by combination does not create new competition. (3) Permits rapid diversification into new markets. 4) Income tax benefits. 9. In an asset acquisition, the firm must acquire 100% of the assets of the other firm, while In a stock acquisition, a firm may gain control by purchasing 50% or more of the voting stock. Also, In a stock acquisition, formal negotiations with the target’s management can sometimes be avoided. Further, In a stock calculation, there might be advantages in keeping the firms as separate legal entities such as for tax purposes. 10. Does the merger increase or decrease expected earnings performance of the acquiring Institution?

From a financial and shareholder perspective, the price paid for a firm Is hard to justify if earnings per share declines. When this happens, the acquisition is considered dilative. Conversely, if the earnings per share increases as a result of the acquisition, it is referred to as an creative acquisition. 11. Under the parent company concept, the write-up or written of the net assets of the subsidiary In the consolidated financial statements Is restricted to the amount by which the cost of the Investment Is more or less than the book value of the net assets acquired.

Noncontributing interest in net assets is unaffected by such retries or writer’s. The economic unit concept supports the write-up or written of the net assets of the subsidiary by an amount equal to the entire difference between the fair value and the book value of the net assets on the date of acquisition. In this case, write-up or written of the net assets of the subsidiary. 12. A) Under the parent company concept, noncontributing interest is considered a liability of the consolidated entity whereas under the economic unit concept, noncontributing interest is considered a separate equity interest in consolidated net assets. The parent company concept supports partial elimination of interception profit whereas the economic unit concept supports 100 percent elimination of interception profit. C) The parent company concept supports valuation of subsidiary net assets in the consolidated financial statements at book value plus an amount equal to the parent company’s percentage interest in the difference between fair value and book value. The economic unit concept supports valuation of subsidiary net assets in the consolidated financial statements at their fair value on the date of acquisition thou regard to the parent company’s percentage ownership interest. ) Under the parent company concept, consolidated net income measures the interest of the shareholders of the parent company in the operating results of the consolidated entity. Under the economic unit concept, consolidated net income measures the operating results of the consolidated entity which is then allocated between the controlling and noncontributing interests. 13. The implied fair value based on the price may not be relevant or reliable since he price paid is a negotiated price which may be impacted by considerations other than or in addition to the fair value of the net assets of the acquired company.

There may be practical difficulties in determining the fair value of the consideration given and in allocating the total implied fair value to specific assets and liabilities. Fair value violates the cost principle of conventional accounting and results in the reporting of subsidiary assets and liabilities using a different valuation procedure than that used to report the assets and liabilities of the parent company. 14. The economic entity is more consistent with the principles addressed in the Abs’s conceptual framework. It is an integral part of the Abs’s conceptual framework and is named specifically in SFA No. As one of the basic assumptions in accounting. The economic entity assumption views economic activity as being related to a particular unit of accountability, and the standard indicates that a parent and its subsidiaries represent one economic entity even though they may include several legal entities. 15. The Abs’s conceptual framework provides the guidance for new standards. The laity of comparability was very much at stake in Abs’s decision in 2001 to eliminate the pooling of interests method for business combinations.

This method was also argued to violate the historical cost principle as it essentially ignored the value of the consideration (stock) issued for the acquisition of another company. The issue of consistency plays a role in the recent proposal to shift from the parent concept to the economic entity concept, as the former method valued a portion (the noncontributing interest) of a given asset at prior book values and another portion (the monitoring interest) of that same asset at exchange-date market value. 6. Comprehensive income is a broader concept, and it includes some gains and losses explicitly stated by FAST to bypass earnings. The examples of such gains that bypass earnings are some changes in market values of investments, some foreign currency translation adjustments and certain gains and losses, related to minimum pension liability. In the absence of gains or losses designated to bypass earnings, earnings and comprehensive income are the same.