- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 11. Intercorporate Investments
- Subject 5. Business Combinations
CFA Practice Question
Which of the following statements is (are) true with respect to the acquisition method of accounting for business combinations?
II. The acquisition method is designed to maintain consistency in the reporting of financial statements by the acquirer both before and after a combination.
III. During the combination, if the acquired firm had some off-balance sheet items, they must now be explicitly recognized by the acquiring firm.
IV. During the combination, if the acquired firm had intangible assets such as in-process research and development, U.S. GAAP mandates that this item be measured at fair value.
I. The book value of the assets and liabilities of the acquired firm are combined with the book value of the acquiring firm.
II. The acquisition method is designed to maintain consistency in the reporting of financial statements by the acquirer both before and after a combination.
III. During the combination, if the acquired firm had some off-balance sheet items, they must now be explicitly recognized by the acquiring firm.
IV. During the combination, if the acquired firm had intangible assets such as in-process research and development, U.S. GAAP mandates that this item be measured at fair value.
A. I and III
B. III and IV
C. II and III
Explanation: I is incorrect because it is the market value of the assets and liabilities of the acquired firm that is combined with the book value of the acquiring firm. For this reason, there will be an inconsistency in the reporting of financial statements by the acquirer both before and after a combination; thus II is wrong as well.
User Contributed Comments 6
| User | Comment |
|---|---|
| yly14 | How exactly are the intangibles on the acquiree's statements capitalized? Are they not considered in the purchase, or are they brought onto the parents statements directly? |
| bmeisner | What if the acquiree was carrying goodwill on its B/S. Wouldn't that stay on the acquiror's B/S if it paid above book value for the acquisition? Goodwill is not expensed or even amortized. |
| dblueroom | I remember reading from cfa book that excess of purchase price over FMV should be first attributed to identifiable intangible assets of the target, and the remaining amount record as goodwill. to answer bmeisner, target's goodwill would be part of the acquiring's goodwill, because it's not identifiable (by definition). I have to look up the expensing of r&d thing. |
| phadrian | why is II. wrong? |
| krunk | According to the text book (Vol 2 FRA p. 161), in-process R&D is first capitalized at fair value (if measurable) and then either AMORTISED if successfully completed or IMPAIRED if non-successful. |
| Stoibayev | The relevant LOS in this website says that "In Process R&D" is expensed according to US GAAP... |