Lessons

Acquisition Method to Account for Controlling Interest Investments

U.S. GAAP requires the acquisition method when accounting for controlling interest business combinations, starting in December 2008.

Under the Acquisition Method:

  • The acquired identifiable assets and liabilities are recognized at full fair value, even if the parent purchases less than 100% of the subsidiary.

  • Direct costs in support of the acquisition (ex. legal fees) are not added to the acquisition price, but are directly expensed by the acquirer.

  • Contingent assets and liabilities are recognized at their fair value on the transaction date.

  • In process research and development (R&D) is recognized at fair value as an intangible asset.  This asset is not amortized, but tested annually for impairment.

  • The fair value of the subsidiary on the transaction date is used to calculate minority interest.

  • Minority interest is reported under the equity section of the consolidated balance sheet (recall that under the purchase method, U.S. GAAP placed minority interest on the mezzanine between debt and equity).

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