Running Head Accounting standards for business consolidations Accounting standards for business consolidations XXXX ACC 407 Your name Date 2 Business Consolidation Accounting standards for business consolidations In competing market it is very common for one business to merge with another one In order to survive in this rivalry marketplace Companies need to expand business to the most profitable capacity No matter what kind of reasons for company seeking extension under the ownership the main one is to track potential profit Today s business environment Financial Accounting Standards Board FASB one of regulators represented concepts related with business combinations Below is my briefly understanding of accounting standards of business combination What is the history of account for business combinations How many businesses are consolidated with each other Companies often learn that entry into new product areas or geographic regions is more easily accomplished by acquiring or combining with other companies than through internal expansion For example SBC Communications a major telecommunications company and one of the Baby Bells significantly increased its service area by combining with pacific Telesis and Ameritech later acquiring AT T and adopting its name and subsequently combining with BellSouth Moreover Cingular Wireless the largest provider of mobile wireless communications in the United States and now part of AT T was operated as a joint venture of AT T Baker R E Christensen T Cottrell D 2011 AT T was entering new business market and providing more kinds of service by merging Owing to the poor economic status quo the companies seek for surviving and combining during 2007 2008 The most common of internal expansion are split off occurs when the ownership of newly created or existing subsidiary is distributed to the parent s stockholders without the stockholders surrendering any of their stock in the parent company The split off occurs when 3 Business Consolidation the subsidiary s share are exchanged for share of the parent thereby leading to a reduction in the outstanding share of the parent company The other example of business combinations is Delta with Northwest which is a larger airline carrier Delta Air Lines quarterly earnings announcement contained a glimmer of hope for the airlines sector as the carrier revealed a significant bump to its forecasted synergies expected to come out of its planned merger with Northwest Airlines Delta anticipates as much as 500 million in synergies next year increasing to the full run rate of approximately 2 billion in annual synergies by 2012 Conversely the expected integration costs have also been lowered to a projected 600 million spread over three years as opposed to four The biggest cost will come from transitioning the two carrier s separate technology systems to a single platform with additional outlays dedicated to aircraft modifications and maintenance programs MacFadyen K 2008 Delta with Northwest s merger is a kind of split off mostly both airlines share their resource to increase profit and service Most of consolidations for any business are expending their service and operation also merger will benefit of stockholders and investors What does the Financial Accounting Standards FAS govern business alliance In June 2001 the Financial Accounting Standards Board FASB issued two new accounting standards SFAS 141 Business Combinations and SFAS142 Goodwill and Other Intangible Assets These new standards will require that all business combinations must be accounted for using the purchase method of accounting The pooling of interests method of accounting for mergers will no longer be accepted Goodwill will no longer be amortized but evaluated on an annual basis for impairment Impairment testing will be performed at the reporting unit level on an annual basis Impairment must be measured using a two step approach requiring institutions to determine fair values for each reporting unit These changes in accounting for business 4 Business Consolidation combinations not only affect future mergers and acquisitions of oil gas and energy companies but also those companies that are currently carrying goodwill on their balance sheets from previous acquisitions Under the new standard a company may avoid a charge against net income if they can show that goodwill has not been impaired The elimination of the annual goodwill amortization charge will improve not only a firm s net income but also ratios that include assets or net income in their calculation McCarthy M Christian C Douglas K S 2002 SFAS 141 Business Combinations and SFAS 142 Goodwill and Other Intangible Assets materially change the financial accounting for merger and acquisition transactions Under SFAS 141 the pooling of interests method of accounting for acquisitions is no longer applicable All corporate M A business combinations will now have to be accounted for under the purchase method of accounting SFAS 142 requires that goodwill acquired in a business combination no longer be periodically amortized to earnings The value of acquired goodwill must be periodically reviewed for possible impairment charges In the appraisal of real estate there are 3 approaches to valuation of discrete intangible assets such as customer client relationships 1 cost approach 2 market approach and 3 income approach The income approach is most often applicable to the valuation of customer client relationships In the income approach the value of customer relationships is based on the economic income earned by the company servicing the subject customers Common measures include operating income net income operating cash flow and net cash flow The selected measure of economic income is capitalized by an appropriate capitalization rate in order to estimate the customer client relationship value Reilly R F 2002 All business combinations must now be accounted for using the acquisition method many companies financial statement will continue to include the effects of previous business combinations record Baker R E Christensen T Cottrell D 2011 FASB Business Consolidation Statement No 141 contains business combinations through acquisition of net assets and stock The acquisition method is now and only acceptable method of business consolidations 5 What are the advantages of business combination for acquirer and acquiree The main objective of business combination is to eliminate cut throat competition and secure the