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In this scenario taken from week 7 quiz, a fictitious company called Key Corp. issued 1,000 shares of its nonvoting preferred stock to acquire all of Lev Corp’s outstanding common stock.


The day of the transaction, Key’s nonvoting preferred stock had a market value of $100 per share, ($100 X 1000 shares = $100,000)


Lev’s tangible net assets had a book value of $60,000. In addition,


Key issued 100 shares of its nonvoting preferred stock to an individual as a finder’s fee for arranging the transaction.


As a result of this capital transaction, Key’s total net assets would increase by $100,000.


1. A business acquisition is accounted for using fair values.


2. The net assets acquired were recorded at:  Their fair value and or at the fair value of the stock issued.  (whichever is more objectively determinable)


In this case, the fair value of the stock issued is a better measure of the value of the purchase $100,000.00. (1,000 shares x $100 per share = $100,000).


The total cost of acquiring the net assets is the fair value of the preferred stock ($100,000).


The finder’s fee is treated as an expense of the period.



Compare/contrast GAAP and IFRS definition of control using intangible assets as an example:

With regards to control, IFRS is more principled.

The treatment of acquired  intangible assets  is one of the best ways to explain the principled method by International Financial Reporting Standards (IFRS).

Intangible assets are only recognized if the asset will have a future economic benefit and has measured reliability. Examples of Intangible assets are  goodwill , R&D, and advertising costs.

The U.S. GAAP on the other hand, acquired intangible assets are recognized at fair value. (Christina Majaski, 2022)



A business combination involves an entity obtaining control over one or more businesses (this entity is known as ‘the acquirer’). 

IFRS 10 ‘Consolidated Financial Statements’ and IFRS 3 provide guidance to determine whether an entity has obtained control.

1. Control of an investee is obtained through holding the majority of voting rights

2. Through various other transactions and arrangements – some of which require careful analysis and judgement.

Limitations: The identification of an acquirer is discussed in more detail in a separate narrative ‘ IFRS 3 – Identifying the acquirer ’.

For instance, it is possible for control to be obtained:

1. Without holding or acquiring a majority of the investee’s voting rights

2. Without the investor actually being party to a transaction or paying consideration. (Acquisition and mergers, 2022)



Can you capitalize acquisition costs – GAAP?

GAAP permits purchasers to capitalize certain transaction costs, such as investment banking, legal and accounting fees in the acquisition cost to be allocated among assets acquired through the business combination (Can you capitalize acquisition costs GAAP?, 2014)




Acquisition and mergers. (2022, May 16). Retrieved from https://annualreporting.info/acquisitions-and-mergers/#:~:text=A%20business%20combination%20involves%20an%20entity%20obtaining%20control,to%20determine%20whether%20an%20entity%20has%20obtained%20control.:

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