Evaluate the reasons business combinations occur and the accounting implications of such transactions.
CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as “entrepreneurial geeks,” met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.
Lately, Connor and Martin have been working with “radio frequency identification” (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.
One of the most basic applications is tracking manufacturing components; if tagged components “go walking” (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC’s cash flow from sales and services has adequately funded its operations.
CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future.
Connor and Martin are contemplating acquiring Adverse Systems, a smaller security system manufacturer who is in the market to sell due to financial hardships. It is important for CMC to analyze the internal and external factors that could possibly affect the company’s future performance after acquiring another company. SWOT is a comprehensive audit and competitive analysis that analyzes the Strengths, Weaknesses, Opportunities and Threats facing an organization. CMC has asked you to be a part of the company’s acquisition planning process to identify strategies, financial and operational goals. They have requested that you outline the internal and external factors that are relative to the acquisition and report the results using a SWOT analysis. CMC and Martin have the option of recognizing goodwill or making a bargain purchase.
Prepare a PowerPoint presentation of a SWOT analysis comparing goodwill and bargain purchase.
Presentation Mechanics should be as follows:
- Prepare a 5-8 slide PowerPoint presentation, including slide notes.
- Summarize the strengths, weaknesses, opportunities, and threats for CMC under each purchase option.
- Explain the advantages and disadvantages of each option under both US GAAP and IFRS standards.
- Explain how either the “goodwill recognition” or “bargain purchase” can impact an acquisition.
Use the FASB Codification and IFRS to address all technical accounting issues presented in the requirements, being certain to reference the applicable sections of the Codification and IFRS in your presentation. You will need to register for the basic service at these sites. It is free.
All sources used to support your responses should be properly documented. You should have other credible sources in addition to the Codification and IFRS.