Chapter 4
Business Combinations
Business combination
• Expansion through business combinations
– Entry into new product areas or geographic
regions by acquiring or combining with other
companies
– A business combination occurs when “. . . an
acquirer obtains control of one or more
businesses”
– The concept of control relates to the ability to
direct policies and management
Cont’d
• Traditional view - Control is gained by
acquiring a majority of the company’s
common stock
• However, it is possible to gain control with less
than majority ownership.
2.3Creating Business entity
• The company transfers assets, and perhaps
liabilities, to an entity that the company has
created and controls and in which it holds
majority ownership
– The company transfers assets and liabilities to the
created entity at book value, and the transferring
company recognizes an ownership interest in the
newly created entity equal to the book value of
the net assets transferred
Cont’d
• Recognition of fair values of the assets transferred in excess of their
carrying values on the books of the transferring company is not
appropriate in the absence of an arm’s-length transaction (Basis of
determining fair market value (FMV), it is a dealing between
independent, unrelated, and well informed parties looking out for their
individual interests. Transactions involving family members, and parent
companies and subsidiaries, are deemed arm-in-arm dealings. To qualify
as an arm's length transaction, neither of the involved parties may have
any interest in the transaction's consequences to the other party.}
• No gains or losses are recognized on the transfer by the transferring
company
• If the value of an asset transferred to a newly created entity has been
impaired prior to the transfer and its fair value is less than the carrying
value on the transferring company’s books, the transferring company
should recognize an impairment loss and transfer the asset to the new
entity at the lower fair value
2.4 Business Combinations
Definition:
• Business combinations are events or transactions in
which two or more business enterprises, or their net
assets, are brought under common control in a single
accounting entity.
• International Accounting Standards Board defines
business combinations as: Business combination occurs
when an entity acquires NET ASSETS that constitute a
Business or Acquires EQUITY INTERESTS OF ONE OR
MORE OTHER ENTITIES AND OBTAINS CONTROL OVER
THAT ENTITY OR ENTITIES.
• In common parlance, business combinations are often
referred to as MERGERS AND ACQUISITIONS.
Cont’d
• The Financial Accounting Standards Board has suggested the
following definitions for terms used in business combinations:
• Combined Enterprise: The accounting entity that results from a
business combination.
• Constituent Companies: The business enterprises that enter
into a combination.
• Combinor :A constituent company entering into a combination
whose owners as a group ends up with control of the ownership
interests in the combined enterprise.
• Combinee: a constituent company other than the combinor in a
business combination. The term acquired, acquiree and
combinee can be used interchangeably.
• Control:Ownership by one company, directly or indirectly of
outstanding voting shares of another company.
Cont’d
The following are the assertions relating to business
combinations as per SFAS No.141
1. Business combination is a transaction or other event in
which an acquirer obtains control of one or more businesses.
2. An acquirer can be identified in every business combination.
3. The business combination acquisition date is the date the
acquirer obtains control of the acquiree.
4. A business combination is accounted for by applying the
purchase/acquisition method.
5. By obtaining control of an acquiree, an acquirer becomes
responsible and accountable for all of the acquiree’s assets,
liabilities, and activities, regardless of the percentage of its
ownership in the acquiree.
Types of Business Combinations
There are Three types of business combinations: Horizontal
Combination, Vertical Combination, and Conglomerate Combination:
1. Horizontal Combination: is a combination involving enterprises in the
same industry.
2. Vertical Combination: A Combination involving an enterprise and its
customers or suppliers. It is a combination involving companies engaged
in different stages of production or distribution. It is classified into two:
Backward Vertical Combination – combination with supplier and
Forward Vertical Combination – combination with customers. E.g.1: A
Tannery Company acquiring a Shoes Company - Forward
E.g.2: Weaving Company acquiring both Ginning and Spinning Company
– Backward
3. Conglomerate (Mixed) Combination: is a combination involving
companies that are neither horizontally nor vertically integrated. It is a
combination between enterprises in unrelated industries or markets.
Methods of Arranging Business Combinations
The four common methods for carrying out a
business combination are:
1. Statutory Merger
2. Statutory Consolidation,
3. Acquisition of Common Stock, and
4. Acquisition of Assets
1. STATUTORY MERGER
• A business combination in which one company
(the survivor) acquires all the outstanding
common stock of one or more other companies
that are then dissolved and liquidated, with their
net assets owned by the survivor.
• The survivor can effect the transaction by
exchanging voting common stock or preferred
stock, cash, or long-term debt ( or a combination
of these) for all of the outstanding voting
common stock of the acquired company or
companies.
Cont’d
• In a statutory merger, one or more of
the combinee companies are liquidated
and thus cease to exist as separate
legal entities, and their activities often
are continued as divisions of the
survivor, which now owns the net
assets (assets minus liabilities), rather
than the outstanding common stock, of
the liquidated corporations.
Cont’d
Statutory merger can be summarized in the following main
points:
1. The boards of directors of the constituent companies work
out the terms of the merger.
2. Stock holders of the constituent companies approve the term
of the merger in accordance with applicable corporate bylaws
and state laws.
3. The survivor issues its common stock or other consideration
to the stockholders of the constituent companies in exchange
for all their outstanding voting common stock of that
company.
4. The survivor dissolves and liquidates the other constituter
companies receiving in exchange for common stock
investments for the net assets of those companies.
2. STATUTORY CONSOLIDATION
Statutory consolidation can be summarized in the following
main points
1. The boards of directors of the constituent companies work out
the terms of the consolidation.
2. Stockholders of the constituent companies approve the terms
of the consolidation in accordance with applicable corporate
bylaws and state laws.
3. A new corporation is formed to issue its common stock to the
stock holders of the constituent companies in exchange for all
their outstanding voting common stock of those companies.
4. The new corporation dissolves and liquidates the constituent
companies, receiving in exchange for its common stock
investment in the net assets of those companies.
3. Acquisition of Common stock
• One corporation (the investor) may issue preferred or common
stock, cash, debt or a combination there of to acquire from
present stockholders a controlling interest in the voting common
stock of another corporation (the investee).
• This stock acquisition program may be accomplished through
direct acquisition in the stock market, or through tender.
• The price per share stated in the tender offer usually is well above
the prevailing market price of the combinees’ common stock.
• If a controlling interest in the combinees voting common stock is
acquired, that corporation becomes affiliated with the combiner
(parent company) as a subsidiary, but is not dissolved and
liquidated and remains a separate legal entity.
Reasons for acquiring interests in other entities include
(1) gaining voting control,
(2) entering new product markets by purchasing
companies already established in those areas,
(3) ensuring a supply of raw materials or other
production inputs,
(4) ensuring a customer for production output,
(5) gaining economies associated with greater size,
(6) diversifying operations,
(7) obtaining new technology,
(8) Lessening competition, and (9) limiting risk
4. Acquisition of Assets
• A business enterprise may acquire from another
enterprise all or most of the gross asset or net
assets of other enterprise for cash, debt, preferred
or common stock or a combination thereof.
• The transaction generally must be approved by the
board of directors and stockholders of the
constituent companies.
• The selling enterprise may continue its existence
as separate entity or may be dissolved and
liquidated; it does not become on affiliate of the
combiner.
Cont’d
• Establishing the price for BC(Valuation of Business
Entities)
• It could be made:
1. Value of individual assets and liabilities:
– Value determined by appraisal, Determination of current fair
value of the combine net assets (including good will).
2. Value of potential earnings , It is capitalization of
expected average annual earnings of the combinee;
– “Going-concern value” based on:
• A multiple of current earnings.
• Present value of the anticipated future net cash flows generated by
the company.
• Valuation of consideration exchanged
Purchase Accounting for business combinations
Accounting for Business Combinations
• Two methods acceptable earlier:
– Purchase
– Pooling of interests
• 2001 - the FASB eliminated pooling of interests
method
Cont’d
• Initial recognition- Assets are commonly
acquired in exchange transactions that trigger
(cause)the initial recognition of the assets
acquired and any liabilities assumed. Initial
measurement like other exchange transactions
generally, acquisitions are measured on the basis
of the fair values exchanged.
• Allocating cost: Acquiring assets in groups
requires not only ascertain the cost of the asset
or net asset group but also allocating the cost to
the individual assets (or individual assets and
liabilities) that make up the group.
Procedures under Purchase Method of Accounting for Business Combinations
1. Determination of the Combinor or the Acquiring Company – this
steps deals with identification of the combinor.
• The Combiner
• The carrying amounts of the net assets are not affected by a
BC(Business Combinations).
• The FASB stated that in a business combination effected solely by;
the distribution of cash or other assets or
by incurring liabilities,
the constituent company that distribute or incurring liability is generally
the acquiring company.
• Generally, the combiner is the constituent co. whose stockholders
as a group retain or receive the largest portion of the voting rights
of the combined enterprise and there by can elect a majority of
the governing BODS or other group of the combined enterprise.
Cont’d
2. Determination of Cost of Acquisition – assets to be acquired and liabilities to be
assumed are identified and then, like other exchange transactions, measured on
the basis of the fair values exchanged.
The Cost of combine includes also some other costs as discussed below.
• The cost of a combine on a BC accounted for by purchase method is the total of
a. The amount of consideration paid by the combiner,
b. The combiners DIRECT “out of pocket” costs of the combination&
c. Any contingent consideration that is determinable on the date of the business
combination.
Amount of Consideration:
• This is the total amount of
a. Cash paid,
b. The Current fair value of other assets distributed,
c. The present value of debt securities issued &
d. The Current fair value (Market) value of equity security issued by the combiner.
Direct out of pocket costs
• Out of pocket costs are classified as direct and indirect.
Direct out of pocket costs
This includes
• Legal fees,
• Accounting, &
• Finder fees.
• Finder fee- An amount paid to the investment banking
firm or other organizations or individuals that
investigated the combinee, assisted in determining the
price of the business combination & other wise
rendered service to bring about the combination.
INDIRECT COSTS
BOND ISSUE COSTS- refers to cost of registering
(with the SEC) and issuing DEBT SECURITIES in a
Business combination is debited to bond issue
costs. They are not part of the cost of the
combine.
Cost of registering with SEC & issuing equity
securities are not direct costs of the business
combination but are offset against the proceeds
from the issuance of the securities.
Cont’d
• Indirect out-of-pocket costs of the
combination, such as salaries of officers
involved in the combination, are expensed
as incurred by the constituent companies.
• Direct out-of-Pocket Costs are added to
the Cost of Acquisition of Combinee
where as indirect out of-pocket costs are
immediately expensed by the constituent
companies.
Cont’d
3. Allocating Cost Combinee (Allocating Total Cost
of Acquisition
The cost of a combinee in a business
combination must be allocated to assets (other
than goodwill) acquired and liabilities assumed
based on their estimated fair values on the date
of the combination.
• Any excess of total costs of the acquired
company over the amounts allocated to
identifiable assets acquired less liabilities
assumed is assigned to goodwill.
Cont’d
4. Determination of Goodwill –The goodwill should
be determined and recorded under purchased
method.
• Goodwill: Goodwill frequently is recorded in
purchase-type business combinations because the
total cost of the combinee exceeds the current fair
value of identifiable net assets of the combinee.
• That is, goodwill is the difference between the
total acquisition costs less current fair value of the
net assets (the current fair value of the assets less
current fair value of liabilities).
Cont’d
5. Recording the Acquisition – the transaction is
recorded on the date of the business
combinations is consummated.
• Under purchase accounting, both the combinor
and combinee record transactions relating to the
business combination.
• The combinee that is dissolved and liquidated
passed the following journal entries:
Cont’d
Investment in xxx Stock --------xxx
Current Liabilities -------------------xxx
Accumulated Depreciation -------xxx
Loss on sale of Net Asset-----------xxx
Cash and Receivables -----------------xxx
Inventory ----------------------------------xxx
Land -----------------------------------------xxx
Buildings and Equipment --------------xxx
Gain on Sale of Net Assets --------------xxx
To record transfer of assets to combinor
Cont’d
Steps
1. Purchase price
2. Current fair values on net assets acquired
3. Goodwill or negative good will
4. Recording amount paid to the acquired
company
5. Recording security related costs
6. Recording individual assets and liabilities
acquired
7. Recording dissolution of the acquired company
1.Illustration on Purchase Accounting for
Statutory Merger
Given: on January 1, 19X1, Point corporation
purchases all assets and liabilities of Sharp
company in a statutory merger by issuing to
Sharp 10,000 shares of $ 10 par common stock.
The shares issued have a total market value of
$600,000. Point incur legal and appraisal fees of
40,000 in connection with the combination and
stock issue costs of 25,000.
1. Sharp co. balance sheet information, Dec 31, 19X0
Assets, liabilities and equity BV CFV
Cash and Receivables 45, 000 45, 000
Inventory 65, 000 75,000
Land 40,000 70,000
Buildings and equipment 400,000 350,000
Acc. Depn. (150,000)
Patent - 80,000
Total assets 400,000 620,000
Current liabilities 100,000 110,000
Common stock, (par) 100,000
Additional paid in capital 50,000
Retained earnings 150,000
Total liabilities and equities 400,000
Cont’d
Required
Record what is necessary journal entry by both
companies for the above business combination
using purchase accounting.
Steps
1. Purchase Consideration
Amount paid to Sharp Co. (10,000*60) 600,000
+ Direct Out of Pocket Costs(legal and finders fees) 40,000
Total cost of the business combination 640,000
Cont’d
2. Current fair values of net assets acquired
Current Fair Values of Assets
Cash and Receivables 45, 000
Inventory 75,000
Land 70,000
Buildings and equipment 350,000
Patent 80,000
CFV of Total asset 620,000
Less: Current Fair Values of Current liabilities 110,000
Current Fair Values of Net assets acquired 510,000
Cont’d
3. Goodwill
Purchase Consideration 640,000
Less: Current Fair Values acquired 510,000
Goodwill 130,000
4. Recording amount paid to the acquired company
Investment in the net assets of Sharp Co. 600,000
Common Stock(10,000*10) 100,000
Paid in Capital in Excess of Par 500,000
5. Recording security related costs
Investment in the net assets of Sharp Co. 40,000
Paid in Capital in excess of Par 25,000
Cash 65,000
Cont’d
6. Recording individual assets and liabilities acquired by Point
Corporation
Cash and Receivables 45, 000
Inventory 75,000
Land 70,000
Buildings and equipment 350,000
Patent 80,0 00
Goodwill 130,000
Liabilities 110,000
Investment in the net assets of Sharp Co. 640,000
7. Recording dissolution of the acquired company (Company Sharp)
a) sale of net assets to Point Corp.
Investment in the common stock of Point Corporation 600,000
Current Libilities 100,000
Acc. Depn. 150,000
Cash and Receivables 45, 000
Inventory 65, 000
Land 40,000
Buildings and equipment 400,000
Gain on sale of net assets to Point Corp. 300,000
b). Closing of Stockholders equity accounts, gain on sale and investment account and
distribution of common stock investment will be made.
Common stock, (par) 100,000
Additional paid in capital50,000
Retained earnings 150,000
Gain on sale of net assets to Point Corp. 300,000
Investment in the common stock of Point Corporation 600,000
Gain on Bargain Purchase .
• Bargain Purchase—Consideration Transferred Is Less Than Net Amount
of Fair Values of Identified Assets Acquired and Liabilities Assumed.
• Occasionally, the fair value received in an acquisition will exceed the fair
value of the consideration transferred by the acquirer. Such bargain
purchases typically are considered anomalous.
• Businesses generally do not sell assets or businesses at prices below
their fair values. Nonetheless, bargain purchases do occur—most often
in forced or distressed sales.
• The excess of the estimated fair value of the net assets acquired over
the purchase consideration will be recognized as a gain on the business
combination.
• Assume in previous illustration, shares issued to acquire the combinee
has 220,000 and direct out of pocket costs are 40, 000. what would be
the entries to effect the combination using purchase method of
accounting.
Recording individual assets and liabilities acquired by Point Corporation
Cash and Receivables 45, 000
Inventory 75,000
Land 70,000
Buildings and equipment 350,000
Patent 80,000
Liabilities 110,000
Investment in the net assets of Sharp Co. 460,000
Gain on Bargain Purchase 50,000
2. Illustration on Purchase Accounting for
Statutory Consolidation
• Because a new corporation issues common stock to effect a
statutory consolidation, one of the constituent companies
must be identified as the combinor, under the criteria
described to identify combinor.
• Once the combinor has been identified, the new corporation
recognizes net assets acquired from the combinor at their
carrying amount in the combinor’s accounting records;
however, net assets acquired from the combinee are recorded
by the new corporation at their current fair values.
• To illustrate, assume the following condensed balance sheets
of the constituent companies involved in a purchase-type
statutory consolidation on December 31, Year 1999:
Lamson Corporation and Donald Company Balance Sheet(Prior to
Business Combination)
December 31, 1999
Asset Lamson Co. Donald Co.
Current assets ..................................................... Br.600,000 400,000
Plant asset (net) .................................................. 1,800,000 1,200,000
Other assets ........................................................ 400,000 300,000
Total assets ......................................................... 2,800,000 1,900,000
Liabilities & Shareholders Equity
Current liabilities ................................................ 400,000 300,000
Long-term debt ................................................... 500,000 200,000
Common stock, Br10 .......................................... 430,000 620,000
Paid in capital ..................................................... 300,000 400,000
Retained Earning ................................................ 1,170,000 380,000
Total ................................................................... 2,800,000 1,900,000
Cont’d
• The current fair values of both companies’ liabilities were
equal to carrying amounts.
• Current fair values of identifiable assets were as follows
for Lamson and Donald, respectively: current assets, Br
800,000 and Br 500,000; plant assets, Br 2,000,000 and
Br 1,400,000; other assets, Br 500,000 and Br 400,000.
• On December 31, Year 1999, in a statutory consolidation
approved by shareholders of both constituent companies,
a new corporation, LamDon Corporation, issued 74,000
shares of no stated value common stock with an agreed
value of Br 60 a share, based on the following valuations
assigned to the two constituent companies’ identifiable net
assets and goodwill.
cont’d
Lamson Donald
Current fair value of identifiable net assets:
Lamson: Br 800,000 + 2,000,000+500,000-400,000-500,000 = 2,400,000
Donald: Br 500,000 +1,400,000+400,000-300,000 -200,000 ....... 1,800,000
Goodwill assigned to determine number of shares to be issued= 180,000 60,000
Net assets’ current fair value ...................................................... 2,580,000 1,860,000
Number of shares of LamDon to be issued to constituent companies’
Stockholders, at Br 60 a share agreed value ....................................43,000 31,000
58% 42%
Cont’d
• Because the former shareholders of Lamson
Corporation receive the largest interest in the
common stock of LamDon Corporation (43/74,
or 58%), Lamson is the combinor in the
purchase-type business combination.
• Assuming that LamDon paid Br 200,000 out-
of-pocket costs which comprises Br 110,000
direct and Br 90,000 indirect for the statutory
consolidation after it was consummated on
December 31, Year 1999; LamDon’s journal
entries would be as follows:
Cont’d
To record consolidation of Lamson corporation and
Donald company as a purchase
Investment in Lamson and Donald Co Common Stock (74,000 @ 60) ....4440,000
Common stock, no par ............................................................ 4,440,000
To record payment of costs incurred in consolidation of
Lamson Corporation and Donald Company. Accounting
legal and finder’s fee in connection with the
consolidation are recorded as investment cost; other
out-of-pocket costs are recorded as a reduction in the
proceeds received from the issuance of common stock.
Investment in Lamson and Donald Co. common stock ......... .............. 110,000
Common stock, no par ................................................................................. 90,000
Cash .................................................................................... 200,000
Cont’d
To allocate total cost of investment to identifiable assets
and liabilities, at carrying mount for combinor Lamson
corporation’s net assets and at current fair value for
combinee Donald company’s net assets. Assume Lamson
Corporation was identified as Combinor and valued Current
Assets at Br 500,000; Plant assets at Br 1,400,000; and
Other assets at Br 400,000 of Donald Company:
Current assets (600,000 + 500,000) .............................................................. 1,100,000
Plant assets (1,800,000 +1,400,000) .............................................................. 3,200,000
Other assets ((400,000 +400,000) ..................................................................... 800,000
Goodwill ......................................................................................................... ..... 850,000
Current liabilities (400,000 +300,000) ........................................................... 700,000
Long-term Debt (500,000+ 200,000) ........................................................... 700,000
Investment in Lamson and Donald Co
common tock (4,440,000+110,000) ……………………... 4,550,000
Cont’d
Note in the foregoing journal entry that because of the combinor’s net
assets’ being recorded at carrying amount and because of the Br 110,000
direct costs of the business combination, the amount of goodwill is Br
850,000, rather than Br 240,000 (Br 180,000+Br 60,000=Br 240,000),
the amount assigned by the negotiating directors to goodwill in the
determination of the number of shares of common stock to be issued in
the combination.
Amount of Goodwill is computed as follows:
Total cost of investment (4,440,000 + 110,000) ....................................... Br 4,550,000
Less: Carrying amount of Lampson's Identifiable net Assets ..................... (1,900,000)
Current Fair Value of Donald’s Identifiable net assets ............................. (1,800,000)
Amount of Goodwill .................................................................................. Br 850,000
Example
On December 31, Year 1, META Company (the combinee)
was merged into SAXON Corporation (the combinor or
surviving company). Both companies used the same
accounting principles for assets, liabilities, revenue, and
expenses and both had a December 31 fiscal year.
SAXON exchanged 150,000 shares of its Br 10 par
common stock (Current Fair Value Br 25 a share) for all
100,000 issued and outstanding shares of META’s no-
par, Br 10 stated value common stock. In addition,
Saxon paid the following out-of-pocket costs associated
with the business combination:
Accounting fees
For investiigation of META Company as prospective combinee ......................... Br 5,000
For SEC registration statement for Saxon common stock ..................................... 60,000
Legal Fees:
For the business combination ................................................................................. 10,000
For SEC registration statement for Saxon common stock ..................................... 50,000
Finder’s fee ............................................................................................................ 51,250
Printing charges for securities and SEC registration statement ............................... 23,000
SEC registration statement fee ..................................................................................... 750
Total out –of- pocket costs of business combination .............................................. 200,000
There was no contingent consideration in the merger contract. Immediately prior to the
merger, META Company’s condensed balance sheet was as follows:
META COMPANY (Combinee)
Balance sheet (Prior to Business Combination)
December 31, Year 1
Assets
Current assets ............................................................ Br 1,000,000
Plant assets (net) ........................................................ 3,000,000
Other assets ................................................................ 600,000
Total assets ................................................................. 4,600,000
Liabilities & Stockholder Equity
Current liabilities ....................................................... 500,000
Long-term debt .......................................................... 1,000,000
Common stock, no par Br 10 stated value ................. 1,000,000
Paid in capital ............................................................ 700,000
Retained Earnings ...................................................... 1,400,000
Total ........................................................................... 4,600,000
• Using the guidelines in SFAS No. 141, “Business Combinations,” the
board of directors of Saxon Corporation determined the current fair
values of META Company’s identifiable assets and
liabilities(identifiable net assets) as follows:
Current asset ............................................................ Br 1,150,000
Plant assets .................................................................... 3,400,000
Other assets ............................................................. ....... 600,000
Current liabilities ....................................................... .... (500,000)
Long-term debt (present value) ..................................... (950,000)
Identifiable net assets of combinee.............................. 3,700,000
Required
Prepare journal entries that are required for SAXON Corporation (the
Combinor) to record the Merger with META Company on December
31, Year 1, as a Purchase-type business combination. SAXON uses an
investment ledger account to accumulate the total cost of META Co.
prior to assigning the cost to identifiable net assets and goodwill.
• Example 2: Purchase Accounting for Acquisition
of Assets
• On December 31, Year 1, Davis Corporation
acquired the net assets of Fairmont Corporation
for Br 400,000 cash, in a purchase-type business
combination. Davis paid legal fees of Br 40,000 in
connection with the combination. The condensed
balance sheet of Fairmont prior to the business
combination, with related current fair value data,
is presented below:
•
FAIRMONT CORPORATION (Combinee)
Balance Sheet (prior to business combination)
December 31, Year 1
Carrying Current Fair
Amounts Values
Assets
Current assets ..................................................................... Br 190,000 Br. 200,000
Investment in marketable securities .................................. 50,000 60,000
Plant assets (net) ................................................................ 870,000 900,000
Intangible assets (net) ........................................................ 90,000 100,000
Total assets ........................................................................ 1,200,000 1,260,000
Liabilities &Stockholders' Equity
Current Liabilities .............................................................. 240,000 240,000
Long-term debt .................................................................. 500,000 520,000
Total Liabilities .................................................................. 740,000 760,000
Common stock, Br 1 par ................................................... 600,000
Deficit (Dr. balance in Retained earnings) ........................ (140,000)
Total stockholders' equity .................................................. 460,000
Total liabilities & stockholders' equity .............................. 1,200,000
Required: prepare the necessary journal entries to realize the business combination using purchase method
of accounting.
