BARDEEN ELECTRIC: FASB ASC AND IFRS RESEARCH CASE
On October 18, 2017, Armstrong Auto Corporation ("Armstrong")announced its plan to acquire 80 percent of the outstanding 500,000shares of Bardeen Electric Corporation’s ("Bardeen") common stockin a business combination following regulatory approval. Armstrongwill account for the transaction in accordance with ASC 805,“Business Combinations.” On December 1, 2017, Armstrong purchasedan 80 percent controlling interest in Bardeen’s outstanding votingshares. On this date, Armstrong paid $40 million in cash and issuedone million shares of Armstrong common stock to the sellingshareholders of Bardeen. Armstrong’s share price was $26 on theannouncement date and $24 on the acquisition date. Bardeen’sremaining 100,000 shares of common stock had been purchased for$3,000,000 by a small number of original investors. These shareshave never been actively traded. Using other valuation techniques(comparable firms, discounted cash flow analysis, etc.), Armstrongestimated the fair value of Bardeen’s noncontrolling shares at$16,500,000. The parties agreed that Armstrong would issue to theselling shareholders an additional one million shares contingentupon the achievement of certain performance goals during the first24 months following the acquisition. The acquisition-date fairvalue of the contingent stock issue was estimated at $8 million.Bardeen has a research and development (R&D) project underwayto develop a superconductive electrical/magnetic application. Totalcosts incurred to date on the project equal $4,400,000. However,Armstrong estimates that the technology has a fair value of $11million. Armstrong considers this R&D as in-process because ithas not yet reached technological feasibility and additionalR&D is needed to bring the project to completion. No assetshave been recorded in Bardeen’s financial records for the R&Dcosts to date. Bardeen’s other assets and liabilities (at fairvalues) include the following:
Cash $ 425,000
Accounts receivable 788,000
Land 3,487,000
Building 16,300,000
Machinery 39,000,000
Patents 7,000,000
Accounts payable (1,500,000)
Neither the receivables nor payables involve Armstrong. Answerthe following questions citing relevant support from the ASC andIFRS. 1. What is the total consideration transferred by Armstrongto acquire its 80 percent controlling interest in Bardeen?
2. What values should Armstrong assign to identifiableintangible assets as part of the acquisition accounting?
3. What is the acquisition-date value assigned to the 20 percentnoncontrolling interest? What are the potential noncontrollinginterest valuation alternatives available under IFRS?
4. Under U.S. GAAP, what amount should Armstrong recognize asgoodwill from the Bardeen acquisition? What alternative goodwillvaluations are allowed under IFRS?
