BUSCOM ACTIVITY CHAPTER 2

(1)
A reverse acquisition, also known as a reverse merger or reverse takeover (RTO), is a process in
which a private company acquires a publicly traded company. Here's a concise summary of key
points:

 Objective: The private company aims to go public by acquiring a controlling interest in a

publicly traded "shell" company.

 Process: The private company's management typically takes over leadership roles in the
combined entity.

 Speed and Simplicity: Reverse acquisitions are often faster and less complex than
traditional Initial Public Offerings (IPOs).

 Public Listing: The private company's shares are listed on the stock exchange where the
public shell company was previously listed.

 Consideration: The acquisition is often paid for with shares of the private company,
issued to the shareholders of the public shell company.

 Due Diligence: Thorough examination of each other's financial health, operations, and
legal standing is conducted by both parties.

 SEC Filings: Regulatory filings with the Securities and Exchange Commission (SEC)
disclose transaction details and financial information.

 Market Reaction: The announcement can affect stock prices of both companies,
reflecting market perceptions and expectations.

 Post-Acquisition Phase: Involves integration of operations, systems, and cultures of the

two companies.

 Risks and Challenges: Potential challenges include resistance from existing shareholders,
regulatory hurdles, and the need for effective post-merger integration.

In summary, a reverse acquisition provides a route for a private company to achieve a public
listing by acquiring a publicly traded company, offering a faster and potentially simpler
alternative to the traditional IPO process.
(2)
Push-down accounting refers to a specific accounting method used in the context of a business
combination or acquisition. In push-down accounting, the acquirer "pushes down" the fair
market value of its assets and liabilities to the financial statements of the acquired company.
This accounting treatment is often applied when a parent company acquires a subsidiary or a
significant portion of its assets.

Here are key points to understand about push-down accounting:

 Fair Value Adjustment: The acquiring company revalues the assets and liabilities of the
acquired entity to their fair market values at the time of acquisition.

 New Basis for Reporting: The fair values determined during the acquisition process
become the new basis for reporting the assets and liabilities in the financial statements
of the acquired entity.

 Reporting at Fair Value: Under push-down accounting, the acquired company's financial
statements reflect the fair values of its assets and liabilities as if it were a standalone
entity.

 Independent Valuation: Fair values are often determined through an independent

valuation process to ensure objectivity and accuracy.

 Balance Sheet Impact: The balance sheet of the acquired entity is adjusted to reflect the
fair values, impacting line items such as assets, liabilities, and shareholders' equity.

 Implications for Depreciation and Amortization: The depreciation and amortization

expenses in the income statement may change based on the new values assigned to the
assets.

 Historical Cost vs. Fair Value: Push-down accounting contrasts with the traditional
approach, where the acquired company's assets and liabilities are carried over at their
historical cost.

 Regulatory Considerations: The use of push-down accounting may be subject to

regulatory requirements and may impact financial ratios and covenants.

 Consolidation Process: The consolidated financial statements of the acquiring company

will reflect the fair values of the acquired entity's assets and liabilities, as per push-down
accounting.
  Relevance in Business Combinations: Push-down accounting is often applied in situations
where the acquirer has legal control over the acquired entity, allowing for the
integration of fair values into the financial reporting.

(3)
The exclusion of a subsidiary from consolidation refers to the accounting treatment where a
parent company does not include the financial results, assets, and liabilities of a subsidiary in its
consolidated financial statements. Here is a summary of key points regarding the exclusion of a
subsidiary from consolidation:

 Control Requirement: Consolidation is typically required when a parent company has

control over a subsidiary. Control is often defined as ownership of more than 50% of the
voting shares or the ability to govern the financial and operating policies of the
subsidiary.

 Significant Influence or Control Loss: If a parent company loses control or significant

influence over a subsidiary, it may exclude the subsidiary from consolidation.

 Discontinued Operations: If a subsidiary is classified as a discontinued operation, the

parent may exclude its results from ongoing consolidated financial statements.

 Fair Value or Held for Sale: A subsidiary may be excluded from consolidation if it is
classified as held for sale or if its assets are being measured at fair value with the intent
to sell.

 Consolidation Exception Criteria: Accounting standards provide specific criteria and

guidelines for when a parent company can exclude a subsidiary from consolidation.
These criteria often relate to the nature of control, ownership, and the parent's
intentions.

 Separate Financial Statements: Even if excluded from consolidation, the subsidiary's

financial results are still typically presented in the parent company's separate financial
statements.

 Equity Method or Cost Method: If a subsidiary is excluded from consolidation, the

parent may account for its investment using the equity method or cost method,
depending on the level of influence.

 Disclosure Requirements: Accounting standards usually require detailed disclosures in

the financial statements regarding the exclusion of a subsidiary, including the reasons for
exclusion and the impact on the financial statements.
  Impact on Financial Ratios: The exclusion of a subsidiary can have a significant impact on
financial ratios, such as earnings per share, return on equity, and others, as the financial
results of the subsidiary are not included in the consolidated figures.

 Legal Structure and Control Assessment: The decision to exclude a subsidiary depends
on both the legal structure of the subsidiary and the parent's ongoing assessment of
control or influence.

It's important for companies to adhere to accounting standards and regulatory requirements
when deciding to exclude a subsidiary from consolidation, and they should provide transparent
and comprehensive disclosures to ensure that stakeholders understand the rationale and
impact of such exclusions.

(4)
An investment entity is a term often used in the context of accounting and financial reporting to
describe a specialized type of entity that primarily invests in financial assets. Here is a summary
of key points related to an investment entity:

 Definition: An investment entity is an entity that obtains funds from investors for the
purpose of providing those investors with investment management services.

 Primary Business Activity: The primary business activity of an investment entity is to

invest in a diverse range of financial assets, such as securities, bonds, real estate, or
other investment instruments.

 Passive Investment Management: Investment entities typically engage in passive

investment management, focusing on managing a portfolio of investments rather than
actively participating in the day-to-day operations of the companies in which they invest.

 Investor Funds: An investment entity raises capital from external investors and pools
these funds to create an investment portfolio.

 Diverse Portfolio: Investment entities often maintain a diverse portfolio to spread risk
and optimize returns. This diversification can include investments in various asset
classes, industries, and geographic regions.

 Investment Holding Structure: The structure of an investment entity is often designed to

facilitate the holding and management of investments, allowing for efficient portfolio
management.
  Financial Reporting Considerations: In the context of financial reporting, entities that
meet the criteria of an investment entity may be subject to specific accounting and
reporting requirements.

 Consolidation Exemption: An investment entity may be exempt from consolidating its

subsidiaries if it meets certain criteria. Instead of consolidating, it may account for its
investments using the fair value method.

 Risk Management and Performance Evaluation: Investment entities focus on risk

management strategies to protect investor capital and evaluate their performance based
on the overall returns generated from their investment portfolios.

 Regulatory Compliance: Investment entities are often subject to regulatory requirements

and may need to comply with securities laws and financial regulations.

 Investor Communication: Communication with investors is crucial for investment

entities, providing them with regular updates on the performance of the investment
portfolio and other relevant information.

 Tax Considerations: Tax treatment for investment entities may vary based on the
jurisdiction and the specific legal and regulatory framework.

It's important to note that the classification of an entity as an investment entity has implications
for financial reporting and accounting treatments, and companies should carefully assess
whether they meet the criteria outlined by relevant accounting standards.

(5)
Variable Interest Entities (VIEs):

 Definition: A Variable Interest Entity (VIE) is an entity in which an investor holds a

controlling interest that is not based on owning a majority of voting rights but rather
through contractual arrangements that convey decision-making authority.

 Control Determination: Control over a VIE is established when an entity has both the
power to make decisions that most significantly impact the VIE's economic performance
and the obligation to absorb losses or receive benefits that could be significant to the
VIE.

 Consolidation Requirement: If an entity has a variable interest that gives it a controlling

interest in a VIE, it is generally required to consolidate the VIE in its financial statements.
  Primary Beneficiary: The entity that consolidates a VIE is referred to as the primary
beneficiary. It is the entity that has the most significant variable interest in the VIE and,
therefore, consolidates it.

 Risk and Rewards: Control is often determined by assessing which entity bears the
majority of the risks and rewards associated with the VIE's economic activities.

 Disclosure Requirements: Financial statement disclosures are typically required to

provide transparency about an entity's involvement with VIEs, including the nature of its
interests, risks, and potential impact on financial position and performance.

Deferred Taxes in Consolidation:

 Deferred Tax Assets and Liabilities: In consolidation, deferred tax assets and liabilities are
recognized based on the temporary differences between the book and tax values of
assets and liabilities acquired in the consolidation process.

 Temporary Differences: Temporary differences arise when the carrying amount of an

asset or liability in the financial statements differs from its tax base. This can result from
different depreciation methods, recognition of revenue or expenses, or other factors.

 Consolidated Tax Provision: The consolidated financial statements include a provision for
income taxes that reflects the impact of deferred taxes. This provision considers the
combined deferred tax assets and liabilities of the consolidated entities.

 Intra-Entity Transactions: Deferred taxes are also considered in intra-entity transactions

to eliminate any unrealized profits or losses. This ensures that the tax consequences of
these transactions are appropriately accounted for in consolidation.

 Change in Tax Rates: Changes in tax rates can affect the valuation of deferred tax assets
and liabilities, and the impact is reflected in the consolidated financial statements in the
period of enactment.

 Valuation Allowances: Valuation allowances may be necessary to reduce deferred tax

assets if it is more likely than not that they will not be realized.

 Disclosures: Comprehensive disclosures about deferred taxes, including the nature of

temporary differences, the impact of tax rate changes, and any valuation allowances, are
typically required in the consolidated financial statements.
In summary, understanding and appropriately accounting for Variable Interest Entities and
Deferred Taxes are critical aspects of the consolidation process, ensuring accurate
representation and disclosure in the consolidated financial statements.