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CPA FAR: Select Transactions: Acquisition Method, Leases, Taxes, and Compensation

CPA FAR · Work through your exam, one topic at a time.

All guide sections

Select Transactions: Acquisition Method, Leases, Taxes, and Compensation

Where the points come from

Select transactions tests discrete, rule-driven topics: business combinations, consolidation, leases, derivatives and hedging, stock compensation, income taxes, pensions, foreign currency, investments, and revenue with multiple performance obligations. Each has a decision model that must be applied in order.

Business combinations use the acquisition method: identify the acquirer, determine the acquisition date, recognize and measure identifiable assets acquired and liabilities assumed at fair value, then recognize goodwill as the residual. Goodwill = consideration transferred + fair value of noncontrolling interest + fair value of any previously held interest − fair value of net identifiable assets. Acquisition-related costs are expensed, not capitalized; contingent consideration is remeasured at fair value each period with changes in earnings.

Leases: a lessee recognizes a right-of-use asset and lease liability at the present value of payments for any term longer than 12 months, with short-term and low-value exceptions. Finance leases produce separate interest expense and amortization; operating leases produce a single straight-line lease expense in the income statement but still appear on the balance sheet.

Traps

  • A bargain purchase produces a gain (negative goodwill) in income, not a deferred credit.
  • Intraperiod tax allocation runs through continuing operations, then OCI, then discontinued operations.
  • A valuation allowance is required when it is more likely than not that a deferred tax asset will not be realized.
  • Stock options: compensation cost is the grant-date fair value, recognized over the vesting period, with forfeitures estimated.
  • Hedges must be highly effective and documented to receive special accounting.

Worked example

Acquirer pays $900,000 cash; acquired assets have fair value of $1,000,000 and assumed liabilities $250,000; NCI fair value is $50,000. Goodwill = $900,000 + $50,000 − $750,000 = $200,000.