Major changes have occurred for financial reporting for business combinations. These changes are documented in SFAS No. 141R, “Business Combinations” and SFAS No. 160, “Noncontrolling Interests and Consolidated Financial Statements” (to replace Accounting Research Bulletin 51). These new pronouncements require the acquisition method instead of the purchase method. The acquisition method emphasizes fair values for recording all combinations as opposed to the cost-based provisions of SFAS 141.

These latest FASB effort to promote the acquisition method will significantly affect several aspects of financial reporting in consolidated financial statements. Using information available on the FASB Web site, address the following:

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  1. Conduct a preliminary search of SFAS No. 141R, “Business Combinations” and SFAS No. 160, “Noncontrolling Interests and Consolidated Financial Statements” and discuss the basic valuation principle for measuring and recognizing business combinations under the acquisition method and the purchase method.
  2. To what extent have you seen evidence that lead to the determination the “fair value” of a business at acquisition date for 100 percent acquisitions?
  3. In your opinion, what other alternative ways to estimate fair value and when such alternatives might be appropriate.
  4. Compare the key aspects of purchase versus acquisition method reporting requirements for an excess of fair value of the net assets acquired over consideration transferred (bargain purchase from the buyer’s perspective) in a business acquisition. Which method do you think is appropriate and why?

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