Walk me through the acquisition method step by step with a worked example.

Question

AcadiFi · Accepted Answer

Let's walk through Orchid Pharmaceuticals acquiring Trelawney Biotech on April 1, 2026 for $720M (cash $500M + 2M acquirer shares at $110 = $220M).

**Step 1: Identify acquirer.** Orchid paid cash and issued shares, it obtained voting control — Orchid is the accounting acquirer.

**Step 2: Acquisition date.** April 1, 2026 when the deal closes and shareholders transfer control.

**Step 3: Measure consideration.** Total = $720M (shares measured at fair value on acquisition date, NOT historical cost).

**Step 4: Fair value identifiable net assets.**
- Tangible assets: $340M
- Developed IPR&D intangible: $95M
- In-process R&D: $45M (capitalized, even though expensed at target)
- Assumed liabilities: ($160M)
- Deferred tax liability on step-up: ($25M)
- **Net identifiable = $295M**

**Step 5: Goodwill.** $720M - $295M = $425M.

**Step 6: Journal entry.** Dr. Net Assets $295M, Dr. Goodwill $425M; Cr. Cash $500M, Cr. Common Stock/APIC $220M.

Transaction costs ($12M banker fees) are expensed immediately. Shares issued to raise acquisition cash are charged to equity, not expense.

Walk me through the acquisition method step by step with a worked example.

Master Level II with our CFA Course

Related Questions

Practice Questions