RE: 13-07 Definition of a Business
There are two different companies involved in this case, Fuzzy Dice a manufacturer of novelty items and Tiny Tots Toys a manufacturer of children’s toys. Recently, Tiny has faced financial hardship and has thus decided to sell its assets to Fuzzy. This asset acquisition will include the manufacturing facility and all of the equipment, delivery vehicles, licenses, and patents.
Fuzzy would like to utilize the new facility in one of two ways. First, they may choose to enter a new line of business by continuing to use it for making toys. Alternatively, they may refurbish the factory in order to increase its novelty item production and expand its current business.
Issues and Alternatives
The following issues pertain to the case:
• According to ASC 805, if Fuzzy continues to use the newly acquired factory for making toys, will it be accounted for as an acquisition of a business or an acquisition of assets?
• If Fuzzy intends to use it for making novelty items (its current business) instead, will this change the accounting for it under ASC 805?
• What would the effect of IFRS be on this transaction if the acquisition is structured through Fuzzy’s foreign subsidiary? Would the foreign subsidiary record it as an acquisition of business or a group of assets?
Authoritative Literature and Conclusion
It is important to determine whether the transaction is a business combination or an asset acquisition for a variety of reasons including: ___________. ASC 805-10-25-1 states that an entity shall account for each business combination by applying the acquisition method. For acquired assets that are not a business, they shall be accounted for as an asset acquisition. The four components of the acquisition method include: 1) identify the acquirer, 2) identify the acquisition date, 3) recognizing and measuring the assets acquired, liabilities assumed, and any noncontrolling interest, and 4)...