Definition of a Business Essay

Fuzzy Dice, Inc. manufactures and distribute novelty items. Fuzzy is having a great demand on their products and atomic number 18 holding a large list of cash on its balance sheet. In the same argona ar early(a) manufacturing companies, among them Tiny Toys LLC, a childrens toy manufacturer. Tiny has been having financial troubles and late filed for Chapter 11 bankruptcy protection. Fuzzy is interested in Tinys manufacturing facility, location and capabilities. Tinys manufacturing equipment is operational they dont have some(prenominal) good provide, but have some impalpable summations. Since, Fuzzy is holding so much cash they decided to buy Tinys and are in the final stages of the accomplishment. The Company is non certain in how to use Tinys facilities. They will either a. continue to use the facility to manufacture toys or b. renovate the factory in order to expand their current operations.IssuesFuzzy is having trouble determining how they should phonograph recording the doing. There are three scenarios -Operate the factory in its current capacity to manufacture toys. -Refurbish the factory to manufacture novelty items.-Structure the encyclopaedism through its French subsidiary, which issues behave-alone financial statements below IFRS. For each scenario they should read if they would record the transaction as an science of a employment or acquisition of an asset.ResearchAsset acquisition The purchase of a company by acquire its assets instead of its stock. An asset acquisition strategy may be used for a takeover or buyout if the target is bankrupt. Market knowledge, research and experience are important to a successful asset acquisition strategy. In some character references, a plan for selling the asset, c aloneed asset disposition, is built into the asset acquisition strategy. failure proceedings represent an opportunity for a company to implement an asset acquisition strategy. By taking advantage of one companys upset(a) position, another company can purchaseassets like equipment and machinery for its own argumentation enterprise at reduced prices. stage business Combination A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. If a business combination occurs because of a bankruptcy reorganization or troubled debt restructuring under fresh start measure statementing, the purchase consideration should take into account the value of the re incorporated debt. In these cases the original book value of the debt will likely differ from its fair value. business organization (ASC 805) An integrated set of activities and assets that is capable of being conducted and managed for the dissolve of providing a return. This definition is broad and can result in many transactions qualifying as business combinations when they are actually only asset acquisitions. When determi ning if a set of assets and activities is a business, the relevant factor is whether or not the integrated set is capable of being conducted and managed as a business and not if the seller operated the set as a business or if the acquirer intends to do so. Unless there is evidence to the contrary, any set of assets that includes goodwill is false to be a business. However, the existence of goodwill is not required to witness the definition of a business. If the acquired assets are not a business, the acquirer will account for the transaction as an asset acquisition. The definition goes on to explicitly discuss mergers of equals. A change of control can occur without the exchange of consideration or even without the acquirer holding any ownership interest. The acquisition conflict is defined as the eon the acquirer obtains control of the acquiree, regardless of the legal date of the expatriation or the date the consideration is transferred. If a business combination is impinge oned primarily by transferring assets or by incurring liabilities, the acquirer is ordinarily the entity that transfers the assets or incurs the liabilities.If a business combination is affected by transferring beauteousness interests, the acquirer is usually the entity that issues its equity interests. However, in some business combinations, commonly called hold back acquisitions, the issuing entity is the acquiree. In a reverse acquisition the legal acquirer is defined as the acquiree for accounting purposes. 55-4 A business consists of inputs and processes applied to those inputs that have the competency to create outputs. Although businesses usually have outputs, outputsare not required for an integrated set to qualify as a business. The three elements of a business are defined as follows a. Input. Any economic resource that creates, or has the ability to create, outputs when one or more processes are applied to it. Examples include long-lived assets (including impalpable a ssets or rights to use long-lived assets), intellectual property, the ability to obtain access to requisite materials or rights, and employees. b. Process. Any system, standard, protocol, convention, or rule that when applied to an input or inputs, creates or has the ability to create outputs.Examples include strategic management processes, operational processes, and resource management processes. These processes typically are documented, but an organized workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs. invoice, billing, payroll, and other administrative systems typically are not processes used to create outputs. c. Output. The result of inputs and processes applied to those inputs that provide or have the ability to provide a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.Identifying a Business CombinationClassifying or Designating Identifiable Assets Acquired and Liabilities Assumed in a Business Combination 25-6 At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to subsequently apply other GAAP. The acquirer shall make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies, and other pertinent conditions as they exist at the acquisition date.25-7 In some situations, GAAP provides for different accounting depending on how an entity classifies or designates a grumpy asset or liability. Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to the followinga. Classification of particular investments in securities as trading, available for sale, or he ld to maturity in accordance with Section 320-10-25b. Designation of a derivative instrument as a hedge instrument in accordance with paragraph 815-10-05-4c. Assessment of whether an embedded derivative should be separated from the host contract in accordance with Section 815-15-25 (which is a matter of classification as this Subtopic uses that term).Identifiable Intangible Assets25-10 The acquirer shall recognize separately from goodwill the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion described in the definition of identifiable. Additional guidance on applying that definition is provided in paragraphs 805-20-25-14 through 25-15, 805-20-55-2 through 55-45, and Example 1 (see paragraph 805-20-55-52). For guidance on the recognition and subsequent measurement of a defensive intangible asset, see Subtopic 350-30.05-4 Paragraph 805-10-25-1 requires that a business combination be accounted for by applying what is referred to as the acquisition method. The acquisition method requires all of the following stepsa. Identifying the acquirerb. Determining the acquisition datec. Recognizing and bar the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquireed. Recognizing and measurement goodwill or a gain from a bargain purchase. 805-10-25-1 An entity shall determine whether a transaction or other event is a business combination by applying the definition in this Subtopic, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the account entity shall account for the transaction or other event as an asset acquisition. An entity shall account for each business combination by applying theacquisition method. Accounting After Acquisition35-1 After the acquisition, the acquiring entity accounts for the asset or lia bility in accordance with the appropriate generally accepted accounting principles (GAAP). The basis for measuring the asset acquired or liability assumed has no effect on the subsequent accounting for the asset or liability.Recognition Principle25-1 As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 805-20-25-2 through 25-3.55-2 Paragraph 805-10-25-1 requires an entity to determine whether a transaction or event is a business combination. In a business combination, an acquirer might obtain control of an acquiree in a variety of ways, including any of the following a. By transferring cash, cash equivalents, or other assets (including net assets that constitute a business) b. By incurring liabilitiesc. By issuing equity inter estsd. By providing more than one type of consideratione. Without transferring consideration, including by contract alone (see paragraph 805-10-25-11). 55-3 A business combination may be structured in a variety of ways for legal, taxation, or other reasons, which include but are not limited to, the following a. One or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer. b. One combining entity transfers its net assets or its owners transfer their equity interests to another combining entity or its owners. c. All of the combining entities transfer their net assets or the owners of those entities transfer their equity interests to a newly formed entity (sometimes referred to as a roll-up orput-together transaction). d. A group of former owners of one of the combining entities obtains control of the combined entity. 55-5 To be capable of being conducted and managed for the purposes defined, an integrated set of activities and assets requires dickens essential elementsinputs and processes applied to those inputs, which together are or will be used to create outputs.However, a business need not include all of the inputs or processes that the seller used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs, for example, by combine the business with their own inputs and processes. FRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the acquisition method, which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date. AlternativesFuzzy Inc should determine how they will account for the transaction with Tiny Toys if either as an acquisition of assets or as a business combination.ConclusionUsing FASBs ASC 805 definition of Busin ess combination and acquisition of assets is hard to choose one alternative. The definitions are broad and can result in different interpretation on how to account for the transaction in the Balance Sheet, but I think the one that suits best the transaction is acquisition of assets. As guidance, I used ASC 805-05-4 Paragraph 805-10-25-1 that says requires that a business combination be accounted for by applying what is referred to as the acquisition method. The acquisition method requires all of the following steps a. Identifying the acquirerb. Determining the acquisition datec. Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree d. Recognizing and measuring goodwill or a gain from a bargain purchase. 805-10-25-1 An entity shall determine whether a transaction or other eventis a business combination by applying the definition in this Subtopic, which requires that the assets acquired and liabilities as sumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. In addition, manufacturing equipment and trucks are functional, but the case doesnt mention anything about other type of assets necessary (e.g computers) for the operation of the business. This means that if Fuzz is in the intention of using the facilities as Business they will not be able to meet the three elements of a business input, process, output. Fuzz probably is using the bankruptcy of Tiny as a strategy for acquiring needed assets and good stand geographical facility in a good price. Also, Fuzzy is not assuming any liability from Tiny.Questions 2 and 3 will be answered by acquisition of assets, considering the information above. None of these two scenarios represent a business combination since neither of them can operate as a business. In case of question 1, is more difficult to determine how to account for i t. Fuzz in the position to account for it in either one of the possibilities since the definitions presented are vague in structure and cannot be taken into account to conclude one straight answer. 1. If Fuzzy decides to operate the factory in its current capacity to manufacture childrens toys, should the transaction be accounted for under ASC 805 as an acquisition of a business or an acquisition of assets? 2. If Fuzzy decides to refurbish the factory to manufacture novelty items, would this affect its assessment of how to account for the transaction under ASC 805? 3. If Fuzzy decides instead to structure the acquisition through its French subsidiary, Ds Floue Inc., which issues stand-alone financial statements under IFRSs, should the transaction be accounted for differently under IFRSs with regard to whether it should be deemed as an acquisition of a business or a group of assets?