4. Thomas Corp. acquired Dye Technologies in 2014. Thomas included the following

Question

4. Thomas Corp. acquired Dye Technologies in 2014. Thomas included the following information in its 2014 annual report We acquired Dye Technologies, Inc. on August 3, 2014 by means of a merger of one of our wholly owned subsidiaries such that Dye became a wholly owned subsidiary of Thomas. The total purchase price for Dye was $21,370 million In performing our preliminary purchase price allocation, we considered, among other factors, our intention for future use of acquired assets, analyses of historical financial performance and estimates of future performance of Dye's products. The fair values of intangible assets were calculated using an income approach and estimates and assumptions provided by both Dye and Thomas management The rates utilized to discount net cash flows to their present values were based on our weighted average cost of capital and ranged from 8% to 16%. The following table sets forth the preliminary components of intangible assets associated with the Dye acquisition Dollars in millions) Useful Life Fair Value Software support agreements and related relationships $2,408 8 years Developed technology 2,070 6 years 7 years Core technology 2,037 Customer relationships 888 8 years 95 5 years Trademarks and other Total intangible assets $7,498 Required. d. As part of the acquisition, Thomas also recorded $5,940 million of goodwill. Explain how Thomas arrived at this amount for goodwill e. If the amount allocated to software support agreements was decreased to $848 million, what effect would this have on the allocation of the purchase price to the remaining acquired assets? What effect would this have on current and future earnings? You should quantify the effect in dollar terms

Explanation / Answer

The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to the customers which the name and reputation possesses.”
International Financial Reporting Standards (IFRS) IAS 38, "Intangible Assets," does not allow recognizing internally generated goodwill (Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance). The only accepted form of goodwill is the one that acquired externally, though business combinations or acquisitions.

using formula

Goodwill

=

Consideration transferred

+

Amount of non-controlling interests

+

Fair value of previous equity interests

-

Net assets recognized

we get, consideration received = $ 21370

Less : Total Tangible assets    = $ 7498

Less: goodwill                       = $ 5940

        Total other fixed assets = $ 7932

NOTE: due to lack of information provided in question it has been assumed that value arrived $7932 is value of      other fixed assets.

Now using this value of other fixed assets we get amount of goodwill as -

        Total consideration= $21370

less: other fixed assets = $7932

less: ingangible assets = $7498

        Goodwill              = $5940

e) If amount allocated to software support agreement = $848 then total intangible asset will be (848+2070+2037+888+95) = $5938

Goodwill              = $5940

Add:: other fixed assets = $7932

Add: ingangible assets = $5938

   Total consideration= $19810

earnings will be decreased since value of future income generating intangible asset has been decreased from $2408 to $848 therfore future earnings will decrease.

derease in earnings = $21370 - $19810 = $1560

Goodwill

=

Consideration transferred

+

Amount of non-controlling interests

+

Fair value of previous equity interests

-

Net assets recognized

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