Food for Thought

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Case 11-7:
Food for Thought

The Audit Committee of the Board of Directors of Allfoods Corporation:
Allfoods Corp. acquired 80% of the outstanding common stock of Baked Beans Corp in a business combination on February 1, 2009. Allfoods paid $40 million in cash and issued two million shares of Allfoods common stock to the selling shareholders of Baked Beans. Allfoods stock options will replace all outstanding stock options granted to Baked Beans employees as required by the merger agreement. This transaction has been accounted for in accordance with ASC 805, Business Combinations.
We have determined that consideration transferred amounts to $135 million, land and buildings should be recorded using the “in-use” valuation
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ASC 805-30-30-11 further clarifies that a replacement award that is part of the consideration transferred in exchange for the acquiree equals the portion of the acquiree award that is attributable to pre-combination service. Any portion of replacement award that relates to post-combination service should be recorded as compensation cost.
Acquisition Cost
ASC 805-10-25-23 indicates that acquisition related costs shall account as expenses in the period in which the costs are incurred and received. However, cost to issue debt or equity securities shall be recognized in accordance with other applicable GAAP. In our case, we assume that acquisition cost is not allocated for issuing debt or equity securities.
After critical examination of the related standards, we conclude that cash, common stock, contingent consideration and replacement stock option awards attributable to pre-combination services should be considered to determine consideration transferred. As a result, total consideration transferred is (in million)
Cash $ 40
Common Stock (2*35) $ 70
Contingent Consideration $ 20
Pre-combination service stock option awards $ 5
Highest and Best Use
ASC 820 requires that the measurement of fair value of assets acquired and liabilities assumed should be based on the

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