In July 2013, Cool Care, an SEC registrant and a hospital operator in the United

Question

In July 2013, Cool Care, an SEC registrant and a hospital operator in the United States, entered into a merger agreement to acquire Healthy Hearts. Healthy Hearts is an unrelated third party that operates specialty hospitals focused exclusively on cardiology. The merger closed on January 31, 2014 (the “Closing”), whereby Cool Care acquired all of the outstanding common stock of Healthy Hearts, and Healthy Hearts become a wholly owned subsidiary of Cool Care (the “Acquisition”). In 2010, in a public offering, Healthy Hearts raised capital to expand and upgrade its operating rooms by issuing $400 million aggregate principal amount of 7.00% senior notes due in 2020 (the “Notes”). In performing due diligence and assessing the terms of the Notes, Cool Care determined that it could obtain cheaper financing and instructed Healthy Hearts to make a tender offer for any and all its outstanding Notes (the “Tender Offer”). Accordingly, contemporaneously with the Closing, all the outstanding Notes were redeemed. Healthy Hearts did not have sufficient cash on hand before the Acquisition to redeem the Notes. Additional Facts: The Acquisition meets the definition of a business combination. • The terms of the Notes did not require Healthy Hearts to redeem or offer to repurchase the Notes upon a change in control (i.e., the decision to redeem the Notes was voluntary). • It was solely Cool Care’s decision to redeem the Notes. • The fair value of the Notes as of the date of the Closing was equal to the amount paid to redeem the tendered Notes. In addition, Healthy Hearts carried the Notes at their par value (i.e., there is neither a premium nor a discount present with the Notes). Required: In consideration of the information presented above, answer the following questions. 1. Should Healthy Hearts include the extinguishment of debt (i.e., the Notes) in its precombination financial statements or should Cool Care include it in the postcombination financial statements? What is the appropriate treatment of any gain or loss on the extinguishment of debt? (Note that for this question, the precombination financial statements represent Healthy Hearts’ operations before the Acquisition and the postcombination financial statements represent Cool Care’s consolidated financial statements after the Acquisition.) 2. Are there differences between ASC 805 and IFRS 3 that should be considered in the analysis?

Provide references to the FASB code that is relevant to the case.

Explanation / Answer

Answer to question 1

Healthy Hearts should include the "Notes" as its debt in its precombination Financial statements as the Notes are redeemed post acquisition by the company .It comes to the note that healthy heart does not have funds to redeem the notes while it redeemed out of the funds given by cool care post acquisition as a consideration (as given) hence if acquisition would not have happened then there would not have been any redemption of notes . Hence it is clear that the "Notes " are still shown as debt in the financial statements of healthy heart.

And when it comes to extinguishment of debt it has to be reflected in the post consolidated statements of the entity as a whole i.e in cool care's consolidated financial statements.

Accounting treatment

FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt,Under Statement 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates Statement 4 and, thus, the exception to applying Opinion 30* to all gains and losses related to extinguishments of debt (other than extinguishments of debt to satisfy sinking-fund requirements—the exception to application of Statement 4). As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item.

*(APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions)

Answer to question2

In the accounting for business combinations under ASC 805 and IFRS 3 there might be some differences between the two standards that may cause accounting differences with respect to the following

1.operating leases are acquired in a business combination:If operating leases are acquired in a business combination and the acquiree is also the lessee, the accounting under ASC 805 and IFRS 3 is essentially the same. However, if the acquiree is the lessor, the accounting under the two standards differ.

2.Contingent Assets and Liabilities : Under ASC 805, both contingent assets and liabilities are recognized at the acquisition at fair value, if fair value can be determined before the end of the measurement period (i.e. whether or not the contingency is probable, possible, or remote under ASC 450). Under IFRS 3, contingent liabilities are recognized at the acquisition date fair value if there is a present obligation arising from past events (i.e. obligation is “probable” under IAS 37). However, unlike U.S. GAAP, contingent assets are never recognized under IFRS

3.Non controlling interest: If an entity acquires a controlling portion of a business but there is a non-controlling interest present, how the non-controlling interest is measured may differ under ASC 805 and IFRS 3. U.S. GAAP requires a non-controlling interest to be measured at fair value at the acquisition date. Unlike U.S. GAAP, IFRS gives the acquirer the option to either: 1) measure the non-controlling interest at fair value at the date of acquisition; or 2) measure the non-controlling interest at its proportion of the fair value of the identifiable net assets of the acquired entity.

4.Push down accounting: As we know, under ASC 805 and IFRS 3, when an entity is acquired, the assets and liabilities are generally required to be recorded by the acquirer at fair value. But what happens if the acquiree continues to maintain and report separate financial statements; should the acquiree’s assets and liabilities also be recorded at its current fair value or should it maintain is previous measurement basis prior to the acquisition?

U.S. GAAP provides an irrevocable “option” for the acquiree to reflect the new basis of accounting (as a result of purchase accounting) in its separate financial statements This is referred to as “pushdown” accounting as the acquirer’s new basis of accounting for their acquisition is “pushed down” to the separate financial statements of the acquiree. ASC Subtopic 805-50 provides guidance on when this option can be elected and exactly “how” pushdown accounting should be performed.

Unlike U.S. GAAP, IFRS is silent and has no guidance when it comes to pushdown accounting and therefore this approach is generally not performed at the acquiree separate financial statement level.

5.Measurement of prior period items:The measurement period is the period during which adjustments can be made to amounts originally recorded as the result of an acquisition at the acquisition date. Amounts may change as the result of new information that is obtained about facts and circumstances that existed at the acquisition date, or due to the acquisition accounting not being completed as of the fiscal year end of the acquirer.

Prior to ASU 2015-16, both ASC 805 and IFRS 3 required measurement period adjustment to be made retrospectively by “recasting” prior periods. However, as the result of ASU 2015-16, under U.S. GAAP, measurement period adjustments are no longer required to be made retrospectively but instead, adjustments are made prospectively by adjusting amounts in the period in which the adjustment is determined. IFRS still requires adjustments to be made retrospectively.

Therefore by applying the above provisions we dont considerably see any differences between them as mentioned in the given case as there are no detailed acquision given in the given case and also the measurement.

But in case of any differences the above treatment needs to be followed accordingly by the company.

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