Accounting for business combinations review

Acquisition that I am studying is the Google acquisition of Motorola’s mobile business, Motorola Mobility, for $40 per share, or a total of $12.4 billion (Google, 2012). Both companies are active in the mobile communication space, Motorola Mobile in the handset space and Google with its operating system. By acquiring the technology and patents of Motorola Mobile, the latter of which Google valued at $5.5 billion (Reisinger, 2012). The acquisition was made entirely with cash, of which Google has no shortage. There were also significant tax benefits associated with the deal, including the ability to reduce taxes as the result of the ongoing losses at the Motorola Mobility division, which will continue to be run independently. This paper will outline a number of issues pertaining to the accounting elements of this deal. Although both firms are American, they are multinational companies and there will be some theoretical explanation of how the deal might be reported under IFRS.

Accounting Requirements

When a business is acquired, the acquiring firm is under certain obligations with regards to the accounting of the acquisition. Google paid cash for Motorola Mobile, which means that the company must then add the entirety of that value ($12.4 billion) back to its balance sheet to avoid a write-down on the purchase. Certainly, Google would not want to write down the purchase immediately as that would make the company look foolish to its stockholders.

The $12.4 billion price is widely believed to be a significant increase over the intrinsic value of the Motorola Mobile business. Google allocated the value as follows. $2.9 of the purchase price accounted for Motorola’s cash; $730 million went to customer relationships and $670 million other net assets. The patents, as noted, were valued at $5.5 billion. This leaves $2.9 billion to be allocated to goodwill on the balance sheet. This fulfills the requirement that the entire purchase price must be allocated to the acquiring company’s balance sheet. The deal was defined as a takeover, so no separate reporting entity exists for Motorola Mobile, although it will continue to be run independently. Preparing financial statements for the combined entity is largely a simple process in this case. Motorola Mobile’s net assets were broken up into different classes and were then added to the Google balance sheet. There did not appear to be any significant issues with the combination of subsidiaries, as there were few independent subsidiaries and Google is going to run Motorola Mobile independently. The transaction will also appear on the Statement of Cash Flows as an investing activity.

Intangible Assets

This combination resulted in the valuation of a number of intangible assets. Under FAS 141, there was no specific guidance on how to classify and designate assets acquired in a business combination (PWC, 2010). New guidance related to GAAP/IFRS convergence holds that “all assets acquired must be classified and designated by the acquirer based on the acquirer’s accounting policies and the facts and circumstances existing on the acquisition date” (PWC, 2010). It appears that, with the breakdown above, Google has met the guidance that requires it to classify and designate assets that are part of the acquisition.

Specific to goodwill, there has also been a recent change in the way this is recognized as the result of an acquisition. The old guidance held that goodwill is recognized as the result of a business combination. The new guidance holds that goodwill in noncontrolling interest as well as controlling interest is recognized. It is not believed that there was any goodwill in noncontrolling interest as the result of this combination.

Fair value is the principle for asset recognition in a business combination. All intangible assets are presumed under both GAAP and IFRS to be reliably measured. One element of these standards is how the intangible asset is intended to be used. Google acquired patents, and it also booked customer relationships as another intangible asset. Prior to the acquisition, these would have been valued in accordance with their value to Motorola. Google could then have ascribed to them very little value if it did not intend to use them. Under new guidance, however, Google must value these at fair value reflecting their “highest and best use.” The underlying assumption here is that even if Google chooses not to use a particular intangible asset, it might be able to sell that asset, so it must first record that asset at a higher value at the time of the acquisition. For example, subsequent to the purchase, Google expressed disappointment that Motorola’s product pipeline “needed to be drained,” that it was not up to Google’s standards (Zeman, 2013). These patents and designs, therefore, would presumably need to be written down from their $5.5 billion value. They might have been worth that much to Motorola as their primary business, but to Google they clearly have a lower value, and eventually that will need to be reflected on the balance sheet.

Goodwill is “an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately-recognized” (PWC, 2010). It is, essentially, the premium paid by the acquirer over book value for the acquisition. In this transaction, Google booked $2.9 billion in goodwill. This amount was arrived at by valuing the other assets it acquired at fair value, with goodwill being the amount that was left over. If Google does not realize this value, it will be forced to write down the goodwill value of the deal at a later date. If this occurs, it will be the result of annual impairment tests that the acquirer must undertake, based on guidance in ASC 350 or IAS 36 if the company is using IFRS. Thus, the accounting standard used will result in differences in the way that goodwill is impaired.

Google has dismantled Motorola, by and large, selling off significant assets while retaining much of Motorola’s intellectual property (Dignan, 2013). At least one analyst sees the value of the intangible assets as being worth the price paid, once these asset sales and the cash and tax benefits of the deal come to Google (Ibid). Some of the intangible assets would have been sold in the subsequent deals, but most has remained. To this point, therefore, there is a case to be made that Google had valued goodwill and other intangible assets fairly. However, it is too early to tell for certain, specifically with respect to the goodwill. Ultimately, goodwill should result from synergies, and there have not been too many of those materializing in the first year of the combined entity. The synergies were supposed to come from the combination of Google’s software and Motorola’s hardware, but the combined entity has not released a hit smartphone or tablet, and its share of the smartphone handset business has decreased (Ibid). . The comments that Google made about the smartphone pipeline at Motorola lead one to believe that the goodwill part of the deal in particular was overvalued, and that at some point the annual impairment tests will bear that out.

Special Issues

There do not appear to be any special issues with respect to the change in ownership, insolvency, liquidation and reorganization resulting from the acquisition. Motorola was retained as a separate unit with Google, and will eventually see its assets folded into a Google hardware or mobile unit.


If this deal was booked under IFRS rather than GAAP, it does not appear that there would have been a material difference in the combination accounting. There has been significant convergence in recent years between GAAP and IFRS with respect to acquisitions, and as a result there remain only minor differences between the two in this regard. IFRS companies will recognize more intangible assets outside of goodwill, but GAAP companies will need to value their intangible assets more in line with IFRS norms.

One area of difference that does remain is with post-acquisition accounting for goodwill. There are “significant differences in the principles in FAS 141 and ASC 805 both in determining the implied fair value of goodwill and in step two of the goodwill impairment test that could lead to different impairment losses” (PWC, 2010). This is a situation that is likely to affect Google, since it appears that there now will be significant goodwill impairment arising from the Motorola deal in light of the state of that company’s poor innovation pipeline. Since future impairment charges will come from the operating income and affect the net income, these differences could have a significant impact on profitability. A firm using GAAP will have a different profit after the writedown than a firm using IFRS, because of the difference in the nature of the writedown.

Works Cited:

Dignan, L. (2013). Google’s Motorola purchase: Was it worth it? ZDNet. Retrieved March 2, 2013 from

Google. (2012). Fact’s about Google’s acquisition of Motorola. Retrieved March 2, 2013 from

PWC. (2010). Accounting for business combinations. Price Waterhouse Coopers. Retrieved March 2, 2013 from

Reisinger, D. (2012). Google: Motorola’s patents, tech are worth $5.5 billion. C/Net. Retrieved March 2, 2013 from$5.5-billion/

Zeman, E. (2013). Google not impressed with Motorola smartphone pipeline. Information Week. Retrieved March 2, 2013 from

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