Question

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain it incorporation?

A) Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed.
B) Direct combination costs are part of the acquisition costs, and the stock issuance costs are a reduction to APIC.
C) Direct combination costs are expensed and stock issuance costs are a reduction to APIC.
D) Both are treated as a part of the acquisition consideration transferred.
E) Both are treated as a reduction to APIC.

Answer 1

In an acquisition accounting, stock issuance costs are treated as a reduction to Additional Paid-in Capital (APIC), while direct combination costs are expensed and not capitalized as part of the acquisition.

Step-by-step explanation:

In the context of a business combination accounted for as an acquisition where the subsidiary will retain its incorporation, the treatment of stock issuance costs and direct combination costs is distinct. According to accounting principles, stock issuance costs are not included as part of the acquisition costs. Instead, they are treated as a reduction to Additional Paid-in Capital (APIC). Conversely, direct combination costs, such as finder's fees, consultancy fees, legal fees, and other costs directly attributable to the business combination, are expensed as incurred. They do not form part of the acquisition costs or the capitalized value of the acquired entity.