Accounting for mergers and reverse mergers: An instructional assignment using SEC Form 10-K and S-4 disclosures

Abstract

► The assignment requires students to investigate two real-world mergers using disclosures in SEC Forms 10-K and S-4. ► Students must examine contextual factors surrounding the merger and reconstruct entries on the books of the acquirer. ► Contextual factors include reasons for the merger, determination of the “accounting acquirer,” and the legal environment. ► Students are given exposure to accounting for reverse mergers, where the legal acquirer is not the accounting acquirer . This instructional assignment explores two real-world business combinations, focusing on contextual factors surrounding the merger as well as accounting recognition by the legal acquirer. The business combinations studied in this assignment are Exxon Mobil Corporation’s (2010) acquisition of XTO Energy Inc. and the 2010 reverse merger between RRI Energy, Inc. and Mirant Corporation. Students must utilize disclosures in Forms 10-K and S-4 to: (1) investigate the reasons behind the merger, (2) examine the criteria used for determination of the “accounting acquirer” (in the case of RRI Energy and Mirant), and finally (3) prepare the entries to combine the firms at the time of merger. Students must learn the basics of reverse-acquisition accounting from relevant authoritative pronouncements as well as study the legal environment surrounding business combinations. Targeted for Advanced Accounting courses, this instructional assignment meets calls from the accounting profession and the Accounting Education Exchange Commission (1990) for instructors to integrate real-world problems that capture complex business transactions into the course curriculum.