Question

Coffee Co. (the "Company") is a global distributor of organic coffee beans and teas that is registered with the SEC in the United States. The Company's operations are primarily located in the United States, Canada, and South America. In March 20X8, Coffee Co., looking to refocus efforts to only produce coffee products, entered into an agreement (the "Agreement") with Nature's Beverage, a food distributor in the United States looking to expand its international footprint (the "Transaction'). Nature's Beverage is registered with the SEC in the United States. Pursuant to the Agreement, Coffee Co, provided a sublicense to Nature's Beverage for the distribution rights of Coffee Co.'s South American local tea brand, Herbal T, whereby Nature's Beverage will distribute Herbal T in South America. Under the Agreement, Coffee Co. transferred the existing customer contracts in South America to Nature's Beverage and an at-market supply contract with the producer of Herbal T. Coffee Co. retained all of its employees and distribution capabilities. The Transaction closed on March 1, 20X8 (the "Closing"). Additional Facts: • Nature's Beverage incurred certain costs to acquire the sublicense of the distribution rights and a license to use the Herbal T brand. The costs included legal, accounting, and other professional or consulting fees totaling $50,000. Nature's Beverage agreed to transfer to Coffee Co. $3 million for the sublicense of the distribution rights of Herbal T. . Assume both companies have adopted FASB Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business Required: 1. Does the acquisition of the sublicense by Nature's Beverage to distribute Herbal T meet the definition of a business? 2. How should Nature's Beverage account for the acquisition, including the treatment of the transaction costs? (Note that the response will be dependent on the response to Question 1.) *in the 2017 update of 805 Case F and 805-10-55-82 states it does not meet the definition of a business The rest of the answers on here says it does, that is why I am reasking this becuase of the confusion

Answer 1

Refer the below images for the above asked questions, in a detailed way of explanation.

Answer: Requirement V: Acquisition of sublicense Meets the Definition of Business : Nature's Beverage is a company in the line of distributing food products in writed States of America. The company a registered in the United States. The company entered agreement with coffee Company to supply the swth American tea brand in united States named Herbal T whereby the company will distribute Herbal T in South America - In the meantime, the coffee company supplied its existing contracts to nature's beverage since the resultant company would thereby look after the distributing Contracts of Herbal T. The above acquisition of sublicense is a valid Contract and is undertaken in terms of expanding the business by nature's beverage. As per the definition of business it includes an agreement undertaken by a company in order to commence trading, distribution Service provider (or any other form of activity in order to commence helling of a product Cor) a service- Therefore, the greement entered amongst the two entity Constitutes business agreement, allowing Nature's Beverage to sell the Herbal T Product in different states of South America. For ther, the investment in the acquisition of distribution rights is done in order to expand the revenues of the Company that itself constitutes establishment and a casisition of bosiness right. This concludes that the acquisition made by the company meets the definition of bosiness.

Requirement : Account for of the the acquisition Acquisition of of Herbal T By Nature's Distribution Beverage : Dist Rights Further in order enter into an agreement with company, Nature's boverage had to incor Some amount int of license fees, legal accoonting & Consultancy expenses, against distribution rights paid to coffee co. Such costs ane by Nature's beverage were in the form of investment that a give returns to the company over the number of upcoming years (Shiztong, 2004). The company shall not charge such expenses incurred in the statement of profit and loss, either the company Shall capitalize all the expenses in the form of acquisition of distribution rights of coffee company in its books of account. All the transaction expenses are thereby called as expenses incurred in order to acquire the distribution rights and therefore all the costs shall not be capitalized in the distribution license only irrespective of the nature of other expenses. As per the financial accoonting Standards board, the transactions costs are not considered in be in exchange of fair value of assets acquired and therefore Shall be expensed. The tax treatment of such expenditures are not Straight forward and the noture & timing of the expenditure have its impact over the tox treatment. costs incurred by the company in order to acquire the sublicense were not to be expensed as they were in form of investments (FASB 2000). These costs are also not amortized in the upcoming years as thy are not in. derms of real expenditure and notar treatment would be there on such expenses.