A type of acquisition that was not discussed in the chapter is the leveraged buyout. Many experts argue that a leveraged buyout (LBO) is not a type of business combination but rather just a restructuring of ownership. Yet some would see an LBO as having many of the characteristics of a business combination. The number of LBOs in recent years has grown dramatically and, therefore, accounting for these transactions is of increased importance.
a. What is a leveraged buyout? How does an LBO compare with a management buyout (MBO)?
b. What authoritative pronouncements, if any, deal with leveraged buyouts?
c. Is a leveraged buyout a type of business combination? Explain.
d. What is the major issue in determining the proper basis for an interest in a company purchased through a leveraged buyout?