Question: Wheatnix purchases electronic components from Salut under a five year supply

Wheatnix purchases electronic components from Saluté under a five-year supply contract at fixed rates.
Currently, the fixed rates are higher than the rates at which Wheatnix could purchase similar electronic components from another supplier. The supply contract allows Wheatnix to terminate the contract before the end of the initial five year term but only by paying a $6-million penalty. With three years remaining under the supply contract, Wheatnix pays $50 million to acquire Saluté, which is the fair value of Saluté based on what other market participants would be willing to pay.
Included in the total fair value of Saluté is $8 million related to the fair value of the supply contract with Wheatnix.
The $8 million represents a $3-million component that is at market because the pricing is comparable to pricing for current market transactions for the same or similar items (selling effort, customer relationships, and so on) and a $5-million component for pricing that is unfavourable to Wheatnix because it exceeds the price of current market transactions for similar items. Saluté has no other identifiable assets or liabilities related to the supply contract, and Wheatnix has not recognized any assets or liabilities related to the supply contract before the business combination.
Discuss how Wheatnix would account for the contract on acquisition of Saluté.

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  • CreatedJune 09, 2015
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