Beruflich Dokumente
Kultur Dokumente
Chapter 3
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Accounting treatment
Add individual asset and liability amounts of the two companies Additional shares of common stock issued by acquiring firm offset in the paid-in capital account Retained earnings are simply added Any remaining offset to paid-in capital account made to retained earnings Consolidated income statement is a summation of each account Accounting treatment reflected in prior year financial data
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4
Purchase Accounting
Combinations usually for cash and taxable; or fail to meet some tests for pooling Operations of target firm are absorbed into acquiring firm Excess of price paid over acquired book net worth assigned either to
Tangible depreciable assets up to fair market value Goodwill
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5
Net worth accounts of target are eliminated Combined common stock account is total shares times par value Total debits less any credit to the common stock account is a "plug" credit to the paid-in capital account
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"Combined" retained earnings is the retained earnings of the acquiring firm Reported net income is lower Goodwill amortization
Financial reporting: write-off period no longer than 40 years Tax reporting: for taxable purchases, 1993 tax law change allows tax deductible goodwill amortization over 15 years
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7
When the excess is assigned to goodwill, the annual amortization of goodwill will be increased whether tax deductible or not
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When the excess is assigned to goodwill whose amortization is deductible under the tax law change of 1993, cash flows under purchase accounting will be increased
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Effects on Leverage
Pooling leverage is unchanged Purchase
When payment is by stock, leverage is decreased When payment is from excess cash or increased debt, leverage is increased
See the text and diskette for use with Weston, Johnson, Siu (2000) for Tables 3.1 through 3.6 for analysis of above relationships
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12
Empirical Studies
Acquiring firms prefer pooling method to avoid negative impact of goodwill amortization on reported earnings Stock prices of acquiring firms are not penalized when purchase method accounting is used No statistical significant difference in stock price reactions to accounting method used in nontaxable transactions
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