April 2011 Newsletter - Financial Executives International

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2 PARTNERS CORNER Maximizing Value Through the Integration of Transfer Pricing and Purchase Price Allocation Companies involved in a business combination typically prepare one analysis that determines the fair value of assets and businesses for financial reporting purposes, and a separate analysis to determine the price that should be charged when assets are transferred between related entities. Performing these studies separately can lead to the use of inconsistent assumptions, inputs, and approaches that can bring about avoidable risks and penalties. Transfer Pricing (TP) and Purchase Price Allocation (PPA) valuations are applied differently but are based upon the same premise. When prepared together, the studies can support each other and provide taxpayers with a strong basis in defending their position if an audit is performed. Other areas where benefits can be derived from valuation and TP professionals working together, include restructuring, due diligence, and merger and acquisition planning. Benefits of Preparing Transfer Pricing and PPA Analyses Jointly 1. Technical Efficiencies a. Different TP structures: Very often an acquired company operates under a TP structure that is different from the acquirer’s TP structure – and the postacquisition plans of the company may involve converting the acquired company’s operations into the acquirer’s TP structure. This could affect both the projected cash flows and risks faced by the specific legal entities being acquired. b. Pre-tax versus post-tax: In general, PPA values are calculated using the present value of after-tax cash flows, and then a tax amortization benefit is added if the particular asset can be amortized and provide a tax benefit to the acquirer. TP values are calculated using the full taxable income (i.e., pre-tax). c. Reconciliation: Clients, their auditors, and tax authorities may request a “reconciliation” be performed to explain any differences between a PPA value and a TP value. Performing these analyses together can make the reconciliation exercise much easier to explain. d. Implications for buy-ins: Postacquisition buy-in payments, which require valuing the contribution of acquired IP to an existing cost-sharing arrangement, will often result in side-by -side comparisons between the value of the acquired IP as determined for the PPA and for tax/TP purposes. Performing these analyses together can minimize the differences that remain between the two conclusions and aid in reconciliation. e. Discount rates: Discount rates reflecting the systematic risk of a given set of cash flows should be the same, whether used for PPA or TP purposes. Thus, a joint determination by the PPA and TP team regarding the appropriate discount rate can result in greater efficiency in the overall project. 2. Cost Efficiencies a. Fact finding: Joint fact-finding calls (e.g., about the nature and economic life of acquired technology) can reduce duplicate efforts and cost to the client. b. Company data development efforts: Most financial information (e.g., projected cash flows) can be used jointly by the PPA and TP teams, so a single data request can be prepared to streamline efforts. c. Tax valuation – legal-entity valuation: Any other post-acquisition needs of the client (e.g., tax or legal-entity valuations) can often be performed concurrently, saving additional duplication effort and costs. (Continued on page 5) 2010–2011 Officers President Kevin R. Rhodes Plum Choice, Inc. Vice President Alan L. Faber Grant Thornton, LLP Vice President Sharon F. Merrill Sharon Merrill Associates, Inc. Treasurer Peter S. Rockett Greater Boston Chamber of Commerce Secretary Karen Edlund 2010–2011 Directors Academic Relations Bernice Bradin Lesley University Career Services Paolo Castelli Agere Enterprise Management Chapter Communications Kevin P. Walsh Hill Holliday Diversity Timothy J. Coakley Island Oasis Membership Involvement Jacquie D. Arthur Nakina Systems, Inc. Membership and Recruitment John J. Dion Partner Programs J. Britton Hutchins Vistagy Meeting Programs Perry W. Morton Baldwin & Clarke Corporate Finance, Inc. Professional Development Edward J. Keefe M/C Venture Partners Special Events Mark J. Sullivan Markley Group Director Emeritus/ Advisor Board Initiatives F. Gorham Brigham, Jr. —————————————————— Chapter Administrator James P. Andersen, Jr. Foundation Management Associates Tel: (781) 248-5759 E-mail: jandersen@feiboston.org
LETTER FROM THE PRESIDENT ABOUT OUR SPEAKER 3 (Continued from page 1) Mark your calendar for April 13, 2011: we have quite the game plan – all under one roof. Our Professional Development session will focus on CFO Best Practices. Please join us to hear a distinguished panel of cross-industry/functional leaders discuss how today’s CFO is managing risk through best-practice initiatives. Same-time, same-place, April 13, 2011 is our latest installment in our Special Interest Group’s Retirement series, “Life Balance in Retirement.” We will welcome Jim Shattuck once again. This series of seminars is perfect for our members who are retired, soon to be retired, or beginning to think about planning for retirement. This program is FREE for our FEI members and their spouses. Also that afternoon, FEI’s Academic Relations Group will proudly honor 25 college students: this year’s FEI scholarship award recipients. Many of them, along with their faculty advisors and family members, have been invited to April’s dinner. Our “grand slam” for the evening will be our Dinner Meeting on April 13, 2011. Our keynote speaker is Leonard A. Schlesinger, President of Babson College. Come join your fellow FEI members, to network and congratulate our scholarship recipients in person! Recent job change? New e-mail address? Please make sure your FEI profile is up to date. It is password-protected, so only you can make changes. This will ensure that timely FEI news finds you and…extra bonus… your name tag is accurate at all FEI events. Just couldn’t make it to one of our recent sessions? Remember, presentations of many of our programs are available online on our website. Read them anytime, anywhere. Just click. Game schedule for later in the season also looks bright! Mark your calendar for two very special year-end events: FEI’s Night at Fenway on May 25, 2011 with Rico Petrocelli, and our CFO Ethics Summit on June 23, 2011. Hope you can join us this month! Kevin Rhodes President, FEI Boston (Continued from page 1) and Foundations programs. Leonard Schlesinger is well known for his pioneering research and publications on the “Service Profit Chain.” He is the author or co-author of 10 books and has written more than 40 articles for academic audiences as well as for The New York Times, Fast Company, and Harvard Business Review. President Schlesinger currently serves as a member of the board of directors of the Network for Teaching Entrepreneurship (NFTE), a board member of the BJ’s Wholesale Club, Inc., a member of the Board of Directors of the Massachusetts Clean Energy Center, a member of the corporation of the Winsor School, serves on the Board of Managers for StriVectin Holdings, LLC, and is a member of the President’s Council of the Franklin W. Olin College of Engineering. He also serves as an Advisory Council Member of The 10,000 Small Businesses Initiative, as well as a member of the Council on Competitiveness, and is a member of the Council on Foreign Relations. Schlesinger earned a Doctor of Business Administration from Harvard Business School, an MBA from Columbia University, and a BA in American Civilization from Brown University. New Members! FEI would like to extend a warm welcome to our new members who joined FEI in March 2011: Juan Morales William Peressini Edward Resch International News! Last month, it was announced that China surpassed the United States as the world’s leading manufacturer. The link below challenges this announcement by questioning the sustainability of China’s recent economic boom. The video can be accessed here.
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April 2011 Newsletter - Financial Executives International

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