Intermediate Financial Management (with Thomson One)

Self-Test Questions
What are some alternative ways of structuring takeover bids?
How do taxes influence the payment structure?
How do securities laws affect the payment structure?
FINANCIAL REPORTING FOR MERGERS
Table 26-4
Although a detailed discussion of financial reporting is best left to accounting
courses, the accounting implications of mergers cannot be ignored. Currently,
mergers are handled using purchase accounting. 23 Keep in mind, however, that all
larger companies are required to keep two sets of books. The first is for the IRS,
and it reflects the tax treatment of mergers as described in the previous section.
The second is for financial reporting, and it reflects the treatment described below.
As you will see, the rules for financial reporting differ from those for the IRS.
Purchase Accounting
Table 26-4 illustrates purchase accounting. Here Firm A is assumed to have
“bought” Firm B in much the same way it would buy any capital asset, paying for it
Accounting for Mergers: A Acquires B
23 In 2001, the Financial Accounting Standards Board (FASB) issued Statement 141, which eliminated the use of pooling
accounting.
POST-MERGER: FIRM A
Firm A Firm B $20 Paid a $30 Paid a $50 Paid a
(1) (2) (3) (4) (5)
Current assets $ 50 $25 $ 75 $ 75 $ 80 c
Fixed assets 50 25 65 b 75 80 c
Goodwill d 0 0 0 0 10 d
Total assets $100 $50 $140 $150 $170
Debt $ 40 $20 $ 60 $ 60 $ 60
Equity 60 30 80 e 90 110 f
Total claims $100 $50 $140 $150 $170
Notes:
a The price paid is the net asset value, that is, total assets minus debt.
b Here we assume that Firm B’s fixed assets are written down from $25 to $15 before constructing the consolidated balance sheet.
c Here we assume that Firm B’s current and fixed assets are both increased to $30.
d Goodwill refers to the excess paid for a firm above the appraised value of the physical assets purchased. Goodwill represents payment both for intangibles
such as patents and for “organization value” such as that associated with having an effective sales force. Beginning in 2001, purchased goodwill
such as this could not be amortized for financial statement reporting purposes.
e Firm B’s common equity is reduced by $10 prior to consolidation to reflect the fixed asset write-off.
f Firm B’s equity is increased to $50 to reflect the above-book purchase price.
Chapter 26 Mergers, LBOs, Divestitures, and Holding Companies • 923