Accounting for M&A, Credit, & Equity Analysts,9780071429696

Accounting for M&A, Credit, & Equity Analysts

by
Edition: 1st
ISBN13: 9780071429696
ISBN10: 0071429697
Format: Hardcover
Pub. Date: 2004-06-24
Publisher(s): McGraw Hill
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Summary

Investment professionals too often regard the acquisition of accounting knowledge as a necessary evil -- and, therefore, too often know less than they should. This lack of knowledge often leads to simple misunderstandings or even out and out errors that, at best, serve as minor speed bumps in a high-stakes transaction and, at worst, lead to the delay or even derailing of the deals in question.

Author Biography

James E. Morris, C.P.A., C.F.A. (Baltimore, MD) is a project manager of financial analysis for the U.S. Nuclear Regulatory Commission. He also trains analysts and associates to value companies.

Table of Contents

Preface xi
Introduction xiii
List of Abbreviations xv
Chapter 1 Equity Method of Accounting for Investments 1(24)
Introduction
1(1)
Description of the Equity Method
1(4)
Tax Considerations When Using the Equity Method
5(3)
Accounting under the Equity Method-Excess of Cost over Equity Purchased
8(2)
Accounting under the Equity Method-Intercompany Transactions
10(2)
Guidance for Applying the Equity Method
12(5)
SEC Staff Views Concerning the Equity Method
17(1)
When to Use the Equity Method-Summary
17(1)
Accounting for Cash Flows from Equity Method Investments
18(1)
Modeling the Equity Method of Accounting in Projection Models
19(3)
Chapter Summary
22(3)
Chapter 2 Minority Interests 25(14)
Introduction
25(1)
Minority Interests
25(1)
Overview of Accounting for Minority Interests
26(5)
Treatment of Minority Interests for Enterprise Valuation
31(1)
Forecasting Minority Interests
32(1)
Treatment of Minority Interests in M&A Transactions
32(3)
Modeling Minority Interests
35(1)
Chapter Summary
36(3)
Chapter 3 Deferred Income Taxes and Income Tax Reporting 39(22)
Introduction
39(1)
Basic Principles of Tax Reporting
39(1)
The First Principle
40(1)
The Second Principle
40(10)
The Third Principle
50(1)
The Fourth Principle
50(2)
Treatment of Deferred Income Tax Items in M&A Transactions
52(2)
Modeling Income Taxes in Projection Models
54(3)
Calculating the Provision for Taxes-Detailed Calculation
57(2)
Chapter Summary
59(2)
Chapter 4 Deciphering the Deferred Tax Footnote 61(16)
Introduction
61(1)
Financial Statement Disclosure for Income Taxes
61(7)
Reconstructing Deferred Taxes on the Financial Statements
68(5)
Problems with Ratio Analysis
73(1)
Valuation of Deferred Tax Items
74(1)
Chapter Summary
74(3)
Chapter 5 Estimating the Tax Basis of a Firm's Assets 77(18)
Introduction
77(1)
Factors Affecting Differences Between Asset's Book and Tax Bases
78(1)
Depreciation (or Amortization) Using Different Schedules
78(6)
Recognizing Asset Impairments
84(2)
Transaction Fair Value Adjustments
86(1)
Asset Sales or Deemed Asset Sales
87(1)
Estimating the Tax Bases of Target Company's Assets-Known Balance Sheet
87(4)
Estimating the Tax Bases of Target Company's Assets-Unknown Balance Sheet
91(2)
Chapter Summary
93(2)
Chapter 6 Pension and Other Postretirement Benefits 95(24)
Introduction
95(1)
Pension versus Other Postretirement Benefit Plans
96(1)
Types of Pension Plans
96(1)
Economic Objectives of Pension Plans
97(1)
How Pension Plans Work
98(3)
Net Periodic Pension Cost
101(11)
Minimum Pension Liability
112(1)
Pension Benefits Summary
112(1)
Other Postretirement Benefit Plans
113(1)
Net Periodic Postretirement Benefit Cost
114(2)
Effects of Business Combinations
116(2)
Chapter Summary
118(1)
Chapter 7 Deciphering the Pension Footnote 119(16)
Introduction
119(1)
Pension Benefit Disclosure Requirements
120(1)
Benefit Obligation Reconciliation
120(6)
Plan Fair Value Reconciliation
126(3)
Employer Securities Included in Plan Assets
129(1)
Net Periodic Benefit Cost Disclosure
130(1)
Funded Status and Unrecognized Items
130(1)
Rate Disclosures
130(2)
Health Care Disclosures
132(1)
Chapter Summary
133(2)
Chapter 8 Analyzing the Firm's Pension Cash Flows 135(10)
Introduction
135(1)
Estimating Future Funding Cash Flows
136(6)
Employer Company's Plan Assets and Liabilities in an Acquisition
142(1)
Plan Liquidation Values
143(1)
Chapter Summary
144(1)
Chapter 9 Employee Stock Options 145(12)
Introduction
145(1)
The Intrinsic Valuation Method
145(2)
The Fair Value Method
147(1)
Evaluating the Firm's Inputs to the Option-Pricing Model
148(2)
Tax Effects of Employee Stock Options
150(1)
Calculation of Diluted Earnings per Share for Companies Expensing Stock Options
150(3)
Accounting for Target Stock Options Rolled Over in a Purchase Acquisition
153(2)
Projecting Earnings Per Share (EPS) for Option-Intensive Firms
155(1)
Chapter Summary
156(1)
Chapter 10 Restructuring Charges 157(16)
Introduction
157(1)
FASB's New Changes to Financial Accounting for Restructuring Charges
158(1)
Restructuring Charges-U.S. GAAP
158(10)
Restructuring Charges-International Accounting Standards
168(1)
Disclosure of Restructuring Charges
169(1)
Restructuring Liabilities in Business Combinations
169(1)
Chapter Summary
170(3)
Chapter 11 Discontinued Operations 173(10)
Introduction
173(1)
How Results of Discontinued Operations Impact Earnings from Continuing Operations
173(2)
Sources of Classification Bias
175(1)
Criteria for Classifying Items as Discontinued Operations
176(1)
The Operations Being Discontinued-Component of a Business
176(1)
Disposal Criteria
177(2)
International Accounting Treatment of Discontinued Operations
179(1)
Chapter Summary
180(3)
Chapter 12 Net Operating Loss Deductions 183(14)
Introduction
183(1)
Net Operating Loss Deductions
183(3)
Other Tax Considerations Relating to NOLs
186(1)
M&A Considerations Relating to NOLs
186(1)
NOL Effects on Financial (GAAP) Reporting
187(2)
Valuation Considerations
189(1)
Modeling NOL Carrybacks and Carryforwards
190(5)
Chapter Summary
195(2)
Chapter 13 Purchase Accounting for Business Combinations 197(40)
Introduction
197(1)
Purchase Accounting Basics
198(2)
Calculating Target Company's Net Identifiable Assets
200(9)
The Net Identifiable Assets Calculation
209(1)
Calculating the Purchase Price
209(1)
Transaction Fees
210(3)
Fair Value of the Consideration Given
213(2)
Calculating Goodwill
215(1)
Negative Goodwill
216(3)
Amortization of Goodwill
219(3)
Accretion and Dilution of Earnings
222(7)
Pro Forma Presentation (as If Combined)
229(1)
Statements of Cash Flows Following Business Combinations
230(1)
Limitations on the Use of Target Company's Net Operating Loss (NOL) Carryforwards
230(1)
Effects on Minority Interests in Business Combination Transactions
231(2)
Chapter Summary
233(4)
Chapter 14 Deemed Asset Sales under IRC Sections 338(h)(10) or 338(g) 237(16)
Introduction
237(1)
Overview of the Section 338(h)(10) Election
237(2)
Benefits of Section 338(h)(10) Sales
239(3)
Determining the Sale Price for a Section 338(h)(10) Election
242(5)
Modeling Section 338(h)(10) Transactions
247(3)
Chapter Summary
250(3)
Glossary 253(6)
Endnotes 259(6)
Index 265

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