Deal Structuring Flashcards
1
Q
M & A require understanding of accounting (2)
A
- need to see behind the number
- different financial statements depend on method used
2
Q
Main methods for accounting (4)
A
- cost method
- equity method
- purchase/ consolidation accounting
- outdated: pooling of interest accounting
3
Q
Cost method (5)
A
- 0-20%
- non influence investment
- investment as an asset on balance sheet
- apply the lower of cost or current market value
- gains or losses of the sales on these securities are only shown in income statement when realize
4
Q
Equity method (4)
A
- 20-50%
- influence but not control
- investment are shown on acquiring balance sheet on cost plus share of target net income less any dividend received when purchases
- owned share of target net income recognized on acquirer income statement as earned
5
Q
Purchase accounting (5)
A
- > 50%
- controlling stake
- one company is buyer
- identify liabilities and assets
- target revenue and expenses are included
6
Q
Purchase price goes to (3)
A
- goodwill
- intangible assets
- tangible deductible assets are written off
7
Q
Should you care about numbers like EPS (2)
A
- No: economic values will be the same
- Yes: analysis and market are not rational, influence from deal structure, covenant on debt
8
Q
Earning management (6)
A
- EPS enhancement
- tax management
- credit enhancement
- amortization and write off: harms EPS and save tax
- allocation of purchase price
- price maximization
9
Q
goodwill minimization (3)
A
- lower tax
- increase depreciation
- good cashflow, bad on earnings
10
Q
deal structuring involves accounting consideration of (4)
A
- legal
- tax
- form of payment and financing
- incorporate subsidiaries as a conduit for transaction
11
Q
Non-taxable (1)
A
- tax are deferred from the shareholders until they dispose of their stocks
12
Q
Statutory mergers (1)
A
- target exchange stocks for acquired company stocks
13
Q
Non-taxable reorganization (2)
A
- acquiring firm: NOL carryover, tax credit carryover, carryover asset basis
- target firm: deferred gain for shareholders
14
Q
Taxable acquisition (2)
A
- acquiring firm: step up asset basis, loss NOlL and tax credit
- target firm: immediate gains recognition by target SH, depreciation recapture of income
15
Q
Empirical studies of tax (3)
A
- tax factor significants in under 10% merger
- tax effect not main motivation
- role of tax in going private transaction
