JIAR China 2016

Question 1

Companies who use U.S. GAAP are not allowed to

Answer 1

report property, plant, and equipment (PPE) at amounts greater than historical cost

Question 2

Companies in the European Union (EU) and other countries using International Financial Reporting Standards (IFRS) may choose to report assets on

Answer 2

the balance sheet at either historical cost or fair value

Question 3

Those Chinese companies following Chinese GAAP must use the

Answer 3

direct method in preparing the statement of cash flows, whereas most companies in the United States and the EU use the indirect method.

Question 4

Both U.S. GAAP and Japanese GAAP stipulate that research and development costs must be

Answer 4

expensed as incurred, whereas IFRS requires development costs to be capitalized as an intangible asset when certain conditions are met.

Question 5

In a typical reverse merger (RM), a private operating company, either from the U.S. or abroad,

Answer 5

merges with a “shell” U.S. company

Question 6

Upon consummation of the merger, the private company becomes

Answer 6

a wholly owned subsidiary of the shell company; can be traded in the U.S. securities market if the shell company is publicly listed.

Question 7

Since an RM avoid an underwriter, it could potentially allow companies to

Answer 7

go public in the U.S. more quickly and in a a less expensive manner than a traditional IPO

Question 8

Critics point out that RMs allow companies to go public with

Answer 8

less scrutiny of their financial situations, exposing investors to risk

Question 9

Concerns on RMs

Answer 9

-the use of small audit firms that might not have the resources to meet auditing obligations when all or substantially all private company’s operations are in another country; causing them to miss non compliance with relevant accounting standards.
-audit quality

Question 10

In 2011 the SEC passed

Answer 10

new rules tightening the standards that RMs needed to meet for listing on the major exchanges that would provide greater protections for investors

Question 11

SEC New Rules

Answer 11

• require RMs to be traded in the U.S. over the counter or on another regulated U.S. or foreign exchange for at least one year and
  -meet minimum share price requirements before it can be publicly listed on the NYSE, NASDAQ, or NYSE Amex

Question 12

A comparison of domestic and foreign firms that undertake RMs reveals

Answer 12

no systematic difference in earnings management between the U.S. and non-U.S. RM companies

Question 13

Risk considered with RMs

Answer 13

-Domestic RM firms show potentially questionable accounting practices
-Focus on foreign firms as risky investments has been too narrow and ignored Domestic RM firms
-caution should be expanded
-Domestic and foreign RMs engage in Earnings Management

Question 14

RMs that use Big 4 auditors (higher quality auditors) are associated with

Answer 14

lower Earnings Management

Question 15

RM firms that use Big 4 auditors are associated with significantlly

Answer 15

lower rates of failure (delistin) in the years following the reverse merger; equal to almost half of the failure rate of RM firms that do not employ a Big 4 auditor

Question 16

RM firms intending to issue equity within the year of a reverse merger are more likely to

Answer 16

manage earnings than firms undertaking a reverse merger alone

Question 17

The firm-level characteristics of the identity of the auditor and the desire to raise equity capital in the U.S. are more important indicators of

Answer 17

earnings quality than the geographical location of the RM firm

Question 18

The most common type of RM is conducted as a

Answer 18

reverse triangle merger, whereby a public shell company forms a new wholly owned, empty subsidiary and then merges this subsidiary into a company that wishes to go public through a reverse merger

Question 19

Once a reverse triangle merger is completed, the company’s

Answer 19

shares are converted into shares of the public shell and constitute a majority stake in the public company.

at this point the firm operates as a wholly owned subsidiary of the company

is used more often than an RM because it has few transaction costs

Question 20

RMs have been conducted since the

Answer 20

1950s

Question 21

RMs are considered ______ investments

Answer 21

risky; due to their relatively unregulated status

Question 22

The SEC adopted a rule change in 2005 affecting the use of

Answer 22

S-8 and Form 8-k by shell companies

new rules clarified the definition of shell companies as those with little to no operations and assets other than cash, prohibited the use of Form S-8 by shell companies

required shell companies to file additional information on 10-K forms.

Question 23

Currently all RM companies that trade on the NYSE, NASDAQ, or OTC Bulletin Boards are required to

Answer 23

file Forms 10-K and 10-Q disclosures and provide audited annual financial statements

Question 24

Under new SEC rules NYSE, NASDAQ, NYSE Amex are required to

Answer 24

impose a one-year “seasoning period” for firms going public through RMs, where they must first trade in the OTC market or other regulated U.S. or foreign exchange following the reverse merger

during this period, firms must file audited financial statements before being listed on the major U.S. exchanges

the price for sustained period of time and stays at this price or above for at least 30 of the 60 days prior to listing application with the major exchange

Question 25

The most commonly cited reason for choosing and RM is

Answer 25

the cost; it is lower

Question 26

Companies wishing to issue equity would have less incentive to use a reverse merger as the cost of a reverse merger that includes an SEO ( Seasoned Equity Offering), is approximately

Answer 26

equal to the cost of an IPO

Question 27

Reasons companies choose RMs

Answer 27

lower cost
raise capital
lower speed
higher likelihood of completion

Question 28

Management typically cites one of seven categories as the primary reason for conducting and RM

Answer 28

growth
diversification
organizational depth
taking advantage of economies of scale
capitalizing on firm strengths
expanding into complementary lines of business
desire of a private firm to be publicly listed

Question 29

Firms that undertake RMs are typically

Answer 29

smaller, younger, and low-performing before the merger than firms that undertake an IPO

Question 30

Disadvantages of RMs for smaller firms

Answer 30

smaller firms do not get provided with liquidity and marketing
they typically see shares more thinly traded post-reverse merger
RMs do not require support of underwriters serving as a signal of low quality
low-quality firms are less likely to raise capital after completion of the RM

Question 31

Firms involved in RMs are generally

Answer 31

unprofitable prior to the merger
shareholders receive significant gains at the announcement of the merger
there is little to no post-merger improvement in operations or profitability for the RM firms
2 yrs following the merger,
firms continue to have higher debt,
higher volatility,
lower profitability,
lower growth opportunities,
lower trading liquidity,
lower institutional ownership than conventional IPO firms
more than 40% are delisted or bankrupt by the end of the 2 yr period

Question 32

Due to issues with quality of the firm and accounting transparency, RM firms are typically characterized by a high

Answer 32

high degree of information asymmetry and high asymmetric information environment has been found to encourage earnings management behavior