Question

"Push-down Accounting and the Recording of Both Tangible Assets and Intangible Assets"

• Imagine you are the chief financial officer (CFO) of a corporation with plans to complete the acquisition of a key subsidiary during the current year. Your chief executive officer (CEO) has requested a presentation to the Board of Directors describing the methods available to account for the acquisition internally and the best method for the company during the acquisition year. Please assess the value of each method identified in your presentation to the Board and support your recommendation with examples.
• Compare the key differences between the U.S. GAAP and IFRS positions on both intangible research and development costs and tangible depreciable assets. Indicate the key benefits and drawbacks to financial statement users of each method (U.S. GAAP and IFRS). Next, determine the method that provides the most relevant information to financial statement users. Provide support for your rationale.

Answer 1

An acquisition/takeover is the purchase of one business or company by another company or other business entity.Specific acquisition targets can be identified through myriad avenues including market research, trade expos, sent up from internal business units, or supply chain analysis.Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.

Earn-Out

An earn-out occurs when the two companies on either end of the acquisition cannot reach an agreement regarding the future financial success of the company. If you are the company that is being acquired, an earn-out allows you to “earn” a portion of the purchase price over a period of time. The amount you are able to earn is based on the company’s performance going forward.

Important things to remember about earn-outs:

• The time to earn usually lasts between 3 and 5 years, but that is negotiable.

• The amount the seller earns is contingent on how the company performs following the purchase. There is no upfront price.

• If the new owner financially advances the company, you (the seller) get paid for the new profit.

• If the buyer runs the company poorly, you may receive less money than expected over the earn time period.

This method is more reliant on negotiation and what both the buyer and seller seek from the deal.

Cash Deal

A cash deal consists of a bank loan or, in rare cases, straight cash from the buyer. A cash deal usually occurs when the buying company is significantly larger than the selling company. Depending on the size of the company, a cash deal may take several routes:

• SBA (small business administrative) loans are typically given out to smaller businesses to assist with the purchase.

• A typical bank loan is more common within the M&A process, which usually involves $1-$30 million spaces.

• These bank loans usually involve a fixed rate over a 7- to 10-year term.

The seller may want all cash if they don’t trust the buyer to run the business correctly, but this is more common for purchase prices under $2-$3 million.

Term loan

Term loans are paid to the seller over a period of time, typically 5-7 years. The price is usually fixed and the interest rate 2-3% higher than bank loans. A term loan is usually sought out if:

• The buyer cannot get enough financing from the bank.

• The seller may not need cash immediately and prefer the stream of income spread out over the years.

A term loan is a great idea for sellers if the circumstances allow. It provides a good return on the original purchase price and saves income tax dollars as the transaction is calculated.

Part Cash/Part Equity

There comes a time in every merger and acquisition process when the sale is stymied by growth and the seller is stuck at a certain revenue point. When that happens, you may not have the right resources to reach your sale goals. Enter a larger company and the M&A process gets a whole lot easier. Here’s how:

• The buyer buys out 80% of your company but keeps you on as a 20% owner.

• You now have the resources to make things happen and achieve your financial goals.

• At the end of an average 3-7 year period, the company usually reaches an estimated financial goal and the acquiring firm takes over your 20%.

At the end of this process, the value of your original 20% ownership has either increased or decreased, depending on how the company performed in those 3-5 years.

In my opinion cash deal method or part cash/part equity would be good as in the question the organisation is buying its subsidiary company which is much smaller than the buying company.