Abstract
This chapter focuses on the financial reporting implications of accounting methods for merger and acquisition transactions (equity method, full consolidation, and proportionate consolidation). We begin by comparing each method to each other in terms of off-balance sheet financing. The equity method is a single-line consolidation method, which means that the investee’s liabilities are netted against its assets, and hence, the investee’s debt is not shown explicitly on the investor’s balance sheet. In contrast, proportionate consolidation and full consolidation show the investee’s debt on their balance sheets. We continue by analysing changes in purchase price allocations. Acquirers may, in fact, revise the initial purchase price allocation of an acquisition and these revisions may provide useful information to the users of financial statements. An additional choice for acquirers reporting under IFRS is between the partial and full fair value method for non-controlling interests and goodwill. We analyse the motivation and the reporting implications of this choice. Then, we analyse the growth of a company, as reflected in the financial statements, separating organic (internal) growth from acquired growth. The chapter ends by analysing the impact of acquisitions on the acquirer’s cash flow statement.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
The argument against proportionate consolidation is that the investor does not normally have access to its share of assets and liabilities, and therefore, a balance sheet under proportionate consolidation is somewhat misleading.
- 2.
Debt covenants are often defined in terms of accounting ratios.
- 3.
The academic literature distinguishes between two types of financial reporting management: accrual management and real earnings management. Accrual management is achieved by selecting certain accrual accounting parameters. For example, a company may select a shorter useful life for a depreciable asset, thus reducing depreciation expenses. Real earnings management means executing a certain set of transactions in order to affect reported income. For example, selling a subsidiary in order to recognize a gain in the income statement.
- 4.
Normally, the proportionate consolidation method would not be allowed under the circumstances described in this example. We use it here to demonstrate the effect of different accounting methods on ratios and debt covenants.
- 5.
Snyder’s-Lance is a snack food company that manufactures, distributes, markets, and sells snack food products in North America and Europe. Its primary brands include Snyder’s of Hanover and Lance, Kettle Brand, Cape Cod, Snack Factory Pretzel Crisps, Pop Secret, Emerald, and Late July. All the data used here are available on https://investor.campbellsoupcompany.com/financial-information.
- 6.
The acquisition of Capital cities/ABC got the attention of Abraham J. Briloff, a distinguished accounting professor at Baruch College, New York. Briloff wrote an article arguing that Disney used the PPA to boost its post-acquisition income by nearly $2.5 billion. The article “Disney’s Real Magic: Is the entertainment giant’s accounting pure Mickey Mouse?” appeared in the Wall Street Journal on March 23, 1998.
- 7.
See IAS 36, Appendix C, § C4.
- 8.
Penman S. (2010).
- 9.
Libby R. et al. (2020).
References
Libby R., Libby P. A., Hodge F., Financial Accounting, 10th edition, 2020, McGraw Hill.
Penman S., Accounting for Value, 2010, Columbia University Press.
Author information
Authors and Affiliations
Corresponding author
1 Electronic Supplementary Material
Below is the link to the electronic supplementary material.
Rights and permissions
Copyright information
© 2020 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Amir, E., Ghitti, M. (2020). Financial Analysis of Business Combinations (Advanced Issues). In: Financial Analysis of Mergers and Acquisitions . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-61769-1_9
Download citation
DOI: https://doi.org/10.1007/978-3-030-61769-1_9
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-61768-4
Online ISBN: 978-3-030-61769-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)