INSEAD Library

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Advanced Accounting Advanced Accounting Consolidation 8 Minorities........................................................................................................... 1 . . Table of Contents WHAT IS A GROUP? ................... . . .............................................................................................. 1 So what? .......................... ........................................................................................................... 2 CONSOLIDATED OR GROUP ACCOUNTS ........................ . ......................................................... 2 Pooling or merger method -When to use it: .................................................................................. 2 Pooling or merger method How to do it: ..................................................................................... 2 Purchase or acquisition method -When to use it: .................... ......................................... 4 Purchase or acquisition method -The issues:............................. .................................................. 4 Purchase or acquisition method -The balance sheEt: ................................................................5 In summary: ................................................................................................................................. 8 Purchase or acquisition method -The income statementlprofit and loss account: ....................... 8 Purchase or acquisition method - The cash flow statement: ........................................................ 8 Purchase or acquisition method - Some other details: ............................................................. 8 MINORITY SHAREHOLDERS........................................................................................................... 9 Who are they?................................................................................................................................. 9 So how do we deal with them? ..................................................................................................... 9 SOME MORE DETAILED ISSUES .................................................................................................. 13 Fees .............................................................................................................................................. 13 Tax impact of deals.......................................................................................................................14 Equity Method Investments 15 WHAT IS AN EQUITY METHOD INVESTMENT OR ASSOCIATE? ...................... . . ................ 15 So what? ........................... ..................................................................................................16 EQUITY METHOD ACCOUNTING: ....................... . ................................................................. . . 16 Equity method accounting and the balance sheet: ...................... . . .................................. 16 Equity method accounting and the Income statemenffprofit and loss account: ............. .........18 Equity method accounting and the cash flow statement: ....................................................... 19 Taxes 21 TAXES ......................................................................................................................................... 21 GAAP NUMBERS VERSUS TAX NUMBERS?................................................................................ 21 Two sets of accounts .................................................................................................................... 21 Permanent differences.................................................................................................................. 22 Temporary differences.................................................................................................................. 22 Marginal tax rate ........................................................................................................................... 23 Effective tax rate ........................................................................................................................... 23 DEFERRED TAXES ASSETS AND LIABILITIES......................................................................... 24 Like a prepaid expense or an accrued expense........................................................................... 24 Thin Liuy's depreciation: ........................................................................................................... 25 Strongman Steel's income statement: .......................................................................................... 25 Deferred taxes to the rescue! .................... . ................................................................. . ...... . . 26 Is that it?! ...................................................................................................................................... 26 Warning1 Don't mix up your assets and liabilities ................... ...... ...................................... 27 Deferred taxes - What creates them ...................... ............................................................... 27 TAX LOSSES ................... ....... .................................................................................................. 28 Loss Relief .............................................................................................................................. 28 Loss carry backs ..................................................... ................................................................... 28 Loss carry forwards .................................................................................................................... 29 TAXES AND DEALS ........................................................................................................................ 29 Goodwill and taxes........................................................................................................................ 30 Asset step ups and taxes .............................................................................................................. 31 Earnings per share 33 TWO TYPES OF EARNINGS PER SHARE.....................................................................................33 Basic earnings per share ............................................................................................................ 33 Diluted earnings per share ............................................................................................................ 33 BASIC EARNINGS PER SHARE ..................................................................................................... 33 The top part................................................................................................................................... 33 - . . . .......................................................................................................... . . . . ................................................................................................................................................... . . .. .......................................................................................................................... The bottom part............................................................................................................................. 33 34 DILUTED EARNINGS PER SHARE .................................... .. ........................................................ Potentially dilutive securities......................................................................................................... 34 34 Deciding whether to convert or not ............................................................................................... In 35 Executive share options . the money? ..................................................................................... The treasury method.................................................................................................................. 35 Treasury method shortcut ........................................................................................................... 36 .. . Convertible bonds ......................... . ...................................................................... 36 The Impact on the earnings to commonlordinary shareholders ................................................. 36 ....... .......................................................... 37 Watch out for antidilutive securities ................... Complex debt 39 DISCOUNTED BONDS AND PIK NOTES ........................ .................................................. 39 39 Normal debt .................................................................................................................................. . ................................................... . 39 The accounting engineering for normal debt: ................... . PIK notes ................................................................................................................................... 39 The accounting engineering for PIK notes:.................................................................................. 39 40 Discounted bonds ......................................................................................................................... The accounting engineering for discounted bonds:............................. ............................. 41 42 CONVERTIBLE DEBT.............................................................................. 43 LEASES ........................................................................................................................................... So the key questions.................................................................................................................. 43 Buying or renting: The rules.......................... ........................................................................... 43 Operating leases...........................................................................................................................43 43 Capitalized leases......................................................................................................................... How do you measure the liability ................................................................................................ 43 What about the asset side? .......................................................................................................... 44 And the accounting engineering! ................... ........................................................................... 44 . SUMMARY ....................................................................................................................................... 45 MAKING APPLES INTO ORANGES............................................................................................. 46 Multiple method............................................................................................................................. 46 47 DCF method.................................................................................................................................. Pensions 49 INTRODUCTION.............................................................................................................................. 49 49 HOW plans ARE FUNDED!....................................................................................................... 49 DEFINED CONTRIBUTION (Money Purchase) PLANS......................................................... What are they?........................................................................................................................... 49 How the accounting works! ................................................................................ . ......................... . 50 DEFINED BENEFIT (final salary) PLANS ........................................................................................ 50 50 What are they?.............. ............................................................................................................ 50 What the actuary does! ............................................................................................................... The level of funding:................................................................................................................. 51 52 THE PBO CALCULATION!....................................................................................................... ........................................................ 52 THE PLAN ASSETS CALCULATION! ................................... . ...................................... 52 SO HOW DOES ACCOUNTING FOR ALL THIS WORK! ..................... The fundamentals of pension accounting: .................................................................................... 53 The problem with return on assets and actuarial gainsllosses.................................................... 54 ...... ........................................................................... 55 Pensions in the balance sheet .............. Pensions in the income statementlprofit and loss ........................................................................56 57 IFRS - Full recognition in the BS and IS ...................................................................................... IFRS - Partial recognition in the BS and IS............................................................................... 57 US GAAP - Full recognition in BS, partial recognition in IS ......................................................... 58 Stock option accounting 59 INTRODUCTION.............................................................................................................................. 59 THE FUNDAMENTAL LOGIC BEHIND THE ACCOUNTING.......................................................... 59 60 SOME JARGON TO START OFF ................................................................................................ Grant date ..................................................................................................................................... 60 60 Vesting date .................................................................................................................................. Exercise date ................................................................................................................................ 60 . . ............................................................................................................................ .. . . . . ............................................................................................................................................. . . ............................................................................................................ Service or vestina oeriod .............................................................................................................. 60 SO HOW MUCH C~MPENSATION ARE WE TALKING ABOUT? ............................... .... ............ 60 61 HOW STOCK OPTION EXPENSINGACTUALLY WORKS! ....................................................... 61 Market based conditions: .............................................................................................................. Non market based conditions: ...................................................................................................... 62 DEALING WITH THE TAX IMPACT IN THE FINANCIALS: ......................................................... 63 63 US GAAP: .................................................................................................................................... IFRS: ............................................................................................................................................. 64 Financial instruments 65 INTRODUCTION.............................................................................................................................. 65 FAIR VALUE THROUGH THE INCOME STATEMENT (FV)........................................................... 65 65 Designated on initial recognition:.................................................................................................. .. . 65 Held for trading ...................... ............................................................................................. AVAILABLE-FOR-SALE (AFS) ................................................................................................ 66 . AMORTIZED COST ACCOUNTING .......................................................................................... 67 . .......................................................................... . 68 Loans and receivables.............................. . Held-to-maturity investments...................................................................................................... 68 68 Other financial liabilities ................................................................................................................ 71 Hedge Accounting INTRODUCTION.............................................................................................................................. 71 The problem ................................................................................................................................. 71 71 The solution ................................................................................................................................. HEDGING RULES................................................................................................................... 71 ... ................................72 What items can be hedged? ............................................................. What can be used as a hedging instrument? ........................................................................... 72 What is an effective hedge? ....................................................................................................... 72 Types of hedge ............................................................................................................................ 72 .................................................................................. 72 FAIR VALUE HEDGE............................ Hedge accounting engineering..................................................................................................... 73 Was the hedge effective? ............................................................................................................. 73 CASH FLOW HEDGE ..................................................................................................................... 74 Hedge accounting engineering ..................................................................................................... 74 Was the hedge effective? .................... ............................................................................. 75 75 Was the hedge effective? ............................................................................................................. Recycling gains through the income statement............................................................................ 76 NET INVESTMENT HEDGE ...................... .............................................................................. 76 . . 77 Hedge acwuntlng engineering................................................................................................... ........................................................................................................................ ............................................................................................................................. .... .. . .