INVESTING DECISIONS

TEMPORARY INVESTMENTS Use of idle cash Low risk investments Quickly and easily converted to cash Highly liquid securities 3 3 3 3

LONG-TERM INVESTMENTS Long-term income source (interest, dividends, price appreciation) Develop beneficial intercompany relationships to improve profitability of investing company. Gain ownership interest. 4 4 4 4

ACCOUNTING ISSUES Classification issues Management’s intended holding period for the security Valuation and investment income measurement Cost vs. fair value Treatment of holding gains & losses Disclosure issues 5 5 5 5

Common characteristics OPERATIONAL ASSETS Common characteristics Actively used in primary operations Long-term = benefits future periods Generally not held for resale Categories Tangible assets = have physical substance Intangible assets – lack physical substance

OPERATIONAL ASSETS Classes Property, plant & equipment Buildings Machinery, furniture & fixtures Land & land improvements Natural resource rights Intangibles Patents, copyrights, trademarks, trade names Franchise rights Goodwill

OPERATIONAL ASSETS Acquisition Cost Cost of gaining right to use asset, bring it to the location and condition necessary for its intended use Cost = FMV of consideration given or FMV of asset received, whichever can be more reliably determined

LONG-TERM LEASES Capital vs. Operating Leases Criteria - must be accounted for as a capital lease if ANY ONE of the following exist: Transfer of ownership Bargain purchase option Term is greater than or equal to 75% of economic life of asset PV of minimum lease payments is greater than or equal to 90% of FMV of asset

DEPRECIATION CONCEPTS Depreciation - expiration or consumption of the economic service potential of plant assets AN ECONOMIC FACT Depreciation accounting - the systematic and rational allocation of the cost of the tangible plant assets, less salvage, to expense over the estimated useful life of the asset AN ACCOUNTING PROCEDURE Depreciation accounting is a “cost allocation” process and is not directly related to the “market value” of the asset

CAUSES OF DEPRECIATION Physical deterioration Wear and tear from use Exposure to elements Passage of time Obsolescence Technological Market

DEPRECIATION CONCEPTS Related Areas Depletion accounting - periodic allocation of the cost of natural resources Amortization accounting - periodic allocation of intangible assets

DETERMINING DEPRECIATION Determinants of computed “Depreciation Expense” Asset cost Estimated residual value Estimated useful (economic) life Specific method of depreciation

Tax depreciation methods Straight-Line Activity methods Units of service Units of production Accelerated methods Sum-of-the-years’-digits Declining balance Tax depreciation methods

PLANT ASSET IMPAIRMENT Impairment is the loss of a significant portion of the utility of an asset through casualty, obsolescence or lack of demand for the company’s asset. When plant assets suffer a permanent impairment in value, a loss should be recorded.

IMPAIRMENT OF LONG-LIVED ASSETS Reporting Requirements Reviewed when circumstances indicate the carrying value may not be recoverable Recognition of impairment loss Required if sum of expected future net cash flows is less than carrying value of the asset Measurement of impairment loss The amount by which the carrying value of the asset exceeds the fair value of the asset

IMPAIRMENT OF LONG-LIVED ASSETS Reporting Requirements - Continued Presentation of impairment losses Shown as a component of income from continuing operations before taxes Restoration of impairment losses Reduced carrying value is basis for future accounting and restoration is prohibited

IMPAIRMENT OF LONG-LIVED ASSETS Disclosure Requirements Description of impaired assets Circumstances leading to impairment Amount of impairment loss How fair value was determined

BUSINESS COMBINATIONS Motivations Growth New markets Increase in market share New products Reduction in costs Diversification Tax implications Management incentives Ego

BUSINESS COMBINATIONS Economic Substance Horizontal combinations Vertical combinations (integration) Conglomerates

BUSINESS COMBINATIONS Legal Forms Merger Statutory Consolidation Acquisition

BUSINESS COMBINATIONS Method of Accounting Pooling Purchase Acquisition The FASB has eliminated pooling and purchase as methods of accounting for business combinations, but this requirement is NOT retroactive!

Accounting for Combinations June 30, 2001 Calendar 2009 Purchase OR Pooling Purchase only (Not retroactive) Acquisition only (Not retroactive) Selection based on specific criteria for Pooling All new combinations must use Purchase (no adjustment of older results) All new combinations must use Acquisition (no adjustment of older results)

Pooling Purchase Acquisition Horizontal Vertical Conglomerate Merger Statutory Consolidation Stock Acquisition

PURCHASE ACCOUNTING Accounting Considerations Combination = one entity BUYING another Normal GAAP for acquisition of an asset Valuation of acquired net assets: - Fair value of consideration given AND - Fair value of net assets acquired Recognition of COST/FAIR VALUE differential Recognition of Earnings and Retained earnings of acquired entity: from DATE OF ACQUISITION Direct expenses of combination = Cost of Investment

PURCHASE ACCOUNTING Key Computations Cost of investment: (FMV of consideration given – cash, debt, stock – or some combination of all three) versus Book value of net assets (assets – liab.) acquired = Total differential to be accounted for in the combination

ALLOCATION OF DIFFERENTIAL Purchase Accounting Determine “differential” on acquisition of net assets acquired (see previous slide) Allocate “cost” to identifiable NET assets acquired - Based on FMV of individual assets and liabilities - Includes identified intangibles - May involve writeups or writedowns Account for differential If positive (cost > FMV of identifiable net assets) = “Goodwill” If negative (cost < FMV of identifiable net assets) = differential is allocated to a reduction of selected assets (other than highly liquid assets) with any remainder treated as an extraordinary gain

CRITERIA FOR POOLING APB No. 16 Attributes of combining companies - Autonomous - Independent of one another Manner of achieving combination - Single transaction - Common stock for Common stock - Exchange for “substantially all” common (90%) Absence of planned transactions - Planned spin-off of assets - Contingent agreements

POOLING OF INTERESTS Accounting Considerations Combination of ownership interests - NOT AN ACQUISITION NO TRANSACTION by the corporate entities - No new basis of accountability - Total combined net assets unchanged NO CHANGE in total combined stockholders’ equity Reallocation of individual accounts may be required Retained earnings accounts combined Earnings - combined for entire year of pooling Direct combination expenses = period expenses

POOLING OF INTEREST Key Computations Total par value of new shares issued Versus Total par value of old shares exchanged = Possible rearrangement of stockholders’ equity on combined balance sheet

POOLING OF INTERESTS = + + = + = Assets Liabilities Assets Assets Par OCC Par Par RE + = Stockholders’ Equity OCC OCC RE RE OCC Par RE