1. INVESTING DECISIONS

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

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

6. 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

7. 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

8. 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

9. 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

10. 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

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

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

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

14. 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

15. 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.

16. 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

17. 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

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

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

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

21. BUSINESS COMBINATIONS Legal Forms
Merger
Statutory Consolidation
Acquisition

22. 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!

23. 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)

24. Pooling Purchase Acquisition Horizontal Vertical Conglomerate Merger
Statutory
Consolidation
Stock
Acquisition

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

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