Accounting for M&A, Credit, & Equity Analysts

Investment professionals too often regard the acquisition of accounting knowledge as a necessary evil -- and, therefore, too often know less than they should. This lack of knowledge often leads to simple misunderstandings or even out and out errors that, at best, serve as minor speed bumps in a high-stakes transaction and, at worst, lead to the delay or even derailing of the deals in question.

James E. Morris, C.P.A., C.F.A. (Baltimore, MD) is a project manager of financial analysis for the U.S. Nuclear Regulatory Commission. He also trains analysts and associates to value companies.

Preface

xi

Introduction

xiii

List of Abbreviations

xv

Chapter 1 Equity Method of Accounting for Investments

1

(24)

Introduction

1

(1)

Description of the Equity Method

1

(4)

Tax Considerations When Using the Equity Method

5

(3)

Accounting under the Equity Method-Excess of Cost over Equity Purchased

8

(2)

Accounting under the Equity Method-Intercompany Transactions

10

(2)

Guidance for Applying the Equity Method

12

(5)

SEC Staff Views Concerning the Equity Method

17

(1)

When to Use the Equity Method-Summary

17

(1)

Accounting for Cash Flows from Equity Method Investments

18

(1)

Modeling the Equity Method of Accounting in Projection Models

19

(3)

Chapter Summary

22

(3)

Chapter 2 Minority Interests

25

(14)

Introduction

25

(1)

Minority Interests

25

(1)

Overview of Accounting for Minority Interests

26

(5)

Treatment of Minority Interests for Enterprise Valuation

31

(1)

Forecasting Minority Interests

32

(1)

Treatment of Minority Interests in M&A Transactions

32

(3)

Modeling Minority Interests

35

(1)

Chapter Summary

36

(3)

Chapter 3 Deferred Income Taxes and Income Tax Reporting

39

(22)

Introduction

39

(1)

Basic Principles of Tax Reporting

39

(1)

The First Principle

40

(1)

The Second Principle

40

(10)

The Third Principle

50

(1)

The Fourth Principle

50

(2)

Treatment of Deferred Income Tax Items in M&A Transactions

52

(2)

Modeling Income Taxes in Projection Models

54

(3)

Calculating the Provision for Taxes-Detailed Calculation

57

(2)

Chapter Summary

59

(2)

Chapter 4 Deciphering the Deferred Tax Footnote

61

(16)

Introduction

61

(1)

Financial Statement Disclosure for Income Taxes

61

(7)

Reconstructing Deferred Taxes on the Financial Statements

68

(5)

Problems with Ratio Analysis

73

(1)

Valuation of Deferred Tax Items

74

(1)

Chapter Summary

74

(3)

Chapter 5 Estimating the Tax Basis of a Firm's Assets

77

(18)

Introduction

77

(1)

Factors Affecting Differences Between Asset's Book and Tax Bases

78

(1)

Depreciation (or Amortization) Using Different Schedules

78

(6)

Recognizing Asset Impairments

84

(2)

Transaction Fair Value Adjustments

86

(1)

Asset Sales or Deemed Asset Sales

87

(1)

Estimating the Tax Bases of Target Company's Assets-Known Balance Sheet

87

(4)

Estimating the Tax Bases of Target Company's Assets-Unknown Balance Sheet

91

(2)

Chapter Summary

93

(2)

Chapter 6 Pension and Other Postretirement Benefits

95

(24)

Introduction

95

(1)

Pension versus Other Postretirement Benefit Plans

96

(1)

Types of Pension Plans

96

(1)

Economic Objectives of Pension Plans

97

(1)

How Pension Plans Work

98

(3)

Net Periodic Pension Cost

101

(11)

Minimum Pension Liability

112

(1)

Pension Benefits Summary

112

(1)

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Accounting for M&A, Credit, & Equity Analysts

Summary

Author Biography

Table of Contents

Supplemental Materials