Investing Decisions

1. INVESTING DECISIONS

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

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. 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

6. 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 ASSETSClasses • Property, plant & equipment • Buildings • Machinery, furniture & fixtures • Land & land improvements • Natural resource rights • Intangibles • Patents, copyrights, trademarks, trade names • Franchise rights • Goodwill

8. OPERATIONAL ASSETSAcquisition 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 CONCEPTSRelated 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. 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 ASSETSReporting 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 ASSETSReporting 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 ASSETSDisclosure Requirements • Description of impaired assets • Circumstances leading to impairment • Amount of impairment loss • How fair value was determined

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

20. BUSINESS COMBINATIONSEconomic Substance • Horizontal combinations • Vertical combinations (integration) • Conglomerates

21. BUSINESS COMBINATIONSLegal Forms • Merger • Statutory Consolidation • Acquisition

22. BUSINESS COMBINATIONSMethod 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 only (Not retroactive) Acquisition only (Not retroactive) Purchase OR Pooling 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 ACCOUNTINGAccounting 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 ACCOUNTINGKey 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 DIFFERENTIALPurchase 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 POOLINGAPB 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 INTERESTKey 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 Assets Assets Par RE + = Liabilities Liab. Liab. Par OCC Par Par RE Stockholders’ Equity + = OCC OCC RE RE Par OCC RE