Question 8

Michelle Jambekar, CFA, has just assumed the responsibility for covering the consumer nondurables sector for Vancouver Investment Trust Funds. Vancouver manages a variety of investment funds that are marketed directly to the general public throughout Canada. In addition, the company manages pension assets for plan sponsors in Canada and the U.S.

Jambekar had previously been a member of the analytical team responsible for covering consumer durables. While she is familiar with the companies in the nondurables area in a general sense, her new duties will require her to gain a much more thorough understanding of the sector. This is particularly true for the seven consumer nondurable firms that are held in various Vancouver Trust portfolios.

During her review, Jambekar learns that one of the firms of interest, Tamco Enterprises, acquired Fairwool Products several years ago. Both of these firms are based in the U.S., so U.S. GAAP rules apply. This acquisition was accounted for using the pooling method. She wonders how this might be affecting currently reported results for Tamco.

The acquisition of Fairwool by Tamco was effective on January 1, 2000. At that time, both companies were profitable, and they have continued to be since then. The fair market value of Fairwool’s assets was $55 million greater than their book value when the acquisition was completed. The write up of the assets would have resulted in an incremental increase in depreciation over a 10 year period under the purchase method. She has also determined that Tamco’s total assets, which are reported at $250 million in the most recent financial statements, would be $266.5 million if the acquisition had been accounted for as a purchase transaction. Tamco’s net income during the previous year was $20.25 million.

Three of the seven firms in which Jambekar is most interested are domiciled in Europe, one in Japan, one in Australia, and two (including Tamco) in the United States. Jambekar is wondering how differences between IAS rules and U.S. GAAP rules may be affecting the financial data reported by these firms, and the comparisons between them.

Part 1)

Which of the following statements concerning the accounting for mergers and acquisitions is most accurate?

A)   IAS rules typically use the pooling method, but U.S. GAAP requires the use of the purchase method.

B)   IAS rules require the use of the purchase method, but U.S. GAAP rules permit the use of pooling or purchase method.

C)   IAS rules and U.S. GAAP rules both require the use of the pooling method.

D)   IAS rules and U.S. GAAP rules typically require the use of the purchase method.

Part 2)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for assets and net income would have been:

       Assets       Net Income

A)   Higher        Higher

B)   Higher        Lower

C)   Lower         Higher

D)   Lower         Lower

Part 3)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for equity and net profit margin would have been:

       Equity        Net Profit Margin

A)   Higher       Lower

B)   Higher       Higher

C)   Lower        Higher

D)   Lower        Lower

Part 4)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for return on assets and return on equity would have been:

       Return on Assets (ROA)     Return on Equity (ROE)

A)   Higher                      Lower

B)   Higher                      Higher

C)   Lower                       Lower

D)   Lower                       Higher

Part 5)

Ignoring incremental changes in taxes, if the acquisition had been accounted for as a purchase, Tamco’s net income last year would have been:

A)   $20.25 million.

B)   $25.75 million.

C)   $16.40 million.

D)   $14.75 million.

Part 6)

Using the relevant year-end data and ignoring any incremental change in taxes, what is Tamco’s ROA under pooling, and what would it have been under the purchase method?

       Pooling       Purchase

A)   8.1%           9.7%

B)   7.6%           5.9%

C)   8.1%           5.5%

D)   7.6%           10.3%

Part 1)

Which of the following statements concerning the accounting for mergers and acquisitions is most accurate?

A)   IAS rules typically use the pooling method, but U.S. GAAP requires the use of the purchase method.

B)   IAS rules require the use of the purchase method, but U.S. GAAP rules permit the use of pooling or purchase method.

C)   IAS rules and U.S. GAAP rules both require the use of the pooling method.

D)   IAS rules and U.S. GAAP rules typically require the use of the purchase method.

The correct answer was D) IAS rules and U.S. GAAP rules typically require the use of the purchase method.

While both pooling and purchase methods were both allowed in the past, U.S. GAAP (since 2001) and IAS (since 2003) rules both require the use of the purchase method of accounting for mergers and acquisitions. The one exception under IAS is that the pooling method is allowed if the acquirer cannot be identified.

This question tested from Session 5, Reading 22, LOS b

Part 2)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for assets and net income would have been:

       Assets       Net Income

A)   Higher        Higher

B)   Higher        Lower

C)   Lower         Higher

D)   Lower         Lower

The correct answer was B)

Higher     Lower

Since both firms are profitable, and the market value of the assets exceeded book value, using the purchase method would have resulted in higher values for assets and lower values for net income than the firm is currently reporting under the pooling method.

This question tested from Session 5, Reading 22, LOS b

Part 3)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for equity and net profit margin would have been:

       Equity        Net Profit Margin

A)   Higher       Lower

B)   Higher       Higher

C)   Lower        Higher

D)   Lower        Lower

The correct answer was A)

Higher     Lower

Since both firms are profitable, and the market value of the assets exceeded book value, using the purchase method would have resulted in higher values for equity and lower values for net profit margin than the firm is currently reporting under the pooling method.

This question tested from Session 5, Reading 22, LOS b

Part 4)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for return on assets and return on equity would have been:

       Return on Assets (ROA)     Return on Equity (ROE)

A)   Higher                      Lower

B)   Higher                      Higher

C)   Lower                       Lower

D)   Lower                       Higher

Your answer: C was correct!

Since both firms are profitable, and the market value of the assets exceeded book value, using the purchase method would have resulted in lower ROA and lower ROE than the firm is currently reporting under the pooling method.

This question tested from Session 5, Reading 22, LOS b

Part 5)

Ignoring incremental changes in taxes, if the acquisition had been accounted for as a purchase, Tamco’s net income last year would have been:

A)   $20.25 million.

B)   $25.75 million.

C)   $16.40 million.

D)   $14.75 million.

The correct answer was D) $14.75 million.

Ignoring any incremental change in taxes, if the acquisition had been accounted for as a purchase, assets would have been written up by $55 million. This would have resulted in an increase in depreciation expense of $5.5 million per year during the 10 years following the acquisition. Thus, the reported net income would have been $20.25 – 5.5 = $14.75 million during the past year.

This question tested from Session 5, Reading 22, LOS b

Part 6)

Using the relevant year-end data and ignoring any incremental change in taxes, what is Tamco’s ROA under pooling, and what would it have been under the purchase method?

       Pooling       Purchase

A)   8.1%           9.7%

B)   7.6%           5.9%

C)   8.1%          5.5%

D)   7.6%           10.3%

The correct answer was C)

8.1%      5.5%

Under pooling, ROA = (20.25 / 250) = 8.1%. Under the purchase method, ignoring any incremental change in taxes, depreciation expense would have been $5.5 million greater during the 10 years following the acquisition. Thus, the reported net income would have been $20.25 − 5.5 = $14.75 million during the past year, and ROA = (14.75 / 266.5) = 5.5%.

This question tested from Session 5, Reading 22, LOS b

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APPRECIATE UR HELP

MANY THANKS

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THX A LOT

thanks

Question 8

Michelle Jambekar, CFA, has just assumed the responsibility for covering the consumer nondurables sector for Vancouver Investment Trust Funds. Vancouver manages a variety of investment funds that are marketed directly to the general public throughout Canada. In addition, the company manages pension assets for plan sponsors in Canada and the U.S.

Jambekar had previously been a member of the analytical team responsible for covering consumer durables. While she is familiar with the companies in the nondurables area in a general sense, her new duties will require her to gain a much more thorough understanding of the sector. This is particularly true for the seven consumer nondurable firms that are held in various Vancouver Trust portfolios.

During her review, Jambekar learns that one of the firms of interest, Tamco Enterprises, acquired Fairwool Products several years ago. Both of these firms are based in the U.S., so U.S. GAAP rules apply. This acquisition was accounted for using the pooling method. She wonders how this might be affecting currently reported results for Tamco.

The acquisition of Fairwool by Tamco was effective on January 1, 2000. At that time, both companies were profitable, and they have continued to be since then. The fair market value of Fairwool’s assets was $55 million greater than their book value when the acquisition was completed. The write up of the assets would have resulted in an incremental increase in depreciation over a 10 year period under the purchase method. She has also determined that Tamco’s total assets, which are reported at $250 million in the most recent financial statements, would be $266.5 million if the acquisition had been accounted for as a purchase transaction. Tamco’s net income during the previous year was $20.25 million.

Three of the seven firms in which Jambekar is most interested are domiciled in Europe, one in Japan, one in Australia, and two (including Tamco) in the United States. Jambekar is wondering how differences between IAS rules and U.S. GAAP rules may be affecting the financial data reported by these firms, and the comparisons between them.

Part 1)

Which of the following statements concerning the accounting for mergers and acquisitions is most accurate?

A)   IAS rules typically use the pooling method, but U.S. GAAP requires the use of the purchase method.

B)   IAS rules require the use of the purchase method, but U.S. GAAP rules permit the use of pooling or purchase method.

C)   IAS rules and U.S. GAAP rules both require the use of the pooling method.

D)   IAS rules and U.S. GAAP rules typically require the use of the purchase method.

Part 2)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for assets and net income would have been:

       Assets       Net Income

A)   Higher        Higher

B)   Higher        Lower

C)   Lower         Higher

D)   Lower         Lower

Part 3)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for equity and net profit margin would have been:

       Equity        Net Profit Margin

A)   Higher       Lower

B)   Higher       Higher

C)   Lower        Higher

D)   Lower        Lower

Part 4)

Concerning Tamco’s reported financial results, had the acquisition of Fairwool been accounted for using the purchase method, the values for return on assets and return on equity would have been:

       Return on Assets (ROA)     Return on Equity (ROE)

A)   Higher                      Lower

B)   Higher                      Higher

C)   Lower                       Lower

D)   Lower                       Higher

Part 5)

Ignoring incremental changes in taxes, if the acquisition had been accounted for as a purchase, Tamco’s net income last year would have been:

A)   $20.25 million.

B)   $25.75 million.

C)   $16.40 million.

D)   $14.75 million.

Part 6)

Using the relevant year-end data and ignoring any incremental change in taxes, what is Tamco’s ROA under pooling, and what would it have been under the purchase method?

       Pooling       Purchase

A)   8.1%           9.7%

B)   7.6%           5.9%

C)   8.1%           5.5%