Case Study Of FASB 141 R Mergers

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Register to read the introduction… If the merger was soundly conceived and effectively implemented, then the combined cash flows should be greater than the simple sum of the cash flows of the constituent firms had the merger not occurred. In this longer-term perspective, even if an acquisition results in initial dilution in earnings per share for the stockholders, the merger still might make business and economic sense. The initial dilution can be regarded as an investment that will have a payoff in future years in the form of magnified cash flows for the combined company. Under FASB 141 R acquisitions must be valued at fair value. The difference between the purchase price and the fair value should be recognized as goodwill. FAS 141(R) adds details to the purchase method of accounting for business combinations, designed to ensure that financial statements reflect more useful information including accurate predictors of future cash flows. Excess of price paid over acquired book net worth assigned to goodwill. FASB issued the Statement of Financial Accounting Standard No 141, which indicated that, starting July 1, 2001, all business combinations must be accounted for only by using the purchase method of accounting. In 2007, FASB issued the Financial Accounting Standard No. 141 R, which replaced the previous FAS 141. The new statement (FAS 141 R) became effective on December 15, 2008; it requires that assets and liabilities of the target company be stated at "fair value" in calculating goodwill. In 1993, the Omnibus Budget Reconciliation Act of 1993 increased the federal corporate income tax rate from 34% to 35%. TRA 1986 also had a number of impacts on merger and acquisition transactions: (1) It severely restricted the use of net operating loss carryovers; (2) the General Utilities doctrine was repealed; and (3) greenmail payments could not be …show more content…
| Question : | (TCO J) List any three of the reasons why the firm would continue to exist beyond the point where its products have become obsolete. (10 points for each reason; total 30 points) | | | Student Answer: | | The firm has gained a competitive position in the market at great costs. It has to continue for growth purposes, to remain in business since it has already acquired a good reputation. A firm can launch new products at a lesser cost since the awareness of the company is already there as well as the distribution channels. It is also often necessary for a firm to alter its product-market mix or range of capabilities, in order to reduce or close the strategic gap. | | Instructor Explanation: | * Bankruptcy or liquidation costs may be high. * Product- and market-extension mergers can provide opportunities for carryover of generic and/or industry specific management capabilities. * Many managerial skills take time to develop; continuing into new product lines may preserve organization capital and allow the management team to continue up the managerial learning curve. * Other capital, such as property, plant, and equipment, may be able to be used effectively in product- or market-extension mergers. Otherwise, it might have to be discarded or sold at a considerable discount. (10 points each for any one reason in a combination of 3 reasons). (Chapter 5, pp. 106-111)

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