Financial Information Analysis

The role of accounting information in modern society

Philip O'Regan

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317906674
• Edition: 3
• Topic: Business
• Subtopic: Business General
• Index: Business

The accounting landscape shifted following the era of global financial crisis and accounting information continues to play a vital role. Philip O'Regan's authoritative textbook provides readers with the tools and techniques to fruitfully analyse accounting and financial data.

Updated to reflect changes in corporate governance, regulatory frameworks and new forms of IFRS, the text continues to shed light on the growing emphasis placed on the role of accounting information in formulating financial strategy.

Features which add value to this third edition of Financial Information Analysis include case studies in every chapter with numerous supporting articles from the major financial presses, questions for review, and a comprehensive companion website. This essential textbook is core reading for advanced undergraduate and postgraduate students of finance and accounting.

Section IV
Issues

Most large companies will have to grapple with more complex accounting issues than those alluded to so far. This is not simply a function of their size, but also of their corporate structure, global focus and wider responsibilities.

Section IV addresses a number of the more common accounting-related issues that arise. These range from the accounting implications of group structures to the more prosaic aspects of accounting for foreign currency transactions.

The section begins with two rather technical chapters, one dealing with business combinations and the other with taxation, pensions, share options, leases and foreign currency transactions. It is important to work through the detail provided as any interpretation will require more than a passing knowledge of these topics.

Three less technical chapters follow. The first deals with creative accounting and identifies past examples, regulatory responses and ongoing problems in this area. It also introduces broader ethical concerns and looks specifically at the role of whistleblowers.

Chapter 14 broadens the debate on governance, revisiting the whole notion of the company as a “corporate citizen” in the context of corporate social responsibility.

Finally, Chapter 15 places UK practice in its international context, looking at accounting practice and governance regimes in France and Germany. It concludes with a review of the catalysts for international harmonization and convergence of accounting practice, together with an examination of the roles of IASB and FASB in this process.

Chapter 11
Business Combinations

When you have completed this chapter you will understand:

• the nature and structure of business combinations (groups);
• IFRS accounting principles and rules for accounting for business combinations, especially IFRS 3 and 10;
• political aspects of the standard setting process for business combinations;
• how to account for investments in “associate companies”;
• how to account for “joint ventures”;
• why related-party transactions must be disclosed.

“Final” Astra Bid Leaves Doubt Swirling; Ashley Armstrong Explains What LED To Pfizer’s new Offer Amid Confusion on Whether a Deal is Still Possible

It may have been the hottest weekend of the year but AstraZeneca’s and Pfizer’s army of advisers was trapped indoors, sweating over what promised to be the UK’s biggest ever company takeover. Finally, on Sunday night, after hours of conference calls and email exchanges, AstraZeneca’s deal team called a halt to their labours – believing their work was done, at least until the morning. Some even had the sense that it was all over and there was no more to be done to secure a deal.

But, no sooner had the advisers arrived home than their phones buzzed back into life. Pfizer had decided not to down tools for the night and had suddenly gone public with a £55-per-share “final” offer – better, but not good enough, as it would turn out. “When there’s a big deal on, weekends are cancelled,” one weary adviser said, reflecting on the takeover drama that had sparked into life again last Friday night.

After markets closed, Pfizer lived up to its aggressive reputation and went low-ball at £53.50 in a letter to AstraZeneca’s chairman. Analysts had reckoned a proposal between £53 and £55 would have been sufficient to bring AstraZeneca to the table …

On Saturday, AstraZeneca’s board met to discuss the offer and emphatically decided it undervalued the company, still lacking certain “key aspects” that it required. These included more comfort on the combined group’s operating structure, details of planned cost cutting, and reassurance around pipeline and deal execution risks, mainly concerns surrounding Pfizer’s own tax inversion plans.

“Unfortunately, we could not really engage Pfizer on those very important dimensions,” said Pascal Soriot, Ast ra-Zeneca’s chief executive. “We could not really get to any sort of meaningful discussion that would be reassuring for us. So a combination of a low price and risks without any protection led the board to reject it.”

It is understood that AstraZeneca remained focused on the value and certainty surrounding the potential bid, rather than being swayed by any political ramifications.

Pfizer boss Ian Read – who had returned to the United States – was said to be extremely frustrated with the lack of engagement from AstraZeneca’s board and asked for a “principals’ call” to take place between himself, Pfizer chief finance officer Frank D’Amelio, Astra-Zeneca’s chairman Leif Johansson, Mr Soriot and finance boss Marc Dunoyer. After a “polite and professional” phone call that lasted over an hour, Pfizer intimated it might be willing to make a “minor” increase to the price of its proposal. But AstraZeneca, unusually for a target, put a price on its independence. Ast raZeneca said that it would only be prepared to do a deal if the offer were 10pc higher, meaning roughly £59 per share, or a £70bn overall bid.

While Mr Soriot’s on-going rejection of Pfizer had so far been lauded by UK and Swedish politicians, he had been increasingly under fire from shareholders for not fully engaging in talks and dismissing the interest out of hand. The new tactic of naming a price was meant to illustrate that AstraZeneca wasn’t burying its head in the sand. Pfizer is understood to have ended the conversation on Sunday night. For the first time, it knew the price at which it could get a deal done. But it had no intention of going that high.

The Pfizer decision on late Sunday night, however, to propose £55 had baffled some of Astra-Zeneca’s team, seeing it as Pfizer directly ignoring its attempt to be clear about the recommended deal level. But, while the swift rejection yesterday morning by AstraZeneca stunned the market, it didn’t necessarily surprise Pfizer. The US drug maker had imposed various restrictions that meant it couldn’t go hostile or raise its price – its proposal was “final”.

Yesterday as news of AstraZeneca’s rejection broke, there remained widespread confusion about whether the deal was definitively over. Even AstraZeneca’s Mr Johansson admitted he had “no idea” when the saga will end. The uncertainty was primarily caused by the three caveats Pfizer included in its £55 proposal that meant it could raise its offer if: Pfizer’s share price fell considerably; it achieved a recommendation from AstraZeneca’s board; or a rival bidder appeared with a lower offer.

However, sources close to the Takeover Panel have confirmed that “final” means final – even in the case of a proposal, rather than a formal offer. Pfizer is restricted to making a firm bid at £55 a share with AstraZeneca’s board backing, which requires Mr Soriot and Mr Johansson to suddenly change their minds about the adequacy of the offer.

The clock is ticking ever louder on next Monday’s deadline which requires Pfizer to make a firm bid or walk away under panel rules. Pfizer is hoping that AstraZeneca’s shareholders put enough pressure on Mr Soriot and Mr Johansson to force them back to the negotiating table.

This could still be enough, with sources close to the process pointing out that there remains a week still to play. AstraZeneca may even be looking to accept the £55 bid only to then negotiate a higher price while the deal progresses through a regulatory process that could last up to a year. “At the moment AstraZeneca has rejected a proposal, it hasn’t rejected a bid,” one source said.

(Daily Telegraph, 20 May 2014)

Introduction

Pfizer’s proposed takeover of AstraZeneca would have been one of the largest such deals in corporate history. As it turned out, it never took place. However, the fact that such a deal was mooted in the first place points to the manner in which acquisitions and mergers have played such a key role in corporate growth, especially in Anglo-American countries.

Traditionally, mergers and acquisitions (M&A) have been important means by which companies grow. Indeed, it can be argued that the governance culture and the presence of a vibrant stock market combine to encourage growth by acquisition rather than organic growth. The consequence of such M&A activity is that most large US and UK businesses are actually not individual companies, but complex webs of interrelated entities, with one identifiable “parent” company. Such combinations are normally called “groups” or “business combinations.”

The importance of groups and the ways in which they can be structured was outlined in Chapter 6. This chapter will deal with the accounting implications of these business combinations, looking at mergers and acquisitions, associates and joint ventures.

Mergers and Acquisitions (M&A)

Companies grow by various means. One is organic growth, that is by developing business internally. While this will be a factor in the expansion of most entities, another will be growth by acquiring, or merging with, other entities.

A merger (called a “pooling of interests” in the US) is essentially a coming together of companies to form a larger entity. Usually, but not always, these companies will be of similar size. An acquisition, on the other hand, typically involves one company actively, and often aggressively, acquiring shares in another with a view to obtaining sufficient shares to gain control.

In the Anglo-American world the nature of corporate structure, together with the presence of a dominant capital market, ensure the enduring influence of mergers and acquisitions as means of growth, although the volume of M&A activity often follows the business cycle.

In Practice

The following two extracts illustrate how quickly M&A activity can turn around: within nine months it changes from a “record low” to a bullish market.

UK mergers and takeovers at record low, by Philip Imman

With only 60 in first quarter of 2013, the number of deals is lowest since Office for National Statistics started collecting data in 1969.

The number of domestic mergers and takeovers collapsed to a record low in the first three months of the year, according to official figures. Not since the first Apollo moon landing and the Beatles recorded their final LP has the number of UK business takeovers been so low.

The Office for National Statistics, which first started collecting data on the number of acquisitions and disposals in 1969, found that the number of deals fell from 154 in the first quarter of 2012 to 60 in the same period this year. Of the total, only 24 deals involved the buying and selling of UK companies compared with 61 in the last three months of 2012.

Analysts blamed the on-going economic uncertainty in the UK and the Eurozone for the 61% decline in the number of domestic mergers a nd takeovers. Global volatility has also discouraged firms from embarking on costly transactions. The US has already seen Yahoo bid $1.1bn for blogging site Tumblr among a raft of proposed acquisiti ons, but the UK market has remained lacklustre…

In 2007 the total number of deals hit 869 and peaked in value a year later at £36bn as firms embarked on a spree ahead of the Lehman’s crash. In 2012 there were 266 deals worth a combined £3.4bn.

Source: Guardian, 4 June 2013

British companies ready M&A war chests; lenders providing companies with significantly more loans for M&A purposes, according to the Bank of England, by Ashley Armstrong

British companies are readying themselves for an upturn in deal making and are busy building war chests, according to the Bank of England’s Credit Conditions survey. The survey of Britain’s banks showed a significant uptick in loans arranged for companies for mergers and acquisition purposes, compared to previous years.

Since the recession corporate deal making has dried up as companies focus on less risky measures to encourage growth while keeping an eye on the statement of financial position. However, with improving economic confidence and cheap borrowing costs, companies are now busying themselves with running the rule over opportunities and taking steps to raise funds for acquisitions.

“In the UK an acquisition of a listed company requires a proof of funding under Takeover Panel rules. “Businesses are priming themselves to either acquire other companies or invest in new equipment or staff. This is good news and suggests the recovery is broadening out,” Richard Woodhouse, the BBA’s chief economist said.

“In 2011 the Bank of England reported a –9.4 net percentage balance score of the lenders who said that M&A was the main reason for a change in the demand for lending. In contrast, lenders in the last quarter of this year reported a total 27 score – a significant uptick.

“The figures chime with Deloitte’s recent survey of UK chief financial officers which found that the top priority for CFOs was expansion. ...