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 âcorporate citizenâ 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 âassociate companiesâ;
- how to account for âjoint venturesâ;
- why related-party transactions must be disclosed.
âFinalâ Astra Bid Leaves Doubt Swirling; Ashley Armstrong Explains What LED To Pfizerâs new Offer Amid Confusion on Whether a Deal is Still Possible
It may have been the hottest weekend of the year but AstraZenecaâs and Pfizerâs army of advisers was trapped indoors, sweating over what promised to be the UKâs biggest ever company takeover. Finally, on Sunday night, after hours of conference calls and email exchanges, AstraZenecaâs deal team called a halt to their labours â 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 ÂŁ55-per-share âfinalâ offer â better, but not good enough, as it would turn out. âWhen thereâs a big deal on, weekends are cancelled,â 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 ÂŁ53.50 in a letter to AstraZenecaâs chairman. Analysts had reckoned a proposal between ÂŁ53 and ÂŁ55 would have been sufficient to bring AstraZeneca to the table âŠ
On Saturday, AstraZenecaâs board met to discuss the offer and emphatically decided it undervalued the company, still lacking certain âkey aspectsâ that it required. These included more comfort on the combined groupâs operating structure, details of planned cost cutting, and reassurance around pipeline and deal execution risks, mainly concerns surrounding Pfizerâs own tax inversion plans.
âUnfortunately, we could not really engage Pfizer on those very important dimensions,â said Pascal Soriot, Ast ra-Zenecaâs chief executive. âWe 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.â
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 â who had returned to the United States â was said to be extremely frustrated with the lack of engagement from AstraZenecaâs board and asked for a âprincipalsâ callâ to take place between himself, Pfizer chief finance officer Frank DâAmelio, Astra-Zenecaâs chairman Leif Johansson, Mr Soriot and finance boss Marc Dunoyer. After a âpolite and professionalâ phone call that lasted over an hour, Pfizer intimated it might be willing to make a âminorâ 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 ÂŁ59 per share, or a ÂŁ70bn overall bid.
While Mr Soriotâs 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 wasnât 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 ÂŁ55 had baffled some of Astra-Zenecaâs 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 didnât necessarily surprise Pfizer. The US drug maker had imposed various restrictions that meant it couldnât go hostile or raise its price â its proposal was âfinalâ.
Yesterday as news of AstraZenecaâs rejection broke, there remained widespread confusion about whether the deal was definitively over. Even AstraZenecaâs Mr Johansson admitted he had âno ideaâ when the saga will end. The uncertainty was primarily caused by the three caveats Pfizer included in its ÂŁ55 proposal that meant it could raise its offer if: Pfizerâs share price fell considerably; it achieved a recommendation from AstraZenecaâs board; or a rival bidder appeared with a lower offer.
However, sources close to the Takeover Panel have confirmed that âfinalâ means final â even in the case of a proposal, rather than a formal offer. Pfizer is restricted to making a firm bid at ÂŁ55 a share with AstraZenecaâs 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 Mondayâs deadline which requires Pfizer to make a firm bid or walk away under panel rules. Pfizer is hoping that AstraZenecaâs 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 ÂŁ55 bid only to then negotiate a higher price while the deal progresses through a regulatory process that could last up to a year. âAt the moment AstraZeneca has rejected a proposal, it hasnât rejected a bid,â one source said.
(Daily Telegraph, 20 May 2014)
Introduction
Pfizerâs 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 âparentâ company. Such combinations are normally called âgroupsâ or âbusiness combinations.â
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 âpooling of interestsâ 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 ârecord lowâ 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 lacklustreâŠ
In 2007 the total number of deals hit 869 and peaked in value a year later at ÂŁ36bn as firms embarked on a spree ahead of the Lehmanâs crash. In 2012 there were 266 deals worth a combined ÂŁ3.4bn.
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 Englandâs Credit Conditions survey. The survey of Britainâs 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.
âIn the UK an acquisition of a listed company requires a proof of funding under Takeover Panel rules. âBusinesses 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,â Richard Woodhouse, the BBAâs chief economist said.
âIn 2011 the Bank of England reported a â9.4 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 â a significant uptick.
âThe figures chime with Deloitteâs recent survey of UK chief financial officers which found that the top priority for CFOs was expansion. ...