Labor Cost Accounting in a Transactional Environment

1
Labor Cost Accounting in a Transactional
Environment

• Segment 3, Part 1
• Purchase Accounting for Different Typesof
  Business Recombinations
• Randy Gullo

2
Table of Contents

• Purchase accounting overview
• Characteristics that distinguish types of
  transactions
• Asset purchase Discussion
• Stock purchase Discussion
• Merger of equals Discussion

3
Table of Contents

• Pooling Discussion
• Partial spinoffs Discussion
• Split offs Discussion
• Asset purchase Example
• Pooling Example

4
Table of Contents

• Partial spinoffs Example
• Split offs Example
• Purchase price adjustments Goodwill
• Basic principles and effects common to most types
  of business recombinations
• QA

5
Purchase accounting overview

• SFAS No. 141
• Generally, all acquisitions are deemed to be
  purchases
• What was acquired?

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Purchase accounting overview

• Requires consideration paid to be allocated to
  net assets acquired including tangible,
  intangible assets and liabilities
• Consideration paid could be cash, equity, combo,
  assumption of liabilites or other assets
  (exchanges)
• General exception common control transactions

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Characteristics that distinguish types of
transactions

• Acquisition of business vs. acquisition of assets
• Determination driven by
• Nature of the assets acquired
• Processes in place
• Employees
• Access to customers
• Consideration paid not integral to determination
  in the type of transaction

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Asset purchase Discussion

• Includes the purchase of a portion of a business
• Assessment of facts and circumstances required
• Fair value transaction

9
Stock purchase Discussion

• Purchase for consideration of the underlying
  common equity interests of a target enterprise
• Assessment of facts and circumstances required
• Fair value transaction
• Example Company A purchases the underlying
  common stock of Company B

10
Merger of equals Discussion

• Could be two companies merging of similar size
• Assessment of facts and circumstances required
• One must be the accounting acquirer
• Driver of determination of acquirer could be who
  will manage the combined entity including CEO,
  board of directors, shareholder ownership
  percentages/changes, etc.
• Fair value transaction

11
Pooling Discussion

• After SFAS No. 141 (2001), generally prohibited
• Exception common control transactions
• Not a fair value transaction under old pooling
  rules
• Retroactive presentation required

12
Partial spinoffs Discussion

• Treated from an accounting perspective as a
  dividend to existing shareholders
• Transaction recorded at historical cost (i.e. no
  fair value step up in basis)
• Could lead to curtailments or settlements under
  pension plan rules (FAS 88)

13
Split offs Discussion

• Existing shareholders of parent determine if they
  want to exchange shares in parent with shares of
  split off business
• Non-pro rata split offs generally at fair value
• Could lead to curtailments or settlements under
  pension plan rules (FAS 88)

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Asset purchase Example

• Facts and circumstances assessment required for
  determination to be made
• Company A acquires one asset from company B which
  has many assets in the same line of business
• No employees are transferred to acquirer
• Future revenue stream will come from other
  sources

15
Pooling Example

• Company reorganizes certain of its subsidiaries
  or changes the consolidation structure
• No effect on parent at consolidated level
• Middle tier subsidiary reporting affected

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Partial spinoffs Example

• Company spins off 30 of the common stock of a
  subsidiary to existing shareholders
• Post spin - Parent owns 70 of sub and existing
  parent shareholders own 30 of sub

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Split offs Example

• Parent splits off 100 of a subsidiary of to
  shareholders (ceases to own)
• Existing shareholders decide if they would like
  to exchange shares of parent for shares of
  subsidiary
• At existing shareholders discretion
• After split off, existing shareholders could own
  stock of Parent, subsidiary or both

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Purchase price adjustmentsand goodwill

• Accounting rules require the fair value of assets
  and liabilities acquired to be determined within
  one year of acquisition
• Generally, to the extent information becomes
  available that was not previously available at
  time of original purchase price allocation
  exercise, an adjustment to the purchase price can
  be made

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Purchase price adjustmentsand goodwill

• The difference between fair value of
  consideration paid and fair value of net assets
  acquired represents goodwill
• Goodwill can be affected by purchase price
  adjustments
• What happens to goodwill i.e. how does it
  affect the acquiring companys financials?

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Basic principles and effects common to most types
of business combinations

• Fair value transactions
• Purchase price allocation exercise to identify
  all assets and liabilities acquired (some of
  which may not have been previously recorded in
  targets financial statements)
• One year window of opportunity to determine fair
  value of business/assets acquired

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QA

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Labor Cost Accounting in a Transactional
Environment

• Segment 3, Part 3
• Pre- and Post-Merger Compensation and Benefit
  Restructuring Alternatives
• Ian Jones / Josh Bank

23
Table of Contents

• Introduction
• MA process so far
• The bigger picture
• Issues for stakeholders
• Pre- and post-merger alternatives
• Special considerations
• QA

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Introduction

• Company A likes Company B
• Company A tenders offer to Company B
• Company B accepts offer from Company A
• How to put Company A and Company B together?

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MA process so far

• Due diligence findings
• Summary of compensation and benefit programs of
  both companies
• Gaps are identified
• Statutory/mandatory shortfalls identified
• Relative population sizes in each country
  analyzed

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The bigger picture

• What has been occurring in the real world?
• Senior management have promised a new era of
  efficiency and cost savings
• Downsizing rumors are rife
• The direction of the new organization is outlined
  
• New name for business venture?

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Issues for stakeholders

• How to integrate two separate entities
• Culture clashes
• Who will lead the new company?
• ? Feed into the CB program design

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Issues for stakeholders

• HR service delivery
• Staffing models
• Total rewards alignment

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Pre-merger Alternatives

• Typically changes put on hold
• Targets sometimes put changes through quickly to
  lock-in benefits or obtain improvements
• Maintenance periods negotiated into deal
• May preserve benefits for fixed period
• May negotiate no reduction in total
  compensation for period

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Post-merger Considerations

• Total compensation approach
• Global or regional approach
• Prioritization of key locations/regions

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Post-merger Considerations

• Senior leadership buy-in and support
• Level of HR resources
• Consolidation period

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Post-merger Alternatives (1)

• The Gold Standard
• Take best of benefit plans in each location
• Easiest in terms of employee support!
• Most costly
• Unlikely to meet synergy targets
• Infrequently used

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Post-merger Alternatives (2)

• Acquirers Benefits
• Target employees placed on acquirers plans for
  all benefits
• May mean take-away in certain areas
• Acquired rights difficulties
• May need employee consent
• May be balanced in other elements of remuneration
  package
• May not be feasible in all countries
• Most commonly used

34
Post-merger Alternatives (3)

• Acquirees Benefits
• Usually only applies in countries where relative
  population weighted towards acquiree
• Similar concerns/issues than Alternative 2
• Additional concern for acquirers employees why
  move to a new benefit structure?
• More common in mergers (vs acquisitions)

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Post-merger Alternatives (4)

• Entirely New Plan
• Take opportunity of deal to examine overall
  benefit structure
• Start from scratch and assess best
  market-competitive plan
• Potential for take-aways, but also for cost
  reductions
• Again, potential acquired rights issues
• Unlikely to tie into deal synergy promises

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Special Considerations

• Sunset clauses
• Grandfathering
• Executive contracts
• Acquired rights

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Special Considerations

• Communication issues
• Implementation
• Verbal promises
• Skeletons in the closet

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QA