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Financial Statement Analysis: A Practitioner's Guide, Fourth Edition by FERNANDO ALVAREZ, MARTIN FRIDSON

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Chapter 10

Mergers-and-Acquisitions Accounting

The accounting treatment of a merger or acquisition does not affect the combined companies’ subsequent competitive strength or ability to generate cash. Discretionary accounting choices in mergers-and-acquisitions (M&A) activity can, however, have a substantial impact on reported earnings. Intentionally opaque accounting makes it difficult for users of financial reporting to tell whether a highly acquisitive company is achieving organic growth or creating an illusion of dynamism through business combinations that generate no economic benefits.

MAXIMIZING POSTACQUISITION REPORTED EARNINGS

The conglomerate Tyco International devised an ingenious means of dressing up postacquisition performance in its 1998 acquisition of United States Surgical. Shortly before closing its deal with Tyco, the acquiree took a $190 million write-off, reducing future depreciation charges and thereby boosting future earnings. United States Surgical filed no further financial statements after taking the write-off, however. The reduction in asset values was consequently never reported to investors. After the renowned short seller James Chanos drew journalist Floyd Norris's attention to the issue, Tyco's chief financial officer provided more details than the New York Times columnist had managed to back out of Tyco's Securities and Exchange Commission (SEC) filings. Norris commented that the unreported write-off was significant for the light it shed on Tyco's ...

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