Acquisitions, Taxes, Translations, and Derivatives

Please contact NYU IT (askit@nyu.edu, 212-998-3333) or NYU Stern IT (helpdesk@stern.nyu.edu, 212-998-0180) for all ZOOM/email/NYU Brightspace/Admin/CapitalIQ issues. Please do not copy/contact me regarding such issues. If NYU/Stern support cannot help you, please contact Student Affairs/Dean's office. All emails are sent to the email address in the NYU Brightspace roster. NYU Brightspace lists @nyu.edu email for some of you and @stern.nyu.edu email for others. This mess is beyond my control. Please contact NYU/Stern support to learn how to read/forward/check spam for @nyu.edu and @stern.nyu.edu accounts. Their instructions are rather poor. Students do not realize that they are logged in as a Stern student and think they are checking their NYU email when they are still checking NYU Stern's email. Please use a new browser to ensure that you check NYU's email. Do not write to Almaris or me if you are not getting Almaris emails sent to the NYU email address because this issue is between NYU and you.

This course [ACCT-GB.3330] is offered only once in spring to MS in Accounting students.

Overview

• Accounting for income taxes [ASC 740]
• Accounting for business combinations [ASC 805]
• Consolidations [ASC 810]
• Foreign operations [ASC 830]
• Derivatives [ASC 815]

Attendance

Timely in-person attendance is required. Classes will not be videotaped. Your absence will not be penalized if you miss class for a documented medical reason or family emergency. However, you will have to learn from the detailed class materials and notes. Please do not contact me or the TA to review materials for missed classes.

Help and Office

• Me: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86.
• TA: Please check NYU Brightspace.

Materials

• I use my materials. Therefore, there is no required textbook, and you need not purchase anything.

Assignments

• All assignments are mandatory. I will email you once the assignments are ready. You will then get an email from Almaris with your user id and password. Login to view the online assignments at http://www.almaris.com/assess/. The email is sent to the email official Stern email. The Almaris password is different from the Stern password. You can retrieve the password at any time by entering your official email (no aliases) and leaving the password blank.
• You can learn concepts from others, but you must work on the actual assignment alone. You may be called upon in class to explain your answer to the assignments.
• I might update the deadlines as the course progresses. The deadlines shown at Almaris are the correct deadlines. NO EXTENSIONS will be granted for any reason except medical or family emergencies. If you have religious or personal conflicts, submit the assignments early. The related materials are covered well in advance of the assignments. Please do not email me to request extensions unless you have a medical or family emergency. Some assignments are short; others are long. Please manage your time.
• Assignments are marked “late” if you do not meet or exceed the passing score described below before the deadline. There is no additional penalty for lateness other than the low score.
• I set the passing score at 100% if you should ace the assignment. However, you do not "fail" the assignment if you do not ace it. Whatever you get on your last attempt is your final score.
• Almaris is offering these tests to Stern at no charge since I am a co-founder of Almaris.
• Almaris staff is not authorized to extend deadlines under any circumstances. Only my TAs can do that. Almaris staff will reply to your emails only if they pertain to technical issues with the Almaris system. Please contact Stern IT for technical issues with your network.

Exams and Grading

• If you have a qualified disability and require academic accommodation during this course, please contact me directly. I will arrange a separate room/time for you.
• Grades will be based upon the following factors:
• 25%: Attendance, professional conduct in class, and class participation as measured by answering questions in class when I call on you in class.
  • You will lose points for every missed class unless you have a medical emergency, family emergency, a confirmed interview, or required work travel for Langone students. No other reasons will be accepted as valid reasons unless you have cleared them with me. If you have a medical or family emergency, do not worry about the course. Take care of that emergency and email me later.
  • If you are more than 10 minutes late, you will be marked absent.
  • Please bring your name tags to each class.
• 25%: Almaris assignments described above.
  • You need not get a full score on the Almaris assignments; any score above 80% is considered a passing score and will be rounded up to 100%.
• 50%: Final exam
  • Your exam will consist of one or more spreadsheets. Your score on each spreadsheet will be max(attempt1, attempt2 - 7, attempt3 - 14, attempt4 - 21, attempt5 - 28).
  • If you want us to grade your incomplete or incorrect spreadsheet manually, submit it within FIVE MINUTES of the end of the exam. Do not email it; look for File Exchange in the left-hand menu bar on NYU Brightspace. If you submit the spreadsheet for manual grading, you would be considered to have used up your five attempts. Therefore, your maximum score on that spreadsheet can only be 72/100 due to the penalty for multiple attempts.

Important computer tips for the final

• DO NOT WORK ON A SPREADSHEET WITHIN A BROWSER. Save the spreadsheet to your desktop, work on it, and save it periodically. If you navigate away from the spreadsheet in a browser, ALL YOUR WORK WILL BE LOST.
• Restart your computer before the exam to minimize problems.
• Bring an external mouse with a scroll wheel to speed up test-taking. Do not waste time using the trackpad or the internal mouse.
• Maximize screen space by hiding the Excel ribbon and browser menus. The more of the screen you see, the faster and more accurate you are.
• Bring a computer with as big a screen as possible.
• Organize your computer files and designate a directory where you will be saving your exam files.
• Do not get an unfamiliar computer.

Schedule

• There is no midterm. There will be no in-class graded quizzes.
• Please do not schedule any travel that conflicts with the exam. I will not move the exam for you unless you have a medical or family emergency.
• A detailed document is provided in the course materials. It lists the sequence of topics, related pages from the materials, related spreadsheets, and related assignments. The outline below is a summary.

1. Deferred taxes: An introduction

We will skip this part if you are already comfortable with it based on the coverage in prior classes.

Permanent versus temporary differences

• Book income versus taxable income
• Book basis versus tax basis
• Tax paid, tax bill, current tax expense, deferred tax expense, total tax expense
• Taxes payable, uncertain tax benefit liabilities, deferred tax liabilities
• Tax refunds receivable

2. Deferred taxes: Four key examples

Taxable and deductible temporary differences

• When book revenues precede taxable revenues: Book basis versus tax basis of receivables
• When book revenues follow taxable revenues: Book basis versus tax basis of deferred revenues
• When book expenses precede tax deductions: Book basis versus tax basis of accrued expenses
• When book expenses follow tax deductions: Book basis versus tax basis of deferred expenses
• When future enacted tax rates are different

3. Deferred taxes: Intermediate issues

Accumulated other comprehensive income

• Other comprehensive income arising from available-for-sale securities
• Introduction to intra-period tax allocations

Tax credit carryforwards and tax loss carrybacks and carryforwards

• R&D credit carryforwards
• AMT credit carryforwards
• NOL carryback
• NOL carryforwards

Valuation allowance

• More-likely-than-not criterion
• Positive evidence
• Negative evidence

4. Investments

Financial investments

• Trading securities
• Available-for-sale securities

When there is no consolidation

• Cost-method investments
• Equity-method investments

Introduction to consolidation

• Voting interest entities versus variable interest entities
• A peek at variable interest entities

5. Acquisitions: An example to illustrate the overall process

On the acquisition date

• Identify the acquirer
• Determine the acquisition date
• Compute consideration paid
• Measure the fair value of assets acquired and liabilities assumed: Step-ups
• Determine if push-down or top-side accounting applies
• Compute Deferred taxes
• Derive goodwill

After acquisition date

• Increased depreciation and amortization
• Unwinding of deferred tax assets and liabilities
• Impairments

6. Acquisitions: Scope and Consideration paid

Scope of ASC 805

• Acquiring assets versus acquiring a business
• Definition of a business
• Joint ventures
• Transactions between entities under common control
• Veto rights

Consideration paid

• Components of purchase consideration
  • Cash paid
  • Debt assumed
  • Equity issued
  • Contingent consideration: Equity-classified and liability-classified earnouts
  • Replacement stock awards issued to employees
  • Off-market contracts
• Items that are excluded from purchase consideration
  • Preexisting relationships
  • Share-based payments allocated to post-acquisition services
  • Transaction costs
• Premium paid
  • Understanding premium over book value versus premium over market value
  • Understanding control premium

7. Acquisitions: Acquired assets and liabilities

Acquired assets

• Trading, available-for-sale, and held-to-maturity securities: Difficulty of valuing Level III securities
• Receivables and allowances: Misleading days sales and allowance ratios after an acquisition
• Raw materials, work-in-process, and finished goods inventories: Misleading gross margin and days of inventory ratios after an acquisition
• PP&E: Distorted accumulated depreciation to gross PP&E ratios after an acquisition; distorted PP&E turnover after an acquisition
• Favorable leases and contracts
• Intangible assets
  • Brands and trademarks
  • Customer relationships
• Deferred tax assets are covered in the next section

Acquired pre-tax liabilities

• Accounts payable and accrued expenses: Misleading days payable after an acquisition
• Asset retirement obligations
• Deferred revenues: Understated future revenues, misleading days of deferred revenues
• Unfavorable leases and contracts

Deferred tax liabilities and assets

• Book basis versus tax basis in acquisitions and resulting deferred tax assets and liabilities

Goodwill

• What goodwill represents

8. Acquisitions: Post-acquisition date accounting

Amortization

• Finite life assets
• Indefinite life assets other than goodwill

Impairment

• Finite life assets
• Indefinite life assets other than goodwill
• Goodwill

9. Acquisitions: Non-controlling interest

When the parent retains control

• Profits and losses
• Other comprehensive income
• Dividends
• Increases or decreases in ownership stake while still maintaining control

When the parent acquires or relinquishes control

• Acquire control: Marking the existing investments to fair value and computing the fair value of remaining non-controlling interest
• Relinquish control: De-consolidation and marking the remaining investment to fair value

10. Foreign Operations

Overview of the process

• Identify the reporting entity and its reporting currency
• Identify distinct and separable operations within the reporting entity
• Determine the functional currency of each operation
• Remeasure amounts not in functional currency to functional currency
• Translate functional currency amounts to reporting currency

Remeasurements

• Monetary assets
• Non-monetary assets
• How remeasurements affect financial ratios

Translations

• Cumulative translation adjustment
• How translations affect indirect cash flow adjustments

11. Intercompany transactions

Purchase and sale of inventory and long-lived assets

• Sale of inventory
• Sale of PP&E and intangibles

Intercompany debt

• Finite duration
• Indefinite duration

12. Introduction to derivatives

Institutional knowledge

• What are derivatives? Why are they useful?
• Forward versus futures contracts

Commonly used derivatives

• Commodity derivatives
• Foreign currency derivatives
• Interest rate derivatives

13. Hedge accounting

The five possibilities

• Forward sale agreements
• Financial instruments at fair value but not accounted for as hedges
• Fair value hedge
• Cash flow hedge
• Hedge of net investment in a foreign operation