(Georgia Institute of Technology, 2011-07)
Mulford, Charles W.; Comiskey, Eugene E.
In this report we examine more closely the use of natural hedges. Given their effectiveness in limiting earnings volatility while bypassing the risks associated with hedge accounting, natural hedges are gaining in importance to the financial management of the firm.
(Georgia Institute of Technology, 2011-04)
Comiskey, Eugene E.; Mulford, Charles W.
SFAS 141(R), Business Combinations, includes significant changes to the accounting and disclosure
requirements for acquisitions made at less than fair value. Under new rules, acquisition-related gains,
asset valuations and shareholders’ equity will be higher in transactions yielding negative goodwill, a
financial statement element referred to henceforth as a bargain purchase amount. In years after the
acquisition, operating earnings will be reduced as increased asset valuations are amortized or
depreciated.
Disclosure requirements contained in the revised standard provide financial statement readers with new
insights into why firms are able to effect acquisitions at less than fair value. In reviewing 71
acquisitions, we find several reasons for the existence of such bargain purchase gains, ranging from
financial distress of the target, to special characteristics of the acquiring firm, to flaws in the bidding
process. These findings have implications for investors, who must analyze bargain purchase
transactions, for CFOs and other corporate managers, who must implement the new standard’s
provisions, and for regulators, who must determine whether the new standard is being properly applied.