 Corporate finance presentation business combinations methods get ready. It's time to take our chance with corporate finance We're going to start off with business combinations from the past These are not the current method that we're going to be using However, it's good to have some historical context so that if you hear these methods, you know what you're talking about We also want to think about these concepts in terms of just a logistical standpoint If you were to make these laws then how would you do it? What are some of the challenges that have happened and by looking through the historical process? You can kind of think about okay. These are what we're put in place I see why those were put in place here that changes that are happening We could see why the changes are happening and therefore have a better understanding of what we are doing and how the current process Is being put in place and why the decisions were made to put it in place So in the past we had combinations methods that included the purchase method and the pooling of interest methods so the purchase Then what happened is the pooling of interest method was taken away by FASB So FASB said hey, we're not gonna allow anymore the pooling of interest method And then the purchase method has been replaced with the acquisition method So if you hear that purchase method that in essence is what we're currently doing However, we changed the name from the purchase method to the acquisition method So in the past we had the purchase method We had the pooling of interest method pooling of interest method has been removed Then the purchase method has basically been changed or renamed and modified to the acquisition method Therefore, what are we talking about now when we have the comp the business combinations? Which generally we're talking about the external expansion of the business businesses expanding can do that internally or externally We're typically talking about an external expansion and we're going to be using then the Acquisition method for the business combinations related to it So let's talk about the pooling of interest method really quick This is going to be the old method the old method that has been removed now We can no longer use the pooling of interest method So that's going to be the combining of the book values of companies No, no revaluation to the fair market value under this method So basically if you're considering two separate legal entities and you're thinking about if you're thinking about Okay, how am I going to do this? We got these two separate legal entities that we need to kind of merge in some way shape or form How can we do that? Well one way to think about it is well We got we're just going to take whatever the book values are and in essence merge them together And that would be basically the pooling of interest method now one kind of issue with that note That you might have some things on the books like property plant and equipment for example Which which we put on the books and historic value and then depreciate it and usually if there's a sale Or something like that if there's a sale that takes place with say the fixed assets Then usually you're going to recognize a gain or loss at that point in time that the sale took place So if you're talking about the pooling of interest method Then if you're just using the book value Then you're not really putting the items to the fair market value And if you consider the merger or the combination that is happening as kind of like a negotiation Which it is to a sense. There's a negotiation. There's some kind of sale taking place Then you would think if there's a sale taking place if assets are basically being bought and sold at this point There should be a triggering of a sales type of transaction in any gain or losses on These items that were currently at the book value should be revalued and you should have to recognize basically any gains or losses At that point in time. Also, there's kind of a push to go from from an An item where you're on a cost basis or book value basis to more of a fair value fair market value basis especially in the global accounting Accountants to try to conform basically with international accounting policies. There's often this push to To move more towards a fair market value type of accounting method Which would be basically revaluing your your assets and liabilities to reflect Current prices is that as best as possible. There's pros and cons that we won't get into the to the pros and cons in that But but if we eliminate the pooling method and we look at the acquisition method It kind of aligns with that type of that type of movement So there's been a move away from the pooling method now note from up from a managerial standpoint The pooling method Oftentimes might be a good thing right the people that when are involved in the actual merger the people that are Merging the company may want that you know Maybe looking for the pooling method because there wouldn't be a revaluation at that point in time It wouldn't trigger all the things that could be triggered with the with a purchase with the idea of this being like a purchase Kind of transaction which would result possibly in the recognition of gains and losses with regards to the revaluation of Of the of the entities information. Also, we have to of course revalue it which probably would have been taken place if you're doing some time type of Combination they probably revalued all the assets to come up with the with whatever the terms are of the agreement but Now you're gonna have to put that into the accounting in some way and and Instead of just pooling the information together on a book value method If we eliminate the book value the pooling method then you're gonna have to to revalue That the assets and that could be kind of a cumbersome situation. How do you do that? With regards to some type of assets which are going to be more difficult You have to take appraisals and things like that to get an accurate value And of course that's going to be estimates in some way shape or form depending on the type of property If we were to use the pooling of interest method There would mean no goodwill as a result of using that method So we'll talk more about what goodwill is but the concept of goodwill when you think about goodwill you're basically thinking Hey, there's something in this company of value above and beyond what's reflected on the balance sheet So in other words if you take a look at the assets minus the liabilities That's going to give you the net assets or the equity section and that's going to be the value that would be in essence the book value of The organization if if you were to have a purchase situation and the book value was Exactly the same value as the market value then when there was a purchase You would think that the purchase price would be Directly for the equity value of the organization the net assets the assets minus the liabilities however, that's almost never the case and Usually there's going to be a payment oftentimes for more than the assets minus the liabilities There's some kind of purchase beyond that. What what is that? We don't really we're going to call it goodwill and that goodwill is basically you can think of it as future earning potential You could think of it as a as a brand name Investment the name of the organization results in profits that are above and beyond basically the market standards But then above and beyond just the assets minus the liabilities So what how would you get goodwill on the books? Well, you can't really do it internally They won't you don't really report goodwill on the books if you just if you're growing you don't just say I'm going to report goodwill it typically happens as a result of some type of purchase arrangement in which case The purchase price is greater than in essence the book value So in essence, you're saying assets minus liabilities equity section net assets The the purchase price is greater than the the net assets Well, if you if you were then to use not the pooling method, but some type of acquisition method You're going to have to account for that in some way. Why did someone pay more on a market basis? Then the assets minus liabilities Why would somebody pay more? Than what you was what you would perceive the value of the organization to be well given It's an arm length transaction given It's a market transaction and we trust the market To determine prices we've got a we've got to assume then that there's some type of value That's intangible That's above and beyond the assets minus the liability that the market is willing to pay for and that intangible asset would Be goodwill now now the goodwill being reported is something that we wouldn't have to be dealing With with the pooling method because even even though there might be Certainly goodwill in the transaction you would just be combining the book value and due to the fact of not having to to adjust the the Fair to fair market value you wouldn't be dealing with the goodwill and of course that's another reason that the The the regulations now don't like the pooling method because again that they want to say hey look There's a market transaction happening here. There's some kind of purchase happening That's an opportunity for us to get a valid Assessment about the value of this company. There's there's a transaction. There's an arm length transaction There's a market transaction we would like then to revalue the organization at that point in time and and basically have that the Reflecting value reflect that that transaction that has taken place So those are some of the pros and cons why that why the method of the pooling method has been removed What do we have left then we've got the acquisition method So that's what's going to be put in place in other words Like we say that if you look at it from an ace ace yet like a regulatory type of standpoint You like the act the reason they like the acute was acquisition method is because again There is a transaction in essence This is kind of like a purchase and sale taking place you're pooling together But you could think of it basically as a purchase that's happening There's usually in other words a dominant kind of corporation and a corporation that's being purchased in that in that case in that case You can think of it kind of a sales transaction. There's a negotiation that's happening That's a market activity and that means that that market activity. We would like to have it drive What we think the value of the organization is because the market valuation is our best tool to value that the organization So at the point in time that there's this market arms length transaction It would be a good time to revalue the organization. So note again from a Regulatory standpoint, they're typically gonna want that because you get that transparency as we can see here the acquisition method Because you would think you get it get that transparency of the transaction from a managerial standpoint oftentimes the manager like the book method, right? Because then you don't have to deal with the revaluation And you don't have to deal possibly with the from a tax standpoint You can you can consider the fact that if there's good will being paid for then there could be gains and losses or gains Typically that could be could be recognized and you could be tax effects on this and so that could all Result in more regulatory burden as well as it as a tax burden. So from a from a Managerial perspective you like you probably pulling method probably it was preferred from a transparency standpoint taking taxes aside because taxes You know distort distort everything if you take taxes aside Obviously from a regulation and a transparency standpoint the acquisition method has a lot of virtues and good values for it So the acquisition method values are based on fair value of the consideration given and the fair value of any non-controlling interest That is not acquired. So when you when you think about the acquisition method You're gonna you're basically thinking hey, there's a transaction happening here and usually you can you can figure out What what the value is by the amount of consideration given meaning how much money was paid for it And it may not be money. There might have been other things of consideration stocks Bonds other types of property any anything could be given in consideration, but that but that is easier to value the things that are given in consideration often times Are easier to to value so you can you can then look at what the consideration that was given and then consider the price now If there it could be a little bit more confusing conceptually if there's a purchase not of a hundred percent Say of the stock of another company. They didn't purchase a hundred percent So then if there wasn't a hundred percent purchase, then you have this issue of a non controlling Interest so we'd still have to value in essence The non controlling interest as well. That's going to be something that complicates matters a little bit more So it's not like the acquisition method is is an easy method Which one is easier you could have pros and cons on a pooling versus the acquisition method Which is easier the pooling method was probably you know easier because you just you just took the book value You didn't have to reappraise everything or anything like that The acquisition method you're gonna have to do of course the appraisals to get it on in place and your but Generally, you're thinking that the purchase the price that you paid for it If it was just cash, it would be something easy to value But if it's cash and stock then you got to value the stock if it's publicly traded stock Then maybe it's not too difficult because you can look at that what it's trading for it at a given point in time to value the stock And if it's property that's being paid then then you got to value it possibly take appraisals on The property so we'll talk more about that In future presentations, but at this point in time just note acquisition method. That's the current method