Question

• Imagine you are the chief financial officer (CFO) of a corporation with plans to complete the acquisition of a key subsidiary this year. Your chief executive officer (CEO) has requested a presentation to the board of directors describing the methods available to account for the acquisition internally and the best method for the company during the acquisition year. Please assess the value of each method identified in your presentation to the board and support your recommendation with examples. Respond to at least one other student.

Answer 1

Ans:

The Role of the CFO (Chief Financial Officer)

The role of the CFO (Chief Financial Officer) has been changing over the past twenty years. Originally, the role of the CFO revolved around producing and analyzing the financial statements. However, because of the computerization of the accounting function the need for accounting skills in performing the roles and responsibilities of a CFO diminished. Though the job description of a CFO (Chief Financial Officer) remains broad the tasks comprising that function fall into four distinct roles.

The Strategist CFO

The first role of the CFO is to be a strategist to the CEO. The traditional definition of success for a chief financial officer was reporting the numbers, managing the financial function, and being reactive to events as they unfold. But in today’s fast paced business environment, producing financial reports and information is no longer enough.

CFO’s in the twenty-first century must be able to “peak around corners”. Therefore, they must be able to apply critical thinking skills, along with financial acumen, to the long term goals of the organization.

The CFO as a Leader

The second role of the CFO hand in hand with the first one. That is one of a leader implementing the strategies of the company. As a result, it is no longer sufficient for a CFO to sit back and analyze the effort of others. The chief financial officer (CFO) of today must take ownership of the financial results of both the organization and senior management team.

The chief financial officer of today must be responsible for providing leadership to other senior management team members, including the CEO. The CFO’s role can sometimes force them to make the tough calls that others in the organization don’t or can’t make. Occasionally, this can mean the difference between success and failure.

The CFO as a Team Leader

The third role of the CFO is that of a team leader to other employees – both inside and outside of the financial function. Not only will a coach call plays for a team, but they are also responsible for getting the highest results out of the talent on their team.

An aspiring and successful coach will produce superior results by finding the strengths of their team members and obtaining a higher level of performance than the individuals might achieve on their own. The role of the CFO (Chief Financial Officer) is to bring together a diverse group of talented individuals to achieve superior financial performance.

The CFO with Third Parties

Last, but not least, the role of the CFO is that of a diplomat to third parties. People outside of the company look to senior management team for inspiration and confidence in the company’s ability to perform. In almost every case the financial viability of the company is vouched for by the CFO.

The CFO’s role becomes that of the “face” of the company’s sustainability to customers, vendors and bankers. Often these third parties look to the CFO for the unvarnished truth regarding the financial viability of the company to deliver on it’s brand promise.

Acquisition Accounting

Acquisition accounting is a set of formal guidelines describing how assets, liabilities, non-controlling interest (NCI) and goodwill of a purchased company must be reported by the buyer on its consolidated statement of financial position.

The fair market value (FMV) of the acquired company is allocated between the net tangible and intangible assets portion of the balance sheet of the buyer. Any resulting difference is regarded as goodwill. Acquisition accounting is also referred to as business combination accounting..

How Acquisition Accounting Works

International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) require all business combinations to be treated as acquisitions for accounting purposes, meaning that one company must be identified as an acquirer and one company must be identified as an acquiree even if the transaction creates a new company.

The acquisition accounting approach requires everything to be measured at FMV, the amount a third-party would pay on the open market, at the time of acquisition — the date that the acquirer took control of the target company. That includes the following:

• Tangible assets and liabilities: Assets that have a physical form, including machinery, buildings, and land.
• Intangible assets and liabilities: Nonphysical assets, such as patents, trademarks, copyrights, goodwill, and brand recognition.
• Non-controlling interest: Also known as minority interest, this refers to a shareholder owning less than 50% of outstanding shares and having no control over decisions. If possible, the fair value of non-controlling interest can be derived from the share price of the acquiree.
• Consideration paid to the seller: The buyer can pay in many ways, including cash, stock or a contingent earnout. Calculations must be provided for any future payment obligations.
• Goodwill: Once all those steps have been taken, the purchaser must then calculate if there is any goodwill. Goodwill is recorded in a situation when the purchase price is higher than the sum of the fair value of all identifiable tangible and intangible assets bought in the acquisition.