Wednesday, September 23, 2009

SEC War Story-2

This is follow up my 9 May 2009 post: I recently discussed the acquisition accounting issue with three SEC staff accountants. They told me they had met with others in the SEC accounting staff, including the chief accountant and concluded their accounting is correct. Let's revise the example in my 9 May 2009 post.

1. Company A issues 20 million shares to Company B's shareholders to buy B when A's market price was $5 a share, market value = $100 million.
2. Company B's shareholders give Company A $70 million simultaneously as part of an "integrated transaction".
3. The IRS still has its "step transaction" doctrine.
4. Elevating substance over form in integral to accounting.

What did A pay to buy B?

My answer is $30 million, $100 million in shares less $70 million "cash back". To me the purchase price is still $30 million; $100 - $70 = $30 just like $50 - $20 = $30. The SEC staff accountants told me A should record the $70 million as goodwill with a credit to additional paid in capital. I kid you not. Think about this. By manipulating the amount of shares A issues and the "cash back" A can create any "cost" it wants. These are the guys you want to stop the Bernie Madoffs of the world. Hahahahahaha. You're kidding. Never argue substance over form with the SEC. I can't imagine how much worse the SEC will be to deal with if IFRS is adopted.


Anonymous said...

Isn't most "financial engineering" form over substance?

The fin/engineers ran amok... nobody stopped them.

Nope they just blew up the global financial system.

The SEC? Uhm...

Rulemakers or rulebakers?

Robyn said...

can i do that when i'm calculating cap gains, profits, depreciation, et al? invent whatever cost i want?