Accounting: Valuation Model in Use

Introduction

In contemporary business environments, there is an increased business combination through mergers and acquisitions; the combinations are necessitated by the hard economic environment experienced in the world or as effort to improve business. When a certain company is acquiring another, there is some consideration for the acquisition which must be determined in a method that favors the two companies (Michael, 2006). In the case of mergers and acquisitions, shareholders, managers, and other stakeholders of the acquiring company are interested in determining the fairest price they should pay for the acquired company; on the other the shareholder, managers and stakeholders of the acquired company are more likely to ask for a higher price for their company (Straub, 2007). The differences in stand points create the need to have a standard method through which combining businesses can use to value their net worth to satisfy each party. International accounting standards (ISA) 22 and IFRS 3 give guidelines and procedure that should be used when accounting for business combinations; however there are no set rules and procedures that need to be used when calculating the worth of the acquired business. Accounting scholars have developed different methods or approaches that can be used to determine the value of target companies however, they all appreciate that different companies can be valued effectively using different methods. In the past, there have been acquisitions and mergers that have been valued according to the nature of the businesses and the information available but the question remains what is the best method to value a company for acquisition purposes (Rosenbaum & Joshua, 2009).

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Project/dissertation aims and objectives

With the prevailing situation to determine the cost of acquisition, this paper has its primary aim or objective to determine the most effective way to evaluate the worth of a business. It will give recommendations of processes and approaches that should be used when gauging the net worth of the business.

The secondary questions that the project seeks to answer is the effectiveness and short comings of current business worth evaluation methods; it is from the strengths and weaknesses that recommendations will be built on to come up with an integrated system of evaluation that can be applied across board.

The following are the dissertation questions that the project will address:

  • What are the strongpoints of current business worth evaluation methods
  • What are the shortcomings of current business worth evaluation methods
  • Can there be a single method that can be used across board, if yes offer the process?
  • Are there some acquisitions that suffered from undervaluation or overvaluation during acquisitions?
  • Should the expected benefit after an acquisition be considered when determining the net worth of another company?

The rationale for the project/dissertation

The project will give solution to a burning question among businessmen, accountants and managers; it will address the best method through which acquiring company should use when determining the cost to pay for its target company. When the above has been acquired, business executives will be saved the task of determining the right approach to valuation of a business. Year in-year out, there are issues with how to treat some business transactions such as goodwill, retained earnings, and reserves; with the report, and the recommendations, the above issues among others will have been handled effectively (King, Slotegraaf & Kesner, 2008).

The dissertation report shall not only be a businessmen material, it will be placed in the library where students and scholars can access the information to sharpen their knowledge and understanding of different valuation and the right approach to the same. ISA and IFRS are enriched and developed through researches that address issues on the ground; the final report will be beneficial when making adjustments, additions, and improvements in the international accounting standards and guidelines.

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Project approach and method

The project will use qualitative method of data collection which will be supported through deductive reasoning; data will be collected through early success and failed acquisition companies; to have more recent and current data, the paper will be focused on acquisition that occurred between two Oil powerhouses; Exxon Corporation and Mobil Corporation in 1999. The case will be used as the case study for the survey to offer in-depth data that can be used to make a concrete report.

The focus of the survey

In 1999, two Oil powerhouses Exxon Corporation and Mobil Corporation concluded their acquisition transaction at a cost of $81 Billion; the acquisition was completed on Tuesday November 30th 1999. In the above transaction, the acquirer was EXXON (XON) while the acquired was Mobil Corporation; when completing the transaction, the two companies had to agree on the modalities of the transaction and how each is going to recognize its assets and liabilities.

A business combination results if one company; the parent, takes control of the other, the subsidiary; this form of combination is called acquisition, which is also known as purchase business combination (Palen, 1967). the price quoted must consider the situation of both the acquiring and the acquired company; generally, the comminuting enterprise that obtains more than one half of the voting rights of the other combining enterprise id the acquirer Although it is sometimes difficult to identify an acquirer, there are usually indications that one exists (Reed, Lajoux & Nesvold, 2007). For example:

  1. If the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer
  2. If the business combination is effected through an exchange of voting ordinary equity instrument for cash or other assets, the entity giving up the cash is the acquirer
  3. If the business combination results in the management of one combination entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management can dominate are likely to be the acquirer (Zeff & Goldberg, 1964).

International financial reporting standard (IFRS) 3, Business combinations, requires that all business combinations to be accounted for as acquisition.

Acquisition cost determination

There are different methods of determining the acquisition price to be paid by the acquirer; in the case of Exxon Corporation and Mobil Corporation, the United States Government was a major participant that offered the guidelines and method that would be used in the merger. To complete the deal, Exxon Corporation and Mobil Corporation agreed they will sell 12 stations in Guam, 1740 in Mid-Atlantic States, 319 in Texas, and 360 in California; this was part of the transaction that aimed at reducing the backlog of the two companies after the acquisition; when undertaking the acquisition, a group of experts were used to determine the amount of the deal (Faris & Spiller, 1975). The method that Exxon Corporation and Mobil Corporation used to determine its price consideration is called “pooling of interest together method”. According to this method Exxon Corporation acquired shares in Mobil Corporation instead of paying cash. In this method, a business combination is brought about without any significant out flow of funds from the group. In this method two or more companies come together and merge into a different entity (International Accounting Standards Board, 2007).

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Time frame

Time frame work

Under this section, a timeline will be used to illustrate the period that the researcher wants to take and what activity will be taking place.

Time line

Activity Period
Proposal writing and questionnaire development On and half months
Proposal submission Fifteen days
Proposal defense One month
Data collection One month
Data analysis One month
Report writing One month
Thesis writing One month
Thesis defense and submission to Graduate School One month

Conclusion

When a parent company is acquiring a subsidiary, the price to be paid is determined by considering assets, liabilities, reserves, goodwill, and retained earnings in the acquired company. In the case of Exxon Corporation and Mobil Corporation acquisition in 1999, the federal government authorized the business transaction after looking into the economic benefit that the two oil companies would get when operating as one entity. The consideration by Exxon Corporation to Mobil Corporation looked into the net effect of the company’s assets and liabilities as well as the benefit that the acquisition will result in.

References

DePamphilis, D. (2008). Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press.

Faris, D., & Spiller, J. (1975). Accounting for Business, Second Edition (Book). Accounting Review, 50(1), 210.

International Accounting Standards Board. (2007). International Financial Reporting Standards 2007 including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007). New York: LexisNexis

King, B., & Dominak, G. (1976). Modern Accounting: Accounting as the Information System for Technological Change (Book). Accounting Review, 51(1), 212.

Michael, P. S. (2006). Advanced Accounting: Concepts & Practice. Issues in Accounting Education, 21(1), 69.

Palen, J. (1967). PRINCIPLES OF ACCOUNTING (Book). Journal of Retailing, 43(3), 67.

Reed, S. F., Lajoux, A. R. & Nesvold, P. H. (2007). The art of M & A: a merger, acquisition, buyout guide. New York: McGraw-Hill Professional.

Rosenbaum, J. & Joshua, K. (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken: John Wiley & Sons.

Straub, T. (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitätsverlag

Zeff, S., & Goldberg, L. (1964). A Critical Study of Accounting for Business Combinations (Book). Accounting Review, 39(1), 230.

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