Mergers and Acquisitions Articles
Tax Law Changes for Bonus Depreciation
By: Charles L. Telk Jr., CPA, Partner | email
The latest tax law changes passed in 2010 enhanced available bonus depreciation from 50% to 100% for property placed into service between September 9, 2010 and December 31, 2011. Generally, the following rules apply:
1. The property must be MACRS property with a class life of 20 years or less. This includes qualified leasehold improvements (15 years) and “off the shelf” software (3 years).
2. The property’s original use must begin with the taxpayer, so used assets do not qualify. While there isn
’t much guidance in this area, 168(k) has historically applied to property with a placed-in-service date during the applicable time-frame.
While we wait for the IRS to clarify the rules, RIA has issued guidance stating that property under a binding contract for purchase entered into after December 31, 2007 will qualify for the 100% bonus depreciation if it is placed in service during the dates mentioned earlier in this article.
50% bonus depreciation can’t be elected in lieu of 100%. The election to take bonus depreciation applies to each class life, not each asset.
The deduction drops back to 50% for assets placed in service after December 31, 2011 but before January 1, 2013.
Cooperative Trends Expected in 2011
By: Dennis Gardiner, Partner | email
What we expect to see in 2011…
- Use of 100% bonus depreciation.
- Continued investments in capital improvements, particularly grain storage.
- More interest in non-qualified patronage alloc
ations.
- With the quick build-up over the past few years of retained earnings, we anticipate seeing more time spent in the board room or board retreats addressing the member’s equity mix of the cooperative’s balance sheet.
- Considerable time and money being spent in complying with OSHA standards.
Cooperative Trends of 2010 – What We Have Seen
By: Dave Thomsen, Partner | email
What we have seen in 2010…
- Clients were more profitable in 2010 compared to 2009. Depending on year end, local savings was much better in 2010 than 2009, but not back to record 2008 levels.
- Increased grain and agronomy volumes, lower prices.
- Agronomy margins improved and were closer to historical averages, prices stabilized.
- Wet 2009 harvest led to substantially higher grain drying revenues in 2010, however grain quality became an issue.
- Clients with November 2010 through January 2011 year ends saw an excellent fall fertilizer season that will increase local savings.
- With lower prices, borrowing was down, and with low
interest rates, interest expense was down, sometimes less than half of 2009 totals.
- Accounts receivable ageing generally improved.
- Build, build, build! Many clients spent substantial dollars for fixed asset additions, primarily grain and liquid fertilizer storage facilities. It appears these additions have been good investments.
- The recent trend to build retained savings and the company’s balance sheet continued, aided by the benefits of the gross domestic production deduction (Section 199).
- More clients began to allocate the benefits of Section 199 to their patrons. This was largely caused by the cooperative’s inability to use all of the benefit due to lower earnings.
- Some clients have begun to allocate a mix of patronage and Section 199.
Shark Repellents and Poison Pills
By: Dennis Gardiner, Partner | email
Now how do these terms fit into the Coop world? Actually, they are quite timely. Our clients have built their retained earnings quickly over the last few years, particularly as they utilize the benefits of the Section 199, Domestic Production Activities Deduction, to eliminate or lower the income taxes associated with a large portion of what has been retained.
As we visit our clients this year, we have found ourselves discussing retained earnings, qualified patronage, non-qualified patronage and retaining or allocating the benefits of Section 199. The topic of how much retained earnings is appropriate keeps surfacing as well. One of the concerns that comes up is how the proceeds of a sale of the company would be distributed if the company were to sell. And, with the retained earnings being significant relative to the equity in the names of the members, the concern turns to how vulnerable the cooperative is to an offer that could be perceived as attractive to the members but would end up being a discounted sale of the coop– one heck of a bargain for a buyer.
Shark repellents and poison pills are some of the defensive mechanisms that are designed to make a potential acquirer deal with the board of directors. Shark repellents reduce the desirability of the company and are used to stall the transfer of control over a period of years once the acquiring
company has acquired a majority of the shares of the company they are trying to buy (target). The idea is that the company will be continually less desirable to the potential acquirer the longer they have to wait for control once they acquire a majority of the target company’s shares.
A poison pill is one of the defense mechanisms in another class of anti-takeover provisions that makes it difficult, or impossible, to acquire the necessary shares of the target company regardless of the desirability of the company.
What can your cooperative do to protect itself in an unsolicited take-over situation or in a friendly sale of a control transaction? The first step would be to engage an attorney who can advise you on a specific situation and ensure that the board’s actions are not likely to result in legal consequences later.
An unsolicited offer brings with it a plethora of practical and legal considerations. It is important for cooperatives to have in place defense mechanisms before an offer is made that will enable the board of directors to act as a buffer between the acquirer and the shareholders. With the success of many of our clients over the past several years, now might be as good as time as any to look into what would happen if another company set its sights on your cooperative.
Source: 2009 Summer edition of the NSAC’s “The Cooperative Accountant” written by David P. Swanson, Dorsey & Whitney LLP and Charles L. Woltmann, Sunkist Growers, Inc.
Section 199 Update – Amended Returns
By: Gardiner Thomsen CPAs | email
So far, there have been several private letter rulings dealing with section 199. These rulings have been issued on pooling cooperatives, although a thorough review of the facts indicates that all of the cooperatives involved have been conducting their business like non-pooling marketing cooperatives and are pooling cooperatives in name only.
Currently – there are 2 private letter rulings still pending before the IRS, requested by non-pooling marketing cooperatives. We are keeping an eye on these as they make their way through the long process and will report on these as soon as they are issued.
Because the IRS issued the critical ILM regarding section 199, several years after the implementation of section 199, there are open tax years which may be eligible for filing amended returns. While we feel that the IRS will eventually allow amended returns claiming the higher section 199 deduction to be filed, we are not certain that this is currently the case.
Therefore, we are starting the information gathering process to file protective amended return claims for those cooperatives with a tax year ending December 31, 2005 and January 31, 2006. These cooperatives will lose their ability to file amended returns on September 15, 2009 and October 15, 2009 respectively.
If your cooperative has a December 31 or January 31 year end, you will be contacted soon to discuss these amended return filings.
Mergers – No More Pooling
By: Dave Thomsen, Partner | email
For many years, two methods of reporting mergers, the purchase method and the pooling of interests method, had been available to account for mergers and acquisitions “in accordance with generally accepted accounting principles.” In 2001, the Financial Accounting Standards Board (FASB) discontinued the acceptance of the pooling of interest method except for certain business entity types such as mutual enterprises like Farmer cooperatives. However, the FASB has recently issued Statement No. 141(R) that now eliminates the pooling of interests method altogether and also introduced other new requirements to be considered in most, if not all, business combinations.
As most of you know, the pooling of interests method simply combined the accounts of each merging company at book value, with no adjustments to reflect market value differences. In addition, retained savings of both companies were also combined.
On the effective date of FASB 141(R), any new business combination will be required to use the purchase method to measure and recognize the fair value of all assets and liabilities of the companies being combined. A few of the significant issues we see from this new approach are:
- Under the purchase method, one company will be identified as the Acquirer and the other(s) as the Acquired.
- Greater attention will now be placed on the fair value of assets as compared to book value. This applies to both the Acquirer and the Acquired. Appraisals of property and equipment will be much more common in mergers than in the past, and though investments in other cooperatives will be recorded at cost, an adjustment may be included to reflect fair value based on present value calculations.
- Rather than adding the retained savings of the Acquired company to those of the Acquirer, that retained will disappear and any additional value of unallocated equity, net of fair market valuation adjustments may transfer to allocated equities (write-ups as opposed to write-downs) or be recognized as a bargain purchase gain or goodwill.
Previous mergers have always tried to take into consideration “balance sheet equalization.” That equalization will continue with future mergers, only it will become more transparent.
The new rules are effective for business combinations with acquisition dates that occur on or after the first annual reporting period beginning on or after December 15, 2008.
For help in understanding the new guidelines under FASB 141(R), please give us a call.
FAS 141R: The End of Pooling-of-Interests in Mergers
By: Dennis Gardiner, Partner | email
Effective January 1, 2009 mergers of credit unions will be accounted under the “Acquisition Method” of accounting. Each merger will require an acquirer to be identified. Further, the acquirer is required to recognize the assets acquired and the liabilities assumed to be measured at their fair values as of the date the acquirer achieves control.
This Statement is to improve the relevance, representational faithfulness, and comparability of the information that a rep
orting entity provides in its financial reports about a business combination and its effects. The Statement establishes principles and requirements for how the acquirer:
1. Recognizes and measures:
- The identifiable assets acquired and the liabilities assumed
- The goodwill acquired in the business combination or a gain from a bargain purchase
2. Determines what information to disclose
Be sure to contact us as before you consider a future business combination to understand the accounting and reporting requirements
Update to FASB's SAS 141
By: Dennis Gardiner, Partner | email
Accounting for mergers in the future will be impacted by this statement. Essentially, this Statement will require “Purchase Method” accounting for all business combinations. Previously, “Pooling-of-Interests Method” of accounting has been applied to mergers (including triangular mergers) of mutual entities (cooperatives and credit unions).
Simply put, in accounting for mergers in the past, we have combined the balance sheets of the entities involved. After this Statement becomes effective, that will no longer be the practice.
This Statement will define the acquirer as the entity that obtains control in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141(R) does not define the acquirer, but it includes guidance on identifying the acquirer. After the effective date of this statement, one company will be deemed the acquirer, even in “true mergers”.
Improvements:
- Broader scope
- More clearly defines the combining enti
ties
- Recognizes non-controlling interest, gains and goodwill
- Improves the comparability of financial information
The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) establishes principles and requirements for how the acquirer a) Recognizes and measures the assets acquired, liabilities assumed and any non-controlling interest in the acquiree b) Recognizes and measures the goodwill acquired or a gain from a bargain purchase c) Determines what information to disclose.
This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Or more clearly, fiscal years ending December 31, 2009 and later.
As you begin to enter in to discussions or consideration of a merger in the future, you may want to visit with us to understand the accounting implications of the application of SFAS 141(R).