Title: Case 5 When Would Market to Book Be Less Than One Does Acquisition by Stock Explain JDS Uniphase Cor
1Case 5 When Would Market to Book Be Less Than
One? Does Acquisition by Stock Explain JDS
Uniphase Corp.?
- Why might market-to-book ratios fall below a
value of one? - How could recorded goodwill on acquisitions
exceed a companys market capitalization? - Disclosures via a press release explain that the
stockholders should not be concerned since the
acquisitions were by stock rather than cash Does
this make sense? - JDS Uniphase Corp. finds itself with recorded
goodwill on acquisitions that exceeds its market
capitalization
2A search of FARS market to book will identify as
one resource
- Accounting Terminology Bulletins 3 Book Value,
which defines the term. - Also see superseded AIN-APB15, 56
- CON 2, Par. 85 FAS 121, Par. 5
3Goodwill Evaluation In Progress
- The 10-Q file in May of 2001 stated that 56.2
billion of goodwill was being evaluated, and
indicated that the book value which reflected
unamortized goodwill for JDS Uniphase Corp.
exceeded its market capitalization by 39.5
billion.
4Stock Acquisition Implications
- The most on-point guidance is found in Statement
of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets. - The guidance on goodwill makes no distinction
that stems from whether the combination was
achieved through stock or cash. (Also see SFAS
141, Business Combinations issued June 2001
par. 6.)
5Goodwill Evaluation
- In its later press release in July, the company
reported that the carrying value of goodwill
would be reduced by 38.7 billion, - in the following quarter another 6.1 billion in
goodwill was reduced, and - based on a review of long-lived assets, further
charges may arise. - Comparing the numbers across the announcements
implies that almost 98 percent of the excess of
book value over market value was attributable to
the goodwill. Consider the Epion acquisition
6pro forma numbers
- Excluding what?
- Why NonGAAP?
- Compare ratios, such as
- Gross Margin 47.5
- Operating Margin -60.5
- EBITDA 6
ACQUIRED RESEARCH AND DEVELOPMENT --why did the
sec give particular attention to acquired
rd? --are there proprietary costs to the types
of disclosures in the jds filings?
7- FAS 142 requires, as stated in its Summary
"goodwill and intangible assets that have
indefinite useful lives will not be amortized but
rather will be tested at least annually for
impairment." - See regulators guidance U.S. Securities and
Exchange Commission. "Action Cautionary Advice
Regarding the Use of "Pro Forma" Financial
Information in Earnings Releases," Release No.
33-8039, 34-45124, FR-59 (December 4, 2001)
(retrieved from http//www.sec.gov/rles/other/33-8
039.htm) - The Directed Self-Study is addressed by QA 131,
15, as well as FAS 123(R). Using the EITF
Abstracts, three hits are obtained including EITF
00-23 Issue 38 earnings before interest, taxes,
depreciation, and amortization (EBITDA).
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14 FAS 121 was later superseded by FAS 144
Accounting for the Impairment or Disposal of
Long-Lived Assets
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18Delays in recording equity accounting due to
untimely disclosures by companies in which an
entity invests problems? Note that FAS 87, Par.
232 acknowledges practical problems in having
timely actuarial valuation and states should be
as of a date not earlier than three months before
the date of the financial statements. The Board
also noted that ARB No. 51, Consolidated
Financial Statements, allows consolidation of a
subsidiary with an annual fiscal period ending
not more than about three months earlier than the
parents. Hence, there is precedence of a
quarter, but generally in the reverse direction.
19Consider the 10-Q disclosures regarding the
nature of Acquired rd vs sfas no. 2 --Why did
sec give particular attention to acquired
rd? --Are there proprietary costs to the types
of disclosures in the jds filings?
20- Directed Self-Study
- Many press releases have been observed to
reference EBITDA. What does this term mean, and
does FARS provide any related guidance? Be
specific. Open FASB-OP (amended) and query
EBITDA. Then open EITF Abstracts and perform a
similar search. - QA 131, 15 has FARS guidance associated with
EBITDA, defined within the question