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FinancialReporting

and

Taxation

IssuesinM&A

Case:AccountingforAcquisitionsat

JDSUniphaseCorporation

1

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JDSU

Quarterly

Results

FY

2001

2

30Sep00 31Dec00 31Mar01 30Jun01 Total 30Sep00 31Dec00 31Mar01 30Jun01 Total

NetSales 786.5 925.1 920.1 601.1 3232.8 100 100 100 100 100

CostofSales 436.7 449.8 494.2 926 2306.7 56 49 54 154 71

GrossProfit 349.8 475.3 425.9 324.9 926.1 44 51 46 54 29

OperatingExpenses

R&D 62.4 71.2 98 94.3 325.9 8 8 11 16 10

Selling,General,andAdministrative 116.2 105.2 440.8 155.4 817.6 15 11 48 26 25

Amort.OfPurchasedIntangibles 1107.4 1104.1 2120.2 1055.3 5387 141 119 230 176 167

AcquiredInProcessR&D 8.9 383.7 0.6 393.2 1 0 42 0 12

ReudtcionofGoodwillandIntangibles 39777.2 10307.8 50085 0 0 4323 1715 1549

RestructuringCharges 264.3 264.3 0 0 0 44 8

TotalOperatingExpenses 1294.9 1280.5 42819.9 11877.7 57273 165 138 4654 1976 1772

Income(Loss)fromOperations 945.1 805.2 42394 12202.6 56346.9 120 87 4608 2030 1743

GainonSaleofSubsidiary 1770.2 1770.2 0 0 192 0 55

EquityRelatedWritedowns/Losses 41.2 52.3 759.9 30.5 883.9 5 6 83 5 27

Interestand

Other

Income,

Net 13.6 12.2 4.6 18.1 48.5 2 1 0 3 2

AvailableforSaleInvestments 559.1 559.1 0 0 0 93 17

AvailableforsaleInvestments(Writedowns) 522.1 522.1 0 0 0 87 16

Income(Loss)BeforeIncomeTaxes 972.7 845.8 41379.1 13296.2 56493.8 124 91 4497 2212 1748

IncomeTaxExpenses 43.9 49.6 468.8 934 371.7 6 5 51 155 11

NetIncome(Loss) 1016.6 895.4 41847.9 12362 56121.9 129 97 4548 2057 1736

NetIncome

(Loss)

Per

Share

1.07

0.93

36.63

9.39

51.4

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CondensedConsolidatedBalance

Sheet

3

Interim FY2000 Interim FY2000Assets

Cash&CashEquivalents 430.1 319 2 1

ShortTermInvestments 700.6 795.3 3 3

AccountsReceivable 631.9 381.6 3 1

Inventories 493.9 375.4 2 1

OtherCurrentAssets 140.5 101.6 1 0

TotalCurrentAssets 2397 1972.9 10 7

Property,Plant,andEquipment,Net 930.7 670.7 4 3

IntangibleAssets,IncludingGoodwill 20018.3 22337.8 80 85

LongTermInvestments 893.6 760.9 4 3

OtherAssets 705.6 646.8 3 2

TotalAssets 24945.2 26389.1 100 100

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CondensedConsolidatedBalance

Sheet

4

Interim FY2000 Interim FY2000

LiabilitiesandEquity

AccountPayables 232.9 195.2 1 1

AccruedPayrollandRelatedExpenses 114.6 98.8 0 0

OtherCurrentLiabilities 331.4 353.2 1 1

TotalCurrentLiabilities 678.9 647.2 3 2

DefferedTax

Liabilities 926.9 902.1 4 3

OtherNonCurrentLiabilities 21.3 20.2 0 0

LongTermDebt 27.2 41 0 0

TotalLiabilities 1654.3 1610.5 7 6

Stockholders'Equity

CommonStockandAdiitionalPaidinCapital 26340.6 25900 106 98

AccumulatedDeficitandOtherStokcholders'Equity 3049.7 1122.3 12 4

TotalStockholders'Equity 23290.9 24777.7 93 94

TotalLiabilities

and

Stock

Holders

Equity 24945.2 26388.2 100 100

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ThreeAcquisitions

7

Acquisitions Announced TotalValue JDSPriceOCLI Nov.4,1999 $2.8billion $47.97

ETEK Jan

17,

2000 $15

billion $97.84

SDL Jul.10,2000 $14billion $105.50

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PurchaseCostBreakdownofSDL

Acquisition

9

TangibleNetAssets 617.4 1.50%

IntangibleAssets

ExisitingTechnology 455.4 1.11%

CoreTechnology 214.2 0.52%

Trademarkand

Tradename 46 0.11%

Assembledworkforce 47.7 0.12%

DeferredCompensation 203.7 0.49%

Goodwill 39,228.0 95.23%

InProcessR&D 380.7 0.92%

Total

Purchase

Price 41193.1 100.00%

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JDSUAcquisitionofOCLI

PurchasePrice

Allocation

11

Amount Percentage

TangibleNetAssetsRequired 253.2 9.4

IntangibleAssets

Acquired

DevelopedTechnology

Telecommunications 115.1 4.3

FlexProducts 92.2 3.4

AppliedPhotonics 1 0.0

InformationIndustries 23.9 0.9

ProprietaryKnowHow 161.9 6.0

TrademarkandTradeName 38.5 1.4

Assembled

Workforce 14.3 0.5

InProcessResearchandDevelopment 84.1 3.1

Goodwill 1927.4 71.2

DeferredTaxLiabilities 4.1 0.2

Total

Purchase

Price

Allocation 2707.5 100.0

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JDSUAcquisitionofETEK

PurchasePrice

Allocation

13

Amount Percentage

Tangibel

Net

Assets

Acquired 395 2.3

MarketableEquityInvestments 950 5.4

IntangibleAssetsAcquiredDeveloped

TechnologyExtisitingTechnology 248.7 1.4

CoreTechnology 168.5 1.0

TrademarkandTradeName 60.4 0.3

Assembled

Workforce 10.7 0.1

InProcessR&D 250.6 1.4

Goodwill 15,422.50 88.1

Total

Purchase

Price

Allocation 17506.4 100.0

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Deal(Example)

HardinToolCompany

PrattEngineeringCompany

Hardintoissue100,000sharesfor40,000sharesofPratt

Newpublicofferingof100,000sharesofHardincanbemade

publicat$8pershare

NointercompanytransactionsAppraisedvalueofNetAssets:$600,000Assetsbookvalue:$441,000

14

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15

Hardin Pratt Hardin PrattAssets

Current assets $432 $246 39% 44%

Plant and equipment 690 312 61% 56%

Total assets $1,122 $558 100% 100%

Liabilities and Equities

Current liabilities $263 107 23% 19%

Long-term debt 195 10 17% 2%Common stock ($1 par) 100 40 9% 7%

Additional paid-in capital 218 94 19% 17%

Retained earnings 346 307 31% 55%

Total liabilities and equity $1,122 $558 100% 100%

Condensed Balance Sheets as of the Proposed Acquisition Date

(Thousands of Dollars)

Pooling

vs.

Purchase

Method

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16

Hardin Pratt Hardin Pratt

Sales $2,100 1500 100% 100%Expenses 1620 1120 77% 75%

Income $480 $380 23% 25%

Income tax expense 168 133 8% 9%Net income $312 $247 15% 16%

Condensed Income Statement as of the Proposed Acquisition Date(Thousands of Dollars)

Pooling

vs.

Purchase

Method

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17

Pooling

vs.

Purchase

Method

Hardin Pratt Pooling Purchase

AssetsCurrent assets $432 $246 $678 $678

Plant and equipment 690 312 $1,002 $1,161 1002 + (600-441)

Goodwill 200 (100,000*8=800,000)-$600,000

Total assets $1,122 $558 $1,680 $2,039Liabilities and Equities

Current liabilities $263 107 $370 $370

Long-term debt 195 10 $205 $205

Common stock ($1 par) 100 40 $200 $200Additional paid-in capital 218 94 $252 $918 plug in

Retained earnings 346 307 $653 346

Total liabilities and equity $1,122 $558 $1,680 $2,039

Condensed Balance Sheets as of the Proposed Acquisition Date

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18

Poolingvs.PurchaseMethod

Hardin Pratt Polling PurchaseSales $2,100 1500 $3,600 $3,600

Expenses 1620 1120 $2,740 $2,740

Income $480 $380 $860 $860Additional depreciation $16 $15 9,000/10 y ears = 16,000

Taxable income $860 $844

Income tax expense $301.0 $295.4Net income $559.0 $548.6

Earnings Per Share $2.80 $2.74

Condensed Balance Sheets as of the Proposed

Lifeof

plant

and

equipment:

10

yearsDepreciationmethod:Straightlinedepreciation

Incometaxrate:35%

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WhataretheMethodsAvailableto

MitigateGoodwill

Hangover

Problems?

Extend

Amortization

periodtoMax.40years

WriteDown

the

Goodwill

UsePooling

Methodof

Accounting?

43

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WhatistheMotivationforJDSUtodo

theWrite

Downs

at

this

Time?

Giventhestateofthemarketfortechnology

stocks,appropriatetimetoreleasebadnews,alongwith

othercompaniesinthissector

Simultaneouslyannouncedpooroperatingperformanceandwasannouncingano.of

otherwritedownsinventoryandrestructuring

charges

Big

Bath

strategies

lumping

oflosses

Writedownsalsoplacethe

companyin

afavorable

positioninfutureperiods

48

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$44.8

billion

write

down

of

goodwillreduces totalassetsfrom$65.7billionto

$20.9billion

ImprovesROA

Companysfutureearningswillincreasebytheamount

goodwillamortization

that

wouldhavebeenchargedon$44.8billion=~$9billion

peryearover5years

49

HowmuchisJDSUsavinginFutureGoodwill

Amortizationon

an

Annual

Basis?

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WhatistheAdverseEffectofTakingtheWriteDowns

Soonerrather

than

Later?

50

Significantincreasetothenegativeaccumulateddeficitmayimpose

restrictionsonthecompany(eg.:inabilityto

pay

dividend)

for

many

years

to

come

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51

Secondary

Offering

WhatistheOpportunityCostofthe

Acquisition?

Insteadissuing538millionshares

to

pay

for

the

acquisition

Wouldnothavebeenabletosell

suchalargeamountofstockinthe

publicmarket

Amountofcashraisedmaynot

havebeensufficientforacash

purchaseof

SDL

Couldriskindustrydominanceby

notpurchasingSDLandraisecash

instead

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RelevantAccounting

Standards

AccountingStandards

India

AS14

International

AccountingStandard

IAS

22

BusinessCombination

IAS36

Impairment

ofAssetsIAS

38

IntangibleAssets

FAS

141

BusinessCombinations

FAS

142

GoodwillandOtherIntangibleAssets

International IFRS3

70

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Identifying

Acquirer

>1/2voting

rights

incombinedentityPower

to

appoint

orremovemajorityofBOM

Powertocast

majorityof

voting

inmeetingsofBOD

Abilityto

determine

combineentitiesmanagementteam

Fairvalue

of

companiesTerms

of

arrangementsSpecific

voting

rightsprovided Otherconditions

Statutoryrequirements

Optionsor

warrantson issue

83

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IntangibleAssetClassificationandImpairment

TestRequirements

IntangibleAssets

IndefiniteUsefulLife

NoAmortizationRequired

ShoulddoImpairmentTesting(Annuallyoron

Indication)

DeterminableUsefulLife

AmortizationoverusefulLife

(Impairmenttestifindicationofimpairment)

93

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ImpairmentModel

NewCarryingAmount(After

WrittenDown)

CarryingAmountBefore

theImpairment

RecoverableAmount

FairValueLessCosttoSell

ValueinUse

Lowestof

Highestof..

Requirescashflow

forecastforatleast 5

years,Estimatedon

presentconditionofthe

asset, andCashflows

anddiscountrateshould

bepretaxbasis

Priceagreedinabindingsalesagreementforcashgeneratingunitinanarmslengthtransaction,adjustedforincrementalcostsattributabletothedisposalCannotbedeterminedbyreferencetoanactivemarket

94

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ExampleforImpairmentTestingEntityEYAssessingCashGeneratingUnitCGUforImpairment

Assets intheBooksofCGU(Thousand$)PP&E 200

Licenses 50

Land(at

Revalued

Amount) 400

(Cost

320)

Goodwill 50

Total 700

95

ThroughImpairmenttestCGUisfoundtohavearecoverableamountof$550Assets intheBooksofCGU(Thousand$)

PP&E 200 31=169

Licenses 508=42

Land(atRevaluedAmount) 40061=339(Cost320)

Goodwill 5050=0

Total 550

Goodwilliswrittenofffully,andcannotbereversed

EntityEYanalysestheremainingassetsafterwards

Impairmentlossonlandhitstherevaluationreserve preferredbythefirm

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97

AccountingTreatmentofGoodWill

Country Predominant Method Comments

US Caiptalize Amortize expense over useful life (not to exceed 40 years)

UK Write against RE May capitalize if life knownCanada Caiptalize if > 40 years Amortize expense over useful life

Japan Capitalize; Price - Book Value of net assets Amortize in life (not to exceed 5 years)

France Capitalize Amortize expense over 5 to 20 years

Germany Capitalize Amortize expense over 4 years (can extend if justified)Switzerland Both write against RE and capitalize allowed Amortize

Netherlands Both write against Equity or as expenses Amortize expense over 5 years (can extend to 10 if justified)

Hong Kong Both write against Equity or as expenses Amortize only to the extent the value has diminished

Australia Capitalize Amortize in life (not to exceed 20 y ears)

Malaysia Capitalize Amortize expense over useful lifeGoodwill ar ises from pur cha se m ethod

Goddw ill = Purch ase price > fair v alu e of net assets

A m or t iza tion of g oodw il l m a y n ot be ta x dedu ct ib le u n le ss i ts a ll ow ed

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98

Impairment of Assets DifferencesDifference Criterion IFRS and IGAAP US GAAP

Timing of impairment review Annually whenever events or changes in

circumstances indicate that the

carrying amount may not berecoverable

Asset is Impaired if Recoverable amount