Robert Bushman 30117 Spring 2014 Syllabus 1

30117 Accounting and Financial Analysis II Spring 2014 Professor Robert Bushman Phone: 919-962-9809 E-mail: rbushman@chicagobooth.edu Personal Website: http://public.kenan-flagler.unc.edu/faculty/bushmanr/ The course objective is to increase your sophistication as users of financial information and enhance your ability to discern the economic essence of important classes of complex business transactions from the financial statements. The course integrates financial accounting knowledge with financial economics to understand the accounting for and economic nature of complex deal structures, organizational design, financial distress, corporate governance structures, and currency risk. The course involves a mixture of lecture and case analysis. Technical material will be developed in the class sessions. There is a set of core cases that serve as a platform for in-depth class discussion and analysis. The cases span many fascinating deals and key issues facing managers of complex organizations. Course topics include accounting issues related to:

• Control/influence over other entities and changes in control: Mechanisms of control, M&A deals, step-acquisitions, non-controlling interests, strategic alliances, carve-outs/spin-offs, alternative business entities, taxes & financial reporting for control changes, bankruptcy strategy, fresh start accounting.

Financial statement view of healthcare: Analyze the Financial Statements of the United States focusing on off-balance liabilities & inter-agency debt transactions; examine price-setting by analyzing the financials of publicly traded health service providers.

Inflation: Inflation adjusted financial statements, understanding vulnerability to inflation, hyper-inflation, and tax implications of inflation.

Foreign Currency: Foreign currency translation, functional currency and how it delineates currency risk, translation risk, translation in hyper-inflationary economies.

Prerequisites: A solid grasp of basic financial accounting and finance is essential.

Course Materials Course Pack: All cases, readings and homework assignments are included in the packet. Chalk site: Contains lecture slides, as well any course documents not included in the course pack.

Preliminary, Subject to Change Posted: 02.24.2014

Robert Bushman 30117 Spring 2014 Syllabus 2

Overall Course Grades:

4 Homework Assignments:

• Each homework assignment consists of a data set and 5 questions at 3pts each. • Budget 1–2 hours for each assignment. • The homework assignments are not group projects. You are expected to work alone on

the assignments under the honor code.

Final Exam in class To aid in preparation for the final, I will provide a practice exam with both a written and video answer key.

Office Hours:

I will be traveling to Chicago from Chapel Hill, North Carolina each week to teach this course. I can schedule meeting before or after class. If you want to talk during the week, send me an e-mail and we can set up a phone meeting.

4 Homework Assignments 60 % Final exam 40 %

Total 100 %

Preliminary, Subject to Change Posted: 02.24.2014

Robert Bushman 30117 Spring 2014 Syllabus 3

Class Session Details

Week 1 (April 4 & 5) The concept of control, separating cash flow and control rights, private benefits of control, pyramid structures, accounting for influence – the equity method Required: Read:

Control Premiums and the Effectiveness of Corporate Governance Systems, Alexander Dyck and Luigi Zingales. Journal of Applied Corporate Finance Volume 16, Issue 2-3, pages 51–72, Spring 2004

Prepare to discuss the Berkshire Hathaway Case

Week 2 (April 11 & 12)

Strategic alliances and the equity method; Acquisition accounting details & comprehensive example Required:

Prepare to discuss the Renault-Nissan Alliance Case.

Optional Reading

Chapters 2 and 4 in: “Global guide to accounting for business combinations and non-controlling interests”. You should view this document as a reference source. It delivers a lot of information in an efficient format. Link to all PwC accounting guides.

Week 3 (April 18 & 19) Equity method for bank holding companies; accounting for target company executives’ pre-deal stock compensation; alternative business entities; application of acquisition accounting in a private equity setting, carve-outs and spin-offs Required:

Prepare to discuss the Citigroup Case

Read two articles from The Economist:

The new American capitalism: Rise of the distorporation. Oct 26th 2013

Finance in America: Subterranean capitalist blues. Oct 26th 2013

Prepare to discuss the Blackstone Group case.

Optional Reading

Chapter 3: Employee Compensation Arrangements in: “Global guide to accounting for business combinations and non-controlling interests

Preliminary, Subject to Change Posted: 02.24.2014

Robert Bushman 30117 Spring 2014 Syllabus 4

Week 4 (April 25 & 26) Homework 1 due Value to controlling versus non-controlling interests; step acquisitions; M&A risk issues and contingent consideration

Required:

Homework assignment 1 due

Prepare to discuss the Novartis-Alcon case Optional Reading

Chapter 6: Partial Acquisitions, Step Acquisitions, and Accounting for Changes in the Non-controlling Interest in: Global guide to accounting for business combinations and non-controlling interests

Chapter 2, section 2.6: Contingent consideration

Week 5 (May 2 & 3) Homework 2 due Reverse mergers; M&A Tax Issues

Required:

Homework assignment 2 due

Read: Merck to Buy Rival for $41 Billion. By Jonathan D. Rockoff, Wall Street Journal March 10, 2009.

Read Darden case (UV0881): “The treatment of goodwill and other purchased intangibles for tax purposes” (in course pack)

Optional Reading

Chapter 5: Income Tax Implications in Business Combinations in: “Global guide to accounting for business combinations and noncontrolling interests”

Week 6 (May 9 & 10) Acquisition accounting and tax structure; targets NOLs; territorial versus world-wide taxation of corporate taxation, deal strategies to shift corporate profits out of the U.S. Required:

Read: It's Not Just Apple: The Ultra-Complicated Tax Measures That Microsoft Uses To Avoid $2.4 Billion In U.S. Taxes. By Walter Hickey, May 21, 2013, Business Insider.

Read: Perrigo to buy Elan, reincorporate in Ireland. July 30, 2013, The Boston Globe. (By Shawn Pogatchnik, Associated Press)

Optional Reading

Chapter 5: Income Tax Implications in Business Combinations in: “Global guide to accounting for business combinations and noncontrolling interests”

Preliminary, Subject to Change Posted: 02.24.2014

Robert Bushman 30117 Spring 2014 Syllabus 5

Week 7 (May 16 & 17) Homework 3 due Accounting for financial distress; Fresh Start Accounting Required:

Homework assignment 3 due.

Read: Coming Through in a Crisis: How Chapter 11 and the Debt Restructuring Industry Are Helping to Revive the U.S. Economy. Stuart Gilson. Journal of Applied Corporate Finance, Volume 24 Number 4, Fall 2012, pp 23-26.

Prepare to discuss Eastern Airlines Case

Optional Reading

Chapters 1 and 4: An Introduction to Bankruptcy Proceedings in: “Guide to Accounting for Bankruptcies and Liquidation” (course pack)

Week 8 (May 23&24) Structural subordination; healthcare economics through the lens of financial reporting

Required:

Prepare to discuss RJR Nabisco case

Read the document A Citizen's Guide to the 2013 Financial Report of the U.S. Government available at https://www.fms.treas.gov/fr/index.html. Also peruse the Financial Statements of the U.S. on the same site. Check out the “Statements of Social Insurance”.

Prepare to discuss the HCA case.

Week 9 May 30 & 31) Homework 4 due Inflation Accounting Required:

Homework assignment 4 due

Read "Inflation Accounting and Analysis" (HBS 100063; I have also prepared a sheet called Errata for “Inflation Accounting and Analysis”.

Prepare to discuss the two HBS cases Aluar: Aluminio Argentino S.A. (A (HBS 111059) & B (HBS 111070). Both cases are in course packet.

Preliminary, Subject to Change Posted: 02.24.2014

Robert Bushman 30117 Spring 2014 Syllabus 6

Week 10 (June 6 & 7) Foreign Currency Translation; Course wrap up Required:

Prepare to discuss the HBS Case: Cosmeticos de Espana, S.A. (HBS 111019). Think about the question: Should the subsidiary's financial statements be translated into the parent's reporting currency using the official exchange rate (BsF2.15 = US$1), or at the parallel rate (BsF6 = US$1)?

Prepare to discuss the HBS Case Farmington Industries, Inc.: Managing Currency Exposure Risk (HBS 104053) (Case discussion questions on page 6 of the case).

Week 11 (June 13 & 14) Final Exam in Class I will provide a practice exam and both a written and video answer key

Preliminary, Subject to Change Posted: 02.24.2014