ACCOUNTING CASE JEUX DU COMMERCE 2012 UNIVERSITÉ LAVAL

Transcription

1 ACCOUNTING CASE JEUX DU COMMERCE 2012 UNIVERSITÉ LAVAL

2 DESJARDINS GROUP: INNOVATION AND EXPANSION PROJECTS 1 Written by: Francis Couture, CA Amélie Gauvin-Boisvert Revised by: Claude Vallerand, représentant clientèle jeunesse Vice-présidence Réseaux complémentaires aux caisses The history of Desjardins Group is thoroughly intertwined with that of modern Quebec. For over 100 years now, the development of the Desjardins network and the diversification of its activities paralleled the social and economic boom of the province. As one of the biggest financial groups in the country, has always been true to the philosophy of its founder: to contribute to the well-being of individuals and communities. (excerpt from Desjardins website) It is for those reasons that Desjardins always attempts to expand and to associate itself with projects that help the community evolve. In this perspective, Desjardins calls upon your consulting firm, Couture & Gauvin, in order to analyze two (2) distinct projects: o o In July 2011, Desjardins concluded the purchase of the Western Financial Group, supplier of insurance products in western Canada. The transaction being completed, we are at the point of analyzing its impact in the financial statements and in the Desjardins structure. The population growth in Quebec City as well as the expansion of the Desjardins Campus in Levis brings the cooperative to question itself in terms of ways to improve employee transportation and parking facilities. A few ideas have been given but a shuttle project was kept, and we would appreciate having your help to evaluate it. 1 We would like to thank Desjardins Group for their collaboration and open-mindedness with regards to the elaboration of this case. The present document should not be considered as reflecting the opinion or position of Desjardins Group or the author, with regards to parts or the totality of the issues (including products, services, practices and other elements of the case, implicit or explicit) addressed or presented whatsoever. The statements included do not consist in recommendations, neither are formulated to prompt or dissuade from an investment, whatsoever. Moreover, this case does not represent a reliable source of data on the company, its activity sector or the general business environment. Indeed, several elements included have been altered, partly developed or otherwise modified to meet the goals of the present situation. Besides, some data might come from secondary sources, and may have been treated or transformed for practical or competitive reasons. This case does not constitute an example of good or bad management practices. It was written in an entirely pedagogical objective: to stimulate discussion and analysis in an academic context. 2

3 In the next pages, a description of the financial data related to this project will be given. We also have to mention that following the numerous changes in the field of the accounting norms in Canada, Desjardins applies the IFRS since January 1st,

4 Excerpt from the Canadian Press Levis December 23 rd, 2011 Desjardins Group announced last Thursday that they concluded an arrangement for a 443 million dollars offer for the Western Financial Group (TSX:WES), an Albertan financial institution. The friendly transaction suggests a $4.15 share, which represents a 70 % increase from the closing price of the title showed last Wednesday. According to Desjardins, Western Financial Group is the most important insurance and financial services supplier on the western Canadian market. It features 121 offices in British-Columbia, in Alberta, in Saskatchewan and in Manitoba, and serves more than clients. With this transaction, Desjardins wishes to accelerate the development of its activities in western Canada, explained Mrs. Monique Leroux, president and CEO of the cooperative. The transaction is subjugated to the lodging of at least 66.7% of ordinary shares outstanding and to usual regulatory approbation. Moreover, the board of directors of Western Financial advises the shareholders to accept the transaction. On the strength of the agreement between the two societies, the trademark Western Financial Group will be kept. First cooperative financial group in Canada and sixth in the world, Desjardins Group holds assets representing over 175 billion dollars. With a workforce of employees, the group serves some 5.8 million members. The Western Financial Group stock option closed Thursday s session at the Toronto Stock Exchange at 2.45$, with an increase of one cent. The purchase offer was announced after the session close. 4

5 Presentation of Societies: Desjardins Group: Desjardins Group is the biggest cooperative financial group in Canada, with assets representing over 175 billion dollars. It comprises a network of financial service cooperatives caisses and credit unions, and some twenty subsidiary companies in life and general insurance, securities brokerage, venture capital and asset management. The structure of Desjardins Group is established according to the needs of the members and the clients as well as the markets in which Desjardins evolves. Thus, the network of caisses in Quebec and Ontario are supported by four (4) main business sectors, allowing its flexibility to increase and providing an opportunity for the evolution of its products and services. Personal Services The Personal Services segment is responsible for developing and marketing the personal services offer for financing, credit and debit cards. It also supports the caisses and their product and services distribution centers by optimizing the performance and profitability of physical and virtual networks and developing and managing the complementary telephone, Internet, mobile and ATM networks. Business and Institutional Services The Business and Institutional Services segment is responsible for developing and marketing the business services offer and providing support to the caisses and Desjardins Business Centers in their services to this member category. The service offer meets the needs of businesses of all sizes and includes day-to-day transactions, investment, financing, access to capital markets, venture capital as well as specialized and advisory services. This sector provides services to large corporations and to the public, parapublic and institutional sectors. Wealth Management and Life and Health Insurance The Wealth Management and Life and Health Insurance segment offers a wide range of products and services tailored to the changing asset management and financial security needs of individuals, groups, businesses, caisse network members and clients of complementary distribution channels. This service offer meets consumer needs in terms of products and advisory services, life and health insurance, group insurance plans, savings plans, brokerage, as well as securities and real estate investments throughout Quebec and Ontario as well as in several major Canadian cities. 5

6 Property and Casualty Insurance The Property and Casualty Insurance segment offers a line of home and automobile insurance products directly to the general public, to members of partner groups across Canada and to businesses in the Quebec market. See Appendix 2 for Desjardins Group Organization Chart Western Financial Group: Western Financial Group operates in four main sectors: insurance for individuals, insurance for pets,, bank services and property and casualty insurance. Insurance for Pets Insurance for pets represents 17% of the Western Financial Group benefits and is distributed under the name of Western Financial Insurance. Western Financial Insurance is the only insurance company with federal charter to be dedicated to the insurance of pets. Insurance for Individuals The insurance for individuals represents 23% of the Western Financial Group benefits and is distributed under the name of Western Life. Western Life has a complete range of products of life insurance, casualty insurance, wealth insurance for groups, personal accident and health insurance. Bank services Bank services represent 12% of the Western Financial benefits and are distributed under the name of Western Bank. Western Bank offers guaranteed deposits, mortgages and personal loans, financing for farm societies, business mortgages and other bank services. Property and Casualty insurance Western Financial Group has the vastest damage insurance distribution in western Canada with 112 branch offices and over 1000 employees. Property and casualty insurance sales represent 48% of the Western Financial Group benefits. With the property and casualty insurance, the majority of the Western Financial branch offices also sell travel insurance and life insurance as well as financial and bank services. 6

7 Purchase and Integration Following the purchase of Western Financial Group, one of the main preoccupations for Desjardins board of directors is the integration of the group into its structure. Different ideas have already been suggested and Desjardins Group asks for your opinion on the possibilities of integration as well as the pros and cons of each solution. As a reference, some propositions consisted in maintaining Western Financial in its current state and to manage it as a new subsidiary, or to divide it into sectors and integrate them to existing subsidiaries of the Desjardins Group, or a combination of those two ideas. Following your analysis, your ideas and recommendations will be integrated to those developed by to Desjardins Group s consulting team. Accounting Analysis: Following your work on integration of Western Financial Group, Desjardins call upon you to assist the group in the consolidation of the purchase. Several points need to be clarified and Desjardins wishes to have your opinion. Determination of the Goodwill First, following the purchase, Desjardins estimates losses and fees at 12 million dollars in order to get rid of certain activities and business centers of Western Financial. Desjardins wishes to integrate those costs in the consolidation. Beside those fees, the evaluation service at Desjardins estimated the value of the different trademarks of Western to a fair value of 23 million dollars. The accounting team is wondering how to incorporate this element in the business take-over. The evaluation service also analyzed the different assets and liabilities of Western Financial in order to distribute the purchase price. All assets and liabilities have a fair value that is equivalent to their book value, except for tangible and intangible assets, which have a respective fair value of 425 and 70 million dollars. In addition to the recognition of the take-over, the financial management wants to know what will be the impacts of the recognition of goodwill in the financial statements of the Desjardins Group and what will be, the necessary work of recognition of this goodwill in future years. Change of Depreciation Period Moreover, following the acquisition, the accounting management of the Desjardins Group s wish is to modify the depreciation period for tangible and intangible assets of Western Financial Group in order to level them to the Desjardins Group policies. They wonder how to manage this change. Currently, Western Financial Group depreciates those assets in a digressive way with rates ranging from 5 to 25%. 7

8 After the purchase, the depreciation rates would be modifies in order to be leveled with those currently in use within Desjardins Group and would represent a straight-line amortization varying from 4 to 80 years. Following the announcement of the purchase, a European institutional investor has approached the Desjardins Group in order to collaborate into a share of 10% in the acquisition of Western Financial. The investor is willing to pay an amount of 55 million dollars to Desjardins in order to obtain his 10% share in Western Financial Group. The board of directors of the Desjardins Group is highly interested in this proposition since it offers a significant amount of money with regards to the purchase price of Western Financial Group. However, before moving on with this project, Desjardins wishes to have your opinion on the different impacts that the acceptation of this offer would have, on the accounting point of view as well as the financial management. 8

9 We wanted to take advantage of your expertise to evaluate another project. The expansion context of the Desjardins campus in Levis forces us to evaluate new options in terms of transportation and parking facilities for our employees. On June 17, 2011, Desjardins Group announced a 125 million dollars investment in order to revitalize the Levis campus and to modernize its facilities. This project will allow the 800 Desjardins employees who do not work directly on the campus to be relocated. It will also create space for new employees in order to insure the expansion of the Group which already has employees working in Levis. Those investments already have direct impacts on the number of parking places, which are reduced because of the construction of new offices, and which are also insufficient considering the expansion. Furthermore, the population of the cities of Levis and Quebec are constantly growing. At the end of the year 2010, the Levis population was inhabitants, which is an increase of 12.6% compared to There were inhabitants at the end of the year 2010 in Quebec City, which represent an increase of 3.5% compared to This expansion has a direct impact on the volume of drivers on the road network of Quebec and Levis. For the last couple of years, a traffic increase is noticeable on the bridges linking the north shore to the south shore and also on the principal roads of Levis. This reality is defined by an increase of the time it takes to cross the bridges to the Levis Desjardins campus, which represents a 25 minute drive in rush hour, to cover 15 kilometers. Desjardins is reputed for its implication in the community and for its innovative projects. They decided to go forward with a project aiming at minimizing the traffic on the south shore and to reduce frustration among drivers who are subjected to this situation. This is the reason why we are calling upon your firm in order to evaluate a project and to advise us on the profitability of the investment, both for Desjardins and for the Quebec community. You will find enclosed the project description as well as the related financial data. Shuttle service for the Levis campus employees Description Desjardins would purchase a piece of land right at the exit of the bridges on the south shore. The land would be transformed into parking spaces for the employees. A shuttle service between the parking lot and the Levis campus would be offered to the employees who will have to buy a parking vignette which will also be used as a bus pass. Desjardins would offer a shuttle service between 7:15 and 9:30. There would be one shuttle every fifteen (15) minutes, approximately ten (10) rides in the morning. The same service would be offered at the end of the day, between 3:30 and 5:45. 9

10 We evaluate that a shuttle would take thirty (30) minutes to do the round trip between the parking lot and the campus, because the buses would use an express way to get to the campus. According to the data obtained by the human resource and considering the place of residence, we estimate that people would benefit from the shuttle service during the first years. Land Investment We found a vacant piece of land at the bridges exit with an area which would allow parking places. According to the assessed value, we could purchase it for the price of $ In order to have the land ready for cars, we would have to do paving work including parking lines. We will also have to set up a bus shelter for the users in case of bad weather. Those modifications would require a 175 million dollar investment for the paving work, the curbs and the lighting. As for the bus shelter, the fees would be of dollars. Those two investments would have to be made at the beginning of the project. Investment for the shuttles In order to be able to offer a shuttle service every fifteen (15) minutes between 7:15 and 9:30 and 3:30 and 5:45, we would have to do a minimum of ten (10) rides in the morning and in the afternoon. An ordinary shuttle can give a ride to fifty (50) people. With employees who would benefit from the service, we would have to be able to offer forty (40) rides per period, which means that an investment of 8 shuttles would be required. We contacted a shuttle supplier who believes our project is innovative and who would wants to partner with us. He would offer us shuttles at $ a piece; their value being $ The average fuel consumption for this type of shuttle is of 20L/100 km, compared to 10L/100 km for a normal car. Our partner estimates that, with the shuttle annual mileage, they will have an average life of 10 years. Then, repairing will most likely be expensive so we will have to renew our fleet of vehicles. Operation Expenses The one-way drive between the parking lot to the Levis campus is about 14 kilometers (see appendix 3 for the plan). The main expense is certainly gas prices. You will find in appendix 4, statistics related to gas price for the last few years. The offices being closed during holidays, we would offer the shuttle service fifty (50) weeks per year. We would have to hire eight (8) shuttle drivers who would receive an annual salary of $ According to the discussions we had with our shuttle supplier, he estimates annual shuttle maintenance costs at approximately $

11 Subscription to the Shuttle Service In order to use the service, the employees will have to pay a monthly subscription which will allow them to park their car and use the shuttles. In order to insure a good profitability of the project, we decided to establish a monthly subscription fee of $50. Government Subventions The federal and provincial members of parliament were contacted and are very impressed by the innovative and long-lasting nature of the project. They think that if the project is carried out, the governments will be willing to give an annual subvention of $ for the first three years of the project. In that eventuality, we are wondering about the impact of such a subvention from an accounting point of view. 11

12 APPENDIX 1 Excerpt from Western Financial Group Financial Statements Excerpt from Western Financial Group Financial Statements on transaction date. Assets Tresory 35 Investments 342 Capital assets 225 Intangible assets 80 Deferred tax assets 15 Other assets 22 Goodwill 10 Accounting Value Total assets 729 Liabilities Payable accounts 21 Loans 264 Actuarial liabilities 86 Long term dept 98 Other liabilities 54 Total liabilities

13 APPENDIX 2 - Desjardins Organization Chart (in French only) 13

14 APPENDIX 3 - Itinerary plan from parking lot to the Desjardins campus (in French only) 14

15 janv.-00 juil.-00 janv.-01 juil.-01 janv.-02 juil.-02 janv.-03 juil.-03 janv.-04 juil.-04 janv.-05 juil.-05 janv.-06 juil.-06 janv.-07 juil.-07 janv.-08 juil.-08 janv.-09 juil.-09 janv.-10 juil.-10 janv.-11 juil.-11 APPENDIX 4 - Gas Price Statistics (in French only) CAPITALE NATIONALE PERIOD: JANUARY 2000 TO OCTOBER ,60 $ 1,40 $ 1,20 $ 1,00 $ 0,80 $ 0,60 $ 0,40 $ 0,20 $ 0,00 $ 15