Business Law Section American Bar Association. Spring Meeting April 16-18, 2009

Transcription

1 Business Law Section American Bar Association Spring Meeting April 16-18, 2009 Practical Impacts on M&A of U.S. and International Accounting Principles Convergence: What You Need to Know Now About IFRS and FAS 141(R) Sponsored by the International M&A Subcommittee of the Mergers and Acquisitions Committee Chairman and Moderator James R. Walther Mayer Brown LLP Panelists Cameron G. Belsher McCarthy Tetrault LLP Timothy R. Lashua KPMG LLP Robert Marsh PricewaterhouseCoopers LLP Michael G. O Bryan Morrison & Foerster LLP

2 Table of Contents 1. SEC Roadmap for Use of IFRS by U.S. Issuers: A Discussion Outline 2. Impact of FASB Statement No. 141 (Revised) on Mergers & Acquisitions 3. IFRS and US GAAP A Non-Random Sample of Some Significant Differences

3 SEC ROADMAP FOR USE OF IFRS BY U.S. ISSUERS: A DISCUSSION OUTLINE James R. Walther Mayer Brown LLP Los Angeles, California Business Law Section Spring Meeting American Bar Association Vancouver, British Columbia April 16-18, 2009

4 SEC ROADMAP FOR USE OF IFRS BY U.S. ISSUERS: A DISCUSSION OUTLINE I. The SEC Proposal A. The SEC has issued what it calls a Roadmap for the potential use of International Financial Reporting Standards ( IFRS ) by U.S. issuers. SEC Release Nos ; (November 14, 2008) (the Roadmap Release ). The comment period on the Roadmap Release, originally scheduled to expire February 19, 2009, has been extended to April 20, SEC Release Nos ; (February 3, 2009). As the SEC s description suggests, the Roadmap Release is not a definitive statement by the SEC that the use of IFRS by domestic U.S. issuers will become mandatory, or even that use of IFRS by U.S. companies will be permitted on an optional basis. It is instead a detailed statement of how, and in what timeframe the SEC proposes to decide whether to implement a transition to mandatory use of IFRS for SEC filings by domestic U.S. issuers. B. Under the proposal, domestic U.S. issuers would be required to use IFRS, instead of U.S. generally acceptable accounting principles ( U.S. GAAP ), in the preparation of their financial statements included in their SEC filings beginning in the year 2014, if seven criteria or milestones relating to the further development of IFRS and related matters are met to the SEC s satisfaction by the year These milestones are briefly summarized in II below. The Roadmap Release specifies that it is referring only to IFRS in the official form approved and issued by the International Accounting Standards Board ( IASB ), which is a non-governmental accounting standards authority based in London, but with geographically dispersed participation and sponsorship. The official form of IFRS is published by the IASB in English. If implemented in 2014, the use of IFRS would be required for registration statements filed by domestic U.S. issuers under the Securities Act of 1933, and for annual and quarterly reports on Form 10-K and 10-Q, proxy and information statements and other filings under the Securities Exchange Act of Filings by registered investment companies and certain other types of companies would not be subject to this requirement. Privately held companies would not be directly affected by the SEC s decision on the use of IFRS by SEC filers. C. Under a more immediate part of the SEC s proposed Roadmap, a limited number of U.S. issuers in industries in which IFRS is used on a worldwide basis more than any other set of financial reporting standards would be permitted on at least an interim basis to elect to use IFRS in their SEC filings for fiscal years beginning 1

5 after December 15, 2009, which means that IFRS filings could first be made in the year 2010 for calendar year issuers. Under this interim proposal, a U.S. issuer would be permitted to use IFRS as issued by the IASB, rather than U.S. GAAP, in its SEC filings if (i) the issuer is among the 20 largest companies globally in a particular industry and (ii) IFRS is used as the basis of financial reporting more often than any other basis of financial reporting by the 20 largest listed companies worldwide (as measured by market capitalization) within that industry. The SEC s proposal would not require that IFRS be used by a majority of an industry s 20 largest companies; only that it be used by more of the 20 largest companies than any other system of accounting standards. The proposal would include a letter application process for issuers to determine whether they and their industries qualify for IFRS use. Under this process, issuers would be required to submit their analysis of the relevant facts to and obtain a letter of no objection from the SEC staff, which would be publicly posted on the SEC website. The SEC states that it is proposing this limited early use of IFRS because investors may find financial information provided by eligible issuers in the IFRS industries who elect to use IFRS to be more comparable to the financial information of their non-u.s. competitors in the same industry. The SEC also notes that permitting some U.S. issuers to report under IFRS may provide assistance in a transition to mandatory IFRS usage by all domestic U.S. issuers and that the SEC could learn from investors and the U.S. capital market participants about their consideration of IFRS financial information provided by the qualifying domestic issuers. Lastly, the SEC notes that investors in the industry sectors meeting the eligibility requirements of the proposal would likely already be familiar with IFRS. The Roadmap Release states that the SEC estimates that at least approximately 110 U.S. issuers in 34 IFRS industries would currently be eligible to use IFRS in their SEC filings under its interim proposal. D. The Roadmap Release states that the SEC has long supported development of a single set of high-quality global accounting standards as an important means of enhancing comparability of financial reporting for domestic and non-u.s. companies. The SEC believes this is important for the protection of investors and the efficiency and effectiveness of capital formation and allocation. 2

6 E. The SEC also observed in the Roadmap Release, as it has in a number of SEC releases and speeches by SEC officials over the past several years, that U.S. investors have increasing exposure to international investment opportunities as capital markets have become increasingly global and that U.S. investors therefore would benefit from an enhanced ability to compare financial information of U.S. companies with that of non-u.s. companies. F. In a general sense, the Roadmap Release may be described as another step in the SEC s efforts to promote the development of uniform global accounting standards and to integrate the U.S. capital markets with other world markets. The SEC s prior efforts with respect to international accounting standards, however, have focused primarily on convergence of U.S. GAAP and IFRS in the sense of bringing the two sets of accounting standards more closely in alignment on specific accounting topics, rather than mandating that a single set of standards be selected. In contrast, the Roadmap Release states that the SEC believes that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information. The Roadmap Release states that approximately 113 countries currently require or permit IFRS financial statement reporting for their domestic listed companies and that additional countries are in the process of adopting IFRS. The SEC includes in this count the countries of the European Union, Canada, Australia, Brazil and Israel, among others. Japan, China and Korea are also in the process of moving toward IFRS for their domestic listed companies. On the other hand, the SEC s most inclusive listing of IFRS countries represents, according to the Roadmap Release, comprises only approximately 31% of the total global market capitalization of public companies. II. The SEC s Seven Milestones to Mandatory IFRS Use The Roadmap Release discusses seven milestones which, if achieved, could lead to the eventual use of IFRS by all U.S. issuers. In addition to its consideration of the seven milestones, however, the SEC states that it expects to consider, among other things, the question whether IFRS as issued by IASB is in fact a globally accepted set of accounting standards that is consistently applied. This is in recognition of the fact that while many countries have accepted IFRS as either a permissible or mandatory set of standards to be followed by their publicly traded domestic companies, many of such countries have authorized or required local modifications to IFRS as issued by the IASB. Accordingly, there is not actual uniformity of accounting standards among countries that may be generally described as having adopted IFRS standards. 3

7 The SEC s seven milestones are summarized below: A. Improvements in Accounting Standards. When the SEC considers mandating the use of IFRS by U.S. issuers in 2011, it will consider whether the accounting standards embodied in IFRS are of high quality and sufficiently comprehensive. The Roadmap Release notes that the Financial Accounting Standards Board ( FASB ), which is the U.S. accounting profession s principal accounting standard-setting authority, and the IASB have for a number of years been working jointly toward the development of high-quality, comparable accounting standards that could be used both for domestic and cross-border financial reporting. The Roadmap Release further notes that there are areas in which IFRS currently provides limited guidance as compared with U.S. GAAP and that there are other areas in which the FASB and the IASB are working jointly on the development of new standards, such as in the areas of revenue recognition and financial statement presentation, that when completed should improve financial reporting significantly. The SEC further states in describing this milestone that it is important that IFRS accounting standards be established under a robust independent process that includes careful consideration of possible alternative approaches and due process, which allows for input from and consideration of views expressed by affected parties, including investors. The SEC also believes that it is important that accounting standards be promptly considered to keep standards current and to reflect emerging accounting issues and changing business practices. For these reasons, the SEC states, in considering its future action under the Roadmap Release, the SEC will assess whether it believes that the IASB continues to develop its standards, including standards that have been converged with U.S. GAAP, through a process that reflects these elements. B. Accountability and Funding of IASC Foundation. The SEC believes that its determination regarding the required use of IFRS should only occur after the IASC Foundation has reached its current goal of securing a stable funding mechanism that supports the independent functioning of the IASB. The SEC believes it will also be important that the IASC Foundation have established an appropriate relationship with national securities regulators around the world that includes an effective mechanism for oversight of the IASC Foundation by a multilateral monitoring group of such regulators. The IASB, which is based in London, is not a governmental enterprise and is overseen and funded by the IASC Foundation, which is a non-profit 4

8 entity also based in London, but incorporated in Delaware. The IASC Foundation is governed by 22 trustees from geographically diverse countries and is currently funded through voluntary contributions by participants in the world s capital markets, including firms in the accounting profession, individual companies, international organizations, central banks and governments. The IASC Foundation is currently seeking to establish a permanent funding system that provides broadbased, long-term financing from major participants in the world s capital markets, including official institutions, in which the funding burden is shared by major economies of the world on a proportionate basis and that is not contingent on any particular action that would infringe on the independence of the IASC Foundation or the IASB. C. Improvements in Ability to Use Interactive Data for IFRS Reporting. The SEC believes that in order to realize the improvements in usefulness and comparability of financial information, there must be further development of interactive data reporting techniques for IFRS-based financial statements comparable to the extensible Business Reporting Language ( XBRL ) that has been developed, and has recently been mandated for SEC filings, with respect to U.S. GAAP financial statements. See Interactive Data to Improve Financial Reporting, SEC Release Nos ; (January 30, 2009). D. IFRS Education and Training in U.S. A key consideration in the SEC s position on whether to mandate the use of IFRS by U.S. issuers is the necessity of developing sufficient education and training about IFRS for investors, accountants, auditors and others involved in the preparation and use of financial statements. In this connection, the SEC notes that the education and on-going training of most accountants in the United States has to date been predominantly focused on the current provisions of U.S. GAAP. The SEC believes that achieving this milestone will therefore require substantial efforts at many levels, including at basic college and university training levels, among professional associations and industry groups, accounting and other personnel of issuers, audit committee of boards of directors and among regulatory authorities. E. Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors. As summarized above, the Roadmap Release includes a proposal that a limited number of large U.S. companies in IFRS industries be permitted to use IFRS for their financial statements included in SEC filings beginning in The SEC notes with respect to this milestone that, while it would result in some U.S. issuers preparing financial statements on a basis different than other U.S. issuers and would thereby reduce comparability among U.S. issuers to that extent, the SEC 5

9 believes that this potential adverse effect would be outweighed by gains in comparability of financial reporting among large companies in those industries. F. Anticipated Timing of Future SEC Rulemaking. The Roadmap Release targets 2011 as the year in which the SEC intends to decide whether to proceed with rules requiring U.S. public companies to use IFRS for SEC filings, with such requirement then to become effective beginning in the year The SEC believes that making this decision in 2011 would provide issuers with sufficient early notice of the transition to IFRS to permit them to begin using IFRS in their internal accounting in 2012, which would be the earliest fiscal year that would be covered for issuers in the earliest anticipated phase-in category for IFRS reporting in The Roadmap Release states that the SEC is currently contemplating mandatory, rather than elective, use of IFRS for U.S. issuers in order to promote fully the objective of a single set of accepted accounting standards prepared by U.S. public companies and foreign companies. The SEC is further contemplating that in the first year an issuer becomes subject to mandatory use of IFRS, the issuer s financial statements for all years required to be included in their SEC filings would be required to be prepared in accordance with IFRS, rather than establishing a multi-year transition period in which first one, then two, then three years of IFRS conforming financial statements would be required. G. Implementation of Mandatory Use of IFRS by U.S. Issuers. As described in the Roadmap Release, the SEC is currently contemplating, on a provisional basis, that the transition to IFRS reporting would, if decided upon by the SEC, be implemented on a staged basis based on company size. Large accelerated filers (public float of common equity held by nonaffiliates greater than $700 million, with twelve months of SEC reporting history, including at least one annual report) would be required to use IFRS for fiscal years ending on or after December 15, 2014, accelerated filers (public float of common equity of less than $700 million, with twelve-month SEC reporting history and at least one annual report) would begin using IFRS for years ending on or after December 15, 2015 and non-accelerated filers, including smaller reporting companies (public float less than $75 million) would begin IFRS filings for years ending on or after December 15, The SEC notes that this would permit each of the classes of issuers to begin preparation of their books and records, as well as internal accounting controls, on bases required for IFRS reporting for all of the three years of audited financial statements that they would be required to 6

10 include in their respective first years of IFRS reporting. It would also give smaller public companies more time to prepare for their transition to IFRS and the opportunity to benefit from experience gained in the transitions of the larger companies. III. Selected Developments in the Convergence of U.S. GAAP and IFRS A. Norwalk Agreement (2002). FASB and IASB agree to work toward making U.S. GAAP and IFRS compatible on a standard-by-standard basis. The Roadmap Release described this process, commonly referred to generically as convergence, as being the predominant approach taken in the U.S. toward development of a single set of globally accepted accounting standards over the six years preceding the Roadmap Release in November 208. The SEC supported, and continues to support this effort. B. FASB/IASB Memorandum of Understanding (2006). FASB and IASB reaffirm their support of and joint efforts to work toward convergence of their accounting standards. They further agree on a coordinated work schedule for consideration of modification and improvement of individual accounting standards and for joint development of new standards in other areas. Their current work plan includes projects through C. SEC Staff Publishes Observations on Its IFRS Reviews (2007). The SEC s division of Corporation Finance published a summary of observations resulting from staff reviews of the annual reports filed with the SEC by more than 100 foreign private issuers containing financial statements prepared for the first time on the basis of IFRS. This summary included observations on the prevelance of jurisdictional variations of IFRS used and the fact that a range of accounting treatments were found for specified types of transactions. It also reported that the staff asked a number of the reporting companies for further information regarding specific accounting topics in their financial statements. The summary, dated July 2, 2007, is available on the SEC website at D. SEC Concept Release (2007). In this Concept Release, the SEC sought input on the nature and extent of the public s interest in permitting U.S. issuers to file financial statements with the SEC prepared in accordance with IFRS, rather than U.S. GAAP, on an elective basis. See Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards, SEC Release Nos ; (August 14, 2007). E. SEC Roundtables ( ). The SEC held three roundtable public discussions in which investors, issuers, accounting firms, educators, standard setters and other capital market participants were invited to provide input on the use of IFRS. In the first two of these roundtable discussions, held in December 2007, the SEC sought input on the use of IFRS in U.S. markets and on practical issues surrounding the use of IFRS in recent years and its potential expanded use 7

11 in future years. The third roundtable, held in August, 2008, related to the performance of U.S. GAAP and IFRS during the sub-prime mortgage crisis. F. SEC Eliminates Reconciliation Requirement for Foreign Private Issuers Using IFRS (2007). In December, 2007, the SEC adopted amendments in final form to its reporting requirements for foreign private issuers to permit such issuers to include financial statements prepared in accordance with IFRS in their SEC filings without having also to include the reconciliation of those statements to U.S. GAAP formerly required by the SEC. See Acceptance from Foreign Private Issuers Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP, SEC Release Nos ; (December 21, 2007) IV. Recent Developments and Uncertainties A. The Roadmap Release is written as a forceful statement by the SEC of an intention to move toward full adoption of IFRS as issued by the IASB for domestic U.S. issuers, rather than the more limited goal of convergence of U.S. and international accounting standards that the SEC has previously supported. As indicated by its discussion of the milestones it will consider in making its final determination, however, a number of difficult hurdles would have to be overcome to reach the stated goal of IFRS adoption. Nor is there general agreement among relevant market participants and regulatory authorities that adoption of IFRS is desirable. New SEC Chairman Mary Schapiro told the Senate Banking Committee during her confirmation hearing that she will not be bound by the existing roadmap that s out for public comment, citing concerns about the pace of the timeline, the independence of the IASB and the quality of the IFRS accounting standards themselves, among other factors. Reported in Top Obama Advisors Clash on Global Accounting Standards, CFO.com, July 15, B. One aspect of IFRS that is considered a major strength by its proponents is that the IFRS standards are principles-based, meaning that they are not as detailed and prescriptive as U.S. GAAP and are instead premised on stating underlying principles for appropriately reflecting economic substance. IFRS proponents argue that IFRS therefore do not provide opportunities for exploitation of technical details of accounting rules to obscure economic reality in financial reporting. Critics of the IFRS accounting standards, however, are concerned that this lack of detail leaves too much room for interpretation, with the result that there is greater diversity in financial reporting by similar companies than is desirable from the standpoint of comparability. More broadly, opponents of the adoption of IFRS for U.S. issuers express concern that the IFRS system is not yet as well developed to cover all industries and important aspects of financial reporting as U.S. GAAP. 8

12 C. Opponents of mandated use of IFRS for U.S. issuers are also concerned that, at least in its current stage of development, the IFRS system of accounting standards is unduly susceptible to political influence and resulting variation from jurisdiction to jurisdiction. They point out that while the IASB has issued a single set of official IFRS accounting standards, implementation of these standards requires action by individual national securities regulators or other national authorities and that the relevant authorities have in many cases adopted local variations from the IASB s official version. D. Other market participants and commentators argue strongly that U.S. GAAP is a very successful, well developed set of accounting standards that have been an important part of the development of an economy and capital market system that are highly successful and should not be abandoned. The focus, in the view of these critics, should continue to be on improvements in U.S. GAAP and IFRS on a coordinated basis. E. Opponents of mandated transition to IFRS for U.S. issuers further argue that mandating a change to IFRS, rather than continuing on a more gradual course of convergence of U.S. GAAP and IFRS, would be too costly for the companies involved and raise too many uncertainties, especially in the current economic climate. F. In addition to the difficult issues in the continuing debate over IFRS, the SEC s Roadmap proposal raises but does not discuss substantial questions regarding the process for setting accounting standards in the United States. For example, a footnote in the Roadmap Release mentions that the Roadmap Release does not address the method the SEC would use to mandate IFRS for U.S. issuers, but describes as one option the possibility that the FASB would continue to be the designated standard setter for establishing financial reporting standards in issuer filings with the SEC. The Roadmap Release then further states that under this option the SEC s presumption would be that the FASB would incorporate all of the IFRS provisions and all future changes to IFRS, directly into U.S. GAAP. See Roadmap Release, footnote 31. 9

13 TRANSACTION SERVICES Impact of FASB Statement No. 141 (Revised) on Mergers & Acquisitions Presentation to the American Bar Association 2009 Spring Meeting Vancouver, British Columbia April 18, 2009 ADVISORY Agenda Overview of FASB Statement 141(Revised) and FASB Statement 160 Why these Accounting Changes Matter Key Changes and the Implications: Purchase Price - Example 1: Acquisition Date Fair Value of Contingent Consideration - Example 2: Determination of Purchase Price Key Changes and the Implications: Allocation of Purchase Price - Example 3: Allocation of Purchase Price Key Changes and the Implications: Non-Controlling (Minority) Interest Key Impacts of FASB Statement 157 on Accounting for Business Combinations 1 1

14 Overview and Key Changes to Accounting for Business Combinations under US GAAP SFAS No. 141 (Revised) and SFAS No. 160 FASB/IASB Business Combinations Project Second phase of FASB s overall project on business combinations is newly effective: FASB Statement No. 141(R) amends FASB Statement No. 141 but retain much of the previous guidance on accounting for business combination transactions. FASB Statement No. 160 amends ARB 51 to resolve accounting and reporting issues related to non-controlling interests. Effective for all transactions after an acquirer s fiscal period beginning on/after December 15, 2008 (so January 1, 2009 for calendar year end companies) Phase One was completed in 2001 which had, among others, the following key developments: elimination of pooling-of-interest method, expanded guidance on recognizing intangible assets apart from goodwill and the elimination of amortization of goodwill and indefinite lived intangibles. Joint project with the IASB, which issued its revised standards in January 2008: Revised IFRS 3, Business Combinations, and IAS 27, Consolidated and Separate Financial Statements Effective July 1, 2009; however, in contrast to the U.S. standards, early adoption is permitted. This joint effort on business combinations is part of general movement towards fair value and convergence with International Accounting Standards. 3 2

15 Why these Accounting Changes Matter These accounting changes will have a significant impact on a company s financial results following an acquisition. A few key impacts include: The consolidated accrual earnings will change as a result of an acquisition accounted for under FAS 141R and FAS 160. Therefore, to isolate cash flows used to value a company, analysts will require an understanding of those accounting changes and their subsequent impact on non-cash items (amortization, impairment, etc.) Management compensation and bonuses tied to financial results Movement toward fair value and enhanced disclosure will require education of investor relations department to properly communicate with third party stakeholders. Consideration paid for the target (i.e. purchase price) will be calculated differently, impacting the deal value. With an increased use of fair value under FAS 141R, companies will be challenged with the initial determination of fair value and its impact to ongoing IT system capabilities Who s Affected? Public buyers Public sellers Private companies that may be sold Companies with US GAAP financial triggers on debt covenants 4 Overview of Changes under SFAS 141R New rules significantly change accounting for business combinations in a number of areas, specifically with respect to: Scope expanded through change in definition of a business Purchase price: Measurement date (impact on valuation of equity consideration) Acquisition costs Contingent considerations (earn-outs) Allocation of purchase price to assumed assets and liabilities: In-Process Research & Development (IPR&D) Restructuring liabilities Contingent liabilities Accounting for noncontrolling (minority) interests: Partial acquisitions Acquisitions and disposals of noncontrolling interests Presentation of noncontrolling interests 5 3

16 Key Scope Change Definition of a Business New rules will change the definition of a business, expanding the types of transactions that will be accounted for as business combinations: SFAS 141 An early-stage development stage entity is presumed not to be a business. Acquisitions of such entities are accounted for as asset acquisitions (no goodwill). SFAS 141(R) The definition of a business is expanded. The presumption that an earlystage development stage enterprise is not a business has been removed. A business must be capable of generating a revenue stream. Implication More transactions will be accounted for as business combinations (goodwill). 6 Purchase Price Changes Measurement Date New rules will change the accounting for measurement date for equity consideration: SFAS 141 Acquirer must determine the fair value of its marketable equity securities based on the market price of those instruments over a reasonable period of time (eg a few days) before and after the terms of the acquisition are agreed to and announced. SFAS 141(R) All consideration transferred is required to be measured as of the acquisition date, which is the date on which the acquirer obtains control of the target (normally the closing date but not always). Implication When equity securities are issued and the exchange ratio is fixed, the value of the purchase price could vary significantly if there is much time between the announcement / agreement of terms and closure of a business combination. 7 4

17 Purchase Price Changes Transaction Costs New rules will change the accounting for acquisition-related costs: SFAS 141 An acquirer s direct acquisition costs of the business combinations are included in the determination of purchase price. SFAS 141(R) Direct acquisition costs are not part of the acquisition accounting. Instead, they are accounted for under other GAAP and generally will be expensed as incurred (if they are not associated with issuing debt or equity securities). Implication All other things being equal, the amount of goodwill recognized in a transaction will decrease and an acquirer will recognize an increase in expenses. 8 Purchase Price Changes Earn Outs and Other Contingent Consideration New rules will change the accounting for contingent consideration (e.g., earn-out arrangements): SFAS 141 Contingent consideration is recognized when the contingency is resolved and consideration is issued or issuable: If based on earnings, recognized as an adjustment to purchase price If based on acquirer s security price, recognized as an adjustment to paid-in capital SFAS 141(R) Contingent consideration is measured and recognized at fair value on the acquisition date. Subsequent changes in fair value for liability-classified contingent consideration are recognized in earnings (not an adjustment to purchase price). Equity-classified contingent consideration is not remeasured after the acquisition date. Implication Determining the fair value of contingent consideration at the acquisition date and at each reporting period may be challenging. Post-acquisition earnings volatility can result from liability-classified contingent consideration. 9 5

18 Example 1: Acquisition Date Fair Value of Contingent Consideration Assume that buyer agrees to pay $2,000,000 to seller if revenues from Target company grow by 10% per annum for the next four years [Assume appropriate discount rate is 6%] Scenario Scenario 1: Payout is triggered. Scenario 2: Payout is not triggered. Likelihood of occurrence 60% 40% Probability Weighted average $1,200,000 [60% X $2,000,000] Discounted amount $950,570 Liability to record at date of business combination Subsequent changes in liability recognized in income (or under SFAS 133, if applicable) 10 Example 2: Determination of Purchase Price Acquirer ( A ) announced intent to acquire 100 percent of Target ( T ) for 10,000 shares of A s common stock. A s common stock traded at an average of $45 for the two days prior, the day of, and the two days subsequent to announcement. A consummates its acquisition of T three months later, and A s stock traded at $60 on the consummation date. A incurred $50,000 of direct costs associated with the acquisition. As part of the sale agreement, A agrees to an earn-out arrangement, whereby the seller would receive 5,000 shares* of A stock if EBITDA exceeds a set threshold at the end of year one, and an additional $200,000 in cash if EBITDA exceeds the same threshold in year two. * Earn-out provisions, even if settled through a share exchange, require an analysis to determine if they should be classified as equity or liability instruments. For the purposes of this example we are assuming that this instrument would meet the accounting requirements for equity classification. 11 6

19 Example 2 Continued: Impact of Changes to Purchase Price Determination Measurement Share Price $ 45 (1) $ 60 (2) Shares Issued 10,000 10,000 Equity Consideration 450, ,000 Deal Costs 50,000 - (3) Cash Settled Earnout - 50,000 (4) Equity Classified Earnout - 50,000 (4) Purchase Price at Acquisition Date $ 500,000 $ 700,000 (1) Represents the average stock price for the two days prior, the day of, and the two days subsequent to announcement. (2) Represents the stock price on the date of consummation. (3) Expensed as incurred. (4) Cash-settled earnouts (which are liability classified) will be marked to fair value through earnings each period whereas earnouts that are classified as equity will not. This example assumes an acquisition date fair value of $50,000 for both awards 12 Allocation of Purchase Price IPR&D New rules will change the accounting for in-process research and development (IPR&D): SFAS 141 The fair value of intangible assets to be used in IPR&D projects that have no alternative future use is charged to expense at the acquisition date. SFAS 141(R) The acquiree s IPR&D projects are recognized as an intangible asset and measured at fair value. The IPR&D asset is treated as an indefinite-life intangible asset subject to impairment analysis; therefore it is not subject to amortization until the project is completed or abandoned. Implication An acquirer will have to monitor the IPR&D intangible assets post-acquisition; ongoing impairment analysis may require additional valuation expertise. Post-combination expense related to IPR&D may not be as predictable as under existing rules. 13 7

20 Allocation of Purchase Price Restructuring Costs New rules will change the accounting for restructuring costs: SFAS 141 Restructuring costs for plans to be implemented subsequent to the acquisition are recognized as a liability in purchase accounting if the criteria of EITF 95-3 are met within a short period of time after the acquisition date. SFAS 141(R) Restructuring costs are not recognized as a liability in acquisition accounting unless the criteria in SFAS 146 are met at the acquisition date. Implication Post-acquisition expenses will increase as a result of restructuring activities of a target that were previously recognized in purchase accounting. 14 Allocation of Purchase Price Contingent Assets and Liabilities (Background) The FASB desired increased recognition of contingencies on acquisition date and included specific guidance in FAS 141R (as released in December 2007) to achieve their objectives. The guidance required that almost all contingencies (both contractual and non-contractual) would be recorded at their acquisition date fair value and subsequently adjusted based on complex guidance. A number of organizations (including the legal community) were concerned with the possible need for privileged information to make a judgment about the fair value of some contingencies, particularly litigation. Further, there was concern that this increased recognition and disclosure could be a self fulfilling prophecy regarding the outcome of the contingency. This concern lead the FASB to re-deliberate the accounting for contingencies. The Board agreed at their February 25, 2009 meeting to revise the FAS 141R requirements through the issuance of FSP FAS 141R-a. FSP FAS 141R-a is expected to be issued in March 2009 * and the effective date will be the same as FAS 141R. This FSP will change FAS 141R by modifying the accounting on acquisition date as well as removing post-acquisition accounting guidance. * As of the date this presentation was drafted, FSP FAS 141R-a was not issued and therefore the information included in this presentation is based on observations from the February 25, 2009 FASB Board Meeting. 15 8

21 Allocation of Purchase Price Contingent Assets and Liabilities (Changes Expected from FASB) The FASB issued the following statement after their Board Meeting on February 25, 2009: The Board decided to amend the guidance in FASB Statement No. 141 (revised 2007), Business Combinations, to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. - If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would be recognized in accordance with FASB Statement No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. Additionally, the Board decided to remove the subsequent accounting guidance for assets and liabilities arising from contingencies from Statement 141(R). - The Board decided that the guidance in FASB Statement No. 141, Business Combinations, should essentially be carried forward without significant revision. - However, the Board decided that the word determined in Statement 141 should be replaced with reasonably estimated. Under the old guidance of FAS 141, if the fair value of a contingent liability is not readily determinable at the acquisition date, a contingent liability is recognized at the date of acquisition only if it is probable and determinable. - It is measured at the best estimate of the settlement amount, rather than its fair value. 16 Example 3: Allocation of Purchase Price (Fact Pattern) An IPR&D project is included in the net assets acquired, which A determines has a fair value of $400,000. When the acquisition is consummated, A s management has a plan to close several facilities and terminate the employees in those facilities. The plan meets the criteria in EITF 95-3 for accrual. The aggregate amount of the remaining lease payments and projected severance costs is $400,000. As of the acquisition date, the facilities are still in operation and employees have not been given notice of termination. T has $100,000 of NOL carry-forwards; A believes it is not more-likely-than-not that the carry-forwards will be realized. A assumes T s defense of an environmental contamination dispute. The noncontractual contingency is not a probable future sacrifice but meets the more-likely than-not threshold for a liability. The estimated fair value is $150,000.* * As previously noted in this presentation the accounting for contingent liabilities is likely to change once FSP FAS 141R-a is released. This example assumes the original guidance included in FAS 141R (released in December 2007). 17 9

22 Example 3 Continued: Allocation of Purchase Price (Impact on Financial Position) FAS 141 (Old) FAS 141R (New) Current Assets $ 100,000 $ 100,000 IPR&D - 400,000 Goodwill 500, ,000 Recap of Differences Total Assets $ 600,000 $ 950,000 Goodwill Current 500,000 Goodwill New 450,000 Accounts Payable $ 100,000 $ 100,000 Difference (50,000) Restructuring Reserves 400,000 - Pre-acquisition Contingency - 150,000 Restructuring Reserves (400,000) Contingent Consideration - 50,000 (2) Pre-acquisition Reserves 150,000 Total Liabilities 500, ,000 Contingent Consideration 100,000 Transaction Costs (50,000) Common Stock and APIC 500, ,000 (2) Equity Consideration 150,000 Retained Earnings (400,000) (1) - Difference (50,000) Total Equity 100, ,000 Total Liabilities and Equity $ 600,000 $ 950,000 (1) Reflects the guidance of FAS 141 where IPR&D is considered in determining purchase price and goodwill but expensed directly after the transaction. (2) Total purchase price, including equity-settled and cash-settled contingent consideration, equals $700, Example 3 Continued: Allocation of Purchase Price (Impact on Earnings) Year 1 Target's Income (Expense) (1) FAS 141 (Old) FAS 141R (new) a) The Company immediately writes off IPR&D under FAS 141. $ (400,000) $ - b) The Company pays out all severance and, simultaneous to exit, buys out of all but - (300,000) one leased facility for a total $300,000. c) Before finalizing its purchase accounting, the Company exits the last facility and - (200,000) incurs buy-out costs of $200,000, rather than the $100,000 anticipated. (2) d) The Company exceeds the revenue threshold and triggers the first contingent - (50,000) payment of $200,000 (to be paid in shares). The fair value of the second contingent payment of $200,000 (to be paid in cash) increases to $100,000. (400,000) (550,000) Year 2 Target's Income (Expense) FAS 141 (Old) FAS 141R (new) e) The Company partially abandons certain aspects of the IPR&D project. - (300,000) f) The Company concludes it is more-likely-than-not it will be able to realize the NOL - 100,000 carryforwards. g) The Company exceeds the revenue threshold and triggers the second contingent - (100,000) payment of $200,000 (to be paid in cash). $ - $ (300,000) (1) Excludes any deal costs incurred by A under FAS 141R. (2) This is an assumption that this change is cost is due to a change in estimate and permissable to be included in purchase price under FAS 141. However, given a separate set of facts and circumstances, this determination could change under FAS

23 Accounting for Noncontrolling Interests (On Acquisition of Control) New rules will change the accounting for partial acquisitions: SFAS 141/ARB 51 The assets acquired and liabilities assumed are adjusted only for the acquirer s share of the fair value. Noncontrolling interests and their share of the acquiree s assets and liabilities are measured based on the carrying amounts recognized in the acquiree s financial statements. SFAS 141(R)/160 The full fair value of the assets acquired, liabilities assumed, and noncontrolling interests is recognized, regardless of whether all or a partial interest is acquired. The carrying amount of previously acquired tranches are adjusted to fair value at the date control is obtained, and the acquirer recognizes the difference as a gain or loss in income at the acquisition date. Implication Financial statement comparability should be increased. Increase in post-combination expenses may arise due to the full fair value recognition of depreciable and amortizable assets. 20 Accounting for Noncontrolling Interests (Subsequent Increase) New rules will change the accounting for increases in ownership: SFAS 141/ARB 51 The cost of each investment tranche is reflected in the financial statements with a separate purchase adjustment and goodwill amount related to each tranche ( step acquisition accounting). SFAS 141(R)/160 Increases in the parent s share of ownership after control is obtained are accounted for as capital transactions. Implication All other things being equal, decrease in income statement volatility may occur

24 Accounting for Noncontrolling Interests (Subsequent Divestiture) New rules will change the accounting for decreases in ownership: SFAS 141/ARB 51 Decreases in ownership interest generally result in a gain or loss. SFAS 141(R)/160 Decreases in the parent s share of ownership while retaining control are accounted for as capital transactions. A transaction that results in the loss of control results in a gain or loss Implication All other things being equal, decrease in income statement volatility may occur. 22 Other Noteworthy Changes under FAS 141R Purchased loans and receivables must be recorded at fair value (i.e. - no reserve account) Can be a significant challenge to business combinations due to the posttransaction operational challenges Bargain purchase Retrospective application of adjustments during the measurement period and their impact on SEC Filings Specific guidance on exchange of share-based payment awards Classification of noncontrolling interests in equity 23 12

25 Fair Value Measurements Key Impacts SFAS 157 on Business Combinations Overview of FAS 157 Why a standard on Fair Value Measurements? Different definitions of fair value and limited guidance for applying those definitions in GAAP Guidance dispersed among many accounting pronouncements that require fair value measurement Differences in that guidance created inconsistencies that added to the complexity of applying GAAP 25 13

26 Overview of FAS 157 What does FAS 157 do? Establishes a single authoritative definition of fair value to be used when fair value measurements are required or permitted by other accounting standards Creates a framework for measuring fair value Expands disclosures about the use of fair value Effective date and transition: Effective for financial statements issued for fiscal years beginning after November 15, 2007 Prospective treatment as of the beginning of the fiscal year in which the statement is initially applied, except to certain financial instruments where retrospective application is required with an offset to retained earnings 26 Effective Date for Application of FAS 157 to Certain Non-Financial Assets and Liabilities FSP FAS 157-2, Effective Date of FASB Statement No. 157 This FASB Staff Position (FSP) delayed the effective date by one year for certain non-financial assets and liabilities, such as: Non-financial assets and liabilities that are measured at fair value in a business combination or other new basis event, but are not measured at fair value in subsequent periods Reporting units that are measured at fair value in step 1 of a goodwill impairment test Non-financial assets and liabilities that are measured at fair value in step 2 of a goodwill impairment test Indefinite-lived intangible assets Long-lived asset groups measured at fair value in step 2 of a FAS 144 impairment test Asset retirement obligations and liabilities for exit or disposal activities The effective date for assets and liabilities covered by FSP FAS is for fiscal years beginning after November 15, 2008 (and interim periods in those fiscal years)

27 FAS 157 Definition of Fair Value Paragraph 5 of FAS 157 defines fair value as: the price that would be would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Exit price notion (vs. entry price) Emphasis on market participants (vs. entity-specific assumptions) 28 How to Determine Fair Value under FAS 157 To determine a fair value measurement under FAS 157, first identify the: Unit of account: A fair value measurement is for a particular asset or liability Measurement should consider attributes specific to the asset or liability Unit of account determined by other applicable GAAP Principal market or most advantageous market: Principal market: market in which the reporting entity would transact with the greatest volume and level of activity Most advantageous market: market in which the reporting entity would transact with the price that maximizes the amount considering transaction costs Highest and best use of an asset In use In exchange 29 15

28 SFAS 157 Valuation Models FAS 157 does not contain detailed guidance about how to construct valuation models. It only specifies that valuation techniques consistent with one of the following approaches should be used: Market approach Income approach Cost approach Inputs to valuation techniques may be observable or unobservable: Observable inputs reflect assumptions market participants would use in pricing, which are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity s own assumptions about the assumptions market participants would use in pricing, which are developed based on the best information available. 30 SFAS 157 Inputs to Valuation Hierarchy of Inputs to Valuation Techniques Level Input Quoted prices in active markets for identical assets or liabilities. Observable prices in active markets for similar assets or liabilities. Prices for identical or similar assets or liabilities in markets that are not active. Directly observable market inputs for substantially the full term of the asset or liability, e.g., interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, default rates, and credit spreads. Market inputs that are not directly observable but are derived from or corroborated by observable market data. Unobservable inputs based on the reporting entity s own assumptions about the assumptions that a market participant would use, including inputs derived from extrapolation and interpolation that are not corroborated by observable market data

29 Presenter Contact Details Michael G. O Bryan Partner and Co-Chair of Mergers & Acquisitions Morrison Foerster LLP mobryan@mofo.com Tim Lashua Director, Accounting Advisory Services KPMG LLP tlashua@kpmg.com

30 12/03/2009 IFRS and US GAAP A Non-Random Sample of Some Significant Differences * Presentation to the American Bar Association 2009 Spring Meeting *connectedthinking PwC Impairment of long-lived assets held for use US GAAP uses a two-step impairment test IFRS uses a one-step impairment test The IFRS model may lead to earlier impairment recognition PricewaterhouseCoopers LLP Page 2 April 18,

31 12/03/2009 Impairment of long-lived assets held for use The US GAAP model prohibits the reversal of impairments The IFRS model permits the reversal of impairments if certain criteria are met PricewaterhouseCoopers LLP Page 3 April 18, 2009 Impairment of long-lived assets held for use The US GAAP model prohibits the reversal of impairments The IFRS model permits the reversal of impairments if certain criteria are met PricewaterhouseCoopers LLP Page 4 April 18,

32 12/03/2009 Impairment of long-lived assets held for use Under US GAAP, changes in market interest rates are not considered impairment indicators Under IFRS, changes in market interest rates are impairment indicators PricewaterhouseCoopers LLP Page 5 April 18, 2009 Non-financial assets carrying basis US GAAP generally uses historical cost and prohibits revaluations IFRS permits the revaluation to fair value of property, plant and equipment, intangible assets, and investment property and inventories in certain industries PricewaterhouseCoopers LLP Page 6 April 18,

33 12/03/2009 Inventory US GAAP allows the use of the last-in, first-out (LIFO) costing method IFRS prohibits the use of the LIFO costing method PricewaterhouseCoopers LLP Page 7 April 18, 2009 Internally developed intangibles US GAAP generally prohibits the capitalization of development costs IFRS calls for the capitalization of development costs if certain criteria are met US GAAP has specific rules regarding internally developed software IFRS applies the same principles to software development costs as to other development costs PricewaterhouseCoopers LLP Page 8 April 18,

34 12/03/2009 Lease classification US GAAP contains specific bright line tests for lease classification, such as whether the present value of minimum lease payments exceed 90% of the fair value of the leased property IFRS contains similar criteria, but no bright line tests US GAAP has incremental criteria for lessors to consider in lease classification; IFRS does not PricewaterhouseCoopers LLP Page 9 April 18, 2009 Derecognition of financial assets Under US GAAP, derecognition is based on a control and components approach; derecognition can be achieved even with significant ongoing involvement and the retention of significant risks and rewards Under IFRS, derecognition is based first on a risk and rewards model Under IFRS, fewer securitizations will qualify for derecognition PricewaterhouseCoopers LLP Page 10 April 18,

35 12/03/2009 Classification of financial assets Under US GAAP, unlisted equity securities are generally not carried at fair value as Available For Sale (AFS) securities Under IFRS, virtually all AFS securities are carried at fair value PricewaterhouseCoopers LLP Page 11 April 18, 2009 Foreign exchange gains/losses on AFS debt instruments Under US GAAP, all changes in fair value of AFS debt securities (net of tax effects) are recorded in other comprehensive income Under IFRS, the portion of the change in fair value associated with foreign exchange gains and losses is included in the income statement PricewaterhouseCoopers LLP Page 12 April 18,

36 12/03/2009 Definition of Derivative Under US GAAP, only contracts that require or permit net settlement meet the definition of a derivative Under IFRS, contracts that do not require or permit net settlement can still be derivatives PricewaterhouseCoopers LLP Page 13 April 18, 2009 Embedded derivatives Under both US GAAP and IFRS, embedded derivatives that are not closely related to their host contract must generally be separated and accounted for at fair value but there are many detailed differences about, for example, what counts as closely related and when contracts need to be re-assessed for embedded derivatives PricewaterhouseCoopers LLP Page 14 April 18,

37 12/03/2009 Hedge Accounting US GAAP allows an assumption of no ineffectiveness in certain hedging relationships IFRS precludes the assumption of perfect effectiveness US GAAP allows intercompany derivatives to be accounted for as hedges in certain circumstances IFRS does not allow intercompany derivatives to be accounted for as hedges PricewaterhouseCoopers LLP Page 15 April 18, 2009 Hedge Accounting US GAAP allows the time value of an option to be designated as part of a hedging relationship IFRS does not allow the time value of an option to be designated as part of a hedging relationship PricewaterhouseCoopers LLP Page 16 April 18,

38 12/03/2009 Financial liabilities and equity Under US GAAP, financial instruments are separated into liability and equity components by the issuer only in very limited circumstances Under IFRS, if an instrument has both a liability component and an equity component, separate accounting is required PricewaterhouseCoopers LLP Page 17 April 18, 2009 Financial liabilities and equity Many contracts or contractual features that are or would be classified as equity under US GAAP will be classified as derivatives under IFRS For example, under IFRS contracts that require net share settlement will be classified as derivatives PricewaterhouseCoopers LLP Page 18 April 18,

39 12/03/2009 Liabilities taxes Under US GAAP, a two-step process is used to determine first whether recognition of an uncertain tax position is needed, and secondly, to measure the position. The tax position is measured using a cumulative probability model the largest amount of tax benefit that is greater than 50% likely of being realized on ultimate settlement. Under IFRS, accounting for uncertain tax positions is not addressed but use of the cumulative probability model is not supported PricewaterhouseCoopers LLP Page 19 April 18, 2009 Liabilities taxes Under US GAAP, subsequent changes in deferred tax balances are generally taken through the statement of operations, regardless of whether the deferred tax was initially created through the income statement, equity or purchase accounting Under IFRS, subsequent changes in deferred tax balances are recognized in the statement of operations except to the extent that the tax arises from a transaction/event that is recognized directly in equity PricewaterhouseCoopers LLP Page 20 April 18,

40 12/03/2009 Expense recognition share based payments Under US GAAP, companies have a policy choice with respect to awards with graded vesting schedules Under IFRS, each tranche of an award with a graded vesting schedule must be treated as a separate grant PricewaterhouseCoopers LLP Page 21 April 18, 2009 Expense recognition share based payments IFRS results in greater income statement variability for deferred taxes on share based payments, because valuation of the deferred tax asset is revisited each period with adjustments recorded through earnings (within certain limits) Under IFRS, deferred tax benefits are recognized in income only for those awards that currently have an intrinsic value that would be deductible for tax purposes PricewaterhouseCoopers LLP Page 22 April 18,

41 12/03/2009 Revenue recognition Under US GAAP, revenue recognition guidance is extensive, detailed and sometimes industry specific for example, highly specialized guidance exists for software revenue recognition Under IFRS, two primary revenue standards capture all revenue transactions within one of four broad categories PricewaterhouseCoopers LLP Page 23 April 18, 2009 Revenue recognition US GAAP prohibits the use of the percentage-of-completion method to recognize revenue under service arrangements, except for certain construction or production-type contracts IFRS requires that service transactions be accounted for under the percentage of completion method PricewaterhouseCoopers LLP Page 24 April 18,

42 12/03/2009 Thank you PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. 13

43 McCarthy Tétrault LLP Lawyer Profile CAMERON G. BELSHER TITLE Partner OFFICE Vancouver DIRECT LINE LAW SCHOOL Osgoode Hall Law School, LL.B., 1987 BAR ADMISSIONS British Columbia, 1988 Biography Cam Belsher* is a partner in our Business Law Group in Vancouver. His recent experience includes acting as lead counsel on a significant number of merger and acquisition transactions involving public and private companies in a variety of industries including mining, technology, gaming, telecommunications, construction and retail. Recent M&A transactions which Mr. Belsher has successfully led include: Acquisition of the minority interest in a mining project in Scandinavia; Acquisition of the minority interest in an infrastructure project in Western Canada; Acquisition by Scandanavian interests of a Canadian company with a large operating mine in West Africa; Sale of one of Canada s largest gaming companies to Australian interests and prior to that, a series of acquisitions in the gaming industry; Acquisition of one of Western Canada s largest publishers and book distributors; Acquisition by Japanese interests of a Canadian company with a mining project in Chile; Sale of a Canadian mining company with assets in Nevada; Sale of a Canadian solar company to Scandinavian interests; and Sale of a Canadian agricultural company to US interests. Mr. Belsher is featured in numerous publications, such as: 2009 edition of Lexpert/The American Lawyer Guide to the Leading 500 Lawyers in Canada in the areas of corporate commercial law, mergers and acquisitions, income funds, corporate mid-market, and corporate finance and securities law (one of only three lawyers in Vancouver so recognized); 2009 edition of The Best Lawyers in Canada in the areas of corporate, securities, and mergers and acquisitions law; 2008 Canadian Legal Lexpert Directory, a guide to the leading law firms and practitioners in Canada, as a leading lawyer in the areas of corporate finance and securities, private equity, corporate mid-market, corporate commercial law, and mergers and acquisitions;

44 Lawyer Profile CAMERON BELSHER 2006 Lexpert Top 100 Industry Specialists in corporate finance; 2005 Lexpert/Thomson Guide to the leading 100 Canada U.S Cross-Border Corporate Lawyers in Canada; and 2002 Lexpert as one of Canada s "Top 40 Under 40". In , Mr. Belsher also led numerous global acquisition transactions for Ledcor Industries Inc., one of Canada s largest construction companies, and 360 Networks Inc. in connection with their build out of a global fiber optics network prior to restructuring and sale to Bell Canada. Mr. Belsher has lectured extensively on merger and acquisition matters and is a former adjunct professor at the Faculty of Law, University of British Columbia. *Law Corporation Page 2 Lawyer Profile

45 Timothy R. Lashua Director Background Tim is a director in KPMG s Transaction Services Accounting Advisory Group. He provides technical accounting and advisory assistance in a number of areas, including financial instruments, consolidation and derecognition assessment, other-than-temporary impairment assessment, business combinations, IFRS conversions and various other accounting and SEC related issues. Timothy R. Lashua Director KPMG LLP 55 Second Street, Suite 1400 San Francisco, CA Tel Fax Cell tlashua@kpmg.com Function and Specialization Tim is a member of the Accounting Advisory Services within Transaction Services. Professional and Industry Experience Prior to joining the Transaction Services practice, Tim was a Senior Manager for 2 years in KPMG Europe s financial services audit practice based in London, England. Tim also spent 6 years auditing in KPMG LLP s west coast financial services practice. Tim is a member of KPMG s Financial Instrument and Derivatives Resource Team. Tim has provided assistance with financial instruments, consolidation and equity method accounting, debt and equity structures, derivatives, business combination matters across multiple Financial Services institutions including Investment Banking and Global Trading Operations, Mortgage Banking, Private Equity and Asset Management as well as Community Banking. Tim has had extensive experience interpreting transactions in both IFRS as well as US GAAP. Representative Clients HSBC Holdings plc, Hewlett-Packard, Wells Fargo & Co., Visa, Inc, Westamerica Bancorporation, SVB Financial Group, Norwest Venture Partners, Mitsubishi UFJ Securities International plc, Dell, Inc., United Commercial Bank Holdings Education, Licenses & Certifications BS, Accounting Pennsylvania State University Member of AICPA; Certified Public Accountant in California affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International.

46 Robert (Rob) Marsh/Partner Professional, Technical, Risk and Quality/Vancouver EDUCATION B.A. (Honours), Philosophy and Political Science, University of British Columbia, 1986 Ph.D, Philosophy, University of California at Berkeley, 1995 Masters of Accounting, University of Waterloo, 1997 Chartered Accountant, 2000 RANGE OF EXPERIENCE Rob is a Partner in the Professional, Technical, Risk and Quality department of PricewaterhouseCoopers LLP, and a member of Global Accounting Consulting Services (ACS), PricewaterhouseCoopers network of International Financial Reporting Standards (IFRS) specialist technical partners and staff. He specializes in providing accounting consulting services on complex accounting standards, including especially financial instruments and hedging, variable interest entities, leasing, securitizations and other structured transactions under Canadian, U.S. and International generally accepted accounting principles. He has extensive experience in the financial services industry, having worked on audits and other assignments involving many financial institutions, including all Schedule I banks in Canada and several credit unions. Financial Instruments Was a member of CICA Financial Instruments Working Group Was a member of the Working Group developing Questions & Answers on Accounting Guideline 13, Hedging Relationships, during the Working Group s existence Has provided technical accounting consulting services to the audit teams and management of many companies, including several large financial institutions, on financial instruments and hedge accounting standards; experience has covered Canadian, US and International GAAP, and both audit and nonaudit clients Has developed and taught both internal and external courses on financial instruments and hedge accounting, covering Canadian, US and International GAAP Lecturer on Hedging at the CICA In-Depth GAAP Course Part III Co-authored PricewaterhouseCoopers monograph on AcG-13 Member of PwC Global Accounting Consulting Services Financial Instruments Topic Team Variable Interest Entities (AcG-15(r)/FIN 46(r)) Was a member of the task force established by the Emerging Issues Committee of the Canadian Accounting Standards Board to address some unexpected results from applying to mutual funds Accounting Guideline 15, Consolidation of variable interest entities, during the task force s existence Has developed and taught both internal and external courses on variable interest entities Has provided technical accounting consulting services to the audit teams and management of many companies, including several large financial institutions, on variable interest entities Asset Securitization Has developed and taught both internal and external courses on transfers of financial assets and securitizations under Canadian and US GAAP Has provided technical accounting consulting services to the audit teams and management of numerous companies on securitizaton transactions; experience has covered Canadian and US GAAP and IFRS

47 ATTORNEY BIO MICHAEL G. O BRYAN Michael G. O Bryan Partner 425 Market Street San Francisco California mobryan@mofo.com Michael O Bryan is a co-chair of the firm s Mergers & Acquisitions Group and a partner in the firm s Corporate Finance Group. His practice focuses on U.S. and international mergers, acquisitions, divestitures, and other strategic transactions, including the representation of companies and special committees in going private and other related party transactions, and he has advised companies, boards, special committees and investment banks in over 350 such transactions. In addition to advising on structuring and execution, Mr. O Bryan helps clients position the resulting company for success in its operations as part of a larger enterprise or on its own. Mr. O Bryan s recent transactions include the representation of: Mentor Corp., a supplier of medical products for the global aesthetic market, in its acquisition by Johnson & Johnson through a $1.07 billion cash tender offer. Ricoh Company, Ltd., in its acquisition of IKON Office Solutions, Inc., for approximately $1.62 billion in cash. Credence Systems Corporation, in its all-stock, merger of equals transaction with LTX Corporation. Infogrames Entertainment S.A., the 51% shareholder of Atari, Inc., in its acquisition of the remaining interests in Atari. Infogrames also provided interim financing to Atari as part of the transaction. Freescale Semiconductor, Inc., in its $110 million acquisition of SigmaTel, Inc., a semiconductor company. Restoration Hardware, in its $267 million acquisition by Catterton Partners, a private equity firm. Sumitomo Heavy Industries and TPG, in an unsolicited proposal to buy semiconductor equipment maker Axcelis Technologies Inc. for about$640 million. Successful in securing for our clients the ability to conduct diligence and negotiate with target board. MORRISON & FOERSTER LLP

48 MORRISON & FOERSTER LLP Michael G. O Bryan Saifun Semiconductors Ltd., in its $368 million acquisition by Spansion, Inc. Therma-Wave, in its acquisition by KLA in a cash tender offer. GCA and Greenhill, as joint financial advisors to Nikko Cordial s board of directors, in connection with Citigroup's $4.6 billion offer for the remaining publicly-held shares of Nikko Cordial (the largest ever foreign acquisition of a Japanese company, and the first time that shares of a foreign company were offered in a "kabushiki kokan" (statutory share exchange) transaction in Japan). Oracle Systems Corporation, in its acquisition of SPL WorldGroup Holdings, LLC, an enterprise software company which targets major utilities. The special committee of the board of directors of Crowley Maritime Corporation, in the $93.5 million tender offer acquisition by Crowley NewCo Corporation. Glenborough Realty Trust, in its $1.9 billion acquisition by Morgan Stanley Real Estate Fund. Mercury Interactive, in its $4.5 billion acquisition by Hewlett-Packard (the largest computer software transaction in 2006). Legacy Estate Group, in its $97 million sale to Kendall-Jackson through a bankruptcy auction. 724 Solutions, in its going private transaction pursuant to a Canadian plan of arrangement. Del Monte Foods, in its $580 million acquisition of the Milk-Bone brand and other assets from Kraft. Inamed, in its $3.4 billion business combination with Allergan, and its prior proposed merger with Medicis. American Pharmaceutical Partners, in its $4.1 billion acquisition of its majority shareholder, American BioSciences. Access, of Japan, in its $350 million acquisition of PalmSource. Johnson Electric Holdings Limited, a Hong Kong stock exchange listed company, in its $75 million acquisition of Parlex. MarketWatch, in its $520 million acquisition by Dow Jones. Atrix Laboratories, in its $850 million acquisition by QLT of Canada. Verio, in the $6 billion tender offer by NTT for the shares it did not already own and Verio s concurrent tender offer for over $1 billion of debt securities. Hitachi, Ltd., in its $2.0 billion acquisition of IBM s hard disk drive business, with more than 20,000 employees in eight countries. The special committee of Kenetech, in the company s $35 million management buyout. Objective Systems Integrators, in its $600 million cash tender offer acquisition by Agilent Technologies. McGrath RentCorp, in its proposed $480 million acquisition by Tyco. 2

49 MORRISON & FOERSTER LLP Michael G. O Bryan Campari of Italy, in its acquisition of a majority interest in and options to purchase the remainder of Skyy Spirits for $210 million. Ravenswood Winery, in its $160 million acquisition by Constellation Brands. Creative Technology Ltd., in its acquisition of assets from Aureal in bankruptcy. Mr. O Bryan joined Morrison & Foerster in 1988, and worked in the firm s Tokyo office from July 1990 through May 1994 before moving to the San Francisco office. Prior to joining the firm, he worked at a Japanese law firm for two years, concentrating on cross-border transactions, including financings and joint ventures. Mr. O Bryan is the author or co-author of various articles on M&A and related topics, including Revised M&A Accounting Rules Now in Effect, SEC Approves FINRA Rules Addressing Conflicts of Interest in Fairness Opinions, The Developing Role of Proxy Advisory Services, Tender Offers: An Answer to the Need for Speed, Lessons from Disney, and Acquiring or Selling a Controlled Company in the U.S.. He speaks regularly on domestic and cross-border M&A issues, such as Shareholder Activism and Hostile Takeovers: Tips for the New Environment, Japan Cross-Border M&A, M&A in China and Keeping Up with Good Faith; Minimizing the Risk of Personal Liability. He is a member of the American Bar Association s Committee on Negotiated Acquisitions and Task Force on Public Company Acquisitions. Mr. O Bryan serves on the board of directors of the Japan Society of Northern California and is a member of their executive committee. Mr. O Bryan received B.A. degrees in history and economics, with highest distinction and high honors, from the University of Michigan in He received his J.D. degree, cum laude, from Harvard Law School in 1988, where he was an editor of the Harvard International Law Journal. 3

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52 Committee on Mergers and Acquisitions Where the World s Leading Dealmakers Meet The Committee on Mergers & Acquisitions was founded in the late 1980s and has over 3,400 members, including practitioners from 47 states, five Canadian provinces and more than 39 different countries on five continents. The committee is home to the world's leading merger and acquisition (M&A) attorneys and many other deal professionals such as investment bankers, accountants, and consultants. In addition, in-house counsel make up over ten percent of committee membership. We welcome your interest and invite you to join the committee. Annual Market Trends Studies Get the latest in market metrics in negotiated acquisitions with the committee's benchmark studies covering not only U.S. but also Canadian and (coming soon) EU deals. The studies, produced by the committee's M&A Market Trends Subcommittee, have become essential resources for deal lawyers, investment bankers, corporate dealmakers, PE investors, and others interested in "what's market" for critical legal deal points in M&A. In addition to the "flagship" Private Target Study, the committee produces a Strategic Buyer/Public Target Study and a Private Equity Buyer/Public Target Deal Points Study. The studies, as well as updates (and Update Alerts), are available free of charge to committee members only. Knowledge and Networking The committee meets regularly three times a year at the ABA Annual Meeting, Section Spring Meeting, and a Fall Committee Meeting. All committee materials and resources used in CLE programs on M&A-related topics presented by the committee both at ABA meetings and in other forums are accessible to all members via the Section s Program Library. These programs bring together panels of experienced M&A practitioners from law firms and corporate law departments, as well as those in academia and others outside the legal profession who have particular expertise in respect of the subject matter. Savings Discounts on Committee and Section Publications and Products, visit E-Product - International Mergers and Acquisitions Due Diligence Individual downloadable chapters from this product are also available for purchase. Discounted Registration to Committee and Section Meetings Global Business Law Forum will take place in Hong Kong on June 10-12, The committee will meet next at the ABA Annual Meeting taking place in Chicago on July 31- August 3, <<< Join the committee! >>> Committee membership is free for Section of Business Law members. For immediate enrollment in the committee or Section, log in at