Need help on post acquisition purchase adjustment accounting

[muscleman]

I am doing a case study on CBI's Shaw acquisition. They kept saying there were no problems and kept reporting good earnings. At the same time, there was a short report that I could not fully determine whether it was right or wrong at that time.

http://www.presciencepoint.com/reports/cbi_report_6-17-2014.pdf

 

Now that CBI announced sale of its nuclear business with a huge "One-time" charge off, CFO departing and the CEO telling the analysts "I felt great, no regret" about Shaw acquisition, it does seem that they were reporting fake earnings in the past two years, there is quite a possibility that this short report is correct, though maybe by luck in the hindsight.

 

Putting aside whether CBI was playing the numbers game, could you please help me with some questions regarding to post acquisition purchase adjustment accounting? Or if you could recommend a book, I will read it. I'd like to avoid similar land mines in the future.

 

1. After acquisition, is there a given period in which you can adjust purchase price? I remember reading a recent Buffet letter about this but can't quite remember. I will double check. I thought it was 12 months after purchase? If CBI adjusts this number beyond 12 months, is that a violation of GAAP?

2. I googled post-acquisition purchase adjustment but I could only find adjustments related to net working capital changes between deal time and deal closing time, or "Earnout". CBI's PPA seems to be neither of the two. It wrote up the goodwill due to the increase in "Contracts in Progress". The explanation is the following:

Included in contracts in progress is a margin fair value adjustment of approximately $745,500 associated with acquired long-term contracts that were less than fair value at the Acquisition Closing Date. This margin fair value adjustment will be included in revenue on a POC basis as the applicable projects progress over approximately five to six years.

 

Could anyone please help me with margin fair value adjustment? What is this?

3. It seems like an increase in Goodwill due to increased PPA will create some kind of reserve, which Precision Point claims to be 1.56 bn. Creation of this reserve does not impact earnings statement, and does not need to be carried on the balance sheet either? Why does GAAP allow the reserve not to show up on the balance sheet?

 

Thank you very much in advance! :)

 

 

[muscleman]

I can't find the Buffet annual letter that mentioned PPA reserve. Does anyone know which year that was?

[Kiltacular]

muscleman,

 

With regard to Buffett, what you're looking for might be at the end (appendix) to this letter (?):

 

Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy

 

http://www.berkshirehathaway.com/letters/1986.html

 

Not sure, though, because it is from so long ago...rules might differ today.