purchase vs pooling - operating cash flow

i seen in a couple places now that operating cash flow is not affected by the purchase vs pooling method. i think there was even a thread on this earlier that i don’t think was resolved. my issue is that with the purchase method, assets are written up to FMV, so depreciation expense is higher resulting in lower net income and lower ROA. however, since depreciation is higher, taxable income should be less, resulting in less taxes and more CFO, right? am i missing something?

I agree with you. Well noted. I will keep that in mind.

what do you think we should use for the exam

If depreciation is higher -> more taxes, lower NI But, to calculate CFO, you add back the full amount of Dep, so it evens out?

I does not even out. Because taxes are calculated after subtracting depreciation. The whole point is that our taxes payable will be reduced because of low depreciation. Therefore CFO will be low.

Dang, did Schweser even hit on this? I don’t remember the mentioning cash flow at all in that section. Actually, I’m not sure impact on CFO is included in any of the LOS? They seemed to care more about how the balance sheet and financial ratios were impacted, but that’s about it. But good point, I never thought about it.

one more thing to note … If Price paid is > Fair market value… which would notmally be the case. Then a Goodwill A/c is created (or added the exising) = OpBal + Acq Price Paid - FMV of acquisition Now due to this, a goodwill amortization willhappen and in Purchase method that will very well be on the income statement, reducing Netincome further down. In pooling, A+ B = AB, dont hv to worry… So ROA and ROE in Purchase method goes down.

v.raghavan Wrote: ------------------------------------------------------- > Now due to this, a goodwill amortization > willhappen and in Purchase method that will very > well be on the income statement, reducing > Netincome further down. Are you talking about for US GAAP? If so, you cannot amortize goodwill EVER. Only for tax reporting. Never for US GAAP.

True if nothing is told then this is considered IFRS and not USGAAP. Even if its going to be US-GAAP, its tested for impairement and the loss is reported on IS. So we can’t escape that evil on IS. Specifically I refered to schweser, and they mention Amort of goodwill… (not mentioning IAS or GAAP, so I will pretend it to be amortized on exam unless they say its gaap, and so I will hv to Test it for impairement) Good point wangta! It solidified my understanding.

r.agg Wrote: ------------------------------------------------------- > I does not even out. Because taxes are calculated > after subtracting depreciation. The whole point is > that our taxes payable will be reduced because of > low depreciation. Therefore CFO will be low. Ah I see. But didn’t the OP suggest higher taxes payable?

v.raghavan Wrote: ------------------------------------------------------- > True if nothing is told then this is considered > IFRS and not USGAAP. > > Even if its going to be US-GAAP, its tested for > impairement and the loss is reported on IS. So we > can’t escape that evil on IS. > > Specifically I refered to schweser, and they > mention Amort of goodwill… (not mentioning IAS > or GAAP, so I will pretend it to be amortized on > exam unless they say its gaap, and so I will hv to > Test it for impairement) > > Good point wangta! It solidified my understanding. yeah, honestly - I’m confused on the whole US-GAAP vs IFRS. I know the letter went out - but I atleast hope they will STATE which method they are going by for EVERY question? Are we really supposed to just assume international (like for Pension accounting? That is a huge difference)? Do we just assume JVs use proportionate consolidation? How about treatment of in process R&D for goodwill? What the F!

Purchase method: CFO and CFF affected (in case of deal financing) Pooling method: CFO, CFF, CFI added together Am I on the right track?