Cisco Systems

Hello,I need someone write report 2 pages about Cisco Systems. the report should include your opinion about the case and I have attached example report. Pleases! Write your opinion and what’s going on. You have to write your opinion and support your opinion and write new information from other resources.When you see the example report, you will see yellow light that’s the reporter’s opinion. So, you should write your opinion like this.Good luck
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Anonymous
ACCT 542-01
Assignment 2 – Mike Mayo Takes on Citigroup
The article “Mike Mayo Takes on Citigroup” was an interesting reading on
deferred tax assets (DTAs) and their significance in the corporate banking sector. The
article, including the exhibits, did a really good job in explaining what DTAs are and how
they related to Citigroup following the housing crises. One criticism of the article I have
is that it read more like a timeline of the events surrounding Mike Mayo and his criticism
of Citigroup’s treatment of their DTAs instead of providing more critical analysis of the
situation.
The article was written/revised in the middle of 2012. However, it does not
mention any relevant facts after the October 2010 meeting between Citigroup and Mike
Mayo. One important fact that one should consider was the actual earnings of Citigroup
following the meeting and prior to the article being published. A significant point of
contention between Citigroup and Mike Mayo was Citigroup’s future earning potential as
estimated in 2009 and 2010. The actual earning quarterly/yearly earning out prior to the
writing of the article would have allowed a more critical analysis of the claims put out by
both Mike Mayo and Citigroup in 2009 and 2010.
With regards to the two opposing views presented in the article, I support
Citigroup’s position stronger. Mike Mayo’s statement that having 3 years of cumulative
losses should warrant a serious look at writing down the DTA account is valid in normal
times but the period between 2008 and 2009 was an extremely unique time in the
financial sector. The financial crisis was an extraordinary event which had great
consequences for the whole economy and not just Citigroup. By taking the 3 year
cumulative losses which occurred due to the financial crisis and trying to extrapolate
earning twenty years from than does not sound like a very solid argument for writing
down the DTA account. The circumstances surrounding the financial crisis and
Citigroup taking the related losses should not repeat themselves in the 20 years
following the booking of those Net Operating Losses. In my opinion, the determination
to write down Citigroup’s DTA account should have been delayed a few years after the
financial crisis when more “normal” years can be analyzed to determine future earning
potential.
Since it is 2017 now and more “normal” years have passed a better look can be
conducted to see whether a DTA write-down is appropriate. I pulled up and reviewed
Citigroup’s 10-K for year ending 12/31/2015. The DTA for 2015 is broken down on the
following page. Citigroup showed $47.8 billion in net DTAs in 2015 which is an increase
from the $44.5 billion shown on the 2008 10-K filing. This shows us that Citigroup was
not successfully in generating enough income in the six years following the financial
crisis to use up any of the DTA but instead even grew it a little. As the 20 year limit to
use up the NOLs created during the financial crisis get closer, Citigroup would find it
harder to fully use up those NOLs.
As the chart shows, Citigroup has
not taken any valuation allowance as of
2015. They wrote in the 2015 10-K the
following “While Citi’s net total DTAs
decreased year-over-year, the time
remaining for utilization has shortened,
given the passage of time, particularly
with respect to the foreign tax credit
(FTC) component of the DTAs.
Although realization is not assured, Citi
believes that the realization of the
recognized net DTAs of $47.8 billion at
December 31, 2015 is more-likelythan-not based upon expectations
as to future taxable income in the
jurisdictions in which the DTAs arise
and available tax planning strategies
(as defined in ASC 740, Income Taxes)
that would be implemented, if
necessary, to prevent a carry-forward
from expiring.” These reasons are
almost the exact same reasons given
by Citigroup in 2010 for not taking the
DTA write-down. An analysis of
Citigroup’s recent net income shows
improvement from the years looked at
by Mike Mayo in the article, however, if
the improvement is large enough
remains to be seen.
In concluding, I feel that Mike Mayo’s argument was weaker regardless if it turns out
that he might have been right. However, I felt Citigroup’s response of freezing Mike
Mayo out was just a horrible PR move regardless if I felt they had a stronger argument.
They must have known that freezing Mr. Mayo out would make the financial news and
the optics of freezing him out made it look like they were not confrontable talking about
the issues brought up by Mr. Mayo. Thus it just strengthen the feeling of uncertainty
surrounding this whole issue.
9-109-002
JULY1,2008
KARTHIKRAMANNA
The Politics and Economics of Accounting for
Goodwill at Cisco Systems (A)
On March 2, 2000, Dennis Powell, vice president and corporate controller for Cisco Systems, appeared
before the Senate Committee on Banking, Housing, and Urban Affairs. Powell was testifying on a recent
proposal by the Financial Accounting Standards Board (FASB) to abolish the pooling-of-interests method of
accounting for mergers. Powell expressed his opposition to the FASB proposal, arguing that the accounting
method firms would be required to use in lieu of pooling (i.e., the purchase method) would “stifle technology
1
development, impede capital formation and slow job creation . . . .” The Senate heard from eight other expert
witnesses that day; all but one—Ed Jenkins, chairman of the FASB—argued against the proposal to abolish
pooling.
2
Six months later, by September 2000, Powell had abandoned his support for the pooling method. In leading
a group of industry representatives at a meeting with members of the FASB, Powell argued for a regime that
permitted only the purchase method, provided goodwill recognized under that method be solely subject to
impairment testing (rather than amortization as the FASB had proposed).
3
Accounting for Mergers: Purchase and Pooling Methods
Until 2001, U.S. generally accepted accounting principles (GAAP) had two methods to account for mergers:
the purchase method and the pooling-of-interests method. Under the purchase method, acquired tangible assets,
certain acquired intangible assets (e.g., contracts, patents, franchises, customer and supplier lists, and favorable
leases), and all acquired liabilities were revalued to their
1
Prepared statement of Dennis Powell before the Senate Committee on Banking, Housing, and Urban Affairs (Washington: U.S.
Government Printing Office, 2000).
2
Karthik Ramanna, The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting,
Journal of Accounting and Economics (forthcoming).
3
Dennis Powell, Business Combination Purchase Accounting: Goodwill Impairment Test, appendix to the minutes of the September 29,
2000 FASB Board meeting (Norwalk, CT: FASB, 2000).
________________________________________________________________________________________________________________
Professor Karthik Ramanna prepared the original version of this case, “The Politics and Economics of Accounting for Goodwill at Cisco Systems,” HBS No.
108-021. This version was prepared by the same author. This case was developed from published sources. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard
Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise
reproduced, posted, or transmitted, without the permission of Harvard Business School.
109-002
The Politics and Economics of Accounting for Goodwill at Cisco Systems (A)
current fair values before being added to the acquiring firm’s books. Any excess of the total price paid for the
acquisition over the sum of the revalued net assets was added to acquirer’s books as goodwill. In the years
following the acquisition, goodwill was amortized in the acquirer’s income statement. Further, under the
purchase method, the acquiring firm only recognized the acquired firm’s income from the date of the
acquisition.
Under the pooling method, the surviving firm in an acquisition simply added the book value of all acquired
assets and liabilities to its own assets and liabilities. There were no asset and liability revaluations and no
goodwill was recorded. Accordingly, there was no goodwill expense associated with pooling transactions.
Further, under the pooling method, the acquiring firm recognized the acquired firm’s income for the entire fiscal
year in which the acquisition occurred. Thus, the balance sheets and income statements of firms doing pooling
method acquisitions looked very different from those of firms doing purchase method acquisitions.
Firms were required to use the purchase method unless they met certain criteria to qualify for pooling
accounting. The most important of these criteria were (1) that each of the companies in an acquisition was
independent of the other and (2) that the acquiring firm issued only common stock (with rights identical to its
own outstanding common stock) in consideration for the acquired firm.
4
Cisco and the Making of Mergers Accounting
In September 1999, the FASB proposed abolishing the pooling method of accounting for mergers; all firms
5
were asked to use purchase method accounting with amortization required for any goodwill. The vast
differences between pooling and purchase method accounting, the FASB argued, had led to situations whereby
“two transactions that [were] not significantly different [could] be accounted for by methods that produce[d]
6
dramatically different financial statement results.” The FASB solicited public comments on its proposal; about
7
60% of corporate respondents opposed the idea. Cisco was among these opponents, and Powell took a lead
role in expressing Cisco’s concerns.
At Cisco, Powell oversaw global financial reporting, international tax strategies and implementation,
8
corporate procurement, and internal auditing. In a December 1999 letter to the FASB, Powell wrote expressing
“serious concerns” with the proposed elimination of pooling accounting in favor of the purchase method with
goodwill amortization. “While we understand that pooling accounting has its critics,” he wrote, “we believe on
balance, for equity funded transactions, it is less problematic than the purchase accounting model in
representing the economic reality of operating results of the combined entity.”
4
5
6
7
8
9
2
9
Accounting Principles Board Opinion No. 16: Business Combinations, (New York: AICPA, 1970).
Exposure Draft 201-A: Business Combinations and Intangible Assets, (Norwalk, CT: FASB, 1999).
Ibid., p. 34.
See footnote 2.
Dennis Powell’s biography, www.cisco.com, accessed July 19, 2007.
Dennis Powell, Letter of Comment No.: 25A, FASB file reference: 1033-201 (Norwalk, CT: FASB, 1999), p. 2.
The Politics and Economics of Accounting for Goodwill at Cisco Systems (A)
109-002
10
Powell’s opposition to the purchase method was based on the idea that goodwill was not an asset.
“[G]oodwill is simply the amount of purchase price that is left over after allocating value to identifiable assets .
. .,” he noted. “It has no value on its own; it can’t be borrowed against, sold separately or generate any cash
11
flow.”
Powell also expressed doubts about the purchase method in general and about goodwill amortization in
particular:
The purchase method of accounting was designed for accounting for tangible assets that have reliable
measurable fair values. However, in the acquisitions of New Economy technology companies, an
overwhelming portion of the purchase price is attributable to intangibles. It is this situation that makes
the purchase method inadequate. Identifying intangibles is difficult, but determining the fair value of
identified intangible assets with some level of consistency or reliability is impossible. . . .
12
While Cisco continues to grow our business by combining with similar companies with the same
long term strategic goals, our operating results would decrease because of the amortization of goodwill.
This decrease in operating results would continue even if the acquisitions we complete were successful
resulting in an increase to our market capitalization
. . . . Our operating results would not be comparable to companies who develop technology internally.
13
Powell concluded his letter to the FASB with a passionate defense of pooling accounting: “We believe the
retention of pooling of interests accounting is particularly critical considering the adverse impact its elimination
will have on the merger activity in the United States, which in turn will negatively impact the ecosystem that is
driving technology development in this country today.”
14
Concerns from corporations like Cisco over the FASB proposal to abolish pooling quickly reached
Congress. In March and May of 2000, the Senate Banking Committee and the House Finance Subcommittee,
respectively, held hearings on the issue. Several of the corporate respondents who had already expressed their
15
opposition to the FASB testified at these hearings. Cisco was among them: Powell appeared before both the
Senate and House on Cisco’s behalf, reiterating his arguments above. In comments to the House, he added that
extant accounting rules for mergers accounting had “for the past 50 years, generated and supported the strongest
capital markets in the world.”
16
10
FASB Concept Statement No. 6 defines “assets” as “probable future economic benefits obtained or controlled by a particular entity as a
result of past transactions or events.”
11
See footnote 9, p. 2.
12
Ibid., p. 3. Note that when Powell was speaking of “identified intangibles,” he was referring to their definition at the time, that is,
“intangible assets that can be identified and named.” APB Opinion 16, paragraph 88e, p. 319. The current definition of “identified
intangibles” includes any asset that arises from legal rights (regardless of whether those rights are transferable or separable) or any asset that
is capable of being separated or divided for sale, rent, and so on (regardless of whether there is intent to do so). SFAS 141, paragraph 39, p.
17.
13
14
15
Ibid., pp. 4–5.
Ibid., p. 5.
See footnote 2.
16
Prepared statement of Dennis Powell before the House Subcommittee on Finance and Hazardous Materials (Washington: U.S.
Government Printing Office, 2000).
3
109-002
The Politics and Economics of Accounting for Goodwill at Cisco Systems (A)
Sometime after the hearings in Congress, two separate groups of opponents to the FASB proposal met with
17
members of the FASB Board. Powell led the second group. This meeting, held in September of 2000,
included experts from the American Business Conference, Merrill Lynch, the Technology Network, and United
Parcel Service, besides Powell on Cisco’s behalf. Both Powell’s group and the group before it did not discuss
retaining pooling accounting at their respective meetings. Instead, they proposed an alternative to goodwill
amortization under a regime that permitted only the purchase method. In the years after an acquisition, they
argued for goodwill to be periodically tested for impairment. The impairment test, they proposed, would be
based on a comparison of goodwill’s recorded book value and an estimate of the current fair value of
goodwill.
18
The FASB, after some field testing and an additional round of comment solicitation, accepted the goodwill
impairment alternative. In June 2001, the FASB formally promulgated new accounting standards that abolished
pooling accounting, requiring all firms to use the purchase method, with impairment testing for any acquired
goodwill.
19
According to the 2001 standards, an acquiring firm must—upon completing the acquisition— allocate any
acquired goodwill among its reporting units (a reporting unit is a segment within the acquiring firm with
discrete financial information that is regularly reviewed by management). If the acquired goodwill represents
synergies from a merger, managers are required to disaggregate and allocate those synergies to reporting units
based on estimates of how they are expected to be realized. In the years after an acquisition, goodwill must be
tested for impairment within the reporting unit to which it was allocated. The goodwill impairment test in a
reporting unit is a two-step procedure. In the first step, managers must estimate the current fair value of the
reporting unit (as a whole) and compare it to the unit’s total book value. If the unit’s fair value is greater than
the unit’s book value, step two is ignored and no goodwill impairment is recognized. If the unit’s fair value is
less than its book value, step two is conducted as follows. Managers calculate the current fair value of the unit’s
goodwill as the difference between the estimate of the unit’s total fair value (as calculated in step one) and an
estimate of the current fair value of the unit’s net assets (excluding goodwill). The current fair value of goodwill
is then compared to the goodwill’s book value. The excess (if any) of the goodwill’s book value over its current
fair value is the unit’s goodwill impairment.
Managers are not required to disclose the assumptions that underlie their estimates of goodwill’s fair value
(both at the initial stage of allocating goodwill to reporting units and at the subsequent stage of testing for
goodwill impairment within units). The goodwill impairment of reporting units (if any) are aggregated and
reported at the firm level.
17
See footnote 2.
18
Trevor Harris, Accounting for Business Combination: A Workable Solution, appendix to the minutes of the May 31, 2000 FASB Board
meeting (Norwalk, CT: FASB, 2000); see also footnote 3.
19
See Statement of Financial Accounting Standards No. 141, Business Combinations (Norwalk, CT: FASB, 2001) and Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Norwalk, CT: FASB, 2001). The FASB, in collaboration
with the International Accounting Standards Board, is in the process of revising the current rules of purchase method accounting in order to
harmonize them with international accounting practices. Under the new rules, expected to be released in the third quarter of 2007, the
purchase method will be known as the “acquisition method.” See FASB Project Updates: Business Combinations, www.fasb.org, accessed
August 20, 2007.
4
The Politics and Economics of Accounting for Goodwill at Cisco Systems (A)
109-002
Cisco Systems in the 1990s
Cisco Systems was founded in 1984 by two computer scientists from Stanford University. The company
developed technologies that enabled computer networks to communicate with one another. Cisco went public in
February 1990 with a market capitalization of about $224 million. By the close of the 1990 fiscal year, Cisco
had 251 employees and $69 million in revenues. The 1990s were a period of extraordinary growth for Cisco
(see Exhibit 2). As it was a key supplier of computer networking technologies, the company’s fortunes grew
with the rise of the Internet. By 1999, Cisco employed nearly 21,000 people, had sales of about $12.2 billion,
and had a market capitalization of over $235 billion. On March 27, 2000, Cisco briefly became the world’s
most valuable company, with a market capitalization of $569 billion.
20
Cisco’s growth was fuelled in large part by an acquisitions strategy. This strategy was laid out in a 1993
21
plan put forth by then …
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