The Politics and Economies of Accounting for Goodwill at Cisco Systems Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

The Politics and Economies of Accounting for Goodwill at Cisco Systems Case Solution

This factor resolves the concerns of POWELL as this would be helpful to the IT COMPANIES such as CISCO who would be able to base its Goodwill according to its reporting units or intangible assets. The areas will be identified and if the impairment has not occurred then this will not create an impact on the Income statement of the organization.

Price Offering By Cisco Company

Price offered more than book value

Cisco Company has contemplated to acquire another company at price more than book value and pre- market value due to taking the full hold and control of the company. The company has been offering price more than the book value of Arrowpoint Company to ward off the competition and to close the deal.

The company might pay acquisition premium because of the future prediction that acquisition would most likely create synergy, and the created synergy would be greater as compared to the total acquiring cost (Eccles, 2017)

The company might also offer higher price by keeping in mind following listed factors;

Competition within the industry
Presence of other bidders
Motivation of the seller and buyer

Price offered more than pre-market value

The stock of the company being targeted by Cisco Company rose when the company announced that it would acquire ArrowPoint Company sooner. The target stock price rose due to the premium that the Cisco Company was ready to pay for the acquisition.

The purpose for the acquisition premium is that the shareholders of the target company whose approval regarding the takeover is essential would unlikely make approval of the acquisition until and unless the price of the stock is beyond the prevailing market price.

If the bid of the takeover tends to be equated to the lower price of the stock as compared to the current price of the target company, the target company’s current owners would get less incentive in selling their shares to the acquiring company (Why Companies Overpay For Acquisitions, 2016)

Allocation of Purchase Price

Deal Value	5700	Million

Arrow point Communications Balance Sheet
as at April 30, 2000			Allocation

Total Current Assets	199		199
Investments	0		0
PP&E	6		6
Goodwill	0		5450
Other Assets	1		1
Total Assets	206		5656

Total Current Liabilities	9		9
Other Liabilities	35		35

The assumptions for this allocation is that the value being provided by the 337 employee database, the use of ISP systems, and the CEO of the Arrow point are items which are intangible in nature, and thus all the valuation provided should be held at intangibles or Non Fixed Assets section in the balance sheet after accounting for the Current Assets, liabilities, and any other long term payables of the organization.

Journal Entries

The journal entries to record the acquisition of the Arrowpoint in the book of the Cisco Company are summarized below;


General Entries to record the acquisition of Arrow.

Cisco Option			2.1218

Value			74.263	Million Shares
Market Value at 4 May,2000			63.625

Total Value paid			4724.983
Cash			975.0166
Total Deal			5700

Assumption: We Assume that the total deal for the organization is at 5.7 Billion according to sources: We allocate $ 4724.983 million for shares, and cash 975.02 Million




General Entry for CISCO:	Debit	Credit


Investments at Arrow	4941.16
Goodwill	758.84
Share Capital ($0.001 Par Value)		0.1
Share Premium		4,724.9
Cash		975.0166

Cisco System Balance Sheet

CISCO GROUP
Balance Sheet
as at 6th May, 2000
					$-Million

Cash and Cash Equivalents					4840
Accounts Receivables, net					1930
Inventory					882
Other Current Assets					1627

Total Current Assets					9279

Investments, net					16530.16
PP&E, Net					1159
Good will and other Intangibles, net					3972.84
Other Assets					1050

Total Assets					31991

Accounts Payable, net					600
Other Current Liabilities					4508

Total Current Liabilities					5108

Other Liabilities					995

Common Stock					11838.1
Share Premium					4724.9
Retained Earnings					7624
Other Comprehensive Income					1701

Total Stockholder's Equity					25888

Total Liabilities and Stock. Equity					31991

Effect of Acquisition on the Income Statement of Cisco Company

Under the purchase method of acquiring another company, the difference between the purchase price and fair value of the acquired company will result in negative goodwill.

Under acquisition method, the negative goodwill is most likely considered as a gain with the acquisition on the income statement. The further effect of the acquisition on the income statement of the Cisco Company can be viewed through;

After acquiring ArrowPoint Company, the items listed on the income statement of Cisco Company will be highly affected;

The net sales of the Cisco Company after acquisition will be increased to $30 million.
The cost of sales of Cisco Company will be increased to $12 million over the entire period of the fiscal year.

The combined selling, general and administrative expenses of Cisco company will be increased to $27 million.
The research and development cost listed on the income statement will be increased to $6 million.
The other expenses will be increased to $9 million for the period of the first fiscal year.

To sum up, the overall effect of the acquisition on the income statement can be summarized as the overall expenses will be increased to $54 million. As it can be seen that the company went into the unprofitable zone in the initial quarter, the net loss of the company will be $24 million............

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The Politics and Economies of Accounting for Goodwill at Cisco Systems Harvard Case Solution & Analysis