Chap002_class - How companies may manipulate earnings...

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How companies may manipulate arnings through recording acquisitions earnings through recording acquisitions Case: aaiPharma Inc. Visit this link for more details: http://www.sec.gov/Archives/edgar/data/1013243/000095014404006287/g87794e10vk.htm 1
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aaiPharma Inc. 10K report for fiscal year 2003, page 1 Explanatory Note We are restating our financial statements for the year ended December 31, 2002 and for the first, second and third quarters of 2002 and 2003. … This restatement: …… • with respect to 2002 and 2003, changes the accounting for our major product line acquisitions which had been accounted for as business combinations to treat such acquisitions as acquisitions of assets that do not constitute a business. 2
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In simpler words, the company purchased some product lines in 2002. But instead of recording them as purchase of assets, it recorded them as business combination (specifically, our Scenario 2 – acquiring assets/liabilities). But how would this make any difference? 3
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aaiPharma Inc. 10K report for fiscal year 2003, pages 35-26 Restatement of Previously Issued Financial Statements …… Accordingly, no portion of the purchase price for these acquisitions is allocated to goodwill, and the amount previously allocated to goodwill is instead allocated to the ther identifiable acquired assets including assets with other identifiable acquired assets, including assets with definite lives. As a result, our direct costs in 2002 are greater than the amount previously reported by $6.8 million due to the increase in amortization expense resulting from a greater pg g amount of purchase price being allocated to assets with definite lives, and our directs costs in 2003 are greater than the amount we reported in our February 5, 2004 press release for 2003 by $9.1 million . …… 4
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That is, by recording the asset purchase as business combination, the net income was inflated by $6.8 million in 2002, and $9.1 million in 2003.
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This note was uploaded on 10/14/2009 for the course MGMT 503 taught by Professor Staff during the Spring '08 term at Purdue University-West Lafayette.

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Chap002_class - How companies may manipulate earnings...

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