Any venture involving the proposed acquisition of a target company and subsequently integrating this target into a larger parent organization will inevitably entail some risk due to the many potential challenges and uncertainties inherent in the merger process and eventual outcome. For this due diligence deliverable, your group will first perform a risk analysis by evaluating the risk factors facing the parent (acquiring) company if it moves forward with the proposed acquisition of the target. The key is to identify and analyze the major risk exposures and then, for the risk management portion, recommend any specific tools, technologies, processes, procedures, policies, or decisions that might be implemented to mitigate or in some way manage the identified risks.
At this point in your accounting education you should have a solid appreciation of the many options available to a company when applying the rules of U.S. GAAP. These include, but are not limited to, alternatives for inventory flow assumptions (LIFO, FIFO, weighted average), different depreciation methods, and latitude in establishing estimates of reserves and allowances (i.e., bad debt, asset impairment, restrictions on retained earnings). Many of these accounting choices may drastically affect the net income reported by a company. Accounting methods and estimates can consequently impact the quality of earnings published in an organization’s financial statements, giving rise to accounting risk that is significant in companies applying aggressive accounting policies to maximize reported net income.
These accounting risk issues should be considered in evaluating a company for investment and may be relevant to the overall risk analysis implemented in your due diligence investigation for the proposed acquisition in this project. As a part of your research and analysis for this deliverable, be sure to review the notes accompanying the financial statements for the target company.
In reviewing these explanatory footnotes, pay close attention to the significant accounting policies implemented for calculating and presenting items such as depreciation and inventory valuation, determination of value for intangible assets, subsequent event disclosures, contingencies, employee benefits, and anything relating to debt that might pose a threat to ongoing cash flows or dividends. You should highlight and address any noteworthy accounting items of concern as a part of your due diligence documentation.
This is a Team effort. My portion is Analysis and prioritization of risks of Dunkin Donuts.
