EITF ABSTRACTS. A holding company (NEWCO) with no substantive operations acquires an operating company

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1 EITF ABSTRACTS Issue No Title: Basis in Leveraged Buyout Transactions [Nullified by FAS 141(R)] Dates Discussed: June 2, 1988; July 14, 1988; August 25-26, 1988; October 6, 1988; January 12-13, 1989; February 23, 1989; May 18, 1989; June 29, 1989 References: FASB Statement No. 57, Related Party Disclosures FASB Statement No. 141, Business Combinations FASB Statement No. 141 (revised 2007), Business Combinations FASB Statement No. 142, Goodwill and Other Intangible Assets FASB Technical Bulletin No. 85-5, Issues Relating to Accounting for Business Combinations AICPA Accounting Research Bulletin No. 51, Consolidated Financial Statements APB Opinion No. 16, Business Combinations AICPA Accounting Interpretation 26, Acquisition of Minority Interest, of APB Opinion No. 16 AICPA Accounting Interpretation 39, Transfers and Exchanges between Companies under Common Control, of APB Opinion No. 16 AICPA Issues Paper, "Push Down" Accounting, dated October 30, 1979 SEC Staff Accounting Bulletin No. 30, Accounting for Divestiture of a Subsidiary or Other Business Operation SEC Staff Accounting Bulletin No. 48, Transfers of Assets by Promoters or Shareholders SEC Staff Accounting Bulletin No. 54, Application of "Push Down" Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase ISSUE A holding company (NEWCO) with no substantive operations acquires an operating company (OLDCO) in a leveraged buyout (LBO) transaction. The issue is what basis should be used by NEWCO to value its interest in OLDCO; that is, whether the acquisition of shares of OLDCO establishes a new basis of accounting or whether predecessor basis, OLDCO book value, or some combination should be used. 1 1 Issues concerning recognizing a new basis in the financial statements of OLDCO or recording an owner's basis in the financial statements of OLDCO are outside the scope of this Issue. File Page 1 PV'd through Update 44 (9/08 mtg) abs88-16.doc

2 The underlying substance of the transaction must be evaluated to determine whether it constitutes: 1. A financial restructuring-recapitalization for which no change in accounting basis would be appropriate 2. A step acquisition for which a partial change in accounting basis would be appropriate 3. A purchase by new controlling investors for which a partial or complete change in basis based on the fair value of the transaction would be appropriate. Scope To distinguish an LBO transaction within the scope of this Issue from other business combinations, the LBO should be effected in a single highly leveraged transaction or a series of related and anticipated highly leveraged transactions that result in the acquisition by NEWCO of all previously outstanding common stock of OLDCO; that is, there can be no remaining minority interest. 2 This Issue excludes LBO transactions in which existing majority stockholders utilize a holding company to acquire all of the shares of OLDCO not previously owned. Step acquisition accounting continues to be appropriate in such transactions. Definitions For purposes of this Issue, certain terms are defined as follows: Continuing shareholder A NEWCO shareholder that owned a residual interest in OLDCO. Dilutive securities Options, warrants, convertible securities, or any other financial instrument through which a person or entity may increase its voting or residual interest. 2 The concepts of Opinion 16 and consolidation require that 100 percent of the outstanding common stock of a target entity be acquired to potentially justify a 100 percent change in accounting basis. File Page 2 PV'd through Update 44 (9/08 mtg) abs88-16.doc

3 Management Management comprises OLDCO employees or management that hold management positions and a residual interest in NEWCO. Regulation S-K, Item 401 should be considered when determining which individuals are included in management. Monetary consideration Cash, debt, and debt-type instruments such as mandatorily redeemable preferred stock. Predecessor basis A shareholder's basis in an interest in a business enterprise, that is, original cost of the investment in the business enterprise plus that shareholder's proportionate share of earnings or losses less dividends and any other distributions received by that shareholder from the business enterprise since the date of acquisition. A difference between a shareholder's cost of an investment and the amount of underlying equity in net assets of the business enterprise should be accounted for as if the business enterprise were a consolidated subsidiary for purposes of determining predecessor basis. The shareholder's proportionate equity in the book value of the business enterprise may be an acceptable substitute measure of predecessor basis, but only in circumstances for which it is impracticable to recompute predecessor basis. Predecessor basis in a stock option is the amount of cash or other tangible assets paid by the holder to obtain the option. Residual interest An investor's proportionate share (expressed as a percentage and after conversion or exercise of dilutive securities) of the net assets of a business enterprise after satisfaction of equity securities with redemption or liquidation features (see Exhibit 88-16A). Shareholder A residual interest holder. File Page 3 PV'd through Update 44 (9/08 mtg) abs88-16.doc

4 Unilateral control Ownership of more than 50 percent of the voting interest of a business enterprise unless the voting rights are legally or externally restricted in such a way that the ability to exercise the normal rights and privileges associated with voting control is absent. EITF DISCUSSION The Task Force reached the following consensus, which supersedes the consensus reached on Issue No , "Carryover of Predecessor Cost in Leveraged Buyout Transactions." See the SEC Observer's comments on page 10. File Page 4 PV'd through Update 44 (9/08 mtg) abs88-16.doc

5 Section 1. A partial or complete change in accounting basis is appropriate only when there has been a change in control of voting interest; that is, a new controlling shareholder or group of shareholders must be established. 3 Consensus Guidance. For purposes of this consensus, the following guidance should be followed in evaluating whether a new controlling shareholder or control group has been established (related parties as defined in Statement 57 are considered a single individual shareholder unless the parties are related only by ownership of OLDCO): a. A change in control has occurred if any one of the following conditions is met (see Exhibit 88-16B): i. A single shareholder, that may be an individual member of management, obtains unilateral control of NEWCO, and that shareholder did not have unilateral control of OLDCO. This condition is met when either an individual member of management or management as a group obtains unilateral control of NEWCO and did not have unilateral control of OLDCO. ii. A group of new shareholders (shareholders with no residual interest in OLDCO), that may include management, that meets the definition for inclusion in the NEWCO control group (see Section 1(c) below for criteria for inclusion in the control group) obtains unilateral control of NEWCO. For purposes of this test, there is a rebuttable presumption that management as a group is considered a single shareholder. iii. The NEWCO control group (see Section 1(c)) obtains unilateral control of NEWCO, and no subset of the NEWCO control group had unilateral control of OLDCO. b. The change in controlling voting interest must be substantive, genuine, and not temporary. The new controlling shareholder or shareholder group must have the ability to implement major operating and financial policies such as refinancing debt and selling or acquiring assets. At the date of the transaction, it must be probable that the controlling voting interest will not revert to the OLDCO shareholders. In addition, there should be no plans or intentions within 3 Underlying Authoritative Support. In form, LBO transactions within the scope of this Issue are analogous to purchase business combinations. [Note: See STATUS section.] Certain purchase business combinations are, essentially, recapitalization-restructuring transactions or simply a change in the legal form or ownership structure. Interpretation 39 of Opinion 16 specifies that a change in basis is not appropriate if the transfer of net assets or exchange of shares is between entities under common control. To justify using a new basis of accounting to record the acquisition of the target in an LBO transaction (a transaction that can be analogized to the purchase of a subsidiary), the transaction must result in a change of control; that is, an investor or group of investors that previously did not have unilateral control over the target entity must now have such control. The rationale for using a new basis of accounting to record the acquisition of the target in an LBO transaction is supported by the view that the target entity becomes a subsidiary of NEWCO, which is controlled by the new controlling shareholder or control group. The establishment of a new controlling shareholder or control group results in a transaction similar to a purchase business combination as opposed to a recapitalization-restructuring transaction for which a change in basis is not appropriate. File Page 5 PV'd through Update 44 (9/08 mtg) abs88-16.doc

6 a short period of time after consummation of the transaction (for example, one year) for either (i) a controlling shareholder or shareholder group to sell all or a portion of its interest such that the conditions for control would no longer be met or (ii) NEWCO to issue additional voting securities such that the conditions for control would no longer be met. The requirement specified in the preceding sentence would not be considered for purposes of determining change in control if the shareholder is committed to transferring its investment only to another member of the controlling shareholder group or if the voting rights of the securities held by the controlling shareholders enable the other members of the controlling shareholder group to retain control even if the voting interest is sold (see Exhibits 88-16E and 88-16F, Example 6). i. NEWCO dilutive securities other than options or warrants that are substantially equivalent to voting interests of NEWCO that are issued to or held by investors that are not members of the controlling shareholder group (as determined in Section 1(a)) should be considered when evaluating whether control has changed. Factors to consider in determining substantial equivalency to voting interests include, but are not limited to, voting rights, time until exercise or conversion, probability of events triggering exercise or conversion, and the relationship between exercise or conversion price and fair value of NEWCO voting interests. ii. NEWCO warrants and options to acquire voting interests that are issued to or held by investors that are not members of the controlling shareholder group (as determined in Section 1(a)) are presumed to be equivalent to voting interests. Factors to consider in overcoming that presumption include whether such securities can be exercised only after an extended period of time, only after future service is provided over a period of years, or whether such securities can be exercised solely for the purpose of selling the voting securities obtained through exercise (for example, in a public offering). Another factor to consider is the relationship between the exercise price of the NEWCO warrants or options and the fair value of the NEWCO voting interest; however, because of the volatility of new highly leveraged securities, this factor by itself may not be persuasive. c. For purposes of determining inclusion in or exclusion from the NEWCO control group, NEWCO shareholders, including continuing shareholders, are divided into three groups--management, shareholders with a greater percentage of residual interest in NEWCO than they held in OLDCO, and shareholders with the same or lower percentage of residual interest in NEWCO than they held in OLDCO--and are treated as follows: i. There is a rebuttable presumption that the management group is part of the NEWCO control group. That presumption may be overcome if management did not participate in promoting the LBO transaction. In that unusual circumstance, the entire management group is considered an individual shareholder and is subject to the additional tests in items (ii) or (iii) below. ii. Individual shareholders (related parties as previously defined are a single individual shareholder) with a greater percentage of residual interest in NEWCO than they held in OLDCO and (a) that hold a 5 percent or greater residual interest in NEWCO are automatically included in the NEWCO control group or (b) that hold less than a 5 percent residual interest in NEWCO are automatically excluded from the NEWCO control group. File Page 6 PV'd through Update 44 (9/08 mtg) abs88-16.doc

7 iii. The following voting-interest test and capital-at-risk test 4 are to be applied to individual shareholders with the same or lower percentage of residual interest in NEWCO than they held in OLDCO to determine their inclusion in or exclusion from the NEWCO control group. If the shareholder's interest meets or exceeds the stated percentage in either the voting-interest test or the capital-at-risk test, the shareholder is automatically included in the NEWCO control group and, conversely, if the shareholder does not meet or exceed the stated percentage in both of those tests, the shareholder is automatically excluded from the NEWCO control group. a. Shareholders with a voting interest, assuming exercise or conversion of all dilutive securities held by that shareholder, of 20 percent or more of the total voting interests of NEWCO are automatically included in the NEWCO control group. Dilutive securities held by other than the individual continuing shareholder should be assumed to be exercised or converted to the extent that the terms of those dilutive securities are no less favorable than the terms of the dilutive securities held by the continuing shareholder. However, the effect of including the dilutive securities held by other than the continuing shareholder may not reduce the continuing shareholder's percentage of voting interest below its percentage of outstanding voting interest. Rights held by a shareholder to purchase additional NEWCO common stock at fair value as determined at the time of exercise should be ignored if the right is not exercisable until NEWCO has had an extended period of substantive operations (see Exhibit 88-16C). b. Shareholders with 20 percent or more of the fair value of cumulative capital at risk in NEWCO at any risk level (starting with the security with the lowest priority in liquidation and continuing to the security with the highest priority in liquidation owned by the shareholder), based on ownership of NEWCO equity and debt securities as well as on the maximum amount of any direct or indirect guarantees (such as commitments to infuse cash under certain conditions) made by the shareholder on behalf of NEWCO or its shareholders, are automatically included in the NEWCO control group. The maximum amount of any guarantees should be included in the capital-at-risk test at the risk level of the security guaranteed (see Exhibit 88-16D). d. If a change in control is deemed not to have occurred as a result of applying the above guidance, the transaction should be considered a recapitalization-restructuring for which a change in accounting basis is not appropriate. [Note: This consensus has been nullified by Statement 141(R). See STATUS section.] Section 2. The form of a transaction by which the investor obtains its interest in NEWCO does not change the accounting to be applied. In general, if an investor in NEWCO owned a residual interest in OLDCO, then the lesser of that investor's 4 Capital at risk includes all debt and equity securities of consolidated NEWCO, including short-term debt, long-term debt, notes payable, and capital lease obligations. File Page 7 PV'd through Update 44 (9/08 mtg) abs88-16.doc

8 residual interest in OLDCO or NEWCO is carried over at the investor's predecessor basis. 5 Consensus Guidance. For purposes of this consensus, the following guidance should be followed: a. Whether OLDCO shares or other OLDCO interests that convert to residual interests are contributed to NEWCO or purchased outright by NEWCO is irrelevant. The governing factor is whether residual interests are held both before and after the transaction. b. If a change in control has occurred, the carrying amount of NEWCO's investment in OLDCO should be determined as follows: i. The lesser of the continuing shareholder's residual interest 6 (members of management are considered individual shareholders and related parties as previously defined are a single shareholder) in OLDCO or NEWCO is carried over at the continuing shareholder's predecessor basis, except as explained below for shareholders that are not a part of the NEWCO control group. a. The residual interests of individual continuing shareholders that have less than a 5 percent residual interest in NEWCO should (subject to the monetary test that is discussed in Section 3) be valued at fair value. b. The residual interests of all individual continuing shareholders with the same or lower percentage of residual interest in NEWCO than they held in OLDCO that individually have a 5 percent or more residual interest in NEWCO and that in the aggregate have less than a 20 percent residual interest in NEWCO should (subject to the monetary test) be valued at fair value. ii. The remainder of NEWCO's investment in OLDCO, subject to the monetary test, is based upon fair value; that is, the amount that was or would have been paid in monetary consideration. [Note: This consensus has been nullified by Statement 141(R). See STATUS section.] Section 3. The fair value of any securities issued by NEWCO to acquire OLDCO should be objectively determinable. Fair value should not be used, whether or not the NEWCO securities are publicly traded, unless at least 80 percent of the fair 5 Underlying Authoritative Support. To the extent that a shareholder owns the same level of residual interest before and after the LBO transaction, no event has occurred with respect to that retained residual interest. That general notion is consistent with ARB 51, paragraph 10, which establishes accounting principles applicable to a step acquisition. NEWCO's basis in OLDCO in LBO transactions in which one or more of the continuing shareholders has a greater percentage residual interest in NEWCO than they held in OLDCO is generally determined in a manner that is similar to a step acquisition. 6 The computation of the continuing shareholder's residual interest in OLDCO and NEWCO should include the effect of dilutive securities in the same manner as prescribed in Section 1(c)(iii)(a) for voting interests. File Page 8 PV'd through Update 44 (9/08 mtg) abs88-16.doc

9 value of consideration paid to acquire OLDCO equity interests comprises monetary consideration (the monetary test). 7 Consensus Guidance. The following guidance should be followed for purposes of applying the monetary test: a. To reflect at fair value the total consideration paid to OLDCO shareholders, monetary consideration, net of any monetary consideration used to acquire equity securities of NEWCO, should constitute 80 percent or more of the total consideration paid to OLDCO shareholders. Any equity securities of NEWCO received at the formation of NEWCO by NEWCO shareholders in exchange for OLDCO securities should be included in the denominator at fair value (that is, the amount that would have been paid in monetary consideration) when applying the 80 percent test. b. If controlling shareholders of NEWCO obtain their equity interest in NEWCO using proceeds of a loan from OLDCO, the proceeds of that loan should not be considered as monetary consideration. In addition, those proceeds should be classified in the financial statements as a reduction of NEWCO equity (similar to a stock subscription receivable) until paid. Similarly, if a shareholder's investment in NEWCO is obtained from proceeds of an unusual bonus or other unusual payment from OLDCO, those proceeds should not be considered monetary consideration and the charge (net of tax, if appropriate) should be shown as a reduction of NEWCO equity. Such transactions cannot result in new equity because they are not obtained independently of OLDCO. c. If the criteria of Sections 1 and 2 are met but the 80 percent monetary test is not met, any NEWCO equity securities issued to shareholders to acquire OLDCO interest should be valued at predecessor basis. That is, the portion of NEWCO's investment in OLDCO that can be valued at fair value cannot exceed the percentage of the total consideration that is monetary. [Note: This consensus has been nullified by Statement 141(R). See STATUS section.] The examples in Exhibits 88-16A through 88-16I are presented to illustrate the application of the consensus. 7 Underlying Authoritative Support. Opinion 16, paragraphs 72-76, establishes that the fair value of cash, debt, and equity securities issued to purchase a target company (plus costs) should measure the cost of the acquisition. However, the Task Force believes the fair value of equity securities issued by a highly leveraged company may not be objectively determinable. File Page 9 PV'd through Update 44 (9/08 mtg) abs88-16.doc

10 Comments by the SEC Observer Subsequent to the May 18, 1989 Task Force meeting, the SEC Observer indicated that the SEC staff will expect registrants to comply with the consensus for all transactions included in financial statements filed with the SEC after May 18, 1989, unless the transaction was complete or substantially complete as of that date. In those circumstances, if financial statements including the transaction have not been previously filed with the SEC, the SEC staff encourages application of the consensus but will accept accounting in accordance with the guidance provided by the SEC Observer at previous Task Force meetings in which this Issue was discussed (beginning with the June 2, 1988 meeting). See Exhibit 86-16B of Issue for that guidance. The SEC staff will expect registrants to disclose in the notes to the financial statements the accounting policy followed in determining the basis used by NEWCO to value its interest in OLDCO and the rationale therefor. STATUS A related issue was discussed in Issue No , "Allocating Basis to Individual Assets and Liabilities for Transactions within the Scope of Issue No " A related issue was also discussed in Issue No. 02-5, Definition of Common Control in Relation to FASB Statement No When discussed, the Task Force reached a consensus that LBO transactions, within the scope of Issue for which a partial or complete change in accounting basis is appropriate due to a change in control of voting interest, are similar to purchase business combinations that should be accounted for in accordance with Opinion 16. Statement 141 was issued in June 2001 and superseded Opinion 16 for all business combinations except combinations of not-for-profit organizations and combinations between mutual enterprises. Statement 141 is effective for File Page 10 PV'd through Update 44 (9/08 mtg) abs88-16.doc

11 business combinations initiated after June 30, 2001, and its provisions related to the application of the purchase method apply to combinations for which the acquisition date is July 1, 2001, or later. Statement 142 was issued in June 2001 and supersedes Opinion 17. Statement 142 provides guidance on the subsequent accounting for goodwill and other intangible assets, including those recognized in a purchase business combination. Goodwill and other intangible assets recognized in LBO transactions in the scope of this Issue should be accounted for under Statement 142. Statement 142 is effective for financial statements with fiscal years beginning after December 15, The effective date of Statement 142 was deferred for goodwill and intangible assets arising from combinations of not-for-profit organizations and combinations between mutual enterprises with the issuance of Statement 141(R), Statement 142 becomes effective for mutual enterprises on the first annual period beginning on or after 12/15/08. Statement 141(R), which was issued in December 2007, replaces Statement 141, supersedes Opinion 16, and nullifies this Issue. However, this Issue still applies to mergers and acquisitions by not-for-profit organizations, which will be further considered as part of a separate FASB project that was exposed for comment in proposed Statements, Not-for-Profit Organizations: Mergers and Acquisitions, and Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition. Statement 141(R) is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after 12/15/08. No further EITF discussion is planned. File Page 11 PV'd through Update 44 (9/08 mtg) abs88-16.doc

12 Exhibit 88-16A EXAMPLE OF RESIDUAL INTEREST AS USED IN THE EITF CONSENSUS ON ISSUE A shareholder's residual interest as used in this EITF consensus refers to its proportionate share (expressed as a percentage and after conversion or exercise of dilutive securities) of the net assets of a business enterprise after satisfaction of equity securities with redemption or liquidation features. The following example illustrates that definition. Number of Shares Voting common stock (no par) 10 Nonvoting common stock (no par) 10 Redeemable preferred stock 10 A shareholder who owns 2 shares of voting common stock, 4 shares of nonvoting common stock, and 3 shares of preferred stock has a 30 percent (2 voting plus 4 nonvoting common shares divided by 20 common shares) residual interest in that business enterprise. File Page 12 PV'd through Update 44 (9/08 mtg) abs88-16.doc

13 Exhibit 88-16B EXAMPLES OF THE CHANGE IN CONTROL CRITERION USED IN THE EITF CONSENSUS ON ISSUE The following examples illustrate the change in control criterion as described in Section 1(a) of the consensus (all ownership interests are fully diluted). OLDCO NEWCO1 NEWCO2 NEWCO3 NEWCO4 Management 20% 60% 30% 0% 40% Investor Investor Investor Investor % 100% 100% 100% 100% NEWCO1 would qualify as a change in control under the criterion in Section 1(a)(i) (management obtains unilateral control of NEWCO1). NEWCO2 would qualify as a change in control under the criterion in Section 1(a)(ii) because investors 3 and 4, who are members of the NEWCO2 control group, obtain unilateral control of NEWCO2. Assuming investor 2 is not a member of the NEWCO3 control group, for example, because investor 2 has no capital at risk in NEWCO other than a common stock interest, NEWCO3 would qualify as a change in control under the criterion in Section 1(a)(iii). NEWCO4 would not qualify as a change in control because management and investor 1 are in NEWCO4's control group. A subset of the NEWCO4 control group (management and investor 1) owned a majority voting interest in OLDCO. See Section 1(c) for the criteria for inclusion in the control group. File Page 13 PV'd through Update 44 (9/08 mtg) abs88-16.doc

14 Exhibit 88-16C EXAMPLE OF THE VOTING-INTEREST TEST USED IN THE EITF CONSENSUS ON ISSUE The following example illustrates the voting-interest test as described in Section 1(c)(iii)(a) of the consensus. The 100 percent shareholder of OLDCO sells its stock in OLDCO to NEWCO for (a) $700 in cash, (b) $100 of NEWCO preferred stock, (c) 9 shares of NEWCO voting common stock, and (d) warrants to purchase up to 10 additional shares of NEWCO common stock at $5 per share. The new investor in NEWCO owns (a) $600 of preferred stock, (b) 71 shares of NEWCO voting common stock, and (c) warrants to purchase up to 10 additional shares of NEWCO common stock at $2 per share. All warrants are assumed to be exercised because the terms of the warrants held by the new investor are no less favorable than the terms of the warrants held by the continuing shareholder. The continuing shareholder has a 19 percent (19/100) voting interest in NEWCO and would not be considered part of the NEWCO control group. File Page 14 PV'd through Update 44 (9/08 mtg) abs88-16.doc

15 Exhibit 88-16D EXAMPLES OF THE CAPITAL-AT-RISK TEST USED IN THE EITF CONSENSUS ON ISSUE The following examples illustrate the capital-at-risk test as described in Section 1(c)(iii)(b) of the consensus. NEWCO Capitalization Shares Fair Value Nonvoting common equity 10 $ 40 Voting common equity Preferred stock 5 50 Mandatorily redeemable preferred stock 5 50 Subordinated debt 300 Senior debt 1,000 Total capital $1,500 A continuing shareholder with 2 shares of the nonvoting common stock, 2 shares of the preferred stock, and $50 of senior debt has less than 20 percent of the total fair value of NEWCO securities at each cumulative risk level, as illustrated below. Fair Value of NEWCO Equity Continuing Cumulative Shareholder Total Capital at Risk Common equity: Nonvoting $ 8 $ 40 Voting 0 60 Total common equity % Preferred stock % Mandatorily redeemable preferred stock % Subordinated debt % Senior debt 50 1, % Total capital $78 $1,500 File Page 15 PV'd through Update 44 (9/08 mtg) abs88-16.doc

16 If the continuing shareholder owns 6 shares of nonvoting common stock and $50 of senior debt, the continuing shareholder would be automatically considered part of the NEWCO control group regardless of its percentage of overall capital at risk, as illustrated below. Fair Value of NEWCO Equity Continuing Cumulative Shareholder Total Capital at Risk Common equity: Nonvoting $24 $ 40 Voting 0 60 Total common equity % Preferred stock % Mandatorily redeemable preferred stock % Subordinated debt % Senior debt 50 1, % Total capital $74 $1,500 The continuing shareholder exceeded the 20 percent ceiling at the common equity level and is automatically included in the NEWCO control group. The fact that the continuing shareholder held less than 20 percent of total equity and less than 20 percent of total capital at risk does not change the outcome of that test. File Page 16 PV'd through Update 44 (9/08 mtg) abs88-16.doc

17 Exhibit 88-16E EXAMPLE OF APPLICATION OF THE REQUIREMENT THAT A CHANGE IN CONTROL MUST BE SUBSTANTIVE, GENUINE, AND NOT TEMPORARY IN ACCORDANCE WITH THE EITF CONSENSUS ON ISSUE The following example illustrates application of the requirement that a change in control be substantive, genuine, and not temporary. Shares OLDCO NEWCO Parent Company Management as a group 0 6 New investor 0 45 Total The facts satisfy the conditions for change in control in Section 1(a)(ii) because a group of new shareholders that meet the definition for inclusion in the NEWCO control group (Section 1(c)) obtains unilateral control of NEWCO. In this fact pattern, it is assumed that management entered into an agreement for a substantive time period to vote its shares with the new investor, the new investor was instrumental in the decision to offer management the opportunity to purchase shares, management did not hold a substantial residual ownership position in Parent Company, and OLDCO did not represent a substantial portion of Parent Company's operations. As a result, management is aligned with the new investor; therefore, the change in control is considered substantive, genuine, and not temporary as required by Section 1(b). Other fact patterns may also lead to this conclusion. However, different facts may lead to a conclusion that a change in control was not substantive, genuine, and other than temporary. The guidelines in SAB 30 may also be useful for determining that a change in control meets the requirements of Section 1(b). File Page 17 PV'd through Update 44 (9/08 mtg) abs88-16.doc

18 Exhibit 88-16F EXAMPLES OF THE APPLICATION OF THE EITF CONSENSUS ON ISSUE General Assumptions The following general assumptions are applicable to all examples in Exhibit 88-16F. For purposes of these examples, public is a group of unrelated shareholders in which none of the individual shareholders owns 5 percent or more of the residual interests of OLDCO or NEWCO. Each member of management has the same predecessor basis of $110 per share. The presumption that management is part of the NEWCO control group is not overcome. The term management refers to management as a group. The following assumptions are applicable to Examples 1-4, but not to Examples Each example also has other specific assumptions. Both OLDCO and NEWCO have outstanding 100 shares of voting common stock. The fair value of OLDCO shares is $120 per share, and the fair value of NEWCO shares is $10 per share. NEWCO incurs debt of $11,000 and uses the entire proceeds plus any cash investment from management or other investors to acquire outstanding shares of OLDCO. File Page 18 PV'd through Update 44 (9/08 mtg) abs88-16.doc

19 Example 1 Additional assumptions applicable only to Example 1: All OLDCO shares acquired from management are acquired in exchange for NEWCO stock. All other OLDCO interests are acquired for cash and stock on a pro rata basis. Management receives an additional 51 percent ownership interest in NEWCO in exchange for $510. Ownership interests before and after the transaction are presented below: OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Management 1 $ 100 $ $ 630 Public 99 9,900 11, Total 100 $10,000 $12, $1,000 Method of Acquisition of OLDCO Interest Source of cash: Debt $11,000 Common equity (51 shares $10) 510 Cash paid to public 11,510 NEWCO common stock issued to public in exchange for OLDCO common stock (37 shares $10) 370 NEWCO common stock issued to management in exchange for OLDCO common stock (12 shares $10) 120 OLDCO fair value $12,000 Application of the 80% Monetary Test Monetary consideration $11,510 Total consideration $12,000 Portion monetary 96% File Page 19 PV'd through Update 44 (9/08 mtg) abs88-16.doc

20 Accounting for Example 1 The transaction meets the criteria of Section 1 of the consensus resulting in a change in control; therefore, a change in basis is appropriate. In accordance with Section 2 of the consensus, predecessor basis should be used for the 1 percent carryover of management's interest. The transaction meets the criteria in Section 3 of the consensus; therefore, the remaining 99 percent interest should be valued using fair value. Summary of Accounting Percent Amount Valuation: Predecessor basis 1% $ 110 Fair value 99% 11,880 Total investment in OLDCO 11,990 Less NEWCO debt (11,000) NEWCO equity $ 990 Example 2 Analysis of NEWCO Equity Account Stock valued at fair value issued to management for cash (51 shares $10) $510 Stock issued to management valued at predecessor basis 110 * Stock issued to public valued at fair value (37 shares $10) 370 NEWCO equity $990 Additional assumptions applicable only to Example 2: Management's OLDCO interest is acquired for NEWCO stock. All other OLDCO interests are acquired for cash and stock on a pro rata basis. Management receives an additional 17 percent ownership interest in NEWCO in exchange for $170, and new investor receives a 40 percent interest in NEWCO in exchange for $400. Ownership interests before and after the transaction are presented below: *Management's 1% interest in OLDCO was exchanged for a 12% interest in NEWCO. That interest is valued at management's predecessor basis of $110. File Page 20 PV'd through Update 44 (9/08 mtg) abs88-16.doc

21 OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Management 1 $ 100 $ $ 290 New Investor Public 99 9,900 11, Total 100 $10,000 $12, $1,000 Method of Acquisition of OLDCO Interest Source of cash: Debt $11,000 Common equity [(17 shares $10) + (40 shares $10)] 570 Cash paid to public 11,570 NEWCO common stock issued to public in exchange for OLDCO common stock (31 shares $10) 310 NEWCO common stock issued to management in exchange for OLDCO common stock (12 shares $10) 120 OLDCO fair value $12,000 Application of the 80% Monetary Test Monetary consideration $11,570 Total consideration $12,000 Portion monetary 96% File Page 21 PV'd through Update 44 (9/08 mtg) abs88-16.doc

22 Accounting for Example 2 Because management and new investor are included in the NEWCO control group and no subset of the NEWCO control group owns a majority of the voting interest in OLDCO, the transaction meets the requirements of Section 1 of the consensus resulting in a change in control; therefore, a change in basis is appropriate. In accordance with Section 2 of the consensus, predecessor basis should be used for the 1 percent carryover of management's interest. The transaction meets the criteria in Section 3 of the consensus; therefore, the remaining 99 percent interest should be valued using fair value. Summary of Accounting Percent Amount Valuation: Predecessor basis 1% $ 110 Fair value 99% 11,880 Total investment in OLDCO 11,990 Less NEWCO debt (11,000) NEWCO equity $ 990 Analysis of NEWCO Equity Account Stock issued to management for cash (17 shares $10) $170 Stock issued to management valued at predecessor basis 110 * Stock issued to new investor for cash valued at fair value 400 Stock issued to public valued at fair value 310 NEWCO equity $990 *Management's 1% interest in OLDCO was exchanged for a 12% interest in NEWCO. That interest is valued at management's predecessor basis of $110. File Page 22 PV'd through Update 44 (9/08 mtg) abs88-16.doc

23 Example 3 Additional assumptions applicable only to Example 3: All OLDCO interests are acquired for monetary consideration and stock on a pro rata basis. Management acquires an additional 40 percent interest in NEWCO in exchange for $400. Ownership interests before and after the transaction are presented below: OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Management 5 $ 500 $ $ 430 Public 95 9,500 11, Total 100 $10,000 $12, $1,000 Method of Acquisition of OLDCO Interest Source of cash: Debt $11,000 Common equity (40 shares $10) 400 Cash paid to OLDCO shareholders 11,400 NEWCO common stock issued to public in exchange for OLDCO common stock (57 shares $10) 570 NEWCO common stock issued to management in exchange for OLDCO common stock (3 shares $10) 30 OLDCO fair value $12,000 Application of the 80% Monetary Test Monetary consideration $11,400 Total consideration $12,000 Portion monetary 95% File Page 23 PV'd through Update 44 (9/08 mtg) abs88-16.doc

24 Accounting for Example 3 There has been no change in control in this transaction because none of the conditions in Section 1(a) is met; therefore, OLDCO book value should be carried over. Sections 2 and 3 of the consensus are not applicable. Summary of Accounting Percent Amount Valuation: Predecessor basis 0% $ 0 OLDCO book value 100% 10,000 Fair value 0% 0 Total investment in OLDCO 10,000 Less NEWCO debt (11,000) NEWCO equity $(1,000) Analysis of NEWCO Equity Account OLDCO book value $10,000 Stock issued for cash (40 shares $10) 400 Total 10,400 Less dividend (cash paid to OLDCO shareholders) (11,400) NEWCO equity $(1,000) File Page 24 PV'd through Update 44 (9/08 mtg) abs88-16.doc

25 Example 4 Additional assumptions applicable only to Example 4: NEWCO borrows $11,000 from a third party and uses the proceeds and $450 cash from investors 4 and 5 plus 55 shares of NEWCO stock to purchase all OLDCO shares. Ownership interests before and after the transaction are presented below: OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Management 20 $ 2,000 $ 2, $ 400 Investor ,000 4, Investor ,000 3, Investor ,000 1, Investor Investor Total 100 $10,000 $12, $1,000 Method of Acquisition of OLDCO Interest Source of cash: Debt $11,000 Common equity [(30 shares $10) + (15 shares $10)] 450 Cash paid to OLDCO shareholders 11,450 NEWCO common stock issued to management in exchange for OLDCO common stock (40 shares $10) 400 NEWCO common stock issued to investor 1 in exchange for OLDCO common stock (15 shares $10) 150 OLDCO fair value $12,000 File Page 25 PV'd through Update 44 (9/08 mtg) abs88-16.doc

26 Application of the Voting-Interest Test Total Percent Investor 1 NEWCO of Total Voting common stock shares Voting preferred stock shares 0 0 Voting shares obtainable through options, warrants, convertible securities, etc % Application of the Capital-at-Risk Test Fair Value of NEWCO Equity Continuing Cumulative Shareholder Total Capital at Risk Nonvoting common stock $ 0 $ 0 Voting common stock 150 1,000 15% $150 $1,000 Application of the 80% Monetary Test Monetary consideration $11,450 Total consideration $12,000 Portion monetary 95% Accounting for Example 4 The NEWCO control group consists of management and investors 4 and 5 (they all increased their residual interests). The transaction meets the criteria for change in control (the NEWCO control group has unilateral control of NEWCO, and no subset of the NEWCO control group had unilateral control of OLDCO) and, therefore, a change in basis is appropriate. Management is part of the NEWCO control group, and investor 1, based on the above tests, is excluded from the NEWCO control group. Management's 20 percent interest in OLDCO is valued at predecessor basis. In the aggregate, the continuing shareholders (investor 1) with the same or lower residual interest in NEWCO than they held in OLDCO have less than a 20 percent residual interest in NEWCO, and therefore investor 1's interest in NEWCO is valued at fair value (subject to the monetary test). The File Page 26 PV'd through Update 44 (9/08 mtg) abs88-16.doc

27 transaction meets the criteria in Section 3 of the consensus; therefore, the remaining 80 percent interest should be valued using fair value. Summary of Accounting Percent Amount Valuation: Predecessor basis--management 20% $ 2,200 Fair value 80% 9,600 Basis of investment in OLDCO 11,800 Less NEWCO debt (11,000) NEWCO equity $ 800 Analysis of NEWCO Equity Account Stock issued to management valued at predecessor basis $2,200 Less deemed cash dividend to management (2,200) * Stock issued to management valued at fair value 200 Stock issued to OLDCO investor valued at fair value 150 Stock issued to new investors for cash valued at fair value 450 NEWCO equity $ 800 *The deemed cash dividend is computed as follows: Increase in leverage $11,000 Percentage of residual interest retained 20% $ 2,200 File Page 27 PV'd through Update 44 (9/08 mtg) abs88-16.doc

28 Example 5 Additional assumptions applicable only to Example 5: Both OLDCO and NEWCO have outstanding 100 shares of voting common stock. The fair value of OLDCO shares is $120 per share, and the fair value of NEWCO shares is $48 per share. NEWCO incurs debt of $7,200 and uses the entire proceeds to acquire outstanding OLDCO stock of public shareholders. All OLDCO shares acquired from management are acquired in exchange for NEWCO stock. All other OLDCO interests are acquired for cash and stock on a pro rata basis. Management's predecessor basis is $110 per share. Ownership interests before and after the transaction are presented below: OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Management 24 $ 2,400 $ 2, $2,880 Public 76 7,600 9, ,920 Total 100 $10,000 $12, $4,800 Method of Acquisition of OLDCO Interest Source of cash: Debt $ 7,200 Cash paid to public 7,200 NEWCO common stock issued to public in exchange for OLDCO common stock (40 shares $48) 1,920 NEWCO common stock issued to management in exchange for OLDCO common stock (60 shares $48) 2,880 OLDCO fair value $12,000 Application of the 80% Monetary Test Monetary consideration $ 7,200 Total consideration $12,000 Portion monetary 60% File Page 28 PV'd through Update 44 (9/08 mtg) abs88-16.doc

29 Accounting for Example 5 The transaction meets the criteria of Section 1(a) (management obtains unilateral control); therefore, a change in basis is appropriate. Management's 24 percent interest should be recorded at predecessor basis in accordance with Section 2 of the consensus. The monetary test in Section 3 of the consensus is not met; therefore, only 60 percent of the OLDCO interests acquired should be recorded at fair value. The remaining interest acquired from OLDCO public shareholders should be recorded based on OLDCO's book value as a surrogate for public's predecessor basis. Summary of Accounting Percent Amount Valuation: Predecessor basis (24 shares $110) 24% $ 2,640 OLDCO book value [(76% - 60%) $10,000] 16% 1,600 Fair value (60% $12,000) 60% 7,200 Total investment in OLDCO 11,440 Less NEWCO debt (7,200) NEWCO equity $ 4,240 Analysis of NEWCO Equity Account Stock issued to management valued at predecessor basis $2,640 Stock issued to public valued at OLDCO book value 1,600 NEWCO equity $4,240 File Page 29 PV'd through Update 44 (9/08 mtg) abs88-16.doc

30 Example 6 Additional assumptions applicable only to Example 6: Both OLDCO and NEWCO have outstanding 100 shares of voting common stock. The fair value of OLDCO shares is $120 per share, and the fair value of NEWCO shares is $10 per share. NEWCO borrows $7,250 from a third party and uses the proceeds and $750 cash from the new investor plus 25 shares of NEWCO common stock and $3,750 of preferred stock (nonvoting and nonconvertible) to purchase all OLDCO stock. Parent Company's predecessor basis is $105 per share. Based on a review of the specific facts and circumstances of this transaction (including Parent Company's capital at risk in NEWCO), change in control is determined to be substantive, genuine, and not temporary. Ownership interests before and after the transaction are presented below: OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Parent Company 100 $10,000 $12, $ 250 New investor Total 100 $10,000 $12, $1,000 Method of Acquisition of OLDCO Interest Source of cash: Debt $ 7,250 Common equity (75 shares $10) 750 Cash paid to Parent Company 8,000 NEWCO preferred stock issued to Parent Company in exchange for OLDCO common stock 3,750 NEWCO common stock issued to Parent Company in exchange for OLDCO common stock (25 shares $10) 250 OLDCO fair value $12,000 File Page 30 PV'd through Update 44 (9/08 mtg) abs88-16.doc

31 Application of the Voting-Interest Test Parent Total Percent Company NEWCO of Total Voting common stock shares Voting preferred stock shares 0 0 Voting shares obtainable through options, warrants, convertible securities, etc % Application of the Capital-at-Risk Test Fair Value of NEWCO Equity Parent Cumulative Company Total Capital at Risk Nonvoting common stock $ 0 $ 0 Voting common stock 250 1,000 25% Preferred stock 3,750 3,750 84% $4,000 $4,750 Application of the 80% Monetary Test Monetary consideration $ 8,000 Total consideration $12,000 Portion monetary 66.67% Accounting for Example 6 The transaction meets the criteria for change in control (a single investor obtains unilateral control); therefore, a change in basis is appropriate. * The criteria for voting interest and capital at risk are not met, and Parent Company's 25 percent residual interest should be valued using predecessor basis. The 75 percent residual interest owned by the new investor should be recorded at fair value up to the limit (66.67 percent) established by the monetary test. *In this example, Parent Company has 84% of the NEWCO equity capital at risk. As required by Section 1(b), the change in control must be substantive, genuine, and not temporary. The terms of the preferred stock must not restrict the new controlling shareholder's ability to implement major operating and financial policies, such as refinancing debt and selling or acquiring assets. In addition, it must be probable that the controlling shareholder interest will not revert to Parent Company. Otherwise, a change in control has not occurred. File Page 31 PV'd through Update 44 (9/08 mtg) abs88-16.doc

32 Summary of Accounting Percent Amount Valuation: Predecessor basis--retained interest (25 shares $105) 25.00% $ 2,625 Predecessor basis--limited by monetary test 8.33% 875 * Fair value 66.67% 8,000 Basis of investment in OLDCO 11,500 Less NEWCO debt (7,250) Less NEWCO preferred stock (3,750) NEWCO common equity $ 500 Analysis of NEWCO Equity Account Stock issued to Parent Company valued at predecessor basis $2,625 Less deemed dividend to Parent Company Cash (1,813) + Preferred stock (937) + (2,750) Stock valued at fair value issued to the new investor for cash 750 Reduction in equity due to monetary test [8.33% ($12,000 - $10,500)] (125) NEWCO common equity $ 500 *100% less 25% valued at Parent Company's predecessor basis equals 75%; 75% less 66.67% limitation due to the monetary test equals 8.33%; 8.33 shares times $105 equals $875. +The deemed dividend is computed as follows: Debt Preferred Stock Increase in leverage $7,250 $3,750 Percentage of residual interest retained 25% 25% $1,813 $ 937 File Page 32 PV'd through Update 44 (9/08 mtg) abs88-16.doc

33 Example 7 Additional assumptions applicable only to Example 7: Both OLDCO and NEWCO have outstanding 100 shares of voting common stock. The fair value of OLDCO shares is $200 per share, and the fair value of NEWCO shares is $10 per share. NEWCO borrows $19,000 from a third party and uses the proceeds and $540 cash from the new investor plus 46 shares of NEWCO common stock to purchase all OLDCO stock. Investors' predecessor basis is $105 per share, and management's predecessor basis is $110 per share. Ownership interests before and after the transaction are presented below: OLDCO NEWCO Book Fair Fair Shares Value Value Shares Value Management 1 $ 100 $ $ 10 Investor ,300 6, Investor ,300 6, Investor ,300 6, New investor Total 100 $10,000 $20, $1,000 Method of Acquisition of OLDCO Interest Source of cash: Debt $19,000 Common equity (54 shares $10) 540 Cash paid to OLDCO shareholders 19,540 NEWCO common stock issued to investors 1, 2, and 3 in exchange for OLDCO common stock (15 shares $10 each) 450 NEWCO common stock issued to management in exchange for OLDCO common stock (1 share $10) 10 OLDCO fair value $20,000 File Page 33 PV'd through Update 44 (9/08 mtg) abs88-16.doc

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