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How do you overpay for an acquisition but keep the announced sales price? More journal entries to describe the Olympus fiasco.

with 2 comments

Here are some more journal entries that describe how Olympus moved money in their accounting fiasco.

‘Michael’ asked a great question at re: The Auditors about my guest post on the Olympus accounting fraud. 

The full article with my reply can be found at How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud.

Here is his question, with slight editing:

If they actually bought the tiny companies for way more than they were worth, this would not fix their problem, they would just have the original losses plus the new losses on the companies that they overpaid for.

The only way this works is if they claimed to pay $1,000,000 for the companies but in reality only paid $100,000. Is this the case?

For example if they paid $1,000,000 for the subsidiary you would.

  • Dr. investment 100,000
  • Dr. goodwill 900,000
  •      cr. cash $1,000,000

There would be no cash in the subsidiary, just goodwill. So how could the subsidiary purchase the financial assets that were seriously underwater? The subsidiary would have to actually pay the inflated fair value for this to work?

A very good question, Michael. 

I’ll go into more detail on how the money was moved and my read on what summarized entries would be.  I posted my reply at re: The Auditors. Francine McKenna has allowed me to reprint my response. Here is my explanation:

 

The underlying concept is to circulate a couple billion dollars through a series of companies and bring the cash back to Olympus as if it was a full recovery of the very initial investments. Actually overpaying to outsiders for the investment would not solve anything. The money has to be kept in-house.

As best I can figure out, the three companies were bought for their real value, and then cycled through several intermediaries to step up their value. Those intermediaries were either directly owned by Olympus or controlled by the deal makers who structured the transactions.

You can see the details on pages 14 through 16 of the board report, which is located here.

If I’m reading the report right, you can see the schematic of this part of the deal in the middle of page 38 of the report. Look at Axam and the transactions underneath it.

In the article I’m trying to keep the entries simple. Stepping up the entries for this part of the deal would look like the following, I think. I’ll illustrate using your numbers and assuming the underwater investment that needs to fly away is 900k. Also will simplify using only two companies, Olympus plus one company to buy up the medical companies & flip them to Olympus.

For the non-accountants reading this, please understand this is in accounting shorthand

 

**buy up the small companies

Acquisition company:

  • Dr. Investment 100k
  • Cr. Cash 100k

Buy small medical companies

 

**sell the small companies to Olympus

Olympus:

  • Dr. New med investment 100k
  • Dr. Goodwill 900k
  • Cr. Cash 1,000k

Buy 3 small medical companies from acquisition company & book goodwill for purchase price over FMV of identifiable assets.

Acquisition company:

  • Dr. Cash 1,000k
  • Cr. Investment 100k
  • Cr. Gain on sale 900k

Record sale to Olympus at substantial gain – remember this entity is either owned or controlled by Olympus

 

**move the cash back to Olympus

Olympus:

  • Dr. Cash 900k
  • Cr. Old-underwater-investment-that-needs-to-fly-away 900k

Repatriate cash. Write off the old investment that started the whole mess as if it was sold at face value to an unrelated party

Acquisition company:

  • Dr. Loss or reduction of gain 900k
  • Cr. Cash 900k

Return cash to Olympus

 

**write off goodwill

Olympus:

  • Dr. Loss on write down of new investments 900k
  • Cr. Goodwill on new investments 900k

Write off goodwill on the three new medical companies

 

If you want to sketch out the T-accounts, that leaves the acquisition company in the exact same place it was before the transactions. Olympus has recovered the full face value of the initial investments, holds a 100k investment in three small medical companies, is out 100k, and has an expense of 900k for goodwill write down.

 

Three additional thoughts since I posted my reply:

First, this would require moving 100k from Olympus into the sub to fund the purchases along with cash to cover the fees of the facilitators.

Second, the down stream purchases and transfers would have to be off-books at the Olympus level and fairly well hidden from view.

Third, here are select line items on the Olympus trial balance:

 

**before the above transactions to move money around

  • Cr. Cash (moved into sub so it can buy 3 small companies) 100k
  • Dr. Old-underwater-investment-that-needs-to-fly-away 900k
  • Dr. Some asset account (used as offset for the cash moved to the sub) 100k

 

** after the above transactions are executed

  • Cr. Cash  200k
  • Dr. New investment in 3 medical companies 100k
  • Dr. Old-underwater-investment-that-needs-to-fly-away 0k!
  • Dr. Some asset account (used as offset for cash moved to the sub) 100k
  • Dr. Expense for write off of goodwill 900k

So, that’s how you overpay by a billion or so and keep the money for yourself.

Written by Jim Ulvog

June 21, 2012, 8:46 am at 8:46 am

Posted in Accounting, Fraud

Tagged with ,

2 Responses

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  1. Hey,

    Thanks so much, great answer!

    I was reading this today and it reminded me I asked this question, a few months ago.

    http://brontecapital.blogspot.ca/2012/09/focus-media-one-strange-disclosure.html

    Michael

    September 6, 2012, 4:19 am at 4:19 am

    • Hi Michael:

      You are welcome. That was a great question. This was a very complicated set of transactions. Expanding the explanation to address your question makes the circular flow of cash clearer.

      Jim

      Jim Ulvog

      September 6, 2012, 6:26 am at 6:26 am


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