Eaton Corporation recently made an acquisition of Cooper Industries. Eaton Corporation was founded in 1911 by Joseph Eaton. Eaton Corporation specializes in diversified power management. Its primary business focus is on the Electrical Sector; however, it does have four other segments in Truck, Aerospace, Hydraulics, and Automobile and has businesses both domestic and international. Eaton has over 72,000 employees worldwide and sells products to more than 150 countries. According to its 2011 annual report, Eaton Corporation reported $16 billion in sales with a profit of $1.3 billion.
Cooper Industries was founded in 1833 and like Eaton Corporation; it is a diversified manufacturer of electrical components and tools. “Cooper has seven operating divisions with leading positions and world-class products and brands including Bussmann electrical and electronic fuses; Crouse-Hinds and CEAG explosion-proof electrical equipment; Halo and Metalux lighting fixtures; and Kyle and McGraw-Edison power systems products.” (Eaton to Acquire, 2012). Between the two companies, there is a lot of room to improve their products and meet customer needs. After the acquisition; the new company will continue to make electrical products their primary focus. According to its 2011 annual report, Cooper Industries reported $5.6 billion in revenues and $827.6 million in profits.
The acquisition of Cooper Industries by Eaton Corporation is considered to be a win-win move for both companies that are both leaders in the electrical sector. They bring together a diversified and complimentary portfolio of products that would not only increase the success of both companies, would increase their combined market share. The acquisition will bring both companies together to create a new company called Eaton Global Plc that would absorb both companies where Cooper Industries will cease to exist. Speaking to the specifics of the acquisition, “Cooper shareholders to receive $39.15 per share in cash and 0.77479 in ordinary shares, for 29% premium; transaction equity value of $11.8 billion” (Eaton to Acquire, 2012). The merging of the two companies is set to be completed in the fall of 2012. Sandy Cutler, CEO of Eaton Corporation, further expanded on the advantages of this acquisition, stating that it will broaden the new company’s portfolio of complementary products, market segmentation of expansion, place the company in an excellent position to address long-term requirements, add breadth to global geographic exposure, and offer improved cash management flexibility for the corporation (Eaton Acquire, 201). Another advantage of the acquisition will be Eaton Corporation’s tax advantages that come with relocating the incorporation to Ireland; this will result in substantial tax savings for the company as well as an increase in its sales. Another advantage from the merger of the two companies will be the employment opportunities that usually rise from the combination of such large businesses.
There are four accounting requirements for the business combination that must be completed in order for the acquisition to be validated. The acquirer must be identified in order to make clear the amount of control to be attained and to whom that control is rewarded. Second, a date of acquisition is named and this date determines when financial statements will start to include the subsidiary acquired. To round off the requirements, new acquisitions are measured at fair value and liability assumed is delineated, i.e. the acquiring company enumerates the value of assets acquired at fair market value as well as the liability that is assumed at the time of acquisition, on a predetermined date. Whether a company is acquired at 100% or partial controlled, it is important to determine the information that is going to be in the financial papers of the acquirer as well as that of the company to be acquired and the date of acquisition is the watermark at which there numbers are taken and put into record. As a new owner of a subsidiary, faces the challenge of consolidating the new entity into the financial statement. This process is made simple when the subsidiary is wholly-owned by the parents and the subsidiary is purchased at book value.
In cases were ownership of a company is less than 100% during an acquisition, the parent company will have to go through the process of consolidating the percentage owned into their respective financial statements and separating the subsidiary non-controlling interest. This is accomplished through eliminating entries. One also has to consider that after the date of acquisition, business activities continue to take place which further complicates the transition.
Another thing for parent company to consider is how to allocate its own the revenues and expenses as well as those of the acquired company. There are two methods, one is the full-year reporting alternative where the subsidiary revenues and expenses are included in the consolidated statement then a deduction made for the pre-acquisition. The second method is the partial-year reporting alternative where only the revenues and expenses reported from the date of acquisition is considered. The merger of Eaton Corporation and Cooper industries will be finalized in the fall of 2012; the management team would have to decide which of these alternatives would best fit the new company.
The consolidation of a parent and its subsidiary is challenging enough when dealing with tangible assets but is multiplied when considering how to allocate goodwill and other intangible assets. “Assets and liabilities acquired are recorded at their fair value. Any excess of cost over the fair value of net assets acquired is recorded as goodwill.” (Jeter & Chaney, 2010). For goodwill to be recorded, the price paid has to exceed the fair value of all assets acquired. In this case, the acquiring company has a basis to claim goodwill from the purchase of the subsidiary. The flip side to this would be a bargain acquisition when the value of the acquisition is less than the fair value of assets acquired, and then there is a negative balance. This is a fair and acceptable way to acquire and record goodwill when purchasing a subsidiary, by making it clear that the only way goodwill will be recorded is through the excess of fair value of all asset required. It makes it easier when it is time to consolidate the acquisition.
Change in ownership occurs when a parent company acquires control of a subsidiary. In a lot of cases, control of a subsidiary happens gradually through several purchases of the subsidiary’s stock purchase. Once the parent company has purchased enough stock to have significant influence, then ownership takes place. This can be accomplished through direct stock purchase of the subsidiary, using a third party, if the subsidiary purchases its own stocks from third party. Change in ownership does not happen only when parent companies seek to increase their ownership in the subsidiary, sometimes the parent company wants to decrease ownership in the subsidiary. One way to achieve this is to sell acquired stocks back to the subsidiary or, again, sell them by means of a third party. There are cases where subsidiary may want to purchase its own stock either from the parent company or third party.
Insolvency occurs when a company is not able to pay its obligations. When this happens, the company has three options. One, it can enter into contractual arrangements with the creditors which would buy the company more time to get financing to pay the debts that are due. The second option is liquidation under Chapter Seven of the bankruptcy reform act, the company files a voluntary or involuntary petition to gain order for relief as a way to protect itself from its debtors. If this petition is granted, then the liquidation of assets commences. Third, the company can file Chapter 11 bankruptcy in order to reorganize rather than file bankruptcy. In this case, with the support of debtors, the company reorganizes the company in order to better meet its debt obligation. If reorganization fails, then the company would have no choice but to file Chapter 7 bankruptcy, thus becoming insolvent.
Eaton Corporation is acquiring Cooper Industries in order to create a new company. In this acquisition, Eaton Corporation is poised to gain a 29% equity premium in the new company. However the changes are not one sided; the new ownership will result in newly combined consolidated financial statement that combines both companies. Elimination entries will need to be done on both sides to create new consolidated financial statements under Eaton Global PLC. As for any other subsidiary that Eaton Corporation has, it will also be merged with Eaton Global and cease to exist.
There are several differences regarding business combination between GAAP and IFRS. One key difference is in regards to goodwill. “When a noncontrolling interest exists, IFRS allows a choice between recognizing goodwill fully or only to the extent of the acquired percentage, while U.S. GAAP require full (100%) recognition of implied goodwill, even when a non-controlling interest remains” (Jeter & Chaney, 2010). In the case of Eaton Corporation and Cooper Industries, this would not affect the merger since Cooper Industries will become a wholly owned subsidiary of Eaton once the acquisition is completed in the fall of 2012. “All the issued and outstanding shares of capital stock of, or other equity interests in, each Significant Subsidiary of Cooper have been validly issued and are fully paid and nonassessable and are owned, directly or indirectly, by Cooper free and clear of all Liens, other than Cooper Permitted Liens” (Eaton to Acquire, 2012). Any subsidiary currently owned by Cooper Industries will be combined with Eaton Global Plc.
Another major difference between IFRS and GAAP is the treatment of tax recognition. The acquisition of Cooper Industries will play a major role in the treatment of tax for Eaton Corporation which will transfer its incorporation to Ireland to take advantage of lower tax liabilities. Under GAAP, the acquiree deferred tax is recognized after the date of acquisition, it is then used to offset goodwill, and then it offsets intangible assets, and finally used to offset tax expenses. However under IFRS, though deferred taxes are recognized only after date of acquisition (i.e., having full valuation allowance at acquisition date) and are effected as current period credit to tax expense that do not have to be offset further tax expenses (Epstein 2012). In the case of Eaton Corporation, this would create a material difference because under GAAP, goodwill and intangible assets would offset the deferred tax, while under GAAP it would be not.
As a current employee of Eaton Corporation, I am extremely excited for this merger, I work in the finance office and I will be able to see firsthand the change that this merger will bring to the company and may get an opportunity for participation and learning more about the business. Businesses are created to grow and increase market share. While those that fail are forced to close, many more find ways to prosper because they are willing to change to meet the demands of the consumer. I feel that with this merger, Eaton Corporation not only gets to add to its market share, it gets to take control of its future by aligning itself with Cooper Industries.

Cutler, S. (2012) Acquisition of Cooper Industries plc. Retrieved August 21, 2012 http://www.eaton.com/ecm/groups/public/@pub/@eaton/@corp/documents/content/pct_361359.pdf
EATON TO ACQUIRE COOPER INDUSTRIES TO FORM PREMIER GLOBAL POWERMANAGEMENT COMPANY (2012) Retrieved August,2012 from. http://www.eaton.com/ecm/groups/public/@pub/@eaton/@corp/documents/content/pct_361362.pdf
Epstein, B. J., Accounting for Business Combinations and Consolidated Financial Statements
IFRS versus GAAP. (2012) Retrieved August 26, 2012 tp://www.ifrsaccounting.com/ifrs-combinations.html

Jeter, D., & Chaney, P. (2010). Advanced accounting: 2010 custom edition (4th ed.). Hoboken, NJ: John Wiley & Sons.