Google’s Acquisition of Motorola Mobility and Motorola Solutions

...

3. Accounting Policies

3.1 Accounting Policies

Both Google and Motorola prepare their financial statements in accordance with US generally accepted accounting principles (GAAP). However, in some instances, both companies use different accounting policies and estimates. Motorola uses its supplemental non-GAAP financial measures internally to understand, manage, and evaluate its business and make operating decisions (Motorola, 2012). It includes these non-GAAP measures in the annual reports and prepares non-GAAP adjustments bridge, which is also publically available to investors.

Google’s accounting policies state that if Google can exercise significant influence but do not gain control over the investee, investments are recorded under equity method; if Google cannot exercise significant influence, investments are recorded under cost method (Google Form 10-K, 2012)

According to this policy, the Motorola acquisition should be recorded under equity method.

3.2 Disclosures of Investments in Subsidiaries

Acquisition Regarding the Motorola acquisition, Google disclosed the consolidation policy that is being followed in preparing the consolidated financial statements as well as the allocation of the acquisition price.

Consolidated Statement of Comprehensive Income Because Google used equity method to record its investment income or loss in Motorola, it recorded Motorola’s operating income as tis own operating income and disclosed Motorola’s comprehensive income, discontinued operations, and extraordinary items in the notes to the consolidated financial statements. In addition, Google also included its impairment charge related to certain equity investments (not specify from which acquisition) in the notes to Interest and Other Income entries in the consolidated statement of comprehensive income.

Fair Value of Stock-based Awards Google recorded and disclosed $41 million USD stock-based awards resulting from the acquisition of Motorola.

Reconciliation of Federal Statutory Income Google recorded $2,043 million USD as deferred tax assets on December 31, 2012 resulting from the acquisition of Motorola.

3.3 Conversion to IFRS

Not applicable.

4. Impact of Acquisition on Financial Statements

4.1 Impact on Balance Sheet in 2012

Cash Since Google paid the acquisition price in cash; its cash account should be reduced by the acquisition price of $12.4 billion USD. However, this impact was not reflected on the consolidated balance sheet since Google also engaged in other business activities and did not specifically disclose its cash changes.

Investment in Subsidiaries The balance of this account should include the initial purchase price plus Motorola’s income attributed to Google minus any dividends received from Motorola and amortization of acquisition differential. Although Google did include Non-market equity securities in its consolidated balance sheets, specific information regarding the Motorola acquisition is not available.

Goodwill Google’s goodwill will increase by the amount resulting from the Motorola acquisition. Again, this was not directly reflected on the consolidated since Google also engaged in other acquisitions in 2012.

Other Assets and Liabilities Google’s consolidated balance sheet should include Motorola’s portion after amortizing acquisition differential. Any inter-company gains or losses should be eliminated. Google did not specifically disclose this information.

4.2 Impact on Income Statement in 2012

Revenues and Expenses Google separated its own operating revenues and expenses from those of Motorola’s.

General and Administrative Google recorded $50 million USD transaction costs paid in order to complete the acquisition under the General and Administrative entry.

Operating Income Since Google used equity method, it recorded Motorola’s operating income as its own operating income and did not separate these two.

Non-operating Income: Although the equity method requires the parent company record investee’s non-operating income (discontinued operations, comprehensive income, and extraordinary items) separately, Google did not make the information available in the consolidated balance sheet nor did it disclose the Motorola’s portion in the notes disclosure section.

4.3 Impact on Cash Flow Statement in 2012

Stock-based Compensation Expenses Google allocated $401 million USD of the acquisition price to Motorola’s unvested stock options and restricted stock units. This number was recorded as stock-based compensation expenses in the cash flow statement.

Purchases of Property and Equipment (Investment Activities) Since Motorola is a hardware manufacture, it is likely that the acquisition included the purchases of Motorola’s properties and equipment, although Google did not reveal the specific amount.

Acquisitions (Net of Proceeds from Divestiture) Google recorded $9,946 million USD expense under this entry, $2,354 million USD ($12,400 - $9,946) less than the acquisition price, indicating that Google engaged in other divestitures during 2012.

Non-cash Financing Activities Google paid $41 million USD stock-based awards in connection with the acquisition of Motorola.

4.4 Impact on Company’s Exposure to Foreign Investment

The acquisition increased Google’s risk to foreign currency fluctuation as Motorola and its wholly owned subsidiaries also generated significant amount of revenue in China, the UK, Japan, Malaysia, Brazil, and other international markets.

5. Notes Disclosures on Acquisition

5.1 Google’s disclosures meet the requirements stated by the US GAAP standards.

Consolidation Policy Google properly disclosed its consolidation policy that is being followed in the notes section (ASC 810).

Comprehensive Income Google properly disclosed the amount attributed to the parent for income from continuing operations, discontinued operations, and extraordinarily items. Google also calculated its earnings per share based on the consolidated net

...