http://www.financialpost.com/trading_desk/financials/story.html?id=1171778
Summary:
Canada’s fourth largest bank, BMO Bank of Montréal,purchased the world’s largest insurance company – AIG’s Canadian Life Insurance Unit. It acquired the company with an all-cash transaction of $375 million CAD. AIG was required to pay back the loans from the U.S federal government with an amount of $60 billion US dollars. BMO saw the purchase as a source to expand, strengthen the business’ financial plans, and increase client relationships. Also, the business deal will certainly benefit BMO’s revenue by opening the doors to a variety of customers and enhancing the bank’s earnings. Without a doubt, the BMO has strategically purchased AIG Life of Canada at a perfect timing with a fairly low cost.
Connection:
Chapter 4 focuses highly on Revenue Recognition with the GAAP code and criteria. Businesses strive to keep their company from bankruptcy by continually earning revenue throughout their accounting cycle and recording it into the financial statements. Only the businesses with new and fresh strategies are able to successfully continue their business without being afraid of closing down. Similar to BMO’s earnings with additional accounts and customers, they must recognize the revenue they encounter by verifying it onto the financial statements. Also, the purchase of AIG Life of Canada clarifies the Return on Investment Ratio (ROI) which declares the Performance Measurement of the business.
Reflection:
I think BMO took a mountain load off AIG’s shoulders as they acquired the company with an all-cash transaction. It is fairly beneficial to BMO’s new line of business for financial plans and increasing customers. As a matter of fact, I think BMO made a smart move when they decided to buy AIG Life of Canada. This way, the bank will be able to strengthen their financial position and achieve access to many supplementary customers. Also, AIG couldn’t maintain their expenses at low costs with high revenue which indicates their unsuccessful business strategies. It was impossible for AIG to survive without the help of BMO’s cash flowing into the company.
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In this chapter, it also talks about earnings management. The issue of recognizing revenue might be one of the possibilities that lead to the AIG poor performance. I tried going on their website to research about how they recognize revenue but I couldn't find anything. I think it is because insurance companies have lots of ways for recognizing revenues because they have lots of insurance plans for their users. On the other hand, like you said, Return on Investment Ratio is used. The equation is ROI= Return/ Average investment. In this case, BMO made an investment in AIG, so the revenue from AIG that can be put under BMO’s capital can be use to calculate the ROI. The average investment would consider being a low amount because BMO bought AIG less than its book value to an average industry valuation. This can contribute to a high ROI therefore BMO made a good decision buying the AIG. I really agree with you that BMO made a smart choice of buying AIG in a low price.
ReplyDeleteVanessa Lo
Financial Accounting 12
D1 P2