John Deere 2014 Annual Report Download - page 37

operation as a component or group of components that is
disposed of or meets the criteria as held for sale and represents a
strategic shift that has or will have a major effect on an entity’s
operations and financial results. This ASU requires additional
disclosures about discontinued operations and new disclosures for
components of an entity that are held for sale or disposed of and
are individually significant but do not qualify for presentation as
a discontinued operation. Early adoption is permitted for items
that have not been reported as disposals or as held for sale in
previously issued financial statements. The company early
adopted this standard in the second quarter of 2014. As a result,
disposals that did not or will not meet the criteria for reporting in
discontinued operations are presented in continuing operations.
New Accounting Standards to be Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from Contracts with Customers (Topic 606), which supersedes
the revenue recognition requirements in ASC 605, Revenue
Recognition. This ASU is based on the principle that revenue
is recognized to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or
services. The ASU also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. The effective date
will be the first quarter of fiscal year 2018 using one of two
retrospective application methods. The company has not
determined the potential effects on the consolidated financial
statements.
In June 2014, the FASB issued ASU No. 2014-12,
Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved
after the Requisite Service Period, which amends ASC 718,
Compensation–Stock Compensation. This ASU requires that
a performance target that affects vesting and that could be
achieved after the requisite service period be treated as a
performance condition. Therefore, the performance target
should not be reflected in estimating the grant-date fair value
of the award. Compensation cost should be recognized in the
period in which it becomes probable that the performance
target will be achieved and should represent the compensation
cost attributable to the periods for which the requisite service
has already been rendered. The total compensation cost
recognized during and after the requisite service period should
reflect the number of awards that are expected to vest and
should be adjusted to reflect those awards that ultimately vest.
The effective date will be the first quarter of fiscal year 2017.
The adoption will not have a material effect on the company’s
consolidated financial statements.
4. ACQUISITIONS AND DISPOSITIONS
In December 2013, the company closed the sale of 60 percent
of its subsidiary John Deere Landscapes, LLC (Landscapes) to a
private equity investment firm affiliated with Clayton, Dubilier
& Rice, LLC (CD&R). CD&R acquired newly created shares
of cumulative convertible participating preferred stock initially
representing 60 percent of the outstanding capital stock of
Landscapes on an as-converted basis.
At October 31, 2013, the total assets of $505 million and
liabilities of $120 million for these operations were classified as
held for sale in the consolidated financial statements and written
down to realizable value, which consisted of $153 million of
trade receivables, $219 million of inventories, $37 million of
property and equipment, $106 million of goodwill, $25 million
of other intangible assets and $10 million of other assets less a
$45 million asset impairment. The related liabilities held for sale
consisted of accounts payable and accrued expenses. The total
amount of proceeds from the sale at closing was approximately
$305 million with no significant gain or loss, which consisted
of $174 million equity contribution and third party debt raised
by Landscapes.
The equity contribution was in the form of newly issued
cumulative convertible participating preferred units representing
60 percent of the voting rights (on an as converted basis), which
will rank senior to the company’s common stock as to dividends.
The preferred units have an initial liquidation preference of
$174 million and accrue dividends at a rate of 12 percent per
annum. The liquidation preference is subject to the company’s
rights under the stockholders agreement. Due to preferred
dividend payment in additional preferred shares over the first
two years, CD&R’s ownership will increase over the two-year
period.
The company initially retained 40 percent of the
Landscapes business in the form of common stock. As of
January 2014, the company deconsolidated Landscapes and
began reporting the results as an equity investment in uncon-
solidated affiliates. The fair value of the company’s retained
equity investment was approximately $80 million at closing.
The fair value was determined using an implied equity value
approach. This approach used an option pricing model to
determine the value of Landscapes’ total equity based on the
liquidation preference of the preferred units of $174 million,
as well as the preferred stock’s conversion feature and dividend
rights. The value of the company’s common stock of Landscapes
was the difference between the total fair value of the
Landscapes’ equity and the value of CD&R’s preferred stock.
The significant unobservable inputs were the expected term
of the investment, assumptions about the form of preferred
dividend payments and the assumed volatility of the Landscapes
enterprise during the term of the investment. Due to the
company’s continuing involvement through its initial 40
percent interest, Landscapes’ historical operating results are
presented in continuing operations.
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