In any business combination, there is always a purchaser, the party that retains control of the merged company. Control is defined as “the authority to control the financial and operational policies of a company or enterprise in order to profit from its activities”. For most combinations, an entity is deemed to have acquired control if it acquires more than half of the voting rights of the other entity, unless such majority ownership does not constitute control. While it can be difficult to identify a acquirer in a merger and acquisition, the acquirer`s indicators may include: Significant adjustments to the accounting of acquisitions that are made too late can be considered errors as well as deficiencies in internal controls that may require the disclosure of financial reports. Saito suggested managing acquisition accounting as a project, with finance as the project manager, providing all departments involved with a calendar of key dates and activities until the results are released, so everyone knows what to do and who needs to review it. This approach will ultimately pay off, especially since evaluation is a high-risk area of auditing. Due to the prevalence of merger activities in recent years and the many subjective assessments and estimates associated with the business combination process, the PCAOB highlighted its concerns about the risk of assessment in its August 2017 personnel inspection submission. THE PCAOB also recently released two new standards that impact the auditing of evaluations: changes to the auditing standards for the auditor`s use of specialist work and the auditing of accounting estimates, including the measurement of fair value, and changes to the PCAOB auditing standards. Because post-closing accounting is challenging, GAAP allows for the recognition of acquisitions and the adjustment of the measurement period up to one year after the acquisition. But in some cases, it may only take 30 to 60 days to make a working capital adjustment. The FASB has also developed alternatives for private companies with respect to the accounting for business combinations (see “Private Company GAAP Alternatives: It`s Not Too Late”, page 32).
However, practical means for private companies should only be used if the company`s annual accounts remain in the private sector and banks accept this format. McGahan advised, “Most companies making acquisitions need to have access to the financial markets to raise funds, so transactions may need to be SEC compliant.” “Being part of the due diligence can help the finance department understand the acquired business and uncover areas where something can go wrong. Otherwise, you may not know what you don`t know,” said Linnae Latessa, CPA, business controller and chief accounting officer at USI Insurance Services. To help accountants better anticipate and prepare for the challenges of business combinations, here are a few things to keep in mind. McGahan agreed, “Companies have dedicated their time and effort to developing controls for ongoing day-to-day processes, but may not have robust controls for business combinations and struggle with who they are. A number of specific controls and procedures should be in place. But companies don`t spend enough time developing them if they only make a few transactions. “When accountants are faced with the prospect of a business combination, they will need to prepare for many challenges in transaction and accounting.
FASB ASC Topic 805, Business Combinations, is a specialized accounting area that has evolved over the years and continues to be the subject of FASB simplification initiatives. It is complex and can force CPAs to face new problems and apply certain accounting policies for the first time (see the “Quick Tips for Accounting” box below). For SEC registrants, operating lines may change depending on how the new business will be managed in the future. In addition to the annual financial statements, there is also the Management`s Discussion and Analysis and a description of the business lines that must be developed and prepared within the deadlines for submission. The closing process can be very difficult. Accounting methods and practices may vary and need to be adjusted. This can be an opportunity to evaluate existing accounting policies and make changes. There may also be scheduling issues if the acquired company takes longer to close its books.
The acquirer must allocate the cost of a business combination at the time of acquisition by recording the identifiable assets of the acquired entityAsset typesGlobal asset types include current, non-current, non-current, physical, intangible, operational and non-operational assets. Correct identification of liabilities and contingent liabilitiesResponsibilitywhat a contingent liability is a potential liability that may or may not occur. The relevance of a contingent liability depends on the likelihood that the event will become an actual liability, when it is and the accuracy with which the amount associated with it can be estimated. that meet the recognition criteria at their true value at that time. Differences between the cost of the business combination and the acquirer`s interest in the fair value of identifiable assets, liabilities and contingent liabilities should be recognised as goodwill. There can be a great deal of information to be provided on the conclusion of business combinations, particularly in the case of larger transactions. “The accounting and financial departments of the two companies need to partner,” Saito said. “Workflows may need to change, and changes don`t happen overnight.” “Critical assumptions about opening day balance sheet values are important to users of the financial statements,” McGahan said. “They need transparent disclosure of material assumptions and estimates of the accounting for acquisitions that are not derived from observable inputs, including how they were developed.” “In a typical case, the Business Development Group did its due diligence, analyzed the objective, developed the price and identified the value factors. Then the deal is made and the torch is passed to finance to do the acquisition accounting,” McGahan said. Some companies may carry out the assessment themselves internally.
If this is the case, it is important that the finance department has the necessary expertise and works with external auditors to ensure that the documentation and support that develops acquisition accounting financing meets the needs of auditors. At the time of acquisition, the goodwill resulting from the business combination must be recognised as an intangible asset in the acquirer`s balance sheet. The asset is measured as an excess of cost over the acquirer`s share in the fair value of the acquired assets and liabilities assumed. “If you don`t work for a company that is a serial acquirer, don`t apply acquisition accounting on a daily basis as you do in other GAAP areas like revenue recognition and inventory accounting,” said Greg McGahan, CPA, partner at PwC. You may need to open the books and consider a new accounting model to refresh what you remember, but also to keep up with the changes,” he said. To address issues associated with business combinations, it is essential that organizations implement internal controls for the onboarding process. “In my experience, post-merger accounting is less problematic than the integration of the acquired company. The challenges associated with onboarding a new business often depend on the size and scope, but the acquirer may need to consider new systems, processes, and most importantly, new controls,” Callahan said. We developed and designed our Guide to Accounting for Business Combinations (Fourth Edition) to help medium-sized businesses account for business combinations under Theme 805, Business Combinations, the Financial Accounting Standards Board (FASB) Financial Accounting Standards.
The application of the accounting model in Theme 805 is not an easy task given some of the complexities inherent in this model (p.B. recognition of contingent consideration requires that it be first measured at fair value, appropriately classified as an asset, liability or equity, and then adjusted to fair value if classified as an asset or liability). To reduce this complexity, our guide explains how to account for a business combination in clear English and illustrates many aspects of this accounting with detailed examples and illustrations. Fair value challenges are not the only elements that make accounting for business combinations complex. The FASB continues to work on initiatives to simplify this area and improve comparability. In 2017, the FASB published guidelines that clarified the definition of a business. .