Merger and acquisition (M&A) accounting involves recording and reporting financial transactions that stem from either the consolidation of companies or company assets. M&As are a broad term for a variety of actions, which may include the acquisition of another company, the merging of two or more companies, or a related matter. Accurate and reliable accounting is essential in M&A deals to ensure the proper valuation of assets, structure the transaction, plan strategies, negotiate agreements and identify any other issues that may require attention.
While M&A accounting can be done by an in-house team, a better option in many situations is to work with an external partner that specializes in such practices. That’s where Propeller Industries can help. As experts in M&A accounting, our team of accountants can help chart a path for a smooth overall process. Read on to learn more or contact Propeller Industries today.
Key Accounting Standards for M&A
M&As have to be meticulously planned and meet various standards before they can commence. That’s where the value of M&A accounting can really shine. Some of the key accounting standards that need to be considered include:
- Business combination (US GAAP): M&As must follow generally accepted accounting principles, or GAAP standards.
- ASC 805 and ASC 820: ASC 805 and ASC 820 address accounting standards for a transaction or type of event when one or more businesses are acquired. The ASC 820, specifically, is designed to ensure fair value when it comes to mergers and acquisitions.
- IFRS 3 – Business combinations (international standards): These are international standards that contain principles and requirements for how an acquirer in a business combination recognizes and measures its financial strategy.
Determining the Acquirer
Merger and acquisition accounting must first determine the acquirer in a transaction. The acquirer is the combining entity with controlling financial interest whose relative size is larger than the entity or the sum of the entities that are being merged in a transaction. Entity size is based on acquired assets, revenue, earnings and other relevant benchmarks. Acquirers typically check several boxes, such as a long-term plan, a culture of collaboration and transparency, a pattern of financial sustainability and a history of success. It’s also important to properly measure assets and liabilities when determining the ideal acquirer, as well as when selecting the best target company for asset acquisitions.
Purchase Price Allocation
Purchase price allocation, or PPA, involves separating the purchase price of a company into different components, such as assets, liabilities and equity. The main goal of PPA is to determine the fair market value of liabilities assumed and assets acquired to allow for more accurate reporting on behalf of the acquiring company with their financials. There are four key steps to allocating PPA:
- Calculate fair market, assets and liabilities.
- Calculate goodwill, which involves subtracting the book value of equity from the market value of equity.
- Adjusting the balance sheet to reflect fair market value.
- Plugging the balance sheet with goodwill.
Accounting for Contingent Consideration
A contingent consideration is an asset or liability that is first initially measured and then measured again during various reporting periods. It should initially be recorded on the date of acquisition, most commonly listed as a liability. If not properly assessed, the value of contingent consideration can lead to financial uncertainty, underscoring how important it is to have someone who knows what they’re doing perform the accounting on it.
Post-Acquisition Accounting Issues
Various post-acquisition accounting practices need to take place to ensure overall success. These include:
- Pushdown accounting: This is an accounting method that consists of buying a subsidiary at purchase price, rather than at its historical cost. The amount paid then becomes the new value on financial statements.
- Intercompany transactions: These are financial transactions that occur between two or more companies. The companies tend to be a part of the same corporate group, family of companies or enterprise.
- Segment reporting: This is a means of disclosing financial information about a firm’s differing business segments. These segments may include product lines, product divisions and more.
- Goodwill impairment testing: This procedure helps determine if a company’s goodwill is overstated or has changed concerning market conditions.
Best Practices in M&A Accounting
M&A accounting can be very complicated, underscoring both the need for specialized accounting services and the need to follow various industry best practices. These include:
- Engaging valuation specialists: These professionals help determine the value of a company.
- Documenting key assumptions and methodologies: These can help serve as the foundation of a merger or acquisition.
- Implementing robust internal controls: These processes are designed to effectively and efficiently help reach goals and objectives.
- Preparing for regulatory scrutiny: Preparation is key when it comes to addressing the likelihood of supervisory and enforcement.
- Leveraging technology for efficient integration: Utilizing advanced technology throughout the M&A process can help streamline efficiency and reduce the potential for any errors.
Common Pitfalls and How to Avoid Them
Working with an inexperienced accountant can present a number of problems should various best practices not be followed and issues arise. Some of the common pitfalls that you’ll want to avoid in a merger or acquisition, at least from an accounting perspective, include poor due diligence, overpayment, errors of omission, and errors in income and expenditures.
The Role of Propeller Industries in M&A Accounting
If your business is involved in a merger or acquisition, there’s a laundry list of accounting needs that have to be considered before things can fully progress – and it’s important to have experience and expertise on your side. That’s where Propeller Industries can help. We have the experience and know-how to successfully manage the books and accounting during your firm’s merger or acquisition to help make it as seamless as possible.
The Role of Propeller Industries in M&A Accounting
If your business is involved in a merger or acquisition, there’s a laundry list of accounting needs that have to be considered before things can fully progress – and it’s important to have experience and expertise on your side. That’s where Propeller Industries can help. We have the experience and know-how to successfully manage the books and accounting during your firm’s merger or acquisition to help make it as seamless as possible.
Contact Propeller Industries for M&A Accounting Services
From determining acquirers to purchase price allocation to accounting for contingent consideration, Propeller Industries has the experience and expertise to partner with your firm on its next merger or acquisition. Such periods can represent a lot of excitement for firms involved, but poor accounting can make things problematic. That’s why working with a trusted partner, like Propeller Industries, can be so valuable.
For more information on M&A accounting and to learn more about Propeller’s depth of experience in navigating complex transactions and ensuring compliance with accounting standards, contact us today to schedule a consultation.
FAQs
What’s the difference between a merger and an acquisition from an accounting perspective?
The biggest difference is how assets are valued and whether or not goodwill is recognized.
How long does the purchase price allocation process typically take?
This can vary, but is typically determined within six months of the merger or acquisition being finalized.
How do you account for transaction costs in an M&A deal?
Accounting for transaction costs can be complex and largely depends on tax and bookkeeping treatment.
How does earnout accounting work in M&A transactions?
Earnout often consists of upfront payments and then future payments to the seller over an agreed-upon period of time.
What are the key challenges in valuing intangible assets in an M&A transaction?
Key challenges in valuing tangible assets include identifying all relevant intangible assets, determining appropriate valuation methodologies, estimating future cash flows attributable to specific intangibles, assessing the remaining useful life of intangible assets and separating the value of intangibles from goodwill.
