Accounting Considerations When Acquiring a Company

Congratulations, your firm just acquired another company! You went through the long and arduous process of vetting and selecting the best acquisition target. Buyer and seller have done their due diligence, and are confident that it’s a beneficial deal for both sides. All agreements are signed, purchase consideration has been transferred and your firm is now the proud owner of a shiny new subsidiary. You can now sit back, relax and let the synergistic benefits roll in, right?

Of course, this is only just the beginning of a long process undertaken by all employees in the new combined organization to make sure the transaction is a success.

From an accounting standpoint, it is important for the acquirer to record the transaction appropriately on its annual financial statements. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 requires all business combinations to be accounted for using the acquisition method. ASC 805 states that the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition date fair values. This article outlines some important questions that should be answered when preparing to record the newly acquired assets and liabilities.

You’ve acquired a new company. How do you record the assets and liabilities? Ask these key questions:

• What reporting standards will be followed? – Transactions of domestic entities should generally comply with U.S. generally accepted accounting principles (“GAAP”). If a U.S. company acquires a foreign entity, it may need to continue reporting under international financial reporting standards (“IFRS”) for statutory purposes, but also under U.S. GAAP for the new parent’s reporting purposes. This usually results in a consolidating company that converts their books from IFRS to U.S. GAAP for financial reporting purposes.
• Will the acquired assets be recorded on one balance sheet, or will multiple subsidiary balance sheets be required? – Depending on the acquirer’s financial reporting needs, the acquired assets may need to be recorded on one or more subsidiary balance sheets based on their particular function and/or location.
• Was the transaction structured as a stock or asset deal? – Under a stock deal, the buyer generally receives the same tax basis in the assets as the seller (unless an Internal Revenue Code Section 338(h)(10) election is made). Under an asset deal, the buyer receives a step-up in the basis of the acquired assets to their acquired values. The step-up in basis under an asset deal can lead to significant increases in depreciation and amortization of the acquired assets, which will reduce the buyer’s future taxable income. Although this relates to the tax implications of the transaction, and not financial reporting standards, the future taxable income and ultimate cash flows generated by the subsidiary will impact the fair value of the acquired business for financial reporting purposes.
• Was the transaction price representative of the fair value of the target? – If the seller employed an investment banking team to formally market the company for sale, and multiple offers similar to the transaction price were entertained, the transaction was likely representative of fair value. If not, and the business was perhaps sold to a friend of the owner for a low price, a gain on the transaction might need to be recorded on the financial statements (but not for tax purposes).

These are just some initial accounting questions that should be considered when acquiring a company. Discuss these items with your audit team early on to make sure everyone is on the same page in order to help reduce issues down the road.

How will you determine the value of the intangibles?

You will also likely need to engage an independent valuation specialist to assist with determining the fair value of intangible assets acquired, if any. A valuation analyst may also be needed to estimate the fair value of certain tangible assets (most commonly, inventory and property, plant and equipment) depending on the situation and materiality of these assets. Although your audit firm may have valuation expertise, it will likely not be able to perform the valuation in-house, due to independence issues.

Schneider Downs has significant experience in determining the fair value of intangible assets acquired and providing consulting and advisory services to make sure your business combination accounting is in full compliance with ASC 805. For more information about Schneider Downs’ business valuation and other business advisory services, please contact us at [email protected].