Special Considerations in Acquisition Accounting

The ink is dry and the deal is done! Your company just made a giant leap with an acquisition in hopes of increasing the top line and boosting shareholder value. From a bookkeeping perspective, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805 states that the acquired entity’s assets and liabilities that are assumed are required to be adjusted to fair value. But after this allocation is made, there’s still more to consider. Let’s take a look at some common pitfalls to avoid within acquisition accounting.

One common issue involves the treatment of acquisition-related costs or transaction costs incurred by the acquirer as part of the combination. According to Topic 805, the costs – which typically include finder’s fees, along with advisory, legal, accounting, valuation and other professional or consulting fees – should be expensed as incurred when services are received. There is, however, an exception to the rule, in which costs to issue debt or equity securities in conjunction with the acquisition should be treated in accordance with other applicable sections of U.S. GAAP. For example, if a new debt instrument was obtained as part of the acquisition, the associated expenses – otherwise known as debt issuance costs – should be capitalized as part of the outstanding debt instrument and subsequently amortized over the life of the instrument using the effective interest method. Debt issuance costs are recorded as a contra-liability, which reduces the value of the debt shown on the balance sheet.

Another topic that can be difficult to account for correctly due to its subjective nature is contingent consideration, a potential obligation of the acquiring company to transfer additional assets or equity interests to the acquired company if a specified future event is to occur, sometimes referred to as “earn out” provisions. Contingent considerations are useful in business combinations when the two parties are far apart on the valuation of the company and can help facilitate a deal. FASB guidance stipulates that any contingent consideration should be recognized at fair value as of the acquisition date. Subsequently, though, if facts and circumstances were to change on the likelihood of the contingent consideration being realized, the consideration would then need to be adjusted.

Considerations classified as equity should not be re-measured and its subsequent settlement should be accounted for within equity. Considerations classified as assets or liabilities should be re-measured to fair value at each reporting date until the contingency is resolved. Changes in fair value should be recognized in earnings, unless the contingency is a hedging instrument, of which GAAP requires changes to be recognized in other comprehensive income.

A final matter that needs special consideration involves the measurement of goodwill. The excess of the purchase price of the acquisition over the assets acquired and the liabilities assumed should be assigned to intangible assets, including goodwill. The assets represent future economic benefits arising from other assets acquired in a business combination. In simple terms, this bridges the gap between the value of the company from the purchase price to the value of the company derived from the identifiable assets and liabilities. Goodwill should be evaluated for impairment annually at the entity or reporting unit level when a triggering event occurs.

ASC Topic 350 describes the events and circumstances upon which goodwill should be assessed for impairment. In accordance with Accounting Standard Update No. 2014-02, private companies are allowed a policy election in which goodwill should be amortized using a straight-line method over a period of 10 years or less if the company demonstrates another useful life is appropriate to simplify this accounting treatment. Additionally, if the policy election is elected, noncompetition agreements and customer-related intangible assets should not be recognized separately from goodwill unless the customer-related intangible asset is capable of being sold or licensed independently from other assets of the business.

Our experts at Schneider Downs are well-equipped to handle a number of complex intricacies based on our wealth of experience in a multitude of different industries. For any issues you have from implementing a business combination, we’re here to help.