Business combination accounting

Content on this page pertains to the accounting aspects of complex merger and acquisition transactions as a result of business combinations. Please visit PwC’s Acquisitions page for other key elements to consider.

The economic downturn, lack of available funds in the credit markets and continuing market uncertainty have put pressure on companies to look for more creative alternatives in pursuing mergers, acquisitions, strategic investments and/or divestiture options. Examples of recent alternative transactions include seller-financed acquisitions, leveraged buyouts, "UP-C" or similar pre-IPO partnership structures, joint venture arrangements, step-acquisitions (many times involving put / call options), corporate restructurings and partial divestitures. All of these scenarios involve complex accounting issues.

Additionally, even more straightforward M&A transactions and non-controlling investments can introduce complex issues, including accounting and financial reporting for common control (or "put-together") transactions, assessing the necessity for push-down accounting and distinguishing between equity and cost method investments.

An enhanced appreciation of how to account for these complex transactions often facilitates deal evaluation, consideration of alternative structures, and subsequent communication with stakeholders.

Transformative corporate transactions can take many forms, but the key driver is usually the creation and / or preservation of shareholder value. These transactions should not be undertaken without a thorough analysis of the structure and terms during the negotiation process in order to understand the financial reporting implications.

Chad Kokenge, Partner

Impacts to companies:

  • Certain transaction structures may have both pre- and post- acquisition impacts on earnings. For example, certain contingent consideration arrangements or derivatives embedded in the deal financing require separate "mark-to-market" accounting. These are examples of structural elements in a deal that may result in unforeseen dilution to earnings. 
  • Detailed analysis can be necessary to determine the scope of the accounting guidance as well the entity that is subject to its requirements. For example, divesture alternatives present several accounting and financial reporting issues for sellers to evaluate such as: will they be able to deconsolidate the disposed business; will they be able to recognize a gain (or loss) on disposal; how should they account for any retained stake in the business being sold; can the business to be disposed qualify as a discontinued operation before the sale?
  • Complex capital structures as well as puts, calls and other contingent provisions, can require classification of ownership interests outside of equity (and dilution to EPS through accretion or even "mark-to-market" accounting) - and can introduce valuation complexities that can delay or even derail a transaction if not identified early in the process.
  • Complex transactions often touch many areas of GAAP – including consolidation assessments, identifying and accounting for derivatives and complex financial instruments, potential new basis issues, accounting for new or modified stock compensation plans, etc. Many companies don't have the depth or breadth of experience in-house and should consider the assistance of experts early in the negotiation process to identify and understand all of the potential issues.
  • Complex valuation techniques, and the assistance of outside experts, are often required for acquired contracts, intangibles, contingent consideration (i.e., earn-outs), and other assets and liabilities that are difficult to value.

What companies should do:

  • Develop a clear roadmap of the economic objectives which will drive the transaction and can be used to communicate goals, both internally and with advisors.
  • Determine the appropriate commercial, legal, tax, financial reporting, valuation, and regulatory skills needed to complete the transaction and involve the appropriate professionals early in the process.
  • Consider the post-acquisition financial reporting implications of the transaction, including how the transaction will be communicated to stakeholders and whether the transaction will impact any debt covenants or other existing agreements.

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