Understanding book versus tax valuation differences improves M&A planning and reporting

August 2011
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Understanding book versus tax valuation differences improves M&A planning and reporting

At a glance

Differences in purchase price allocation standards determine the appropriate valuation in reporting an M&A transaction, restructuring or other corporate action. Awareness of the issues arising from book and tax valuation differences will improve planning and reporting.

Finance, accounting, and tax professionals constantly ask whether it is appropriate to use financial reporting valuation estimates for tax purposes and whether there are parts of valuations for financial reporting or tax that are interdependent. M&A transactions trigger different rules and procedures with respect to allocations of purchase price under US GAAP and US federal tax principles. Although many of these differences have existed for years, the adoption of FAS 141(R) and FAS 157 has significantly altered how companies account for M&A transactions and define fair value for financial reporting. While changes to financial reporting standards have eliminated some inconsistencies, fundamental differences between the purchase price allocation rules for financial reporting purposes and tax continue to exist.

Best practice calls for an integrated analysis where both book and tax valuations are performed simultaneously to ensure accurate reporting and increase the efficiency of the valuation process, ensure the buyer understands the impacts of both, and facilitate tax and financial accounting after an acquisition. However, many valuation practitioners do not have the in-depth tax knowledge to be able to contrast and compare a valuation for financial reporting while bearing the tax reporting consequences in mind.