This is the second in our series focused on navigating the waters of a cross-border acquisition. The series looks at various aspects along the deal continuum, including pre-acquisition due diligence and strategies, financial reporting requirements, tax implications, and post-acquisition considerations. This edition provides insights on SEC and other financial reporting requirements that may apply in a cross-border acquisition.
This is the first in a series focused on navigating the waters of a cross-border acquisition. This edition focuses on the pre-acquisition phase, including how GAAP differences can impact valuation and how a company can manage the financial risk exposure that arises from a cross-border acquisition.
The acquisition of a business can have a significant impact on both the risk exposures and risk management strategies of the combined entity. In many cases, an acquirer’s financial risk exposure will increase as a result of the acquisition. However, there may be situations in which the acquiree’s operations reduce the acquirer’s current risk exposure. In any event, identifying potential changes in enterprise risks, creating an action plan to address them, and managing changes to risk management strategies post-acquisition are critical to developing short- and long-term solutions for integrating financial risk management considerations in an acquisition.
Companies preparing to go public often face a number of issues related to their financial statements. A common issue is whether push-down accounting should be applied. Push-down accounting is the practice of adjusting the standalone financial statements of an acquired company to reflect the basis of accounting of the buyer. This edition of Mergers & acquisitions - a snapshot, provides an overview of the SEC's rules on push-down accounting and a high-level summary of the complexities and opportunities that can arise in applying the rules to common deal structures.
Determining whether an acquired group of assets is a business has proven to be one of the more challenging aspects of applying the current M&A accounting guidance. For many transactions, the determination will be straightforward. However, the current guidance will cause many transactions that are "on the edge," and previously would have been accounted for as asset acquisitions, to be accounted for as business combinations. This edition identifies relevant considerations in determining whether a business has been acquired and why it matters not only upon acquisition but also for disposals and public company reporting.
In a business combination, buyers are required to record the acquired assets and assumed liabilities of a business at their fair values. Fair value reflects the price that market participants would receive to sell an asset or pay to transfer a liability. Assets and liabilities may be used differently by different market participants, resulting in variations in values. Therefore, a market participant's view is an important aspect of the valuation process as a buyer cannot look only to its own intended use of an asset or its ability to transfer a liability at a certain price. This publication provides insight on the identification of market participants, as well as how entities can develop market participant assumptions.
The M&A Standards changed how a parent reports the minority shareholder interests in a partially owned subsidiary in its consolidated financial statements. The minority shareholder interests, or noncontrolling interests (''NCI''), are generally presented within equity as if the parent and the minority shareholders have similar economic interests. Previously, NCI were generally presented between liabilities and equity (''mezzanine equity''). This edition focuses on the classification of redeemable NCI and how different minority shareholder rights may lead to different financial reporting by the parent.
In many M&A transactions, companies looking to dispose of non-core businesses or to generate cash may sell only a portion of their operations (e.g., a subsidiary or a business unit). As part of these transactions, a seller may need, or want, to prepare separate financial statements of the operations being sold, commonly referred to as carve-out financial statements. The preparation of these financial statements can be challenging as there is limited guidance covering their composition. This volume of Mergers & Acquisitions - A snapshot, focuses on some of the issues companies may face when preparing carve-out financial statements, how those statements may differ from their own financial statements, and how the M&A Standards may impact...
FASB Accounting Standard Codification Topic 810 incorporates FAS 167, Amendments to FASB Interpretation No. 46(R)), which is the U.S. standard on consolidation (the Consolidation Standard). The Consolidation Standard is effective as of January 1, 2010 for calendar year end companies and the impact will soon be reported in the first quarter reporting cycle. As a result of applying the new guidance, certain entities may need to be consolidated while other entities may need to be deconsolidated. Determining who consolidates is just the beginning.
In many M&A transactions, when the buyer and seller cannot agree on the total purchase price in an acquisition, the two parties agree to an additional payment, or contingent consideration, based on the outcome of future events. These payments are commonly referred to as earnouts and are typically based on revenue or earnings targets that the acquired company must meet after the acquisition date. The accounting for these arrangements under the M&A Standards represents a significant change from past practice.
In many M&A transactions, a buyer may acquire assets it does not intend to use. Prior to the M&A Standards, buyers generally would assign little or no value to assets that are not intended to be used when accounting for an M&A transaction. Now, such assets are required to be recognized at fair value from a market participant perspective, even if that perspective differs from that of the actual buyer. One common type of asset that a buyer does not intend to actively use that is receiving considerable attention is called a "defensive asset."
Accounting for partial acquisitions and disposals - it's not so simple! In an economic environment where many companies are buying and selling portions of businesses, the M&A Standards will have an impact on how companies account for these types of transactions. At first glance, the fundamental concept of "control" that drives the accounting seems easy to understand. If a company gains control, the acquisition is a business combination. If a company loses control, it deconsolidates the subsidiary. If a company maintains control, the transaction is recorded in equity. Simple, right? Not so fast!
Doing a deal? How will you compensate employees of the target? The new M&A Standards may impact your decision. Determining whether employee arrangements represent compensation for service prior to and/or after the acquisition will have a direct impact on the amount included as purchase price versus the amount expensed in the future. This installment of Mergers & Acquisitions - A snapshot explores some of the more common issues related to employee compensation arrangements typically seen in business combinations... contingent consideration, golden parachutes and stay bonuses, and exchanges of stock compensation awards. Employee compensation decisions agreed upon during deal negotiations could impact the acquirer's future financial results.
Are you ready for volatility in your effective tax rate? The new M&A standards will likely impact a company's effective tax rate. This impact will be felt by acquisitive companies in all industries, public and private, and as early as the first quarter of 2009 because parts of the new M&A standards apply to prior acquisitions. This installment of Mergers & Acquisitions—A snapshot focuses on how the accounting for merger and acquisition transactions will create volatility in an acquirer's effective tax rate in periods before and after an acquisition.
Did you know that the new M&A standards could impact your company regardless of whether you plan to close a deal? Given the current economic environment, understanding the new M&A standards may not be a priority for many companies, particularly if M&A activity is not on the horizon in the foreseeable future. However, companies should be careful not to overlook the new M&A standards, as they may have a significant impact, even without a deal. This installment of Mergers & Acquisitions - A snapshot will help you avoid last-minute surprises by understanding how the new accounting and reporting standards for M&A may affect your financial reporting even though you haven’t closed a deal.
Since the adoption of FAS 142, the goodwill impairment standard, the equity markets have generally trended upward. Accordingly, impairments may not have been as frequent as we expect to see them today. This edition of Mergers & Acquisitions - A snapshot, focuses on some of the issues companies may face in preparing goodwill impairment tests in the current environment. It also serves as a refresher on certain aspects of the framework for conducting those tests.
Recognizing that the new standards affecting mergers and acquisitions — FAS 141(R) and FAS 160 — will dramatically change the way companies negotiate and account for M&A, PwC has launched the first in a series of publications that will help companies keep abreast of emerging issues resulting from the new standards, as well as provide them with ideas on modifying current strategies and employing new ones for future deals. This first installment of Mergers & Acquisitions - A snapshot focuses on how the accounting treatment for M&A transactions will depend considerably on whether the deal closes before or after the effective date of the new standards.