Over the past year, there seems to be some increase in activity related to mergers and acquisitions (“M&A”). When times are tough you typically see an increase in M&A activity as strong companies will act to buy other companies to create a more competitive, cost-efficient company. M&A’s can come in various forms. They can be structured as asset or equity purchases or as a merger of two companies. M&A’s may be cash deals or equity deals. One thing that must be considered in all M&A deals is the accounting that must be performed to properly record these transactions.
Due to the increased activity noted over the past year, I have spent many of hours helping clients to properly account for these transactions in accordance with Generally Accepted Accounting Principles (“GAAP”). In the GAAP world, a transaction or other event in which an acquirer obtains control of one or more businesses is referred to as a business combination. Transactions sometimes referred to as true mergers or mergers of equals are also business combinations. The key word in the above definition is “control”. When there is a significant change in control, then accounting for business combinations needs to be taken into account.
The accounting that needs to be taken into consideration that many people do not adopt as a result of a business combination is to record assets acquired and liabilities assumed at their fair value. The fair values of assets acquired and liabilities assumed are obtained through a business valuation. The business valuation performed should also take into consideration the valuing of any identifiable intangible assets acquired (i.e. customer list, patents, copyrights, etc.). The consideration transferred in excess of the fair value of any identifiable assets assumed less liabilities acquired is recorded as goodwill. If consideration is less than the fair value of the identifiable assets assumed less liabilities acquired, then a gain on a bargain purchase is recognized as part of the business combination. Acquisition related costs incurred by the acquirer associated with the business combination would be expensed as incurred.
The above is a brief 30,000 foot overview of the accounting that should be applied in a business combination. As you would guess, there are many more details that need to be considered when a business combination takes place so don’t forget to contact your CPA well in advanced of finalizing any purchase agreements to fully understand the impact of this accounting treatment.
By Brian Campbell, CPA