Even seemingly straightforward mergers and acquisitions (M&A) can involve complex accounting issues like determination of which party obtains control, accounting for non-controlling interest, fair value step-ups, put or call options, pre-existing relationships, fair value of assets and liabilities and treatment of potential GAAP differences.
Acquisition accounting may impact post-acquisition earnings in instances with earnouts, significant fair value adjustments arising from the purchase price allocation (PPA) exercise or GAAP differences. Determining the cash generating units (CGUs) to which goodwill is allocated and assessing the risks of future impairments are also important. Identifying and dealing with such issues early in the process prevent surprises at a later stage.
The buyer’s and seller’s accounting policies need alignment, even if they are reporting under the same GAAP. A thorough analysis during the PPA will ease the subsequent integration and external audit. Complex valuation techniques are often required for acquired contracts, intangibles, contingent considerations (earnouts) and other assets and liabilities that are difficult to value.