Post-Merger Accounting Rules Change
After completion of any acquisition or merger, GAAP requires that all of the assets and liabilities of the acquired entity be revalued to “fair value.” This includes not only tangible assets, such as inventory or property, plant, and equipment, but intangible assets such as intellectual property or in-process research and development.
The Financial Accounting Standards Board (FASB) made substantial revisions to the relevant rules, ASC 805, Business Combinations (formerly FAS 141R), which took effect at the beginning of 2009. While not as sweeping as the abolition of “pooling-of-interests” a few years ago, the changes require attention by deal participants. PricewaterhouseCoopers has predicted that “major changes in acquisition accounting will impact nearly every organization.”
A few of the most significant changes include:
* Earnouts must be recorded at estimated “fair value” at the time of closing and marked to market with a new estimated “fair value” in subsequent reporting periods
* Contingent assets and liabilities must be recorded at their estimated “fair values” at the time of closing
* Equity securities used as part of the purchase price must be reported at “fair value” at the time of closing, not at the time of the announcement
* Deal related fees and expenses must be expensed when incurred, not capitalized and amortized
* Restructuring liabilities may not be accrued as of the time of closing
* When the consideration paid exceeds the “fair value” of the assets acquired, the acquirer must expense “negative goodwill”
Acquiring companies face a number of challenging new issues because of these revised rules. At a minimum, acquirers could experience increased volatility of earnings because of the ongoing mark-to-market requirement. Acquirers considering an earnout as part of deal may want to have Teknos model its potential effect before the terms of a deal are finalized. Teknos has considerable experience in intangible asset valuation, having worked with a variety of private and public acquiring companies.
Because the new rules impact a company’s annual goodwill impairment test, regardless of when the goodwill was created, even companies which have not made an acquisition since January 1, 2009 will have consider the implications of ASC 805. In addition, the decline in asset values during the recent years will require many companies to more closely consider the effects of ASC 350, Assets—Intangibles—Goodwill and Other (formerly FAS 142), on their financial statements.
For assistance with ASC 805 or ASC 350 implementation, please contact us at: .(JavaScript must be enabled to view this email address)