Planning on M&A Activity

What you need to know now to help guide you through FAS 141(R), 142 and 144 as well as other best practices.

No public company wants to face the time and expense, as well as the negative investor and media reaction, which comes with adjusting its financial data for previously reported quarters. But that is exactly the risk a company can take after a merger and acquisition.

In fact, it’s a risk that has gone up this year with revisions to the financial accounting standard 141(R). FAS 141(R) has created changes in accounting for mergers and acquisitions starting in 2009, with parts of the new standards applicable to business combinations before 2009. These changes are part of the continued shift to fair value accounting and are designed to increase the relevance and comparability of the information provided in financial reports.

But the reach and impact of the shift may go beyond what many company executives realize. For example, these changes —

• Have the potential to generate greater earnings volatility related to the acquisition.
• Result in the expensing of transaction costs (including audit and valuation costs) and restructuring charges. Previously, transaction costs were included in the purchase price, and restructuring charges were recognized as a liability at the acquisition date.
• Require in-process R&D be capitalized and amortized in future periods, rather than expensed immediately.
• Mandate that Fair Value Accounting be used for certain contingent assets, liabilities and earn-out arrangements.

In addition, each year the accounting valuations for intangible assets and goodwill are required to be assessed by management. Under FAS 142 and 144, if a company’s Fair Value is less than its Carrying Value (book value of equity, including goodwill) then some, or all, of the company’s intangible assets have been impaired and a re-valuation of intangible assets is required.

Dirk Van Dyke, partner with Armanino LLP, said that the goal for a company after a merger and acquisition should be to minimize spending on transaction costs, minimize risk of misstatement, reduce auditor time and lessen the burden of the staff.

Achieving these post M&A objectives under the new requirements, and maintaining an annual compliance, requires significant valuation experience, Van Dyke said. And that experience becomes even more critical with the economic downturn as auditors scrutinize intangible assets that many companies will have to write down.

Immediately after an M&A, and going forward annually, companies should outline for themselves what their needs are from an accounting & valuation services provider which include:

• Determining the Fair Value of acquired intangibles.
• Preparing all analysis, accounting entries & disclosures (including 8-K/A proforma statements) for the acquisition.
• Auditing the financial statements (and prep FIN 48 analysis) of the acquired entity.
• Providing proven (Tax, IT) integration strategies and solutions.
• Preparing annual/interim goodwill and intangible asset impairment testing required by FAS 142.

Many company executives are going to have questions about the implementation of the new accounting requirements for business combinations, Van Dyke said. For those companies that have engaged in prior acquisitions, or that will close a deal in 2009, his best advice is to seek out guidance and expertise in understanding and complying with these new reporting standards.