Would you perform your own appendectomy?
Then don’t tackle your own Business Combination!
For externally audited companies following Generally Accepted Accounting Principles (GAAP) and complying with the Financial Accounting Standards Board’s Accounting Standards Codification, the compliance stakes are high.
Finance and accounting teams are expected to have a working knowledge across a broad range of accounting topics. Compared to standards related to fixed asset accounting and lease accounting, the standards relating to business combinations are encountered less frequently by most teams and involve specialized accounting measures.
In a business combination, one entity acquires another entity and must report for said transaction under the acquisition method of accounting as outlined in ASC Topic 805 – Business Combinations (Mergers and Acquisitions). This is typically referred to as a purchase price allocation (PPA). PPAs are extensive, complex, and highly technical in nature. It requires significant professional experience and judgement to produce a PPA in compliance with ASC Topic 820 – Fair Value Measurements (Overall) and ASC 805.
The following concepts and terms are just a few examples of basic knowledge needed to apply the acquisition method of accounting:
- Fair value
- Fair value hierarchy (Level 1, 2, 3)
- Highest and best use
- Market participant
- Principal or most advantageous market
- Orderly transaction
- Exit price
- Consideration Transferred
- Acquirer
- Business
- Identifiable intangible assets
- Goodwill
- Contingent Consideration
There are many other terms and concepts inherent in every PPA that must be recognized and implemented in accordance with the appropriate FASB guidance. To make matters more complicated, most acquisitions result in “goodwill” landing on the company’s opening balance sheet. Depending on the certain company GAAP and tax elections, the goodwill may or may not need to be tested annually for impairment as outlined in ASC Topic 350. Applying a goodwill impairment test (Step 1 or Step 2) also requires extensive knowledge of business valuation theory.
With financial reporting tasks like this, many finance and accounting teams find it helpful to hire a reputable 3rd party business valuation specialist. Valuation specialists contribute extensive knowledge of relevant FASB guidance which ensures compliance with GAAP. They also possess the experience and skills to utilize complex financial modeling techniques. Relying on a specialist for complicated accounting topics allows management to focus on day-to-day operations and creates a smooth and seamless audit experience.
Adamy Valuation has the experience and team to assist you in completing your most challenging financial reporting matters. If you need assistance with determining fair value regarding a business combination, Adamy is here for you, give us a call.
Written in collaboration with Liz Briggson, a Referral Partner of Adamy Valuation.
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