Practical considerations in accounting for Business combinations

If your company has acquired another entity and the other entity meets the definition of a business under IFRS 3, then your life as corporate controller got a lot more complicated. In this post we lay out the practical considerations for managing business combination accounting

Typically, the acquisition of an entity would be carried out by your M&A team with accounting / reporting getting involved at the very end being asked to figure out implications of the term sheet which has already been signed/ will be signed.

If you are in such a position thing to look out for include

  1. Review the term sheet/ acquisition contract thoroughly, issues in business combination accounting arise from contingent payouts based on future performance or options to purchase further stake in the acquiree (typically embedded put/ call options) . Identifying such elements in the contract is critical as you build workings to support key judgements/ estimates. Making a reasonably accurate determination is important as any changes to the liability especially with contingent consideration may require you to record the adjustment through the income statement which will cause volatility.
  2. Understand the payout structure to the promoters of the acquiree, deciding if such payout is part of employee cost or part of consideration is critical in determining day 1 accounting value for goodwill.
  3. Working closely with the valuation team and understanding the purchase price allocation. The common issue is not identifying intangibles / fair valuation uplifts at a granular level for e.g. lease contracts, customer contracts etc. leaving the company with a higher-than-expected goodwill which can only can be tested for amortization.
  4. Check for harmonization of accounting policy, sometimes your acquiree may follow different accounting policies say inventory valuation- resulting in significant efforts to quantify/ change . Quickly identify gaps in accounting policy/ estimates and have a clear plan of how to handle these differences.
  5. IFRS 3 also allows for a maximum window of 12 months to make changes to the business combinations, if more information comes to light requiring remeasurement of assets / liabilities acquired. If this scenario is applicable , have a clear plan to handle adjustments to the business combination as this would also require you to restate prior periods also as necessary.
  6. Finally, consolidation of an acquiree is a part of the entire financial integration playbook. To de-risk the acquisition from throwing the entire consolidation timeliness, start planning the financial integration at once as this typically will include understanding:
    acquiree GL structure
    audit issues/ ongoing audit remediation
    internal control framework for financial reporting
    finance organization structure.

Also plan to train team members of the acquiree on expected behavior/ best practices of the acquirer

FINA HQ consolidation helps you solve a large piece of this puzzle by proving a framework for managing business combination accounting. Our business combination & fair value amortization module is built to simplify the process of managing IFRS 3/ ASC 805.