It's common for businesses to make acquisitions, but what's often overlooked are the accounting issues that may crop up after the deal closes.
“We're often brought on board to help clean up when it would have been easier to be involved from the beginning to avoid the issues.”
In an ideal world, the finance department and accounting advisors will be involved at the beginning of the process to ensure things run smoothly after the acquisition is completed. When they aren't, this can lead to three major finance department issues that are often overlooked.
Cleaning up the books
The amount of work that must be done will vary depending upon how the seller handled their financial records. The company that was acquired may have had a finance department, a part-time bookkeeper, used accounting software, or a combination of these.
The new entity or the buyer may now have increased audit or other assurance requirements. And the financial records must still be maintained at the same level or possibly a higher level going forward.
There may also be problems if the company that was purchased takes a longer time to close its books than the acquirer. Ideally, both the buyer and acquiree's monthly and quarterly reporting periods should match, which may also necessitate a change in reporting periods, usually that of the acquired entity.
Aligning policies and procedures
The acquired company should align its accounting policies and practices to the purchaser's in its day-to-day activities. And it's not just the accounting policies that should be aligned, but operational ones as well.
On the accounting side, it could potentially mean different accounting methods. Moving from Canadian Accounting Standards for Private Enterprises (ASPE) to International Financial Reporting Standards (IFRS), for example, can be very onerous. More information needs to be reported, additional details must be tracked, and there aren't as many accounting policy options with IFRS as there is with ASPE.
Also, there may be differences in the accounting methods used to determine various accounting numbers, like in the measuring of inventory, for example. The buyer may use one of the three common methods to measure inventory (first in, first out; last in, first out; or the weighted-average method) while the acquired company may use a different one.
Since the buyer is typically bigger, it will often be the one to determine the accounting policies and methods to be used for the group. It can either convert the methods and polices of the acquired company or do a reconciliation on a regular basis that allows the parent to convert existing numbers and policies into the figures and disclosures needed for group reporting.
However, this additional set of reconciliation information needs to be prepared, and scrutinized.
We have seen lawsuits occur after the deal has closed because revenue was not recognized in the same manner in the buyer's accounting systems.”
Another thing to keep in mind is that some deals have agreements in place whereby the seller will receive future contingent payments if certain financial targets are met. In this case, accounting policies must be aligned to the reporting requirements of the agreement and additional reporting may be required. “We have seen lawsuits occur after the deal has closed because revenue was not recognized in the same manner in the buyer's accounting systems,” explains Ziad Akkaoui, a partner in BDO's Consulting practice.
Internal controls and processes
When the company being acquired doesn't have a formal structure in place for internal controls, this can create problems. The processes it uses may be ad hoc, which can be difficult for the new owner to understand, manage, and integrate. The acquired company may also have historically operated very lean and may not have enough people to handle the additional financial reporting workload needed by the parent.
“And if the buyer is publicly traded, there may requirements for processes and controls that need to be met, such as support for controls certifications or Sarbanes-Oxley,” notes Dave Rasmussen, a partner in BDO's Assurance & Accounting practice.
There may also be problems with the enterprise resource planning (ERP) system and the adoption process. In some instances, the purchaser and seller may use two different and incompatible systems. And in other cases, the acquired company may be locked into a long-term contract with its ERP provider that also comes with a large breakup fee.
What to consider before an acquisition
During the due diligence process, the buyer is typically focused on whether the historical financials are accurate and how to make the deal happen, and not the accounting-related issues that may occur after an acquisition is completed.
That's why companies should involve their finance department and financial advisors both before and during the deal process, not just after the fact. This can help to flag issues that will linger and reduce any potential problems going forward. The finance department and advisors can help identify how an acquisition will impact processes and technologies after the deal is done. It's all about planning ahead.