Current Issues in Mergers and Acquisitions
Currently, it is important to note that when it comes to the current issues informing business combinations, Deloitte (August 2008) notes that with regard to the classification of liabilities and equity, redeemable shares that are considered contingent and which might be put under equity treatment (though temporary) under the GAAP (US) may be classified under IFRS as liabilities. When we consider the IFRS definition, a number of instruments may be classified as derivatives as far as IFRS are concerned.
It is important to note that the above change shall impact on the debt verses equity classification. This essentially means redeemable preference shares shall be under debt as opposed to equity under the new dispensation.It is important to note that currently, there are two main differences as far as consolidation is concerned. To begin with, consolidation may be informed by control which can be taken to be ‘de-facto’ and next, in the ‘rewards and risk’ approach to assist in the identification of the controlling entity. With that in mind, businesses carrying our the acquisition must be aware of the fact that a business to be acquired may not be able to consolidate similar entities set under the IFRS that would be of use as far as the US GAAPS are concerned.When it comes to the implications of the above on accounting, it is important to note that more focus must be put on financial reporting as it as things lean more towards fair value. Further, future valuation efforts shall call for enhanced diligence.
Impact of Mergers and acquisitions on financial statements and the US GAAP and IFRS conversion issues
According to Deloitte (August 2008) when it comes to M&A, there are two areas of specific interest to financial accountants. These two areas of specific interest include business combinations and instruments (financial).
As per the IFRS procedures, business combinations must be accounted for using the purchase method. It is important to note that when it comes to M&A deals, we have two methods which can be used to account for the same. One is the one already listed, i.e. the purchase method and the next is the DCF model. These two methods are permitted under GAAP previsions. As per the IFRS standards, there is need to look beyond a transaction’s legal form and with that in mind, IFRS provide well laid out guidelines when it comes to accounting for M&A.
Under the IFRS provisions, there is need to record at fair value all the net assets taken over. The recording of net assets should also include contingent liabilities. Under the GAAP rules, contingent liabilities are put down as liabilities. When it comes to good will amortization which can be taken to have arisen out of an M&A, IFRS provisions prohibits the same. In instances where we have negative goodwill, IFRS standards dictate that acquires liabilities as well as contingent liabilities, assets which are identifiable and combination cost be measured as well as assessed by the acquirer. The excess identified on this assessment and measurement must be recognized inm the income statement. When it comes to GAAP, when the goodwill amount is identified to be negative, it must be recorded in under the capital reserve account in equity. It is good to note here that the capital reserve is not availed to shareholders as distribution and it is not also subjected to amortization.
As stated earlier, when it comes to M&A deals; financial instruments form part of the most important items to consider with regard to structure analysis and consideration. Indeed according to PricewaterhouseCoopers (September 2009), analysts, investment bankers and the leadership of companies interested in M&A take the financial instruments as seriously as they take business combinations when it comes to the consideration and analysis of structure. IFRS guidelines are clear on recognition, measurement as well as classification and identification of financial instruments. The GAAP provisions do not however offer a comprehensive guideline as far as financial instruments are concerned. When it comes to valuations related to M&A, IFRS standards dictate that all assets of a financial nature be classified or categorized according to held to maturity (HTM), available for sale (AFS), loans and receivables and fair value-profit and loss (FVTPL).
When it comes to valuation for purposes of M&A deals or otherwise, IFRS dictate that AFS assets be recognized at fair value. A loss or gain on ASF assets must be indicated in equity which is taken to the income statement. When it comes to FVTPL assets, IFRS note that they be measured at fair value. Here, a loss or gain from a shift in fair value or otherwise must be indicated in the financial statements. Next are the HTM and loans and receivables which must be recognized using the effective interest rate. These are however measured are amortized cost (PricewaterhouseCoopers, September 2009). However, Difazio et al. (2009) notes that beginning January 2013, those assets of a financial nature which as at the moment are under IAS 39 – financial instruments: recognition and measurements will be recognized in either of two ways. One, they can be measured at amortized cost and secondly at fair value. This is as per the provisions of IFRS 9- financial instruments.
PricewaterhouseCoopers (September 2009) notes that there are two classifications of debt instruments that must be measured at amortized cost. This includes those that held for purposes of cash flow collection and two, those that have cash flows regarded as contractual and which happen to be principal and interest payments outstanding. Even in cases when an instrument satisfies the test I list above for amortization, IFRS 9 gives an option which allows one to designate an asset (financial) as recognized in FVTPL but only in cases where such an action would lower an inconsistency with regard to recognition or measurement that would otherwise manifest itself from the asset or liability measurement or gain as well as loss recognition on separate or distinct bases. It is however important to note that all other debt instruments should be recognized at fair value.
As far as accounting is concerned, is important to note that provisions shall be made for making of subsequent payments as compensation to the seller as an asset value reduction as well as issued equity instruments or other obligations which may be incurred as the exchange for control between the acquirer and the acquiree takes place.