8 Issues We See After A Merger or Acquisition

All too often, we find that companies don’t fully consider all of the accounting or tax ramifications of merger and acquisition (M&A) activity. After trudging through the often difficult process of an M&A, it’s tempting to just sit back and relax. But the work isn’t done yet.

There are often overlooked impacts that GAAP or the IRS tax code will require to be addressed, and there are steps that must be taken after the M&A to ensure success and compliance. To help navigate this important time, we’ve compiled a list of questions to consider after the completion of a merger or acquisition:

1. Have you done basic purchase price allocation evaluation?

• Assess what you purchased. All assets and liabilities acquired are required to be put on your books at “fair value.” Things like cash or payables might be easy to value, but what about the fair value of the inventory acquired, intangible assets, or accounts receivable?

2. Did you acquire any tax attributes?

• Things like net operating loss carryforwards have various tax implications in M&A, and depending on the structure of the acquisition, these attributes may be transferred (or lost!).

3. Were there any equity instruments issued?

• We often see profits interest or stock options issued as part of your merger or acquisition. GAAP requires a value to be placed on these instruments—and these are often hard to value at time of issuance. Have you discussed this with your CPA firm?

4. Are there any associated agreements with the M&A transaction?

• Transition services agreements and earn-out contingencies often create difficult accounting and tax implications that need to be discussed and assessed.

5. Did you perform a full inventory count prior to or immediately after acquisition?

• We find that inventory is not often appropriately accounted for upon acquisition due to the amounts or condition of the inventory acquired. Review for stale or damaged inventory carefully as part of the inventory count, rather than just doing a simple count.

6. Does the acquired company have an employee benefit plan?

• Post-M&A, there are specific rules about when two plans are under common control that frequently cause issues in discrimination testing—which could ultimately lead to both plans being disqualified.

7. Have you identified all intangible assets?

• In a business combination, you are required to perform a comprehensive and full analysis to identify and value intangible assets acquired due to material differences in accounting treatment from goodwill and other long-term assets.

8. If you are a private company, will you be electing the private company alternative for goodwill?

• For accounting purposes, a private company election allows you to amortize goodwill over a period of up to 10 years. The election also simplifies the assessment of other customer-related intangible assets during your purchase price allocation.

Closing Thoughts

This is by no means an all-encompassing list, and you should always consult with an experienced CPA firm when evaluating an M&A transaction. Although it is crucial to fully understand the accounting and tax implications before the transaction so you can appropriately evaluate the true costs and benefits of your purchase, evaluating the merger and acquisition process after completion is essential to ensure a successful transaction.