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Accounting in M&A deals - often neglected


M&A transactions regularly present both buyers and sellers with multiple challenges. In the complex and often time-critical M&A process, one important aspect often misses out. The accounting is often treated like a poor relation when faced with so many other urgent issues. However, its importance for the successful completion of M&A transactions should not be underestimated. In the following, based on some typical examples, we look at which parts of the M&A process need to be reviewed early on with questions concerning the accounting, in order to anticipate and counteract as soon as possible any unintended side-effects in the financial statements of the parties involved.


Due diligence

In advance of a planned M&A transaction, performing a due diligence process serves to obtain a better understanding of the transaction target at an early stage. As part of the so-called financial due diligence, a high priority is an analysis of the company's asset, financial and earnings situation based on accounting information.

Since the figures presented will depend substantially on the accounting methods applied (local GAAP, IFRS, etc.), an in-depth dealing with these is absolutely essential. An analysis of financial information can only be meaningfully carried out where there is a shared accounting language. Especially where financial information has been derived using local accounting standards (including, for example, the German Commercial Code [HGB]) but the buyer works with IFRS, then a so-called IFRS quick check is highly recommended. This provides an overview of how the figures would change if the internationally accepted IFRS had been applied, so allowing the buyer to apply comparisons to the transaction target.


Contract design

Accounting can also have a considerable influence on the design of the contract itself. Very often so-called earn-out clauses are used to link subsequent purchase price payments to the development of financial indicators (e.g. EBIT or EBITDA). The determination of these key figures and, therefore, ultimately the purchase price itself, depend on the underlying accounting methods.

This means that attention has to be paid also when drafting the contract to ensure a clear definition of the relevant figures, and to establish any necessary adjustments. In particular, it needs to be defined how any potential changes in the underlying accounting standards over the contract term should be handled. For example, the initial application of IFRS 15 (revenue recognition) in 2018 resulted in changes concerning the periods in which revenue is recognised for many companies. The extensive changes created one year later by IFRS 16 (accounting for leases), led to a considerable increase in EBIT in many companies. Such effects, that are not based on economic circumstances, but rather arise from changes in accounting methods, should be addressed in the purchase agreement to avoid surprises later on. The accounting system can also play a role when evaluating force majeure clauses, which can influence earn-out figures in the event of serious, unexpected events beyond the control of the contractual parties (Corona pandemic?).


Preliminary purchase price allocation and post-merger integration

In addition, buyers should give some thought before signing a contract to how the financial reporting will change after its closing. On the one hand, this concerns the accounting treatment of the M&A transaction by the acquiring company itself. In this context, a preliminary purchase price allocation (pre-PPA) should be carried out in order to make the resulting impact on the balance sheet transparent early on.

Once the transaction has been successfully completed, on the other hand, the transaction project has to be integrated (post-merger integration). In this area, changes to the accounting may be necessary, e.g. if the previously applied accounting standards are different between the acquiring company and the target company. To ensure its success, a change in the accounting, e.g. switching to IFRS, involves very important procedural and IT aspects that require consideration alongside professional aspects (incl. necessary training for employees). In this regard, it is worth taking the trouble to examine the requirements at an early stage.



In an M&A process, the importance of accounting is often underestimated, although this is absolutely one of the critical factors for success. Therefore, as part of due diligence, the impact of the applied accounting methods on the determined financial figures should be analysed. Also when defining earn-out clauses and preparing the post-merger integration, an early consideration of accounting-related effects of the transaction can help to guarantee a successful implementation with no hidden surprises.



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