Getting Merger and Acquisition Accounting Right
Getting Merger and Acquisition Accounting Right
Presented by John Donohue, Partner and Anthony Porter, Senior Manager Moss Adams LLP
Agenda
? Review of accounting for business combinations
? Updates on new standards and proposed changes
? In-depth review of certain challenging areas
? Lessons learned and best practices
2
? Disclosures
What is a Business Combination?
? Business combination vs. asset acquisition
? Definition of a business ? ASC Section 805-10-55 (and soon, ASU 2017-01) ? Examples
? Whole bank ? Branches ? Division or business unit (loan portfolio with operations)
? Identification of the acquirer
3
? "Controlling financial interest" ? ASC Subtopic 810-10 ? Additional factors ? ASC Section 805-10-55 ? Accounting vs. legal acquirer
? Acquisition and measurement date
? The date control is obtained
Definition of a Business
? Current definition is broadly interpreted
? Important distinction, due to significant differences in accounting for assets versus businesses
Current definition
ASU 2017-01
Requires inputs and processes Requires inputs and one or more
substantive processes
4
Outputs defined broadly as
Narrows definition to focus on
ability to provide a return
revenue to align with ASC 606
Does not matter if all value is attributable to a single asset
Requires evaluation of threshold (e.g., if substantially all of the value transferred relates to a single asset, it is an asset acquisition)
Apply the Acquisition Method
Determine Purchase Consideration
Recognize Net Assets at
Fair Value
Identify
Separate
5
Transactions
Goodwill/Bargain Purchase Gain
Applying the Acquisition Method
? Purchase consideration
? Fair value of consideration transferred
? Cash ? Equity issuance ? Contingent consideration ? Other assets or instruments transferred
? Consider...
6
? Escrows
? Working capital true up
Purchase Consideration
? Noncontrolling interest
? Recognize and initially measure at fair value
? Equity Awards
? If the acquirer is obligated to replace the acquiree awards, either all or a portion of the fair-value-based measure of the acquirer's replacement awards shall be included in measuring the consideration transferred in the business combination.
7
? Includes obligations arising from the terms of the acquisition agreement, terms of the acquiree's awards, or applicable laws or regulations.
- ASC 805-30-30-9
? What does this look like?
Purchase Consideration
? Example (simplified):
Replacement options to be issued: Vested prior to the acquisition date(a)
8,000
Unvested awards requiring add'l service
Option Value (ASC 718) Acquiree award Replacement award
8
2,000 10,000
$ 1.50 $ 2.00
Purchase consideration attributed to replacement stock awards ($1.50 x 8,000)
$ 12,000
Post-combination compensation expense ($20,000 - $12,000) (a) Assumes no post-combination service required
$ 8,000
? Purchase consideration may announced deal price!
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