New M&A Accounting Adustment (FASB 141R)
All,
I have heard various answers as to how to correctly adjust for FASB 141R regarding the transaction costs in the PF Balance Sheet (net against buyer's retained earnings?) and subsequent Year 1 Income Statement expensing. Opening up to the forum for the correct adjustments in the above statements at close and during Year 1.
Somebody read this and paraphrase. Thanks.
http://www.allbusiness.com/company-activities-management/company-struct…
TRANSACTION COSTS. Under FAS 141R, the direct costs of a business combination--such as transaction fees, due diligence, consulting services and the buyer's cost of issuing debt or equity securities--will no longer be included in measurement of the business acquired. Instead, those direct costs will be recognized as expenses of the period in which they are incurred and the services received, except for the costs of issuing debt and equity securities, which shall be recognized in accordance with other applicable generally accepted accounting principles (GAAP). So, the buyer's income statement takes a bigger hit right away.
So advisory fees, legal fees, etc will be charged as a 1-time expense on the P&L and thus only hit the B/S in so far as reducing net income and therefore retained earnings. That's how I read it at least.
As per I could understand it, it will affect acquirer's Yr 1 income statement and consenquently balance sheet (via retained earnings) - and not the pro forma retained earnings on BS directly - since it will be recognized in the period when expense was incurred / service received.
so what happens for the PF BS adjustments? The transaction costs would have previously been capitalized with the financing costs. Would this now be balanced in the goodwill calculation? Then the transaction costs would be expensed in the acquisition period of the IS.
i typically flow the adjustment directly to the acquisition adjustment on the balance sheet in the retained earning line while capitalizing the debt and equity fees... i never flow it through the income statement as i recognize it instantly on the pf balance sheet...
what do you guys think?
That's the question of the hour. If you do that, than you should be tax affecting the change to your retained earnings and cash balance by the appropriate corporate tax rate to simulate its flow through the income statement. I don't believe this is correct. If you adjust the retained earnings of a financial sponsor, than it lowers the equity value contributed at close and alters returns at exit.
Sorry to dig up this old thread but this question was never answered. What are the correct adjustments to Pro Forma BS as a result of SFAS 141(r). Previously this was accounted for in the goodwill calc and balanced out by increased sponsor's equity. What are the correct accounts to hit now?
bump
PRIOR TO FASB 141(R)...
Purchase Price (Equity consideration) - Book Value of Net Assets + Existing Goodwill = Excess Purchase Price
Then, Excess Purchase Price - Write-Ups of Intangibles + Deferred Taxes + TRANSACTION FEES = Total New Goodwill
As you can see, transaction fees were added into goodwill, thus increasing the implied Purchase Price of the acquired entity. However, currently, under FASB 141(R) these transaction fees are expensed immediately and hit retained earnings in your pro forma balance sheet adjustments. As stated above, debt / equity issuance fees hit an asset account on your pro forma balance sheet as capitalized costs.
Note: Deferred Taxes are only created in a stock (as opposed) to asset deal due to account for timing differences. In an asset deal, you're required to write off your step-up over a certain period (I think 12 years??)
LCR:
Confused on your last point... in a stock deal, a DTL is created because write-ups are amortized/depreciated for accounting purposes but not tax purposes -- so the DTL is written down over time to hit the cash flow statement. In an asset/338(h)10 deal, no DTL is created initially, but there is a step-up over time due to the amortization of goodwill for tax purposes (15 years). So the goodwill is amortized off the books, resulting in lower taxes, which results in a yearly increase in DTL so the cash can hit the cash flow statement.
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