In LBOs, are people still capitalizing transaction fees? I read that a new accoutning rule says you have to expense transaction fees in M+A but I am not sure about PE deals.
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hmm, depends.
if the 'transaction' fees are related to financing, then they can be capitalized. new rule makes it so you can't include restructuring, retention, etc. fees as a part of total consideration for an M&A transaction, these fees have to be expensed now.
what about fees paid to ibanks?
an LBO is an M&A, only that the merger with the shell company created has alot of debt...
I believe that those are all expensed in the current period
do amortized financing fees have a useful life equal to the life of the loans?
the new accounting rule is that you expense all transaction fee expenses aside from debt financing fees - those still get amortized. previously, you only expensed equity fees, but now you also expense legal, etc.
the new accounting rule is that you expense all transaction fee expenses aside from debt financing fees - those still get amortized. previously, you only expensed equity fees, but now you also expense legal, etc.
From a GAAP perspective, I agree. Capitalize debt financing fees only and amortize over life of the debt.
From a cash taxes perspective, I believe it differs. Last I recall, all deal expenses accrued following submission of an LOI can be amortized.
What periods do people use to amortize from a cash taxes perspective?
Modeling question on capitalizing Transaction Fees (Originally Posted: 01/24/2013)
Working on a debt deal, so the fees can be amortized over the term of the debt, according to GAAP rules.
But, I can't seem to get the balance sheet to balance.
I have it set up as a $5,000,000 asset.
The sequence of modifications I have made are the following:
$5,000,000 additional debt drawn $5,000,000 cash in $5,000,000 cash out (for payment)... so no net cash increase $5,000,000 Transaction Fee Asset
So A & L both went up by $5,000,000
Then, when I amortize, $1,000,000 is expensed and lowers net income by that amount and the Net Transaction Fee Asset moves to $4,000,000.
But, as I amortize, the L + SE side of the balance sheet is growing by the amount I expensed. I've checked several times and the expensed amount lowering net income, which is flowing through and decreasing shareholders' equity.
Am I missing something?
If the cash amount of the transaction fee is paid upfront and you are amortizing the capitalized balance, don't forget to add back the amortization amount below net income but above cash flow from operations on the statement of cash flows, as the amortization is a non-cash expense. Net the cash transaction fee with the debt issuance proceeds to get the "net debt" proceeds, and that is what you bring in on the cash flow from financing line.
amort fee of $1m in first period, here is how it should work...
Income Statement - Net income decreases $1m due to write-off (I'm assuming no taxes, but it will work at any tax rate)
CFS - Starts off with NI down $1m, add-back the $1m in amortization as a non-cash expense. No change to cash.
BS - L&E is down $1m due to decrease in net income. Assets are also down $1m, due to no change in cash and the $1m amorization to your asset.
idk where you are going wrong. feel free to PM me and i can take a look, but considering you have the basic logic now you should be able to figure it out... i think your L&E is correct, you need to amortize the asset though. or you are not accounting for this on the CFS correctly.
peace out - hope that helped.
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