How can you manage the impact of M&A transactions on financial reporting?

1 Identify the type of transaction

The first step to manage the impact of M&A transactions on financial reporting is to identify the type of transaction that has occurred. There are two main types of M&A transactions: business combinations and asset acquisitions. Business combinations are transactions in which one entity obtains control over another entity, and the acquired entity is integrated into the acquirer's financial statements. Asset acquisitions are transactions in which one entity purchases a group of assets and liabilities that do not constitute a business, and the acquired assets and liabilities are recorded at their fair values. The type of transaction determines the accounting method, the recognition and measurement of assets and liabilities, and the disclosure requirements.

2 Apply the accounting method

The second step to manage the impact of M&A transactions on financial reporting is to apply the accounting method that corresponds to the type of transaction. For business combinations, the accounting method is the acquisition method, which requires the acquirer to recognize and measure the identifiable assets and liabilities of the acquiree at their fair values, and to recognize any goodwill or gain from a bargain purchase. For asset acquisitions, the accounting method is the cost method, which requires the acquirer to allocate the purchase price to the acquired assets and liabilities based on their relative fair values, and to recognize any difference as an expense or income. The accounting method affects the amount and timing of revenue, expenses, assets, liabilities, and equity reported in the financial statements.

3 Evaluate the fair values

The third step to manage the impact of M&A transactions on financial reporting is to evaluate the fair values of the acquired assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimation involves various valuation techniques, such as market approach, income approach, or cost approach, and requires significant judgment and assumptions. The fair values of the acquired assets and liabilities affect the allocation of the purchase price, the recognition of goodwill or gain from a bargain purchase, and the subsequent impairment testing and amortization.

4 Assess the impairment risk

The fourth step to manage the impact of M&A transactions on financial reporting is to assess the impairment risk of the acquired assets and liabilities. Impairment occurs when the carrying amount of an asset or liability exceeds its recoverable amount, which is the higher of its fair value less costs of disposal or its value in use. Impairment risk arises from changes in market conditions, business performance, or cash flow projections that affect the recoverability of an asset or liability. Impairment testing involves comparing the carrying amount and the recoverable amount of an asset or liability, and recognizing an impairment loss if the former is higher than the latter. Impairment testing is required for goodwill and intangible assets with indefinite useful lives at least annually, and for other assets and liabilities whenever there is an indication of impairment.

5 Prepare the disclosures

The fifth step to manage the impact of M&A transactions on financial reporting is to prepare the necessary disclosures that provide relevant information to the users of the financial statements. Such disclosures are required for both business combinations and asset acquisitions, and include details such as the name and description of the acquired entity or assets and liabilities, the date and reason of the acquisition, the purchase price and allocation to the acquired assets and liabilities, goodwill or gain from a bargain purchase recognized, pro forma information of the combined entity or impact of acquisition on financial results, contingent liabilities and contingent consideration arising from acquisition, acquisition-related costs incurred and expensed, fair value measurement techniques and inputs used, impairment testing results and assumptions used. These disclosures are essential to enable users to understand the nature and effect of M&A transactions, as well as evaluate performance and financial position of acquirer.

6 Monitor the post-acquisition integration

The sixth and final step to manage the impact of M&A transactions on financial reporting is to monitor the post-acquisition integration of the acquired entity or assets and liabilities. This process involves aligning the policies, processes, systems, and culture of the acquirer and acquiree, as well as realizing any expected synergies from the acquisition. Post-acquisition integration may affect financial reporting in many ways, such as consolidating or eliminating intercompany transactions and balances, harmonizing or adjusting accounting policies and estimates, recognizing or reversing deferred taxes and other provisions, measuring or settling contingent liabilities and contingent consideration, and identifying or resolving accounting errors or disputes. To ensure accuracy and completeness in financial reporting, post-acquisition integration requires ongoing communication, coordination, and control.

7 Here’s what else to consider

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