Historically, earnings before interest, taxes, depreciation, and amortization (EBITDA) and other financial covenants in debt agreements, as well as management compensation arrangements, for newly acquired businesses have been drafted based upon the accounting rules that acquisition transaction costs are deferred as part of the purchase price.  These acquisition costs were generally recorded as goodwill. For purchase transactions occurring during 2009, for calendar year end companies, and subsequent periods, acquisition costs are no longer deferred and are charged to expense.  Generally, these acquisition costs, which include legal, accounting, investment banking and other fees, can be substantial.  As a result of expensing these costs, financial debt covenants based on net income or EBITDA can potentially be violated in the first year after the acquisition.  In addition, management bonuses based upon EBITDA can be adversely impacted by acquisition related expenses and other provisions of the new accounting guidance.

In December 2007, the Financial Accounting Standards Board issued Statement 141 (Revised), Business Combinations, [SFAS 141(R)] providing guidance on accounting for mergers and acquisitions.  SFAS 141(R) is effective for fiscal years beginning after December 15, 2008.  As a result of SFAS 141 (R), key changes, among others, in purchase accounting include the following:

In light of the new accounting rules for recording and allocating the transaction purchase price, the impact should be considered on debt, employment and other related agreements prior to the closing of any planned acquisition transaction. Agreements with covenants or calculations based on net income or EBITDA need to address the profit and loss impact resulting from recording the transaction purchase price. Additionally, lenders may not always be aware of these new accounting rules.

WE CAN HELP

Decosimo Advisory Services can assist you in addressing issues such as accounting for business combinations and purchase price allocations. Contact James Jackson for more information and help with your next transaction.

James Jackson | Assurance Principal

Download Article