The accounting for business combinations should be considered by the acquirer when the transaction is being structured. Given the time it will take to collate the information required to make such fair value assessments for accounting purposes, it is important that companies start assessing their acquisitions earlier than they do at present.
Considerations for Directors of entities entering into business combinations may include:
The level of In-house expertise
Accounts departments will now need to develop supportable bases for estimating uncertain future outcomes and prepare robust valuations which will withstand auditor examination. Directors will need to consider whether they have sufficient in-house expertise to prepare these valuations.
Listed companies, or significant affiliates of such entities, should be aware, that where in-house expertise is limited, reliance cannot be placed on their external auditors for assistance, as they are bound by a Code of Ethics which prohibits such services where the valuation would have a material effect on the financial statements. Other audited entities should also be aware that such services are prohibited where the valuation would involve a significant degree of subjective judgment and have a material effect on the financial statements.
The availability of guidance
Given the recent change in accounting practice, industry standards for estimating the fair value of contingent consideration do not yet exist. However in June 2009, the IASB issued an exposure draft ‘Fair Value Measurement’ which, if adopted, will change the definition of fair value to one based on an ‘exit price’ and defined as ‘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’.
The need for a professional valuation
Directors should consider the need to appoint a professional valuer to assist in developing financial projections and quantifying contingencies in a way which will assist the financial reporting and auditing process. The inputs to models prepared by professional valuers must be supportable and sufficiently robust to withstand auditor examination.
Directors should also be aware that the disclosure requirements in respect of contingent consideration are much more onerous in the revised standard requiring details about the valuation techniques used, the key model inputs, the range of outcomes and reasons for changes thereto in the post acquisition period.