evaluating loan credit quality; however, other fair value adjustments often are overlooked, such as those related to current interest rates and terms as compared to contractual agreements in place, liquidity premiums or estimation of prepayments, all of which can have a material effect on fair value measurements either individually or in the aggregate. Te same is similar to other financial instruments, including deposit portfolios.
Te effects on the financial statement may be long-lasting due to post-acquisition accretion or amortization of discounts or premiums applied to assets and liabilities to arrive at fair value. Tese subsequent adjustments and impairment considerations are important to the pro forma financial disclosures because they may have significant effects on results of operations and cash flows of the entity. It is also important to understand
Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements, regarding elements of financial statements and criteria for recording an asset or a liability. In some cases, assets or liabilities recorded on a target’s balance sheet may not qualify for an asset or liability on the acquirer’s books during the acquisition process and vice versa. Items to carefully
examine may include prepaid assets, unrecorded payables, employee relocation costs or terminations, payroll liabilities arising from stock-based compensation plans, equity method investments, favorable or unfavorable leases and assets and liabilities arising from contingencies. In other cases, costs an acquirer expects
but isn’t obligated to incur in the future aren’t liabilities at the acquisition date but are costs that the acquirer will incur subsequent to the acquisition date. A common example includes the decision to terminate software contracts of the target post-acquisition. In this circumstance, the buyer may have negotiated the termination cost into the acquisition price and cost to the selling shareholders, with a perception the cost will be recorded as a liability at the acquisition date. However, a liability or related expense isn’t incurred until the software is terminated—often post-acquisition— resulting in an expense to the buyer. Many purchase and assumption
agreements include purchase price allocations based on a target’s capital, as stated in accordance with generally accepted accounting principles. Applying a thorough due diligence process with an understanding of the concepts described above can improve buyer and seller expectation related to deal
values and pro forma information results, resulting in accurate pro forma information that can help with expedited regulatory approval and depiction of the transactions post close.
Article reprinted with permission from BKD, bkd. com. All rights reserved.
(Self-Study CPE Exam, 12) Self-Study CPE Details
Interest Area: Designed for:
provider.
Intermediate Prerequisite: None Recommended CPE Credit: 1 hour
Note: CPE credit is available to OSCPA members only.
MUST BE COMPLETED AND SUBMITTED BY JUNE 30, 2018 TO QUALIFY.
May/June 2018
CPAFOCUS
11
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