Have I purchased an entity or acquired the assets?
If you have purchased assets, you will need to ascertain how and when they should be recorded in your books. If you haven’t set up a new entity to purchase the assets and the acquisition becomes part of your existing business, you should consider department/branch type reporting. This gives you the ability to report the on-going results of the acquired business separately, and it can be useful for making decisions, earn out calculations and goodwill impairment testing. Or, if you have purchased an entity and consolidate, you may have additional elimination considerations.
What are the reporting requirements for the acquisition?
Once you’ve acquired an entity and your existing organisation is already preparing financial statements that comply with generally accepted accounting practice, you will need to consider if you control the entity. This is where a business combination comes in: an entity obtaining control over one or more businesses. IFRS 10 ‘Consolidated Financial Statements’ and IFRS 3 provide guidance to determine whether an entity has obtained control.
If you do control what you’ve acquired, you will need to consolidate the financial results of the entity with those of the acquiring entity for financial reporting purposes. You will also need to consider how to account for any non-controlling interest if you haven’t acquired 100%.
If you don’t control the entity, you will most likely need to consult NZ IAS 28 Investments in Associates and Joint Ventures (or NZ IFRS 9 Financial Instruments where there is no significant influence) to understand how to account for the investment. The acquired entity will also most likely need to prepare its own financial statements for reporting purposes as well.
Even if you prepare special purpose financial statements, you’ll also need to think about management and bank reporting. Potentially, consolidation isn’t required for financial reporting purposes but it may still be useful for making business decisions. It’s also a good idea to check in with your bank to see what it requires for covenant reporting purposes.
What else should I be thinking about?
Naturally, the devil is in the details when it comes to acquiring assets and entities – details that can snowball into bigger challenges if they’re not addressed during the acquisition process.
- What have you purchased? Potentially a purchase price allocation should be undertaken to identify the assets and liabilities acquired. This would include identifying and valuing other intangible assets; some examples include brands, customer relationships, restraint of trade, and software.
- Is there goodwill to recognise, and what about impairment testing? Under NZ IAS 36, goodwill acquired in a business combination is required to be tested for impairment annually.
- Does the acquired entity use a different accounting software to you? Which software will you use? You need to think about whether your current software can handle the size of your new operation, or if it makes sense to select another package that can handle any new reporting requirements.
- Does the acquired entity have the same balance date, accounting policies and use the same accounting framework to you? If not, you will need to align these.
- Does the acquired entity have its own finance team? If so, how will you integrate these teams? Managing the human resources aspect of a business combination, including integrating employees and aligning company cultures, can be challenging.
- Is your business currently preparing financial statements that comply with International Financial Reporting Standards? If your answer is no, this could impact your current financial reporting framework. The trading results of the acquisition being added to your profit and loss and balance sheet mean your business may now meet the definition of ‘large’ under section 45 of the Financial Reporting Act 2013. This means your business will need to transition to financial statements that comply with generally accepted accounting practice over the next few years.
- What about tax? Is there deferred tax to be recognised? The tax implications of a transaction can be significant. It is always best to consult your tax advisor during a transaction process.
Save time, cost and energy
Growing your business through new acquisitions can be just as stressful as it is exciting. When you’re making decisions about the commercial merits of a new major purchase, whether it be an acquisition or otherwise, you can minimise the demands on your costs, energy and time by working through the accounting implications during the process, not at the end.