Mergers & acquisitions — a snapshot Change the way you think about

Mergers & acquisitions
— a snapshot
Change the way you think about
tomorrow’s deals
Stay ahead of the accounting and reporting standards for M&A1
April 7, 2014
What's inside
Project planning .................... 2
Complying with reporting
requirements ......................... 2
Pro forma financial
information ............................ 4
In summary ............................ 4
Cross-border acquisitions
Navigating SEC reporting requirements
The contract is signed but the financial statement preparation is just
beginning. In addition to managing legal, regulatory and cultural differences,
buyers are required to comply with specific SEC reporting requirements
related to cross-border acquisitions. Other financial reporting requirements
may also be triggered if debt or equity will be raised as part of the transaction.
If buyers do not properly plan to meet these requirements, additional effort
will be needed and additional cost will likely be incurred. Further, without
proper planning, timely consummation of the acquisition could be jeopardized.
For example, will audited financial statements of the target be required; if so,
for how many periods? Are they required to be prepared on a U.S. GAAP basis
and audited under U.S. GAAS? Will interim financial statements be required?
What adjustments will be needed to the target’s financial statements to provide
SEC required pro forma financial information related to the acquisition?
This edition of Mergers & acquisitions — a snapshot is the second in our series
focused on navigating the waters of a cross-border acquisition. The series looks
at various aspects along the deal continuum, including pre-acquisition due
diligence and strategies, financial reporting requirements, tax implications,
and post-acquisition considerations. This edition provides insights on SEC and
other financial reporting requirements that may apply in a cross-border
acquisition.
1
Accounting Standards Codification 805 is the U.S. standard on business combinations, and
Accounting Standards Codification 810 is the U.S. standard on noncontrolling interests
(collectively the "M&A Standards").
M&A snapshot
1
Project planning
At acquisition, the target’s books and records may reflect
local country GAAP or IFRS, and its financial statements
may be audited under local standards. As discussed in the
first edition of this series, Mergers & acquisitions — a
snapshot: Cross-border acquisitions: Due diligence and
pre-acquisition risk considerations, U.S. buyers of foreign
businesses will need to have a comprehensive
understanding of accounting differences from U.S. GAAP
in order to properly consider the effects of those
differences on the acquisition price and their ongoing
financial reporting needs. The level of effort required to
conform to U.S. GAAP financial reporting will vary
significantly depending on the extent of GAAP differences
as well as aspects unique to the transaction such as size,
timing, and structure. Analyzing these considerations is
critical and should be factored into the transaction
timeline.
The buyer will need to consider the additional timeline
needed and additional information required when using
public or private financing in acquiring a foreign business.
In particular, if a buyer uses public funds, it will be
required to file a registration statement with the SEC. The
key to filing a successful registration statement is advance
planning and coordination with securities counsel,
auditors and stakeholders involved in the transaction.
The buyer may also raise proceeds privately in an offering
that is exempt from SEC reporting requirements.
However, many investors purchasing securities in a private
offering may benefit from the ability to freely trade those
securities in a public market in the future and, accordingly,
may request SEC registration rights. In this case, the best
practice is to include all SEC-required information in the
registration statement to avoid making significant changes
to it when it is filed with the SEC.
Complying with reporting requirements
To meet its reporting requirements, the buyer will
generally require historical financial statements of the
acquired foreign business if the acquisition is deemed
significant under SEC rules. Significance is determined
based on the relative size of the target to the buyer based
on investment, total assets, and pre-tax income. There is a
sliding scale to determine the number of historical annual
periods covered by the target’s financial statements that
the buyer might be required to provide in its filing.
If an acquisition is determined to be significant, a public
U.S. buyer will file a Form 8-K with the SEC within 4
business days of the acquisition date to disclose that the
acquisition has taken place. The buyer then has 71 calendar
days to file a Form 8-K/A (which amends Form 8-K)
accompanied by the historical audited financial statements
of the acquired business and pro forma financial
statements. A summary of the Form 8-K filing timeline
follows.
SEC Form 8-K filing timeline
The Form 8-K/A will need to include interim financial
statements of the target if the date the initial Form 8-K is
filed is more than nine months after the end of the target’s
most recently completed fiscal year. If a registration
statement is involved, interim financial statements of the
target would be required if the acquisition occurs more
than six months, and the registration statement becomes
effective more than nine months, after the target’s most
recently completed fiscal year. In these cases, the buyer
will prepare interim financial statements that cover at least
the target’s first six months of the year, including
comparative financial statements for the same period in
the prior financial year.
In addition, the Form 8-K/A may require the inclusion of
audited financial statements of the most recently
completed year, unless the initial Form 8-K was filed less
than three months after the target’s year-end. Those
audited financial statements may need to be reconciled to
U.S. GAAP in some circumstances.
Up-front project planning with respect to interim and
annual historical financial statement requirements is
critical to avoid late stage surprises and distractions from
closing the transaction and realizing value from the
acquisition.
Determining audited financial statement
requirements
The significance test under SEC rules is used to determine
the number of periods of audited financial statements of
the target to be presented. The three-part test compares
the size of the target to the buyer and can result in
presenting up to three years of SEC compliant financial
statements.
The significance test is performed by comparing the most
recent annual financial statements of the target to the
buyer’s most recently filed annual audited financial
statements prior to the acquisition date. The inputs for the
significance test are typically determined using U.S. GAAP
information. Therefore, understanding the accounting
M&A snapshot
2
differences between the buyer and the target is important
to perform the significance test, regardless of whether a
reconciliation to U.S. GAAP is required to be presented.
Depending on their magnitude, GAAP differences can
impact a buyer’s requirement to provide audited financial
statements of the target. Further, the calculation of each
part of the significance test can often be complex, and the
rules for performing the test generally require significant
technical expertise to interpret.
An acquisition involving a registration statement to raise
funds to finance the transaction would require audited
historical financial statements if the acquisition is
“significant” individually or in combination with other
acquisitions of the buyer. If the acquisition requires a
proxy filing where the buyer’s shareholders must vote on
the transaction, audited financial statements of the target
for the three most recent fiscal years plus interim periods
are generally required irrespective of whether the
acquisition is significant to the buyer. Timing is often
critical, and meeting filing requirements can be a challenge
if not planned for properly. Buyers will customarily
anticipate these requirements during the pre-close phase
of the transaction.
The table below provides information on the number of
periods required based on the outcome of a buyer’s
significance test.
U.S. GAAP financial statement requirements of
acquired foreign business
The financial statements of the target may be filed by the
buyer on a basis other than U.S. GAAP, such as the target’s
local GAAP or IFRS if the target meets the definition of a
“foreign business.” If the target reports under IFRS as
issued by the IASB, then there is no requirement to
reconcile to U.S. GAAP. However, if the target reports
under local GAAP or under IFRS but not as issued by the
IASB, then a quantitative reconciliation to U.S. GAAP is
required if the target is significant to the buyer above the
30% level as determined under SEC rules. In such
situations, the reconciliation to U.S. GAAP is ordinarily
presented for the most recent year and any required
interim periods if the target is significant between the 30
and 40% level and for the two most recent years and any
required interim periods if the target is significant above
the 40% level. In all scenarios, the financial statements
should be audited in accordance with U.S. GAAS.
Meeting SEC definition of a foreign business
Full U.S. GAAP financial statements are required when the
acquired business does not meet the definition of a foreign
business. A foreign business is defined as: A business that
is majority owned by persons who are not citizens or
residents of the United States and is not organized under
the laws of the United States or any state thereof and
either: (1) more than 50% of its assets are located outside
the United States or (2) the majority of its executive
officers and directors are not United States citizens or
residents.
The ownership and officer/director criteria in the
definition of a foreign business are based on the attributes
of the ultimate holding company. The definition of a
foreign business is designed to provide accommodations
when the target would not reasonably be expected to be
subject to U.S. reporting requirements. While the
definition is simple, its application can frequently be
complex. For example, determining the country of
organization can be challenging in situations where the
company acquires parts of businesses in the U.S. and other
foreign countries. Additionally, it is not always safe to
assume that the foreign business criteria will be met
simply because the operations are abroad. Buyers who
understand this are positioned to ask the right questions
about the ownership structure earlier in the deal process.
If a foreign incorporated target does not qualify as a
foreign business, the buyer may prepare a full set of U.S.
GAAP financial statements for the target. The buyer may
also choose to prepare financial statements for the target
in accordance with a basis of accounting other than U.S.
GAAP, along with a reconciliation to U.S. GAAP and all
required SEC disclosures regardless of the level of
materiality (i.e., even if the significance level is 30% or
less). Reconciliation to U.S. GAAP generally is required
even if the financial statements were prepared under IFRS
as issued by the IASB. Additionally, the financial
statements may need to be updated more frequently if the
target is not a foreign business.
M&A snapshot
3
Pro forma financial information
The financial reporting hurdles don’t end with the
historical financial statements. U.S. public companies
should prepare pro forma financial statements for the
most recent year and any required interim periods in
accordance with the SEC guidance where there has been a
significant (at the 20% level) acquisition during the period
or, in the case of a registration statement, it is probable
there will be an acquisition that is at the 50% level of
significance. The pro forma financial statements will
require converting the target’s historical results into U.S.
GAAP for the periods presented in the pro forma financial
statements consistent with the buyer’s accounting policies.
Alternatively, the adjustments to conform to U.S. GAAP
and the purchase accounting adjustments may be
combined for purposes of presentation in the pro forma
information.
Determining which pro forma adjustments can be included
also requires careful consideration. The purpose of pro
forma financial statements is to provide investors with
information about the continuing impact of a transaction
by showing how a specific transaction or group of
transactions might have affected historical financial
statements. Pro forma adjustments are typically
attributable to the transaction and are factually
supportable. Distinguishing transactions that may have a
one-time impact from those that may have an on-going
impact can be particularly challenging. Areas of complexity
in preparing pro forma financial information and some
common pro forma adjustments include:
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Alignment of accounting policies
Reclassifications
Removal of discontinued operations from
continuing operations
Pre-merger costs (e.g., change in control
payments, acceleration of share-based payments,
material subsequent events of the target or buyer)
Acquisition accounting
New capital structure
Transaction costs
Income taxes
Earnings per share
Pro forma income statements are presented using the
buyer’s fiscal year end. When the fiscal year end of the
target differs from the buyer’s fiscal year end by more than
93 days, the target’s financial information must be recast
to a date within 93 days of the buyer’s fiscal year end. This
may be done by adding subsequent interim periods and
deducting comparable preceding periods. If periods other
than comparable periods are combined, additional
disclosures are required.
The process of preparing the pro forma financial
information will require assistance from individuals in the
target’s accounting and finance functions. This can provide
a first indication of the quality and depth of their
accounting knowledge and their ability to render support.
In summary
This edition of M&A Snapshot highlights some of the
important SEC reporting matters that a company will want
to consider in the post-signing pre-close acquisition phase.
Significant planning is often needed prior to a cross-border
acquisition in order to identify SEC reporting
requirements and assess the impact of those requirements
on the timeline for the acquisition and on the buyer’s
business and financial reporting. Decisions about financial
reporting requirements can be difficult. A well thought-out
strategy may smooth the transition and limit unexpected
delays.
Stay tuned for the next edition in our series on crossborder acquisitions focusing on income tax considerations.
For more information on this publication please contact:
John Glynn
Valuation Services Leader
(646) 471-8420
[email protected]
Henri Leveque
Capital Markets & Accounting Advisory Services Leader
(678) 419-3100
[email protected]
Principal authors:
Lawrence N. Dodyk
U.S. Business Combinations Leader
(973) 236-7213
[email protected]
David Bohl
Transaction Services Director
(646) 471-0623
[email protected]
Matthew Naro
National Professional Services Group Director
(973) 236-5824
[email protected]
M&A snapshot
4
PwC has developed the following M&A Snapshot
publications related to business combinations and
noncontrolling interests, covering topics relevant to a
broad range of constituents.
 How timing your transactions in light of the new
standards will impact your business and communication
with stakeholders
 Goodwill impairment testing: What's old is new again
 Deal or no deal: Why you should care about the new
M&A standards
 Even your tax rate will change
 Doing a deal? Be careful about employee compensation
decisions
 Accounting for partial acquisitions and disposals—it's
not so simple!
 Acquired assets not intended to be used: You may need
to record them, even if you don't use them!
 Accounting for contingent consideration—Don't let
earnouts lead to earnings surprises
 The Consolidation Standard—determining who
 Carve-out Financial Statements—A challenging process
 Noncontrolling interests — why minority shareholder
rights matter
 Market participants: how their views impact your values
 Did I buy a group of assets or a business? Why should I
care?
 Don't let push-down accounting push you around
 Financial risk management considerations in an
acquisition
 We’re in the process of acquiring a company with
significant in-process research and development
(IPR&D) activities. What's next?
 Cross-border acquisitions – Due diligence and preacquisition risk considerations
PwC clients who would like to obtain any of these
publications should contact their engagement partner.
Prospective clients and friends should contact the
managing partner of the nearest PwC office, which can be
found at www.pwc.com.
consolidates is just the beginning
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