The deal volume, nevertheless, still surged, despite the impact of the Covid-19 pandemic. Vietnam’s M&A market is considered to be the top attraction in Southeast Asia according to Euromonitor.
When talking about an M&A deal, people often think of value creation, growth strategy, and market expansion, but only few consider about the complexity associated with business consolidation accounting requirements, in particular, the requirement to execute Purchase Price Allocation (PPA) for fair value measurement of assets and liabilities and determination of goodwill. This is the key content of Vietnam Accounting Standard No. 11 (VAS 11) or International Accounting Standard No. 3 (IFRS 3 - Business combination). The PPA exercise is often quite complicated and takes a lot of time and effort.
Many companies when conduct M&A transactions, often pay little attention to these accounting and reporting requirements. In fact in most cases, the reporting / accounting team has no information about the transaction until the deal is closed and reporting deadline approaches. This practice, coupled with the complexity and infrequent nature of M&A transactions, the significant impact it has on the consolidated financial statements, would often bring challenges and issues to Chief Financial Officers and Chief Accountants when it comes to business combination reporting.
With broad experience in M&A advisory as well as assisting clients in PPA implementation, Grant Thornton shares the challenges and our recommendations, so that companies can have a smooth business combination process, and without surprises:
1. Early involvement by the Accounting department
The terms and structure of an M&A transaction can vary widely and have a big impact on business combination accounting and reporting. Matters such as the purchase price mechanism and structure, the payment terms, transaction costs sharing arrangement, or the intended changes in the existing policies at the acquirees, such as ESOP etc. all can have different impacts on the consolidated financial statements as at the acquisition date or after the acquisition date.
While the consideration of accounting impacts should not be the deciding factor in how an M&A transaction should be structured, it is however crucial for the management to understand their effects on the consolidated financial statements after the acquisition in order to form suitable decisions. Early involvement by the accounting team would help to bring better clarity on such impacts.
2. Intangible assets identification
It is always a complex matter to determine identifiable intangible assets that have not been recorded on the acquiree's financial statements.
Important sources of information that the chief financial officer / chief accountant should consider to help identify intangible assets include:
- Business model, financial statements, management reports of the acquiree
- Information on websites, pitch deck or sales documents submitted to investors
- Share purchase agreement (SPA), financial due diligence, legal due diligence report conducted during the M&A process
- Deal team’s investment proposal which analyzes the targeted assets and value that the M&A transaction brings to the buyer
As a starting point, companies can refer to IFRS 3 Illustrative examples – a list of common types of identifiable intangible assets in an M&A transaction.
3. Intangible assets valuation
Asset valuation, whether intangible or tangible, requires a specialised expertise. For intangible assets, the valuation methodologies are often regarded as more complex. Some of the most popular valuation methods for intangible assets include the Relief From Royalty Method (RFR – commonly adopted for brand valuation), the Multi-Period Excess Earning Method (MPEEM or MEEM - usually applied to prime intangible assets such as customer relationship, supplier relationship, technology or licenses). If no such internal capable expertise available, our advice is to use a third-party professional to do the work.
Even when a professional valuer is hired, the company still needs to provide information about the assets to be valued, especially the prospective financial information used in the valuation of intangible assets. One of noticeable things when providing projections for PPA purposes is that they need to reflect the expectations of a typical buyer as at the acquisition date, meaning unbiased view as compared to other market participants. That is, the buyer's intentions, strategies to restructure the acquiree, or any idea of synergy will not be considered on these financial projections. The forecast made by the sellers themselves during the time of transaction negotiation is often an appropriate reference point.
Other issues related to intangible asset valuation include the consideration of discount rate, remaining useful life of intangible assets, Tax amortization benefit (TAB), etc. in which the discount rate often depends on an assessment of the relative risk of the intangible asset to be valued and can be verified through the WACC-WARA-IRR test.
4. Consideration of accounting policy options
Depending on the applicable accounting standard, there may or may not be a choice of the applicable accounting treatment options. For example, for financial statements prepared under IFRS, a company may have options of how to record a business combination for a number of items, including (i) Minority interest, and (ii) classification of assets / liabilities purchased.
The accounting department should evaluate the effects of different options, including the direct impact on the financial statements at the date of purchase, the ease or difficulty in applying the option, the effects of measurement and accounting at later reporting dates, from which to make suitable decisions.
5. Certain assets and liabilities that require special attention
In addition to the above issues, a number of items require special attention in the implementation of the PPA, for example:
- Contingent liabilities, indemnity commitments, third party warranties: should be recognized in the PPA at purchase date if obligation exists and can be reliably measured.
- Deferred taxes: Buyer does not need to recognize deferred taxes previously recognized by the acquiree, but instead, deferred taxes are recalculated based on the results of the PPA, in accordance with the requirements of the Income tax standard (IAS 12 or VAS 17)
- Goodwill: Buyer does not recognize goodwill that the acquiree has recorded in relation to previous M&A transactions, instead goodwill will be recalculated at the purchase date as instructed by IFRS 3 and VAS 11
- Operating lease: when the acquiree has an operating lease, the PPA needs to take into account the assets and liabilities formed by the more favorable or unfavorable lease terms than the market norms.
PPA is a complex exercise but with early preparation, and a sense of potential difficulties that may occur, the amount of time that would be required to complete, the CFOs and chief accountants can achieve a smooth and punctual business consolidation report. Using professional consultants to effectively and independently assist in performing PPA during the busy reporting periods is a good option to support the accounting team, who may not have much experience in the tasks associated with the infrequent M&A transactions.