Mergers and acquisitions: Accounting considerations and best practices

Key considerations before choosing the M&A route

1. Strategic fit: How well does the target align with your long-term business goals?

2. Financial impact: What are the immediate and long-term effects on your balance sheet and cash flow?

3. Legal and regulatory landscape: Are there potential antitrust issues or complex approval processes?

4. Tax implications: How will the deal structure affect your tax position?

5. Integration challenges: Can you effectively merge different corporate cultures and systems?

6. Risk assessment: What liabilities or risks are you taking on?

7. Stakeholder reaction: How will your shareholders, employees, and customers perceive the deal?

Types of M&A transactions and accounting treatment

1. Share acquisition:

• The acquiring company purchases a controlling stake in the target company’s shares.

• The target company continues to exist as a separate legal entity.

• Accounting treatment:

• For publicly accountable entities, follow the acquisition method under TFRS 3, ‘Business Combinations’. Use the purchase price allocation method to determine fair values of acquired assets and liabilities. Goodwill may be recognised if the purchase price exceeds the fair value of net identifiable assets acquired.

• For non-publicly accountable entities, follow the Thai Financial Reporting Standards for Non-Publicly Accountable Entities (TFRS for NPAEs) (Revised 2022), Chapter 9, ‘Investments’ and Chapter 25 ‘Business Combinations’.

 2. Asset / business acquisition:

• The acquiring company purchases specific assets or a distinct business unit from the target company.

• Only the agreed-upon assets and liabilities are transferred.

• Accounting treatment:

        • For publicly accountable entities, this can be treated as either a business combination or an asset acquisition, depending on whether the acquired set meets the definition of a business under TFRS 3.

        • For non-publicly accountable entities, this can be treated as either a business combination or an asset acquisition, depending on whether the acquired set meets the definition of a business under the TFRS for NPAEs (Revised 2022), Chapter 25, ‘Business Combinations’.     

        o If it is an asset acquisition, then follow the relevant chapters for each asset acquired.

        o If it is a business combination, either TFRS 3 or the Draft Accounting Guidelines for Business Combinations Under Common Control (Revised 2023) can be followed. If TFRS 3 is followed, goodwill must be systematically amortized over its useful life, as set out in Chapter 25.8. For goodwill with an indefinite useful life, the useful life should be set at 20 years.

 3. Amalgamation:

• Two or more companies combine to form a new merged entity.

• The original companies cease to exist.

• Accounting treatment:

         • For publicly accountable entities, treated as a fresh start, with the assets and liabilities of both entities recorded at fair value by the new entity.

         • For non-publicly accountable entities, follow the TFRS for NPAEs (Revised 2022), the assets and liabilities of both entities are recorded at cost or net book value in the new entity.

Best practices for accountants in M&A transactions

1. Understand the business strategy driving the M&A transaction.

2. Participate actively in financial due diligence.

3. Assist in accurate valuation of assets and liabilities.

4. Apply appropriate accounting methods based on relevant standards.

5. Conduct thorough fair value assessments.

6. Accurately recognise and measure goodwill and intangible assets.

7. Prepare comprehensive financial statement disclosures.

8. Develop and execute plans for integrating financial systems.

9. Set up systems to track post-acquisition performance.

10.Ensure compliance with all relevant accounting standards and regulations.   

Conclusion

Mergers and acquisitions are powerful tools for corporate growth and strategic positioning, but they come with complex accounting challenges. Understanding the various types of M&A transactions, their key financial considerations, and the relevant accounting standards, is crucial for business leaders, managers, and financial professionals. Proper accounting treatment ensures transparency, compliance, and accurate financial reporting, helping stakeholders make informed decisions and assess the true impact of these transactions. While this overview provides a foundation, each M&A deal is unique and may benefit from professional guidance to navigate intricate aspects like valuation, fair value assessments, and regulatory compliance.

References (in Thai):

• TFRS 3. Retrieved from Thailand Federation of Accounting Professions.

• TFRS for NPAEs (Revised 2022). Retrieved from Thailand Federation of Accounting    Professions.

• Draft Accounting guidelines for business combinations under common control (Revised 2023). Retrieved from Thailand Federation of Accounting Professions.