Companies doing mergers and acquisitions are conducting them a little differently these days as a result of accounting rules that took effect in January 2009, according to the deal experts at PwC.

Economic factors aside, companies are thinking about the accounting as they conduct due diligence, consider deal structures, and set compensation, said Jonathan Isler, a partner with the transaction services group at PwC. He and fellow PwC partner Matthew Sabatini hosted a one-hour webcast recently to explain how deals have changed as a result of the accounting rules. “We have seen, not necessarily a 180-degree shift, but we have seen deal structures change,” said Isler. “We have seen more people rethinking how they award target management compensation and what they do to settle stock-based or share-based payment awards that the target management had in the predecessor company.”

The Financial Accounting Standards Board adopted Financial Accounting Statement No. 141R: Business Combinations (now found in the Accounting Standards Codification Topic 805) to establish new requirements for how to book the effects of a merger, acquisition or any other manner of business combination. The rules require companies to follow a more fair-value-like method of accounting for all of the individual the assets and liabilities assumed in a business combination and book them accordingly on the purchase date. It also required them to expense the deal fees and restructuring costs upfront rather than capitalize them so they could be written down over time.

Two years later, the scope of due diligence has expanded, Isler said, to capture more  information that will be necessary to meet the accounting requirements. Valuation is a much bigger part of the process, with valuation experts using a lot more analytics to arrive at the fair value of assets and liabilities that aren't actively traded, and therefore are more difficult to value, he said. Companies also are coping with a heightened risk of earnings dilution and volatility, he said, because the value on “day one” of the acquisition is more like a marked-to-market value, not the purchase price, so any premium paid for synergy is a little more difficult to capture.

Isler said he also sees more focus on getting the deal executed as efficiently as possible to make the reporting as clean and accurate upfront as possible. Companies are allowed to book preliminary acquisition results based on estimated costs, but then must adjust those numbers later if necessary. “Many companies we work with just want to get the acquisition accounting done quickly and accurately and move on,” to minimize the risk of having to recast numbers later, he said.

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