Business Combination Accounting Continues to be a Hot Button Area for PCAOB

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After the dust settles on an M&A deal, the acquiring entity always has some housekeeping to do in terms of accounting and financial reporting. Business combination accounting in accordance with ASC Topic 805, as well as subsequent accounting in accordance with ASC Topic 350 and ASC Topic 360, continue to be challenging areas for companies and auditors alike.

The Public Company Accounting Oversight Board (PCAOB) recently released a Staff Inspection Brief that previews their observations with respect to audit inspections conducted in 2015. Among the preliminary inspection findings summarized in the PCAOB release, accounting for M&A transactions features prominently.

The PCAOB cited non-financial assets (e.g., assets acquired in business combinations, including goodwill and other intangible assets, and other long-lived assets) as one of the financial reporting areas where audit deficiencies were most frequently observed. The report states that “[t]he audit deficiencies frequently identified during the 2015 inspection cycle related to testing estimates arising from the valuation of assets and liabilities acquired in a business combination and evaluating impairment analyses for goodwill and other long-lived assets.” Examples of audit deficiencies cited by the PCAOB included instances where auditors did not:

  • Sufficiently test controls over the valuation of the purchase price consideration, and acquired assets and liabilities
  • Sufficiently test significant inputs and assumptions used to value certain assets, including projected financial information developed by the issuer

This PCAOB release is an indicator that outside auditors will be placing increasing emphasis on areas where companies utilize complex and/or subjective accounting estimates. As such, companies should strongly consider engaging a valuation specialist to assist with business combination accounting and the related impairment analyses. Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses, and impairment testing. To learn more click here.

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