Common Pitfalls of Business Combination Accounting

With recent merger announcements of companies like Starwood and Marriott, or AT&T and Time Warner, the appetite for business acquisitions is clearly back in full swing. Dixon Hughes Goodman LLP (“DHG”) has also observed an uptick in acquisition activity, particularly in private equity transactions. Given the renewed activity in business combinations, DHG sees this as a good opportunity to provide a few helpful reminders for acquisition accounting, and also provide instances of accounting topics that can be problematic in practice.

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 805, Business Combinations addresses the accounting for acquisitions. If you are working through an acquisition (or might be in the near future), be mindful of the following common pitfalls:

Not identifying all consideration

Determining the aggregate consideration paid can be more difficult than simply using the purchase price amount in the offer letter or purchase agreement. This is because many purchase agreements include transfers of more than a simple cash value, including transfers of other assets, payments made on behalf of the sellers, contingent payment arrangements after the initial wire transfer as well as issuance of equity interests in the new entity. Consideration is the fair value of all assets transferred plus liabilities incurred to the seller and equity interest issued by the acquirer. For instance, transaction costs such as legal or due diligence expenses or liabilities paid for the benefit of the seller should be included in total consideration.

In contrast, items that settle previous relationships or payments for the benefit of the purchaser should not be included in total consideration. For example, the following transactions are considered to be separate, and not included in the acquisition accounting:

  • A transaction that, in effect, settles a preexisting relationship
  • A transaction that, in effect, compensates employees or former owners for future service
  • A transaction that, in effect, reimburses the seller for paying the purchaser’s acquisition related costs


Dan Smith, Senior Manager | DHG Assurance
404.575.8936 |