Acquisition-related costs

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognised in accordance with IAS 32 and IFRS 9. [IFRS 3 53] Acquisition-related costs in business combinations

An acquirer incurs various acquisition-related costs in connection with a business combination, including: Acquisition-related costs in business combinations

  • Direct costs of the transaction, such as costs for services of lawyers, investment bankers, accountants, and other third parties
  • Indirect costs of the transaction, such as recurring internal costs (e.g., the cost of maintaining an acquisition department)
  • Financing costs, such as costs to issue debt or equity instruments used to effect the business combination (i.e., issuance costs)

The IASB believes that acquisition-related costs are not part of the fair value exchange between the buyer and seller for the acquired business. Rather, the IASB concluded that acquisition-related costs are separate transactions with a service provider. Therefore, the guidance in IFRS 3 requires that direct and indirect acquisition-related costs be expensed in the period that the related services are received.

An acquirer does not consider costs incurred to issue debt or equity instruments to effect a business combination to be acquisition-related costs. Generally, debt issuance costs are reported in the balance sheet as a direct deduction from the face amount of the debt and amortized over the term of the debt in accordance with IAS 32, while equity issuance costs are deducted from the proceeds of the issuance (i.e., a reduction of equity) in accordance with IFRS 9. Acquisition-related costs in business combinations

In short: The acquisition-related costs are considered expenses because they don’t represent acquired value under the acquisition method of accounting.

Common acquisition-related costs addressed in IFRS 3, Business Combinations are:

  • Legal
  • Accounting and due diligence
  • Valuation
  • Investment banking/broker/finder’s fees
  • Debt or equity issuance costs
  • Other consulting/advisory costs

These costs are generally to be expensed in the period incurred and are not included in the business combination accounting. With the exception of the costs of registering and issuing debt or equity securities (which are typically recognized in accordance with other applicable accounting guidance), these costs are considered expenses because they don’t represent acquired value under the acquisition method of accounting.

The first step in tackling this issue is gathering the necessary information from all parties. Management, the acquirer and the seller typically each possess critical transactional data that should be aggregated in the funds flow documentation when feasible.

The second step is to determine who will bear the burden of these costs and in which period the costs shall be reported. These issues often are addressed in the terms of the merger or purchase agreement, but the guidance in IFRS 3 does prescribe the following guidelines:

  • Which party do these costs benefit?
  • When were the costs incurred or services provided to the buyer or seller?

In some cases, this may be a straightforward assessment. However, the following arrangements are relatively common and may change the accounting conclusions for these costs:

  • If the ultimate buyer (often a private equity group (PEG)) creates a substantive legal entity (buyer) to complete the acquisition, the PEG will sometimes fund certain buyer costs, i.e., PEG pays the vendor directly. In this scenario, the buyer benefits from these costs and should record the expense on its books with a corresponding credit to equity.
  • If the buyer pays certain costs incurred for the seller’s benefit, these costs should not be expensed or capitalized. Instead, these costs are treated as consideration paid to the seller (which is included in purchase price).
  • If the seller pays certain costs incurred for the buyer’s benefit, these costs should be expensed by the buyer in the period incurred (not as an increase to purchase price).

Next, the parties should be aware of the tax ramifications of transaction expenses. The deductibility of these costs is affected by the structure of the deal, safe harbor laws and many other factors.

Finally, if material, the buyer must disclose the nature and amounts of transaction costs, as well as the income statement line items in which the costs are recognized.

Acquisition-related costs in business combinations


Acquisition-related costs

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