GAAP Flash! News For CPAs in Public Accounting - 11.06.15
GAAP Flash! News For CPAs in Public Accounting - 11.06.15

GAAP Flash! News For CPAs in Public Accounting - 11.06.15

Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. For CPAs in public accounting this means performing higher quality audits. But who has the time to compile a list of relevant and timely accounting news relevant to CPAs? We do! Here are a few articles, blog posts, and publications designed to help increase business acumen in the profession.

And on the seventh day, God was still working on mergers (October 16, 2015) – MarketWatch (@MarketWatch)

This opinion piece outlines the manic pace of deal-making that has gone on during 2015. There have been mergers across industries, from tech companies to beer manufacturers. Mergers have come in all sizes: small, big and bigger, including one merger that may qualify as one of the top five deals ever (Anheuser Busch InBev offering $104 million for SABMiller). This article also points out that these deals are mainly being made by struggling firms and urges caution in approaching the merger craze as anything more than moves made to combat stagnant revenue growth.

How It’s Relevant: This article highlights how important it is to understand business combinations accounting guidance! With the pace of mergers, chances are good that more public accountants are dealing with the challenges that come with complex reporting considerations. Make sure your teams are up to speed, and seek out additional training if needed!

Pfizer and Allergan Begin Merger Talks (October 29, 2015) – Wall Street Journal (@WSJ)

Two pharmaceutical giants, Pfizer (market cap $216 billion) and Allergan (market cap $112.5 billion), are on the road to merger. Pfizer may be looking for a way to dodge high U.S. corporate taxes (Allergan is based in Dublin, Ireland) and also to regain some growth momentum on the heels of revenue declines from the third quarter. Some also believe that Pfizer can also use the merger as a first step to breaking the company into two entities: one selling patent-protected drugs and the other selling off-patent brands.

How It’s Relevant: The healthcare industry has been one of the hottest areas for merger and acquisition activity this year. A deal of this magnitude would cap off an impressive run in deal volume. These business combinations can be tricky and need to be carefully evaluated to account for all the nuances that can pop up! Also, the article references potential spin-offs with different accounting treatments that would need consideration. Phew! That’s a lot of complex accounting!

Walgreens Boots Alliance to Buy Rite Aid for $17.2 Billion (October 27, 2015) – Bloomberg Business (@business)

In further healthcare news, Walgreens expects to purchase Rite Aid, which would combine the second- and third-largest U.S. drugstore chains, in an effort to move past the current market leader, CVS. Many expect the deal to provide significant cost savings in drug distribution networks between the two companies. The acquisition of Rite Aid comes after Walgreens combined with Alliance Boots, a Switzerland-based drugstore company, last year.

How It’s Relevant: Although there is a lot of merger activity in the U.S., it is really a global phenomenon. In addition to the actual business combination reporting requirements, accountants will also need to consider the operation impacts of foreign currencies or new tax jurisdictions on the newly combined entity! This change could have significant consequences on the scope of audit, tax or other engagements. As an auditor, consider if any additional team members or specialists will need to be involved to deal with these new issues!

GE Nears U.S. Finance Exit With Asset Sales at $126 Billion (October 13, 2015) – Bloomberg Business (@business)

In the midst of companies going crazy to acquire competitors and boost financial performance with more scale, GE is pulling out of the finance industry and is close to exiting all U.S. finance operations with a recent agreement to sell $32 billion of assets to Wells Fargo in 2016. Global finance arms of GE are expected to sell off next year as well, leaving GE back in a familiar position focused on producing industrial products like jet engines and locomotives. The slimmer version of GE hopes to improve profit margins and also avoid further U.S. regulatory scrutiny by dropping its designation as a systemically important financial institution.

How It’s Relevant: Just when you think the whole world only cares about acquiring more and more and more assets, some companies will surprise you by divesting large stakes in previously strategic areas. In some cases, re-focusing on core business products will divert a firm’s resources to more effective uses, and an exit strategy is a good way to get compensated for assets or infrastructures that are already in place! Regulatory issues can also prompt a company to decrease its exposure to certain industries, like lending activities in the case of GE Capital. Divestiture may be the new trend down the road as companies get too large to function profitably. Keep in mind the differences and nuances of accounting that can happen when you deal with these types of transactions, compared to acquisitive combinations!

Audit Deficiencies Linked to M&A Surge (October 16, 2015) – CFO.com (@CFO)

A new survey published by Acuitas shows that business combinations, like mergers and acquisitions, caused 49% of audit deficiencies related to fair value measurements in 2013 inspections performed by the PCAOB. Errors resulted from improperly testing management’s assumptions for valuing assets, failure to detect all intangible assets resulting from the business combination, and not sufficiently testing data used in cash-flow projections.

How It’s Relevant: The analysis suggests that auditors are having a lot of trouble properly testing fair value assertions related to business combinations. This rate of deficiency comes at a bad time since mergers and acquisitions activity is happening at a record pace! Be part of the 50% of auditors who get this right and make sure that your team understands the risks with auditing fair value measurements. Now might be a good time to revisit your standard audit procedures and determine that these procedures respond to those fair value risks!

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