The Role of Accounting in Mergers and Acquisitions Explained  

Accounting in mergers and acquisitions (M&A) is central to any business deal. From due diligence before the deal to financial reporting and compliance afterwards, acquisition accounting plays a pivotal role at every stage.   

Accountants help assess the true value of a target company, identify assets acquired and liabilities assumed, and ensure the transaction is structured for optimal tax implications and long-term profitability.  

What Is M&A?  

M&A, short for mergers and acquisitions, covers many business combinations. While the terms are often used interchangeably, there’s a key difference:  

Merger  

In mergers, two companies combine and form a new legal entity. The original companies no longer exist independently and create a shared corporate identity moving forward.  

Acquisition  

In this method, one company purchases another. The acquired company may continue operating under its name or be fully absorbed into the acquiring firm.  

The implications for financial statements, cash flow, and balance sheet presentation are significant in both scenarios.  

What Is M&A in Accounting?  

In accounting for mergers, M&A refers to transactions in which ownership or operational control of one business is transferred to or consolidated with another.   

From an accounting standpoint, these transactions involve several critical areas:  

Acquisition accounting  

Also called purchase accounting, this refers to recording the deal on the acquirer’s books. This includes evaluating net assets, allocating the purchase price, and identifying tangible and intangible assets.   

If the excess purchase price exceeds the fair value of identifiable assets and liabilities, it is goodwill.  

Purchase price allocation (PPA)  

This process assigns value to each asset acquired and liability assumed. It’s essential for proper financial reporting and future depreciation/amortization schedules.  

Consolidation  

The financials of both companies are merged into one set of consolidated financial statements, with intercompany transactions and balances eliminated.  

Post-acquisition Restructuring  

After the deal, restructuring charges like employee severance, facility closures, and systems integration must be documented accurately as part of the valuation process.  

Earnings and Equity Impacts  

Issuing shares to fund the acquisition can dilute earnings, impacting metrics like earnings per share (EPS). One-time M&A costs can also distort the company’s reported profitability.  

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Key Components of M&A Accounting  

No matter whether a company follows US GAAP or IFRS, business combinations must be accounted for using the acquisition method. This approach is at the heart of m&a accounting, requiring a detailed analysis of net assets, intangible assets, and tax implications.  

The Acquisition Method  

In acquisition accounting, once the deal closes, the acquiring company must prepare consolidated financial statements that include the post-acquisition financials of the acquired business.  

A core step in this method is the purchase price allocation (PPA). It involves measuring all identifiable assets and liabilities of the target company at fair value as of the acquisition date, not historical cost.   

In most cases, this means revaluing the acquired company’s balance sheet, often resulting in write-ups of specific assets.  

Determining Fair Value  

The acquiring company will typically hire third-party valuation experts to properly reflect fair value. These professionals assess everything from real estate to intellectual property to determine the updated value of the assets acquired and liabilities assumed.  

For instance, if the deal includes commercial property, a real estate appraiser might analyze comparable sales in the market.   

This feeds into the total value of the net assets, which is calculated by subtracting liabilities from the fair value of assets.  

The difference is recorded as goodwill if the purchase price exceeds the total net asset value.  

Goodwill and Intangible Assets  

Goodwill represents the excess price paid beyond the value of identifiable assets and liabilities. It reflects intangible components like brand equity, skilled leadership, customer relationships, and expected cash flow or operational synergies.  

Unlike other intangible assets, goodwill is not amortized but is classified as an indefinite-lived asset and tested annually for impairment. You won’t find goodwill on a company’s balance sheet unless it results from an acquisition.

Tax Implications  

The valuation process used in acquisition accounting also brings up several tax implications. Businesses maintain two sets of records:  

• One is for financial reporting prepared under IFRS or GAAP rules.  
• Another is for tax filings based on jurisdiction-specific tax laws.  

Fair value adjustments affect the accounting records but may not alter the tax books, leading to temporary differences between the two sets of numbers. As a result, companies often need to account for deferred tax liabilities or assets to bridge the gap.  

Understanding these differences is essential for proper financial statements and maintaining compliance across both financial and tax audits during the due diligence phase.   

The M&A Accounting Process  

Accounting for mergers and acquisitions is more than adding numbers; it’s a detailed, multi-stage process that shapes how the combined entity will appear on its financial statements, impact its cash flow, and operate post-deal.   

Here’s how that acquisition accounting journey typically unfolds:  

1. Valuation and Deal Structuring  

Initially, the acquiring company evaluates the target’s worth using discounted cash flow (DCF), precedent transactions, and comparable company analysis. Once the valuation is set, the deal’s structure is defined—often as a cash transaction, stock swap, or a hybrid of the two.  

These decisions have direct tax implications and influence how the deal is reflected in the acquirer’s balance sheet.  

2. Due Diligence  

Before any ink hits the paper, due diligence is critical. Accountants and analysts review everything from net assets and contractual obligations to litigation risk, liabilities, and operational costs.   

This phase also identifies opportunities for synergies, which are often added to the buyer’s assumptions about growth potential.  

3. Purchase Price Allocation (PPA)  

After closing the deal, the next step is assigning the purchase price to all assets acquired and liabilities assumed, using fair value assessments.   

This is where the real work of purchase price allocation begins and where specialists step in to value both tangible and intangible assets.  

The remainder is goodwill if the excess purchase price exceeds the fair value of identifiable assets and liabilities.  

4. Consolidation and Integration  

This is the moment where two companies become one on paper. The acquiring company integrates the financial reporting, merging income, cash flow, and balance sheets.  

Adjustments for deferred taxes, intangible asset amortization, and goodwill are also recorded here. For companies involved in international mergers, dealing with different currencies and accounting standards adds another layer of complexity.  

5. Post-Acquisition Accounting  

Once the companies are merged, accounting doesn’t stop. Ongoing tasks include:  

• Testing goodwill for impairment  

• Amortizing acquired intangible assets  

• Adjusting for deferred tax implications  

• Tracking accretion or dilution of earnings  

• Ensuring compliance with financial reporting regulations  

This stage ensures the business reflects reality and complies with accounting frameworks like GAAP or IFRS.  

Common Challenges in M&A Accounting  

Even experienced finance teams can face obstacles during M&A. Some of the biggest include:  

Fair Value Estimation: Valuing intangible assets like patents, software, or brand equity requires specialized knowledge.  

Goodwill Impairment: If goodwill is overvalued, it must be written down, impacting investor confidence and company valuation.  

Deferred Taxes: Differences between book and tax values can lead to complex deferred tax assets and liabilities.  

Systems Integration: Merging two sets of accounting systems, especially across borders—can delay financial reporting and cause data consistency issues.  

Think of the M&A process like buying a house—you wouldn’t make an offer just based on the paint job. You’d want a full inspection first. In the same way, accounting in mergers and acquisitions inspects the financial foundation of a business before it’s acquired.