New Rules for M&A

Story Highlights:

• The US Financial Accounting Standards Board (FASB) released new M&A accounting and reporting standards last December 2007, to be effective December 2008.
• This move underscores FASB's efforts to converge US accounting standards with international standards.
• The new rules will impact how companies evaluate, negotiate, and structure potential business combination deals.
• While this is likely a positive step toward more seamless global markets, the move is creating difficulties for today's would-be sellers and buyers of companies.
• Broad-based M&A is unlikely to be impacted as a result of these changes, but they could dampen M&A activity in some cases.

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It's broadly said businesses do best in stable and predictable regulatory environments. So it was a bit of a shock when the US Financial Accounting Standards Board (FASB) released last December 2007, to be effective December 2008.

The new rules signify a joint effort by the FASB and the International Accounting Standards Board (IASB) to develop converged standards, and will impact how companies evaluate, negotiate, and structure potential business combination deals around the world. While this is a likely a positive step toward more seamless global markets, the move is creating difficulties for today's would-be sellers and buyers of companies—particularly those in Financials.

In today's environment of write-downs and heavy borrowing, the new rules couldn't have come at a worse time for financial companies. It's almost perverse; in the banking industry, the very banks that should be consolidating right now—those that are financially troubled— under the new standards.

The new rules change the way a potential target's assets and liabilities are recorded. Under current standards, certain assets and liabilities of an acquired business are recorded at fair (or market) value while others are not. But the new standards will require 100% of a target's assets and liabilities to be recorded at the market value at the time of the transaction—eliminating any leeway for buyers to assess values based on other measures besides market value, such as purchase price or intended use of assets. The new rules also eliminate allowances for loan losses upon acquisition. This places an extra burden on potential buyers of targets with loans that have significantly declined in value.

As a result, banking M&A activity may decline as firms may not want to mark assets to market or raise the extra capital needed to cover loan losses. Still, broad-based M&A is unlikely to be impacted as a result of these changes. In other consolidating sectors like Energy and Materials, the new rules matter less, if at all. The decision to buy or sell a business should be affected less by accounting considerations than by macro-economic factors. One thing that should never happen is a "wag the dog" scenario, where accounting rules (by definition made to simply "account" for something) are driving business practice.

That said, the global convergence of accounting and reporting standards could ultimately spur more global M&A deals as companies feel more comfortable in evaluating and structuring foreign deals under a more united system. These changes are not without their growing pains however, and it'll take time to know if they'll contribute to an even more stable and predictable regulatory environment.