As you are going through your M&A process, you may be wondering, “What are the key controls I should be paying attention to so that I can pass SOX easily?”
I suggest you watch the video. It’s easier to understand if you are a visual/audio leaner. The content below is the same as the video. It’s for those who learn by reading.
Most M&A transactions include six to 10 top key controls. You will tailor these to suit the type of transaction you are doing, whether you are buying assets, or buying intellectual property and technology, versus an acquisition hire for talent.
Key Control #1 – Preliminary Approval – CFO or CEO Level
A company will require that all mergers or acquisition transactions be reviewed and approved by the CFO or CEO prior to entering into contracts for due diligence. Some companies may also require that the board give approval.
Key Control #2 – Preliminary Approval – Board Level
Some companies may need the approval of the board in addition to that of the CEO or CFO. This usually depends on the size of the transaction, where smaller transactions may not need the approval of the board. In some companies the board delegates approval authority to a committee (such as an M&A Committee or a special committee).
Key Control #3 – Balance Sheet Diligence Review
The third consideration is getting the finance team involved. This is typically not a key concern because the business will drive the need, but it is helpful to make the finance team aware of the transaction. They can help make sure the correct accounting is done later.
Key Control #4 – Income Statement Forecast Review
For acquisitions, the forecast/operating plan is prepared by FP&A, reviewed by management, and presented to the board of directors. When you are forecasting your operating plans, the assumptions made by your FP&A team (or your corp/dev team, or your strategy team) are very important. You need to have rigorous debate or review about these assumptions because they will be used by your valuation experts to build out the value of the acquisition.
Key Control #5 – Valuation Report Review
Once the third-party valuation team delivers its report, it is then up to the company to review the valuation. Typically the technical accounting director, controller, or assistant controller will do this review to ensure that the assumptions are consistent with what was provided. If there are any assumptions made about peer companies, you need to check that the right peer companies were considered. You will also check that the right discounting, or the right model, was used.
Key Control #6 – Purchase Price Allocation Review
Once you have the valuation model, someone has to prepare the purchase price allocation workbook and memo that comes with it. The purchase price allocation, while it sounds very simple, can get very complex with different components. You need to make sure that there is a separate person doing the preparation from the person doing the review.
Key Control #7 – Tax Acquisition Review
You may need to consult with a third-party tax expert to make sure that the liabilities you are taking on are properly reflected. You may also consult with them to ensure that you can utilize the assets you are taking on (e.g., a loss carryforward). If so, you then need to have someone internally review the workbook of the tax experts to make sure that you agree with their assumptions, conclusions, and the logic of how they came up with their findings.
Key Control #8 – Acquisition Memo Review
Once you have the expert opinions on how to treat this and a purchase allocation, you then write up the accounting memo. In this you will outline the background, assumptions, prices paid, what is goodwill, and what are actual assets to allocate to – that is your purchase accounting. And of course there is going to be the journal entry that comes out of this to record this asset onto your books.
Key Control #9 – Intangibles and Goodwill Recon
After you acquire this asset, there is going to be a review on a quarterly basis to make sure the goodwill, or the intangibles, that you have bought are still good (or not impaired).
Key Control #10 – Annual Goodwill Impairment
There will also be a review on an annual basis to make sure the goodwill, or the intangibles, that you have bought are still good. The accounting literature requires you to do a robust review of the goodwill that’s resulting and that nothing is impaired.