DealLawyers.com Blog

February 27, 2017

Heads Up! Revenue Recognition Changes Will Alter Deals

This PwC blog says that FASB’s new revenue recognition standard – which goes into effect for most companies in 2018 – could have significant implications for M&A.  While CFOs know they’ve got an implementation deadline fast approaching, many dealmakers may not appreciate the new standard’s potential impact on acquisitions. Here’s an excerpt addressing what the new standard may mean for valuation models & due diligence:

Performance metrics could change in ways that aren’t driven by operations or cash flows. For starters, the pattern of revenue recognition may change under the new guidance, even when the underlying operations and contracting has not changed. In addition, Private Equity funds that adjust GAAP results to determine run rates for purposes of valuation will need to fully assess the impact of such changes. For example, upon adopting the new standard, there could be a loss in the ability to recognize previously deferred revenue, or a requirement to capitalize and amortize costs already incurred in a prior period. Additionally, the ability of target companies to comply with the new rules and implement any required changes to processes and systems will need to be evaluated during due diligence.

Other areas that may feel the impact of the new standard include management compensation, debt covenants, tax planning and exit strategies.

John Jenkins