September 19, 2017

Revenue Recognition: Effects of New FASB Standard on M&A

This recent blog from Steve Quinlivan addresses the wide-ranging impact that FASB’s new revenue recognition standard may have on M&A. Public companies will begin implementation of the new standard on January 1, 2018.  For some companies, the new standard might not have a material impact on their financial statements – but that may not be the case for their deals.

The blog says that the transition to the new standard may affect everything from M&A valuation to due diligence to substantive deal terms.  Here’s an excerpt on how working capital adjustment provisions may be influenced by the new standard:

A change in revenue recognition patterns will affect the calculation of a target’s working capital. The change will be most difficult to deal with when the working capital target is determined before adoption of the new standard with a true up occurring after the new standard has been adopted. Solutions will include calculating working capital using existing standards for the true up (or using the new standard for the determination of the target) but the level of effort will need to be a ssessed as it will vary amongst companies and the alternative calculations may not be feasible for some.

Working capital targets are often calculated using an average of working capital for the twelve preceding months. Thus for transactions documented after the new standard becomes effective, a method may need to be developed to account for differing accounting principles during the look back period.

John Jenkins