October 13, 2017
Revenue Recognition: Deal Terms Address New Standard
Steve Quinlivan has been closely following the impact of FASB’s new revenue recognition standard on the terms of M&A transactions. Steve recently blogged about a public company acquisition – NYSE-listed Envestnet’s acquisition of privately held FolioDynamix – that addresses the new standard in its covenants & closing conditions. Here’s an excerpt:
The heart of the provisions addressing revenue recognition are set forth in Section 7.11 of the merger agreement. From a high level, the target’s representative must provide certain information related to revenue recognition to Envestnet specified on a schedule by certain dates. Envestnet may comment on the information. The information is to be provided to Envestnet’s and Actua’s audit committee by a specified date. In certain circumstances, delivery of the information is a condition to Envestnet’s obligation to close. See Section 9.02(j).
As we recently blogged over on TheCorporateCounsel.net, implementation of the new revenue recognition standard is proving to be tough sledding for many companies, and we’re likely to see many more provisions in acquisition agreements zeroing in on information about the effect of the new standard on target companies as the deadline nears.
The blog points out that buyers’ emphasis on the new standard may create some challenges for private companies looking to sell to a public company buyer. Many of these companies haven’t focused on adoption of the new standard – and if they can’t provide a public company buyer with enough information to enable it to properly recognize revenue, they may disqualify themselves as a public company target.
– John Jenkins