Your Company Made an Acquisition. What Will Your Auditors Need?

Closing a deal is a milestone. For finance leaders, it’s also the start of a new set of accounting questions. Purchase accounting, valuations, internal controls, and disclosures all follow, and each one can shape your next audit. The good news is that most surprises are avoidable with a little planning.

Here is what we tell CFOs and controllers who have just closed an acquisition.

Why Acquisitions Add Complexity to an Audit 

Acquisitions bring transactions, estimates, and risks that sit outside normal operations. Many companies complete deals only occasionally, so management may be revisiting business combination guidance for the first time in years. Purchase price allocations, intangible asset valuations, and goodwill all require judgment. That often means more audit procedures, more documentation, and, in some cases, valuation specialists. 

Start with Purchase Accounting

Purchase price allocation means assigning the price you paid to the assets you acquired and the liabilities you assumed, generally at fair value. Customer relationships, trademarks, and trade names are identified and valued, and whatever remains is recorded as goodwill. 

Some leaders view these intangibles as “paper assets” because they create noncash amortization. The requirement still applies, and the allocation can meaningfully affect future earnings. 

The mistakes we see most often are easy to prevent:

• Bringing in valuation specialists too late, especially for intangible assets
• Not adjusting acquired assets, including fixed assets, to fair value
• Overlooking liabilities and payables that existed on the acquisition date
• Waiting until year-end to address any of it

Know What Your Auditors Will Ask For

Having the right documents organized early makes the audit faster and less stressful. Plan to have these ready:

• The executed purchase agreement, amendments, and closing statement
• Flow of funds showing how the price was paid and to whom
• The acquisition-date balance sheet with supporting schedules and reconciliations
• Management’s purchase price allocation and any valuation reports
• Support for contingent consideration, such as earnouts
• New debt agreements and other significant contracts from the deal

Reconciliations are a common source of delay. Deals often close midmonth, so teams must prepare acquisition-date reconciliations outside the normal month-end close. Build that into the plan from day one. 

Consider the Private Company Alternatives

Eligible private companies have accounting alternatives under GAAP that can simplify the process:

• Intangible asset alternative: Certain customer-related intangible assets and noncompetition agreements can be included in goodwill rather than recognized separately, which can reduce valuation cost and complexity.

• Goodwill amortization alternative: Goodwill can be amortized, generally over 10 years, instead of tested annually for impairment. Electing the intangible asset alternative requires electing this one as well. The reverse is not required.
  
  
• Disclosure relief: Private companies are generally exempt from the supplemental pro forma revenue and earnings disclosures required of public entities.

These elections affect your financial statements for years, so weigh them carefully, particularly if you may someday go public or be acquired by a public company.

Look at Internal Controls and Integration

Combining two organizations means combining systems, processes, and people. Early on, we encourage management to: 

• Understand how the acquired company closes its books
• Align accounting policies, which generally need to be consistent across the consolidated group
• Map the acquired company’s accounts into consolidated reporting 
• Set up processes for intercompany transactions and eliminations 
• Check for gaps in segregation of duties and approval processes 
• Document policy changes, new controls, and significant judgments 

Don’t Forget Lenders and Investors

Your acquisition can affect debt covenants through changes to financial ratios, amortization, and impairment. Talk with your lenders and investors early to learn what they expect. Some will want the acquired business reported separately, others will want consolidated results, and others will ask for comparisons with and without the acquisition. It’s far easier to plan for those requests than to reconstruct the data later. 

What a Smooth Audit Looks Like

In our experience, companies that sail through the first audit after a deal tend to do the same things: 

• Communicate early. They keep auditors informed from the start. 
• Prepare ahead. Reconciliations, support, and valuations are done before the audit begins.
• Know the right people. In addition to accounting personnel, they identify those with operational insight who can provide context on the acquired company’s assets, liabilities, customers, and overall business operations.
• Keep institutional knowledge close. They retain key acquired-company employees, especially if turnover follows the deal.
• Assign ownership. Someone is clearly responsible for purchase accounting, integration, and reporting.
• Set realistic timelines. They allow time for the additional work an acquisition creates.

The Bottom Line

An acquisition doesn’t end at closing. Address the accounting early, involve your auditors and valuation specialists, and understand what your lenders and investors need. Your team will be better prepared, and your audit will be more predictable. 

Planning an acquisition or just closing one? Our Assurance team is here to help you prepare. Contact us to start the conversation.