Accounting after a business combination: what every CFO needs to know
While the volatility of 2022 has caused a slowdown in merger and acquisition (M&A) activity, global firm PwC asserts it's still a "fiercely competitive deals marketplace." Among CFOs the firm surveyed in January, 35% saw pursuing corporate M&A, joint ventures and alliances as "very important" to their company's ability to grow this year. The number was even higher – 47% – when considering all executives.
In business, just as in life, the merging of two entities can be an occasion worth celebrating, but it's not without complication. There's the blending of backgrounds and cultures. There's deciding where to establish a home base. And, of course, there's the joining of finances. This is where so many of the complexities arise.
Here’s what you need to know about accounting for business combinations and how to make the process easier.
Acquisition accounting considerations
Deciding how to properly integrate finances
With the right accounting software, newly acquired or merged companies don't have to relinquish their financial autonomy right away, if at all.
An acquired company can compile separate financial statements from its parent company after acquisition. According to ASC 805, it can do this using its own historical carrying amounts for the assets acquired and liabilities assumed, or it can use the new basis of accounting established by the parent company (known as "pushdown accounting").
Gravity Software's multi-entity accounting capabilities allow financial information for all of an enterprise's entities to be stored within a single database, so it's easy for the acquired company to create its own financial statements its own way, even while the parent company has full visibility into all of its entities' finances.
That said, it may make sense for companies involved in a business combination to merge finances in some way, and Gravity makes that easy as well.
One example is a subscription-based SaaS company that acquires a consulting company hoping to expand its customer base. While each entity maintains separate general ledgers, they want to share customer and vendor information and produce consolidated financial reports to share with their investors.
In another example, a multinational conglomerate has greater buying power than the individual entities it has acquired. When it gains a substantial discount purchasing thousands of office chairs, Gravity allows the parent company to apply the line item to all of the organization's entities at once. It automatically updates the ‘Due To’ and ‘Due From’ accounts, and, though the original transaction was made in US dollars, it allows each subsidiary to track the expense in its home currency.
Gaining visibility into multi-company financial data
According to PwC, companies that engage in M&A activity should have a multi-year capital allocation plan and should take a critical look at their portfolio companies to assess their potential for growth and profitability.
Both of these tasks require full visibility into each portfolio company's financials as well as the ability to make side-by-side comparisons of key performance indicators.
An investor can more easily determine why one of its portfolio companies has a low profit margin compared to others by analyzing how its revenue and expenses compare to others. This will help them determine what type of intervention may be appropriate, whether it’s a capital infusion, divestiture or negotiating with a supplier.
Gravity’s consolidated financial reporting makes it easy to compare financial data for any combination of an organization's entities.
It also integrates seamlessly with Microsoft Power BI so stakeholders can identify trends that matter most to their businesses in the form of colorful dashboard visualizations. With Gravity, you have the tools to make the best possible decisions when it comes to capital allocation, a particular company's future as part of your portfolio, and more.
Tax and reporting considerations
Compiling financial data for tax and reporting purposes isn't always easy under the best of circumstances, but it's even more complicated with new entities added to the mix.
According to PwC, many pain points of a multi-entity business – including process inefficiencies and a high risk for errors – stem from the existence of data silos in place of a "single source" of information. The same principle applies when it comes to financial reporting.
Inaccuracies in the spheres of tax and reporting, whether intended or not, can result in financial, reputational, and legal repercussions, so it’s critical to get them right.
PwC also notes the tax function experiences constant pressure for up-to-date legal entity data and struggles with staff spending time on manual tasks when they could be doing more value-added work. While PwC's piece focuses on the tax function, there's no doubt the closely aligned finance function could echo these complaints.
Gravity Software can resolve these issues. Because data for all companies within an organization is stored in the same database, there’s no need to enter information into a separate spreadsheet to create reports – meaning the information is accessible at all times, in real time, with no manual copying and pasting involved.
Gravity also integrates with Microsoft Power Automate to streamline repetitive workflows, freeing up staff time for more analytical and strategic value-add work.
Grow with Gravity
Business combinations can be an effective way for a company to gain a better foothold in a particular market, position their enterprise for growth, eliminate competition, or gain new technology.
Even if you've just made your first acquisition, you need a multi-entity, multi-functional accounting solution like Gravity Software to keep your ever-growing business running smoothly for the long haul.
Want to see for yourself what Gravity can do for your multi-entity enterprise? Schedule a demo today.
Better. Smarter. Accounting.