M&A: Impact of New Revenue Recognition and Lease Accounting Standards on Deal Terms

Revising Terms to Reflect Adjustments to EBITDA, Valuations, Working Capital, Earnouts, Due Diligence, Reps and Warranties

This program has been cancelled

A live 90-minute CLE webinar with interactive Q&A


Wednesday, December 12, 2018

1:00pm-2:30pm EST, 10:00am-11:30am PST


This CLE webinar will examine the impact of new lease accounting and revenue recognition standards on M&A transactions beginning in 2019. The panel will discuss how the new standards could affect M&A including: target company EBITDA and valuations, due diligence and transition issues, and the terms of acquisition agreements including working capital adjustments, earnouts, and reps and warranties.

Description

Adoption of the FASB’s new revenue recognition standard becomes mandatory for private companies after Dec. 15, 2018 (the transition for public companies began in Dec. 2017). Similarly, new rules for the accounting of operating leases will come into force under IFRS and GAAP in 2019. These new standards represent a significant shift in accounting methodology and are expected to have wide-ranging effects on M&A transactions.

The new revenue recognition standard will impact more than top-line revenue; deal teams will need to assess the total impact of the transition during due diligence. It might also change how costs associated with revenue are recognized, with impacts on both the income statement and balance sheet. Other areas to be consider include the impact of the new standards on sales and executive incentive compensation.

To the extent the revenue recognition standard accelerates or delays revenues, it will impact EBITDA multiples and other metrics used to price transactions. New revenue recognition patterns will also affect the calculation of a target’s working capital and may influence the documentation and calculation of earnout payments in purchase agreements entered into prior to the new standard. If an acquisition is financed with debt, the impact of the new standard will have to be considered when negotiating financial covenants.

The new lease accounting rules require lessees to recognize operating leases as assets and liabilities on their balance sheets, which will result in an increase in EBITDA and impact earnout calculations unless the parties expressly agree to disregard the rule for earnout purposes. If the parties choose to determine the value of lease liabilities differently than under IFRS or U.S. GAAP for purposes of the closing accounts, they will have to accurately define the valuation metrics in the purchase agreement.

Listen as our authoritative panel discusses the impact of the new revenue recognition and lease accounting standards on M&A transactions. The panel discussion will include how the new standards should be addressed in M&A due diligence and deal terms.

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Outline

  1. The new revenue recognition standard (ASC 606, ASU 2014-09)
    1. Five-step process to recognize revenue arising from contracts with customers
    2. The treatment of certain costs associated with obtaining and fulfilling contracts
  2. The new lease accounting standard: IFRS (IFRS 16) and GAAP (ASC 842)
  3. Effect of new revenue recognition standard on M&A deals
    1. EBITDA and business valuations
    2. Forecasts and projections
    3. Working capital adjustments
    4. Earnouts
    5. Due diligence
    6. Debt covenants associated with deal funding
  4. Impact of new lease accounting standard for M&A deals
    1. EBITDA and earnouts
    2. Valuing lease liabilities in purchase agreements

Benefits

The panel will review these and other relevant issues:

  • What is the new revenue recognition standard and how does it change the evaluation of a company’s contracts?
  • How might the new revenue standard affect target company valuations?
  • How does the treatment of operating leases differ under the new lease accounting standards and how does it affect a target’s financial statement?
  • How should earnout provisions address the new revenue recognition and lease accounting standards?

Faculty

Naisbitt, Russell
Russell Naisbitt
Consulting CFO
VCFO

Mr. Naisbitt is a strategic financial leader with a broad and diverse base of industry and functional experience. He...  |  Read More

Additional faculty
to be announced.