Question

What are acquisition-related costs? With reference to relevant accounting standard(s), discuss whether these costs should be capitalised or expensed.

(between 300-600 words)

Answer 1

In Today’s business environment, companies acquire other companies or merger with other companies for inorganic growth or to getting financial and operating synergies from merger. When a company acquires other company or mergers with other company (i.e. it gets involved in Merger & Acquisition related activity), the companies need to make sure that they do correct accounting of purchase price and also for costs involved in carrying our merger and acquisitions. Examples of these costs are – investment bankers fees, advisory fees, legal fees, fees for valuation, accounting, consulting fee and other professional and general and administrative costs etc.

As per US GAAP – “Acquisition-related costs are costs the acquirer incurs to effect a business combination.”

To put it simply acquisition cost will include all costs which are incurred at the time of and in relation to acquisition but it will not represent either any asset which will generate future cash flows.

Acquisition-related costs are to be considered separate transactions and these should not be added as part of the consideration paid or payable to the seller but these should be expensed as these are incurred or related service is received. These costs are not represented by any underlying asset and do not form part of fair value of assets acquired. These services are deemed to be consumed in the process of acquisition. Earlier there was a different treatment for these costs when these used to be capitalized

Companies also incur costs to raise finance when they acquired businesses. These costs are allowed to be capitalized and amortized over the life of debt issue as per accounting standard. At times, costs related to an acquisition and costs related to debt raising may be paid together to an investment bank, in which case it will be important to segregate both costs and accounted for correctly as prescribed