Auditing Merger and Acquisition Transactions How does a company measure the cost of an acquisition of another company? What factors often complicate the determination of actual cost? Explain how each factor complicates the calculation of cost and the steps the auditor has to take to reach a conclusion about the cost of the acquisition

Answer 1

Costs associated with a merger and the valuation issues are as follows:
• Assets – valued at current market value. This is usually determined by an appraisal for fixed assets. Current assets are usually determined through normal audit-type procedures, e.g. estimating current market value of inventory, collectability of receivables, etc.
• Current liabilities – valued at market value. Typical audit procedures can be used to identify amounts eventually paid, or to discover unrecorded assets. The acquiring company can use these same procedures.
• Long-term liabilities – should be adjusted for changes in interest rate and credit rating of the company. Usually a ready market value is available.
• Other liabilities (subjective) – The auditor must be aware of significant changes that might be made to pension plans or other benefit plans. If there are changes, the auditor should engage an actuary to assist in making the judgment.
• Restructuring reserves – this has been a difficult area and one that has been subject to a great deal of manipulation by CFO's. Often, companies have overestimated the reserves for restructuring with intent to subsequently take the items into income. Newer accounting rules make it more difficult to manipulate these accounts.