The recent release of new lease accounting rules by the Financial Accounting Standards Board and the International Accounting Standards Board significantly impacts public and private companies. These changes also influence the accounting and negotiations of mergers and acquisitions.
FASB's ASC 842 — Lease Accounting Standards Update No. 2016-02—changes how companies report assets and liabilities within their financial statements. For example, one of the purchase price elements of an M&A transaction is the target's working capital, which, exclusive of cash and seller-assumed short-term debt, is typically calculated by subtracting current liabilities from current assets. In setting the expected working capital that will be transferred along with the target at closing, the parties will agree to a "peg," typically derived from an average of the target company's historical balance sheets, using somewhere between a trailing 12 and trailing 24 months from the most current financials available during the prospective buyer's due diligence. While all the target company's assets and liabilities are relevant to the acquiror's acquisition analysis, those that translate into a source or use of cash within 12 months from closing are perhaps most meaningful in determining adjustments to the negotiated purchase price.
Implementing New Lease Accounting Guidance, and Effects on Comparability in M&A.pdf (0.2) MB
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