In many transactions, when it comes to how the completion accounts will be prepared, phrases like “we will do it consistent with past practice”, “we will just do it the way we have always done it” or “we will just do it in a manner consistent with the last audited accounts” are all too common.
Sounds simple and well-intentioned, doesn’t it? However, relying solely on ‘consistency’ poses numerous challenges and limitations.
- Demonstrability: Saying ‘consistent with past practice’ is easy but what does it actually mean? Proving it in a dispute requires solid evidence. Will your evidence show that things can only be treated in one specific way?
- Deal-Specific Positions: Negotiated positions for your transaction may demand a departure from past practices. For example, the future cash flows from decommissioning obligations normally recognised as a liability on the balance sheet may already be factored into the valuation and therefore the liability needs be excluded from the completion accounts.
- Judgement Challenges: Judgement relies on the context of facts and circumstances at the time the judgement is made. The conditions and team that existed when the prior year financial statements were prepared, may not align with those at completion of your transaction.
- Adapting to Change: New management, new priorities and evolving circumstances post-completion make consistent adherence to past practices challenging. Kardia has seen many finance teams placed in difficult situations, caught between loyalty to their old employer and wanting to meet the expectations of their new employer now paying their wages.
- Knowledge Gaps: People leave, taking vital knowledge with them, creating gaps without documentation trails. In a recent completion accounts dispute, our founder encountered a situation where the individual responsible for the monthly accrued revenue calculations had exited the business. The monthly submissions to the central finance team merely included a summary calculation, devoid of any supporting details and rationale.
- Misalignment with Cashflows: Past accounting practices may create assets and liabilities which do not align with cashflows. This incongruence can lead to inclusion of items in completion accounts that either do not convert to cash in the near term or do so in significantly different amounts in the future. For example, deferred tax assets and liabilities.
The Kardia Solution: Navigate Complexity with Precision
Let Kardia be your guide in navigating this complexity. We collaborate with the target’s finance team to delve beyond standard accounting policies included at the back of financial statements, understanding how the finance team measures material and judgemental items on the balance sheet. Our aim is to eliminate subjectivity by drafting detailed, specific accounting policies and definitions into the SPA. The goal? Reducing the risk of disputes and preserving your value. It is surprising how challenging it can be to articulate the intricacies of your processes. See our article next week, where we discuss ‘accounting hierarchies’ in more detail.