One of the most challenging financial reporting issues a private equity owned company will encounter is the initial assessment of fair value when the company is originally purchased by the private equity fund or when the company acquires an additional platform entity (whether through an asset or stock deal).
Usually, when a private equity fund invests in a company, the fund obtains a controlling interest in the company. Upon obtaining a controlling interest, the company is required to apply Accounting Standards Codification Section 805, Business Combinations, (ASC 805) if the company wants to be compliant with accounting principles generally accepted in the United States of America (GAAP). ASC 805 requires assets acquired and liabilities assumed to be recorded at fair value.
Recording assets and liabilities at fair value may require the use of third parties such as valuation specialists to value inventory, property and equipment, intangible assets, future contingent consideration and more. Ensuring that the acquisition accounting is recorded correctly in accordance with GAAP is key from a financial reporting standpoint because it establishes the opening balances of the company.
Proper planning for purchase price accounting is a key element of the acquisition.
Common mistakes include, but are not limited to:
- The entity does not have proper cut-off of income and expenses on the date of the acquisition.
- The entity does not adjust reserve accounts to zero.
- The entity fails to account for working capital adjustments correctly.
Schneider Downs has a team of professionals that have significant experience working with private equity funds and their portfolio companies through a multitude of different services.
About Schneider Downs Private Equity Firm Services
Schneider Downs provides all the traditional audit and tax services needed by private equity firms and their portfolio companies, as well as specialized services including accounting advisory, investment valuations, equity incentive structuring, benefit plan analysis, operational efficiency and risk assessments, cybersecurity and technology solutions.
To learn more, visit our dedicated Private Equity Firm Services page.
