McGladrey & Pullen
Certified Public Accountants Preface
We are pleased to provide you with the first edition of Private Equity Group Portfolio Company Accounting Toolkit - A Guide to Accounting for Acquisition-Related Transactions by the Middle Market Portfolio Company. This toolkit was prepared to assist private equity groups and their portfolio companies in determining the proper accounting treatment for certain aquisition-related transactions. In addition, this toolkit includes certain relevant authoritative and interpretive accoutning guidance for these transactions, as well as highlights of future authoritative accounting guidance that is not yet effective at the date of this publication. We hope the toolkit will improve your understanding of the accounting for certain acquisition-related transactions. We recommend you contact a McGladrey & Pullen professional in your region to discuss this topic and how we can be of service. We currently provide audit and tax services to hundreds of portfolio companies of private equity groups and have a deticated National Transaction Support Services group. For contact information, refer to our website at www.mcgladrey.com.
McGladrey & Pullen, LLP May 2008
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Getting Acquisition Accounting Right: The Experts Guide for the Middle Market Portfolio Company
Section 1 – Background, including Accounting Considerations The accounting treatment of acquisition-related transactions (particularly the formation transaction) entered into by a portfolio company of a private equity group can often be extremely complicated and involve many diferent sources of authoritative accounting guidance. McGladrey & Pullen, LLP (The Firm or M&P) has prepared this toolkit to help guide readers through the appropriate accounting guidance, as well as provide examples to help with the related accounting and reporting. A brief discussion of the author sections included in this tollkit follows: • Section 2 – Determination of an Acquirer’s Investment Basis in an Acquiree and the Allocation of that Basis in an Acquisition of a Business This section should be utilized when determining the Acquirer’s accounting treatment in a typical private equity group formation transaction occuring in annual reporting periods beginning prior to December 15, 2008. For transactions occuring in annual reporting periods beginning on or after December 15, 2008, the guidance in this section is not applicable as Financial Accounting Standards Board (FASB) Statement No. 141 (revised 2007), Business Combinations (FAS 141R) and FASB Statement No. 160, Noncontrolling interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160) are effictive at such date. Refer to Section 5 for further information regarding these new FASB Statements. The primary issue addressed in this section is the basis in an Acquree’s assets and liabilities that should be recorded by the Aqcuirer at the acquisition date. The basis to be recorded by the Acquirer would be based on one of the following three methodologies: 1) Acquiree exsisting historical basis (i.e., no revaluation of assets and liabilities) In order to record an Acquiree’s assets and liabilities at their historical accounting bases, the transaction must: a) not result in a change in control of ownership of the Acquiree; b) inculde an operating company Acquiree that merged into an Acquirer that was a non-operating public shell corporation; c) inculde two entities that are under common control with no minority interests; or d) include two entities with identical common ownership interests. 2) Partial fair value and partial Acquiree existing historical accounting basis In order to record an Acquiree’s assets and liabilities at partial fair value and partial Acquiree existing historical accounting basis, the transaction must: a) be within the scope of Emerging issues Task Force (EITF) Issue No. 88-16, “Basis in Leveraged Buyout Transactions” (EITF 88-16) and include shareholders of the Acquiree that become shareholders of the Acquirer and meet certain ownership criteria of EITF 88-16; b) be an acquisition of less than 100% of the Acquiree; or c) include two entities that are under common control with minority interests. 3) Fair value For all formation transactions that are not included in 1) or 2) above, the Acquiree’s assets and liabilities should be recorded by the Acquirer at fair value.
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McGladrey & Pullen Certified Public Accountants
The Preceeding summary of Section 2 should not be used on a stand-alone basis and must be used in connection with Section 2 as well as the following accounting guidance: • EITF 88-16 • EITF Issue No. 90-12, “Allocating Basis to Individual Assets and Liabilities for Transactions within the Scope of issue No. 88-16” (EITF 90-12) • EITF Issue No. 02-5, “Definition of ”Common Control” in Relation to FASB Statement No. 141” (EITF 02-5) • FASB Technical Bulletin 85-5, Issues Relating to Accounting for Business Combinations, Including...Stock Transactions between Companies under Common Control...(FTB 85-5) • FASB Statement No. 141, Business Combinations (FAS 141) • M&P Financial Accounting and Reporting Manual (FARM) Section 0220, Business Combinations • M&P FARM Section 0227, Leveraged Buyout Transactions •
Section 3 – Accounting for an Acquiree’s Basis in its Separate Stand-Alone Financial Statements Subsequent to an Acquisition This section shoul d be utilized when determining the Acquiree’s accounting treatment in a private equity group formation transaction in which the Aquiree will continue to issue stand-alone financial statements. The primary issue addressed in this section is whether the Acquiree’s basis in its assets and liabilities in its stand-alone financial statements shoule 1) be based on the purchase paid by the Acquirer or 2) remain at the Acquiree’s existing historical accounting basis. The key considerations in making this determination are the percentage ownership obtained by the Acquirer, whether the Acquiree is an SEC registrant and whether the Acquiree has publicly-held debt or preferred stock outstanding. The accounting guidance relevant to this section is as follows: • SEC Staff Accounting Bulletin (SAB) Topic 5-J, Push Down Basis of Accounting Required in Certain Limited Circumstances • EITF Issue No. 86-9, “IRC Section 388 and Push-Down Accounting” (EITF 86-9) • EITF Topic No. D-97, “Push-Down Accounting” (EITF D-97) • M&P Farm Section 0104, Push-Down Accounting
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Section 4 – Current Accounting Guidance This section includes certain authoritative accounting guidance relevant to transactions discussed in the preceeding sections of this toolkit along with related guidance from the M&P FARM.
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Section 5 – Future Accounting Guidance This section includes two M&P fact sheets that describe the changes to certain current authoritative accounting guidance relating to business combinations and consolidations that will be effective for annual reporting periods beginning on or after December 15, 2008 (e.g., January 1,2009 for calendar year-end companies).
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