Completion Accounts – Checklist
Aide Mémoire
This can only be an aid to guide the reviewer of a contract towards those areas of an acquisition contract which are of accounting significance and which might be sources of dispute in the future.
At all stages you should be asking the questions:
- Is it clear?
- Is it what my client wants?
- Is it in my client’s best interests?
Definitions:
- Is every definition self-explanatory?
- Is there any doubt about the meaning of words?
- Do all parties use the same words to mean the same thing (e.g. do management accounts include a balance sheet or cash flow statement)?
- Are there definitions elsewhere in the agreement apart from the definitions section? Make sure all are considered.
- Are all accounting terms clear?
- Avoid terms like “generally accepted accounting principles” unless they are further defined.
Completion accounts:
- Are completion accounts to be prepared in the same way as management accounts or as quasi-statutory accounts?
- Is it clear who is to prepare completion accounts?
- What are the completion accounts to comprise: balance sheet, profit and loss account, or both?
- What format will the completion accounts take: management accounts, statutory accounts or some special format?
- Will consolidated accounts be prepared, or will some form of combined accounts be required?
- Are there any special procedures for matters such as property valuation, stocktake attendance, stock quantities, stock valuation, debtor provisions, accruals, balances with the vendor, dividends, off balance sheet items?
Accounting policies:
- What accounting policies are to be applied?
- Do they cover all material items?
- Is the agreement clear on the difference between a policy (e.g. providing depreciation over the estimated useful life, providing for doubtful debts) and the application of that policy (e.g. plant has a lifetime of 8 years, doubtful debts are provided in full)?
- Is consistency with prior periods required?
- What if a new IFRS has come into force since the last statutory accounts but before the completion accounts?
- Which takes precedence: consistency, prudence, purchaser’s accounting policies, strict IFRS’s?
Audit:
- Are there any matters where auditors’ opinion is agreed to be set aside in favour of valuation agreed between the parties?
- What form of audit report is required?
- If “true and fair” can that opinion be given without full disclosure?
- If “accurate” how is materiality to be dealt with?
- Is the mechanism for auditing completion accounts clear?
- Who are the auditors?
- To whom do the auditor’s report?
- Will the other party’s accountants participate in the audit? If so, as joint auditors or with the right to review the audit?
- When do the auditors have to report?
- Are the auditors bound to report? Note that the contract cannot bind those who are not party to it.
- What happens if the auditors fail to report? If joint auditors cannot agree on the accounts, what is the basis for the resolution of the dispute (see below)?
- Who pays the audit fees?
- Who pays the review fees?
Remember that accountants can report or give opinions but often cannot certify.
Agreement or dispute:
- Is there a mechanism for both parties’ accountants to report on the completion accounts? Should they prepare a joint report or separate reports?
- What happens if one firm refuses to sign a report? Is the dispute resolution procedure invoked?
- Who can invoke the dispute resolution procedure and how? Is your client clear of, and satisfied with, its rights?
- Is there a timetable for reaching agreement, with failure to agree invoking the disputes procedure?
- If an independent person is required to determine the dispute, should that person be acting as expert (less formal, procedures agreed between parties, decision almost impossible to challenge) or as arbitrator (quasi-litigation, procedures defined by law, can be appealed to courts)?
- Should the independent person be an accountant, or are there circumstances in which another professional might be preferable?
- Will the outcome of the expert’s or arbitrator’s determination be binding on all parties?
Effect on consideration:
- Are adjustments required to calculate the consideration from the accounts?
- Are the adjustments clearly defined?
- Who is responsible for calculating them?
- Do the accountants have to report on them? Consider dispute points above in relation to the consideration calculation.
Earn-outs:
- Is there an earn-out provision? Are each relevant year’s accounts covered by the auditing/reporting and dispute resolution process?
- Will earn-out payments be governed by audited accounts or are adjustments required?
- Is the earn-out based on pre-tax or post-tax profits? If post-tax, are provisions required for avoiding manipulation of the tax charge?
- Is there control over the purchaser’s actions? Can the purchaser exercise control over the business? What effect will this have on the earn-out?
- How will changes in business practice, or accounting law or practice, be dealt with?
- How will purchaser group relationships (e.g. management charges, director’s remuneration, group relief payments) be dealt with? What constitutes an arm’s length management charge?
- Is vendor management remaining in place? With what powers?
- Who controls the business (e.g. management remuneration, expenses, capital expenditure)?
Excerpt taken from Conquering M&A by James Dow available to purchase from Amazon here.
