In this episode of FinPod, we discuss our new course on purchase price allocations and M&A accounting. This course addresses common challenges and confusion around acquisition accounting, particularly with deferred taxes and transaction fees. The course breaks down these complex topics into manageable chunks using hands-on Excel exercises.

We emphasize the importance of learning by doing, guiding learners through real-world scenarios, and ensuring they can apply their knowledge to actual company financial statements and acquisitions. Tune in to learn more!

Transcript

Asim Khan (00:13)
Hello and welcome to the What’s New at CFI podcast. I’m Asim Khan, subject matter expert and instructor at CFI. And with me, we have Scott Powell.

Scott Powell (00:23)
Good morning, good afternoon and good evening because I don’t know when you’re going to be watching this podcast. Asim, it’s nice to be with you.

Asim Khan (00:30)
And Scott is now our chief content officer and co-founder of CFI, I should say. So Scott, you recently created a course on Purchase Price Allocation with respect to M&A accounting. What motivated you to create this course?

Scott Powell (00:47)
Awesome, great question.

First of all, it’s our learners asking because it’s incredibly confusing and incredibly challenging for a lot of folks, especially those working from an M&A perspective. Once the integration happens, combine those two entities together. And there are often a lot of mistakes in the way that acquisition accounting is undertaken.

So we saw a big gap in the market. There was an ask from learners and we thought we can break this down into bite-sized chunks and make something that’s extremely complex, edible, if I’m going to use this language of bite-sized chunks.

Asim Khan (01:31)
Well, I would say you’ve succeeded. I’ve taken the course and it does just that. You go from an entirely cash acquisition to an entirely equity acquisition, everything in between. And you cover deferred taxes as well, which is often something that puzzles people. Where do you say people have most difficulty with purchase accounting?

Scott Powell (01:54)
Yeah, I think part of it is, first of all, it’s the deferred taxes they don’t get. And the second thing that’s very confusing is how do you deal with fees around a transaction? Because you get fees on the equity side, let’s say, right, to do with any of the equity component or the advisory component, if you brought in investment bankers. And then you have fees related to a lot of acquisitions are funded by debt, like a line of credit revolver and some type of term loan. And there’s unique accounting rules for how you deal with not the interest, but also the fees.

So, you know, you might be charged 50 basis points as an arrangement fee or whatever, 100 basis points. And there’s a lot of confusion around that.

Asim Khan (02:36)
So are those fees charged up front or are they amortized over some period of time?

Scott Powell (02:42)
Yeah, that’s the thing. So we’re paying them upfront. Right?

Asim Khan (02:45)
Right.

Scott Powell (02:46)
But the thing is, there’s different rules on how you amortize them. But generally, you’re amortizing those fees. But there’s unique. Like, so, for example, with a revolving line of credit or revolver,

you have to account for fees on the unpaid portion differently than the sorry, the drawn portion versus the untrawn portion, which is so these small nuances are often taught academically.

And so one of the things that was important to myself, but also I want to give a shout out to our colleague, some Jeff. Jeff did a ton of work with me on this. Was that we thought if we actually start with just a basic acquisition, as you’ve said, a cash acquisition and then build to an equity acquisition, then factor in goodwill, then factor in having the fair value of the assets and liabilities, then thinking about what the write-ups are and kind of building with these bite sized steps. We can get to understanding those fees.

And so maybe I’m just saying something I’ve already said, but we like to explore each of those items in isolation so people get it. And I know that you’ve completed the course, because one of the things I loved about the course was that we do these bite-sized models. And the nice thing also, I want to stress about this course is we believe in learning by doing here at CFI.

And so there are virtually, there are very few slides that you’re going to look at almost all of it is let’s go into Excel and build and do together. And then debrief and then we build again.

But the part I love the most is the very last lesson. The last lesson is, okay, here’s a blank sheet, we’re going to do all of it together, putting it all together. And I think that that’s actually what the worksheet is called: putting it all together.

Asim Khan (04:24)
Right, right, right.

And it can be, you know, a tough thing to get your head around the first time you’ve seen it. But I think that putting it all together tab that you have using and you’re going at a speed where if anyone wants to follow along on Excel, they can also do that. Right?

Scott Powell (04:41)
Yeah, totally.

Asim Khan (04:42)
It’s done very well that way.

So, here’s the question I had. Okay, so in an actual M&A deal, there are fair value adjustments to the balance sheet, right?

Scott Powell (04:52)
Yeah.

Asim Khan (04:53)
Assets are written up or down, and liabilities are as well. So for the analyst sitting at a desk somewhere, that’s not their responsibility, is it? There’s a there’s a whole due diligence squad. That’s not it. I also determining all of this.

Scott Powell (05:07)
You’re almost always bringing in, especially evaluators and the evaluators will be based on whether you’re valuing the company because the other thing we haven’t talked about yet is we also teach you how you need to value, do the whole acquisition accounting differently if you’re valuing the company and the shares. So you’re that’s because you’re buying the stock of the target company or are you buying the assets of the target company? Because that’s another consideration.

But going back to your question, maybe we’ll come back to that in a second

Asim Khan (05:35)
Yeah.

Scott Powell (05:36)
is that you’re going to have people who are either specialists at valuing assets. And that’s not going to be the financial analyst. It’s going to be a third party or at valuing the business, valuing the stock. But ultimately, you need to be able to value the assets in these fair market adjustments and you’re not going to be an expert in how do you value a piece of, I don’t know, heavy machinery or do you know what I mean?

Asim Khan (05:58)
Oh, absolutely. There’s a specialist for this.

Scott Powell (06:02)
Exactly. And so your evaluators are going to be very different based on the nature of the assets.

Asim Khan (06:05)
Right, right. Whether it’s like farm equipment or airplanes.

Scott Powell (06:10)
Yeah, you’ve got it.

Asim Khan (06:11)
Kind of be all over the place. So let’s go to the latter case where, you know, say I’m an old school raider from the 1980s and I’m just buying the stock.

Scott Powell (06:21)
Yeah.

Asim Khan (06:22)
And in that case, how is that different?

Scott Powell (06:26)
So, ultimately, if you’re buying the assets or you’re buying the stock, we have to be thinking about how those those assets are recorded historically and really what they’re worth.

And so if you’re buying the stock, one of the things that you want to be thinking about is you, […] maybe I’m going to answer this differently than you want, but when you’re buying the stock of a company, you’re getting everything, all of its liabilities and all of its liabilities that you may not even know of. And those could be litigation that’s going to come in the future.

Ah, things that are not on the balance sheet. When you’re buying the assets, you don’t you get to pick and choose what you want. So one of the benefits of buying the assets is really the fact that you are not, you know, exactly what you’re getting. But when you buy stock, there’s certain tax advantages. And so it really depends also on what side of the deal you’re in.

If you’re a seller, you want to sell the stock. Often, if you’re the buyer, you just want the assets.

Asim Khan (07:29)
Well, so why is that? Why would the seller prefer to sell the stock?

Scott Powell (07:35)
Uhm, because part of it is tax, but part of it is like you’re handing, It’s basically handing everything over. But you have to be thinking about the tax consequences on selling assets versus selling the company. So there’s often a tax incentive, but also you’re stuck with the liabilities. You’re stuck with whatever’s left.

Uhm, and it also really depends. So what will typically happen is you will do an analysis of the deal on both bases. You’ll say, what’s how would this work if I just bought the assets? How would this work if I bought the stock?

Normally, when you do that calculation, again, what’s going to happen is the seller is going to want the target, or the seller is going to want the stock, and the buyer is going to find it more tax-advantageous often to buy the assets. But then often in the negotiations, that ends up being a conversation about how do we somewhere come to the middle. So we’ll sell you the stock, but we’ll give you more or less, you know, that type of thing.

Asim Khan (08:40)
Right. So in the case of the buyer, if the buyer prevails and they get the assets if they want, there’ll be some sort of markup to the seller

Scott Powell (08:50)
Yeah.

Asim Khan (08:51)
to compensate for the tax disadvantage of selling the assets with each of you, the stock.

Scott Powell (08:54)
Exactly. Okay. You also, of course, I’m telling you things you already know, but things like you buy the assets, we don’t know, there’s no goodwill. Right?

Asim Khan (09:02)
Right.

Scott Powell (09:03)
So there’s and so that’s one reason we want to talk about both because dealing with both is anyway, I’m babbling. I get too excited about this.

Asim Khan (09:15)
No, you’re doing great. And I suppose for our learners, there must have been some sort of gap in their own training in-house where perhaps this subject wasn’t covered in detail and that they can come to CFI and

Scott Powell (09:28)
Yeah, I will tell you that having taught on Wall Street… and in the city of London, you know, for decades, new analysts and associates, we never got this deep. It’s just we don’t have time. We’re teaching the basics. Right?

Asim Khan (09:43)
Right.

Scott Powell (09:44)
So we just never got the steep. So this is why it’s a difficult course.

We’ve said it’s a difficult course, but it’s a missing gap for a lot of people who are looking at how do we deal with these combinations, or, more importantly, when you’re an analyst and where we finish the course is we actually go into real company financial statements and show you how it is laid out so that you can now, if you’re a financial analyst, interpret what’s being presented to you by a company that did acquire a target.

And, in fact, the Excel spreadsheets are purposely laid out so they somewhat match what you actually see in the notes of an annual report of a company that’s acquired another.

Asim Khan (10:31)
Oh, that’s great. So, then wrapping up for anyone who’s interested in this subject, of course, take our class and then you’d recommend what that they download a few 10-K’s from some companies they’re interested in and practice.

Scott Powell (10:44)
Yeah. We start you on the practice by looking at a couple. But what you’re what you then need to do is take a company you’re interested in that’s done an acquisition. And it has to be a recent acquisition because you’re not going to be reporting on it constantly and actually make sure that you can apply your knowledge. And just go to that table that breaks it all down, identifies the fair market value, the assets, et cetera, et cetera, et cetera.

Asim Khan (11:10)
Okay, well, great. Thank you, Scott. It’s a pleasure speaking with you again and we’ll see you soon.

Scott Powell (11:15)
My pleasure. Awesome. Always.