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Auditing M&A transaction

Auditing journals in an M&A transaction

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I have a client who has failed to process the completion journals for an M&A transaction where a 3rd party acquired my client, buying out the prior owner in full.

One journal has me confused; conterporaneous with completion a property asset was to be carved out of the balance sheet (to be held gfwd in a newco started by the vendor). The agreement was that the property would be transfered out at book value and paid for by the vendor out of proceeds from the sale. This was a non-cash transaction as the price of the acqusition was effectivley inflated to cover the property carve out i.e buyer agreed to pay the higher price but equity value/cash paid unchanged as vendor owed the business the same amount he was due to pay.

The incumbent accountant (12m later) has taken the property out of fixed assets but created a debtor from the buyer. In my opinion this is incorrect as the buyer doesnt owe the company, the vendor does. Because this comes down to the equity value of the completion balance sheet being reduced by the property transfer I propose to reduce reserves and credit the incorrect debtor. The balance effectivley being moved to buyer goodwill.

Can anyone advise if this is correct or if there are alternate ways the vendor/buyer should have accounted for the property transfer out of the company?

Replies (5)

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By paul.benny
06th Sep 2020 18:22

Has the seller sold company or trade and assets?

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Replying to paul.benny:
By VanessaIC
07th Sep 2020 12:03

Sold the company but taken the property out of the company upon sale, hence the issue. No cash exchanged in the transfer

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By Paul Crowley
06th Sep 2020 19:36

Accountants never use the word audit to mean check.
Are you checking the journal.

Most responders are probably no longer permitted to perform an audit. My firm gave up statutory auditor status 3 years ago

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Replying to Paul Crowley:
By VanessaIC
07th Sep 2020 12:04

Checking posting as part of the auditing of that financial year

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Hallerud at Easter
07th Sep 2020 12:31

You need to follow the deal/cash.

Is this a sale of shares in A to Company B?

Does the vendor effectively get a wodge of cash , say 500 and the property, say 100?

If that is the case then Company B owes Company A the property cost transferred, in effect an intercompany loan is set up.

So In Company A

Dr sum owed by Company B 100
Cr Property proceeds 100

In company B

Dr Investment 600
Cr Cash 500
Cr inter co with A 100

You are the one with the deal in front of you in black and white, I would jot down what is happening re price and its settlement mechanism to try to determine what is happening.

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