Acquired by a company reporting under IFRS® Standards

From the IFRS Institute – March 11, 2022

KPMG recently assisted a large US manufacturing company when it was acquired by a European company reporting under IFRS Standards. The US company reported under US GAAP. In a matter of months, the US company successfully completed a GAAP conversion and a purchase price allocation, aligned its accounting policies, reporting structure and processes to those of the new parent. Discover here what made success possible.

Being acquired requires an alignment of accounting policies, financial reporting processes and controls, with the acquirer. When the acquirer applies IFRS Standards and the acquiree US GAAP, the exercise becomes even more complex because of the necessary conversion to IFRS Standards. In this article, we discuss what we believe are the 10 most common finance integration complexities that – if dealt with early on – can help make your finance integration successful.

1. IFRS Standards conversion
A comprehensive and detailed accounting gap analysis is critical because it informs many of the other aspects of the finance integration discussed below. See KPMG Handbook, IFRS® Standards compared to US GAAP, for a comprehensive comparison of the accounting standards.

From our case study

GAAP differences are highly dependent on the company and sector. In the Case Study, the following differences between US GAAP and IFRS Standards were the most impactful to the opening balance sheet.

Capitalization of development costs¹	Intangible assets increased primarily due to the requirement under IFRS Standards to capitalize development costs when specific criteria are met. These costs had been expensed as incurred under US GAAP.
Provisions and contingent liabilities (e.g. legal claims², onerous³ contracts)	Certain provisions increased due to a lower recognition threshold under IFRS Standards (‘more likely than not’) and measurement differences. When there is a range of equally likely outcomes, the provision is measured at the mid-point of the range under IFRS Standards compared to the lower end of the range under US GAAP.
Investment property⁴	Certain properties that were rented out were reclassified as investment properties and their fair values had to be determined. Unlike IFRS Standards, US GAAP does not have specific guidance for investment property and it is generally accounted for as property, plant and equipment (PP&E).
Cloud implementation costs⁵	Certain capitalized cloud implementation costs were derecognized. While US GAAP provides for the capitalization of certain implementation costs incurred by a customer for cloud computing arrangements, IFRS Standards do not unless certain criteria demonstrate that the costs represent a prepayment of services or result in the generation of an intangible asset.
Inventories⁶	Inventory was written up because the market had improved and write downs are reversed under IFRS Standards if the net realizable value of inventory subsequently increases. US GAAP prohibits the reversal of inventory write downs.

2. Accounting policy alignment

Unlike US GAAP, IFRS Standards require uniform accounting policies across the group and many IFRS Standards preparers have detailed group accounting policy manuals. As a result, differences between acquirer and acquiree accounting policies may exist even in areas where no significant IFRS Standards vs US GAAP differences are identified.

From our case study

To roll out the acquirer’s capitalization policy for development costs, it was necessary to reconcile how the company and the acquirer monitored the phases of a development project. It also required understanding how the acquirer identified when the capitalization criteria – such as technical feasibility and availability of adequate resources for the completion and use or sale of the intangible asset – are met in the circumstances.

Other instances in which the acquirer and acquiree’s accounting policies had to be aligned included:

capitalization thresholds for PP&E and software development costs;
useful life ranges for the depreciation and amortization of long-lived assets; and
estimation methodologies for variable consideration and guarantees in revenue from customer contracts.

3. Purchase price allocation (PPA)

An acquiree expects to spend time and resources supporting the acquirer-selected valuation service provider in measuring acquisition date fair values, including of acquired intangible assets, PP&E, inventory and contingent consideration. This exercise is often the most impactful to the opening balance sheet.

However, a PPA does not stop there and IFRS 3 provides measurement exceptions from fair value for certain assets and liabilities, which instead are measured based on other applicable IFRS Standards. It is therefore important for management to understand the interaction between business combination accounting under IFRS 3 and other IFRS Standards. For example, vesting of pre-acquisition share-based payments may be accelerated under IFRS Standards as a result of a change in control, or certain liabilities may need to be remeasured using the acquirer’s assumptions. This often requires input from different parties, such as the tax department to conform deferred taxes, legal department to measure contingencies, and actuaries to measure defined benefit obligations.

From our case study

In the Case Study, lease liabilities, defined benefit obligations and certain long-term provisions had to be remeasured using the acquirer’s incremental borrowing rate or discount rates and other relevant market-based measurement assumptions chosen by the acquirer in line with its policies. This had a much greater impact than any related differences between IFRS Standards and US GAAP itself. Quantification of such PPA adjustments also required the help of actuaries in addition to the valuation service provider.

4. Close calendar and reporting structure alignment

Acquirees are advised to coordinate with the new parent early to understand the group close calendar for when reporting is due and the reporting structure post-acquisition. Acquirers, especially large or multi-national companies, may have tight reporting deadlines and complex and rigid reporting structures. For example, subsidiaries may be asked to shorten their closing procedures and follow a required sequence of reporting, maintain several ledgers, or track purchase price adjustments a certain way within their reporting structure.

From our case study

In the Case Study, the acquiree had to reduce its month-end close process from 10 to five days. The acquirer also instructed the acquiree to maintain a separate ledger to record and track the US GAAP to IFRS Standards adjustments and yet another separate ledger to record and track the purchase price adjustments (including goodwill) resulting from the acquisition accounting. The requirement for separate ledgers led to questions about the ledger in which certain adjustments that had elements of both (e.g. leases) would need to be tracked.

5. IT system integration

Until the acquiree’s systems are fully integrated into the systems landscape of the acquirer, the acquiree might need to resort to interim workarounds. Often, data is temporarily reported in Excel and uploaded into the parent’s system manually. To support a proper integration, the acquiree may need to revisit its chart of accounts structure to allow proper mapping to the parent’s reporting system.

Consideration should also be given to the acquiree’s other financial reporting systems currently configured to support US GAAP. For example, lease accounting under US GAAP is different from IFRS Standards. Often a separate solution, or a significant update or remake of an existing one, is needed to be able to report under IFRS Standards.

From our case study

In the Case Study, a third-party digital solutions provider was engaged to update the acquiree’s lease accounting software solution. The software was upgraded to recognize and measure leases under IFRS Standards in addition to US GAAP and calculate the resulting adjustments to the lease liability and the right-of-use asset.

6. Dual reporting

Post-acquisition, in addition to reporting to the parent under group accounting policies for consolidation purposes, the acquiree may need or wish to maintain a US GAAP ledger. For example, the company’s banks may require stand-alone US GAAP financial statements.

In this case, the acquiree needs to determine its primary versus secondary reporting – i.e. how the books and records are maintained and the order in which adjustments are calculated. If the primary reporting remains US GAAP, the company needs to track parent basis adjustments separately. If IFRS Standards become the primary reporting, adjustments are recorded to revert back to a US GAAP stand-alone basis.

From our case study

In the Case Study, the acquiree changed its primary reporting to IFRS Standards. Standalone US GAAP financial information was required only on an annual basis for certain management reporting, primarily for determination of management compensation.

7. Management reporting, financial planning and analysis (FP&A)

Often the acquiree’s management is required to provide updated forecasts under IFRS Standards to the parent shortly after the deal. The FP&A team will also be looking for information on IFRS Standards and PPA adjustments to incorporate into its forecast. These might be requested sooner than actual numbers are available, so the acquiree should consider its plan for preparing information to be provided to the parent.

From our case study

In the Case Study, the first forecast under IFRS Standards was due prior to the first quarterly reporting to the parent when many policy alignment and purchase price adjustments were not yet finalized. As a result, the FP&A team and the financial reporting team needed to work together closely and agree on areas that would be preliminarily included in the first forecast and updated once the numbers were known.

8. Tax and other regulatory compliance

The acquiree may need to comply with new tax filing requirements as a result of being acquired by a foreign company – e.g. provide specific data to the parent to comply with its local regulations. In addition, the acquiree will need to consider the impact of accounting for income tax under IFRS Standards versus US GAAP.

Related to the acquiree’s decision to maintain dual reporting (see Item 6 above), it is important to note that US federal tax is GAAP-agnostic, meaning a US company can choose its GAAP for book purposes independent of tax and does not have to maintain US GAAP books just for tax purposes. However, if US GAAP books are prepared, they will take priority for tax purposes.

From our case study

In the Case Study, the acquiree obtained from the new parent a full list of internal and external parent reporting requirements for which the acquiree was expected to provide supporting data. For example, in addition to balance sheet and income statement information, the reporting included detailed information to support the parent financial statements notes, separate detailed reporting related to defined benefit obligations, separate current and deferred tax information.

In addition to financial information, reporting requirements included sustainability information to support the parent’s compliance with the EU’s Non-Financial Reporting Directive and EU taxonomy. The US subsidiary also was informed that beginning in fiscal 2023 it would be required to provide more extensive sustainability data to support the parent’s compliance with the EU’s currently proposed Corporate Sustainability Reporting Directive (CSRD).

Further, there were US tax compliance implications from the change in fiscal year-end (see below) and transactions with the new foreign parent.

9. Fiscal year-end change

If the US company has a fiscal year-end different from its parent, it might be worth changing to match the parent’s. While there is typically no legal requirement to do so, in the long run, aligning the year-end may bring efficiencies. The acquiree will need to close its books in support of the parent’s close schedule for group reporting purposes regardless. However, changing year-end may also be disruptive in the short run and have tax consequences. All impacts need to be considered.

From our case study

In the Case Study, the fiscal year-ends did not match. The acquirer asked the acquiree to align with its year-end. This required engaging an IT service provider to make the necessary systems changes.

10. Project management

Many parallel workstreams are necessary to address all areas of the finance integration. Having a designated Project Management Office function ensures that all workstreams progress as planned and interdependencies are considered.

From our case study

In the Case Study, the acquirer and acquiree formed a joint Steering Committee that presided over multiple workstreams, including accounting integration (including close process and chart of accounts alignment), FP&A, IFRS conversion, year-end alignment, PPA and valuation, tax integration, and project control. The joint Steering Committee held weekly meetings with the workstream leads to discuss the status of each workstream and share information.

The takeaway

In summary, for a company reporting under US GAAP, being acquired by an IFRS Standards preparer is more complex than just an IFRS Standards conversion and requires careful planning and constant communication with the new parent. Often, matters are made more complicated by cultural differences, language barriers and staff turnover.

We are here to help address these complexities as they arise for your company’s acquisition by a company that prepares financial statements under IFRS Standards. Visit KPMG Accounting Advisory Services – Accounting Change Services: to see how KPMG may help you.

For related content, see the following KPMG IFRS Perspectives articles Converting from US GAAP to IFRS and Acquired by an IFRS company – more than a GAAP conversion.