When a business decides to acquire another company, it is important to thoroughly examine the accounting statement of the target company. The accounting statement will provide a comprehensive picture of the company’s financial health and help the acquiring company make an informed decision. In this article, we will discuss the eight things to look out for in a private acquisition’s accounting statement in the context of Singapore.
#1 Revenue Recognition
One crucial aspect of any accounting statement is how revenue is recognized. The acquiring company should carefully examine how the target company recognizes its revenue, ensuring that it is in line with Generally Accepted Accounting Principles (GAAP) in Singapore.
For example, if a software company recognizes revenue for a long-term contract upfront instead of over the contract period, it could lead to inflated revenue in the short term and may not be sustainable over the long term.
Asset Valuation
The acquiring company should pay close attention to how the target company values its assets, including property, plant, and equipment (PPE), intangible assets, and inventory. The accounting statement should provide details on how the assets are valued and any impairments that may have occurred.
For example, if a target company has overvalued its inventory or PPE, it could lead to a misleading accounting statement that may not reflect the true value of the assets.
Tax Implications
The acquiring company should examine the tax implications of the acquisition, including any potential tax liabilities. The accounting statement should provide details on the target company’s tax position and any potential tax liabilities.
For example, if a target company has a large amount of deferred tax liabilities, it could indicate that the company has been aggressive in its tax planning and may be subject to penalties or additional taxes in the future.
Contingent Liabilities
The acquiring company should pay attention to any contingent liabilities that the target company may have, such as pending lawsuits or potential warranty claims. The accounting statement should provide details on any contingent liabilities and the potential impact on the company’s financial position.
For example, if a target company is facing a class-action lawsuit, it could result in significant financial liabilities for the acquiring company, which should be factored into the decision to acquire the target company.
Employee Benefits
The acquiring company should examine the target company’s employee benefits, including pensions, healthcare, and stock options. The accounting statement should provide details on the target company’s employee benefits and any potential liabilities.
For example, if a target company has a large pension liability, it could impact the acquiring company’s future cash flows and financial position.
Debt and Leases
The acquiring company should carefully examine the target company’s debt and lease agreements. The accounting statement should provide details on the amount and terms of any debt and leases.
For example, if a target company has a large amount of debt with a high interest rate, it could impact the acquiring company’s cash flows and financial position.
Cash Flows
The acquiring company should analyze the target company’s cash flows, including cash inflows and outflows. The accounting statement should provide details on the target company’s cash flows and any potential issues.
For example, if a target company is experiencing negative cash flows, it could indicate that the company is not generating enough revenue to cover its expenses.
Goodwill
The acquiring company should examine the target company’s goodwill, which represents the excess amount paid for the company’s assets over their fair value. The accounting statement should provide details on the amount of goodwill and any potential impairments. For example, if a target company has a large amount of goodwill that is not supported by the company’s financial performance, it could result in a goodwill impairment that impacts the acquiring company’s financial statements and future profitability.
Acquiring a private company is a complex process that involves a thorough examination of the target company’s accounting statement. The eight things discussed in this article are crucial to look out for when examining a target company’s accounting statement in the context of Singapore. By carefully examining these factors, the acquiring company can make an informed decision that will lead to a successful acquisition.
