Chapter 12 - Structuring the Deal: Tax and Accounting Considerations

Abstract

This chapter focuses on the implications of tax and accounting considerations for the deal structuring process. Taxes are an important consideration in almost any transaction, but they seldom are the primary motivation for an acquisition. The fundamental economics of the transaction should always be the deciding factor, and any tax benefits simply reinforce a purchase decision. A transaction generally is considered taxable to the seller if the buyer mostly uses cash, notes, or some nonequity consideration to purchase the target's stock or assets. Conversely, the transaction is generally considered tax free if mostly acquirer stock is used to purchase the stock or assets of the target firm. Tax considerations and strategies are likely to have an important impact on how a deal is structured by affecting the amount, timing, and composition of the price offered to a target firm and how the combined firms are organized following closing. For financial reporting purposes, all M&As must be recorded using the purchase method of accounting. The excess of the purchase price, including the fair value of any noncontrolling interest in the target on the acquisition date, over the fair market value of acquired net assets is treated as goodwill on the combined firm's balance sheet.