If you`re a business owner, you`ve probably heard that your accountant has dropped the term GAAP. But what does this mean and why is it important when selling your business? Whatever the outcome, companies must ensure that they carefully assess the accounting and tax implications of a divestiture or spin-off before embarking on this adventure. It will also be necessary to dig deeper into the specific parts that make up the business or assets you are selling. When considering the impact that a spin-off or divestiture will have on a company, tax considerations should be taken into account at the beginning of the transaction, rather than being left as a later event. John Cromwell specializes in financial, legal and small business matters. Cromwell holds a bachelor`s and master`s degree in accounting, as well as a Juris Doctor. He is currently co-founder of two companies. As soon as you are considering a merger or acquisition of a business, contact your Baker Tilly advisor to understand the relevant financial reporting issues and to record the transaction with confidence. We can also help you do your due diligence and negotiate a transaction that minimizes headaches and maximizes shareholder value. Most of the companies we bring to market follow the basic principles of GAAP, with one or two exceptions. However, these seemingly minor deviations from GAAP can complicate the due diligence process, delay the sale, or affect working capital, which can directly affect the money you receive at closing.
We are not accountants (and you should consult your accountant for more details on this topic), we have seen first-hand challenges arising from companies that are not fully compliant with GAAP: If you are considering a divestiture or spin-off, executives must first decide what to work on or sell. Taking into account the following accounting aspects from the outset allows for a more transparent process and avoids delays at all levels. Finally, the organization that sells or separates assets must determine whether the withdrawal of assets or activities changes the reporting units or business lines of the remaining entity. The Chief Operating Decision-Maker (COHS) is responsible for choosing how to value the business for management evaluation and financial reporting purposes. If the part of the business that is sold is already a separate segment, it is usually deleted and the others remain. However, if the business to be divested is mixed with one or more segments and forms a substantial part of it, the withdrawal of the business could lead to significant changes in overall operations. This would then force the CODM to reassess the segments it has established, including how to remove the divested business from the company`s remaining financial statements. Income and expenses generated by the divested enterprise in the year in which it is sold separately from the result of continuing operations in the income statement. Typically, a business unit generates revenue and expenses for its parent company before a sale. If expenses exceed income, you incur a loss from discontinued operations; If the income exceeds the expenses, you have a profit. If you have suffered an adjustment loss, deduct it from the ordinary gains or losses reported in respect of the discontinued business. Report this amount in the income statement immediately after reporting total income or losses from continuing operations.
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