Preventing expensive surprises with post-closing adjustments when buying or selling a business

Since there is a time lag between the closing date and the date the financial results are available, the price adjustments must be determined after the closing of the sale of the business. Unfortunately, these purchase price adjustments frequently are very large. The accounting principles to be used...

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Bibliographic Details
Published in:The Journal of corporate accounting & finance 1992-12, Vol.4 (2), p.169-177
Main Author: Birdzell III, Luther E.
Format: Article
Language:English
Subjects:
Accounting policies
Acquisitions & mergers
Agreements
Balance sheets
Cash flow
Closing the sale
Consolidated financial statements
Divestiture
Equity
GAAP
Prices
Purchasing
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Summary:Since there is a time lag between the closing date and the date the financial results are available, the price adjustments must be determined after the closing of the sale of the business. Unfortunately, these purchase price adjustments frequently are very large. The accounting principles to be used to determine both the specified amount and the actual closing amount are the first consideration of the purchase and sale agreement. Use of different accounting principles to determine the specified amount and the closing amount will result in a purchase price adjustment from changing accounting principles. GAAP is generally used. The accounts that are subject to post-closing adjustment include: 1. environmental liabilities, 2. post-retirement health care, 3. workers' compensation, 4. taxes, and 5. litigation reserves. Before the specified and actual amounts can be compared, the actual amount must be determined. The buyer is the logical candidate to prepare the closing statement.
ISSN:1044-8136
1097-0053
DOI:10.1002/jcaf.3970040208