Business combinations often include arrangements beyond the purchase price that require separate statutory accounting assessments to avoid misstating the opening balance and post-acquisition earnings. The acquiring company must identify what part of the deal is truly the purchase price for the acquired business and what part relates to other arrangements that need separate accounting treatment. The following questions are practical indicators for assessing whether an arrangement is part of the business combination or a separate post-acquisition or side arrangement (as per IFRS 3.51–52; see also general purchase price principles under § 301 HGB and Art. 960a OR):
- whether the arrangement existed before the acquisition,
- whether future service is required,
- who benefits from the arrangement, and
- whether the item relates to post-acquisition activities.
The following transaction areas highlight common arrangements that are typically accounted for separately from the purchase price allocation, rather than being recognized as acquired assets or assumed liabilities in the opening balance sheet. The discussion is from the accounting perspective of the acquiring company, not the target company.
Pre-Existing Relationships
Topic: Business combinations may simultaneously settle pre-existing contractual or legal relationships between the acquirer and acquiree. Common examples include supply agreements, licensing arrangements, litigation matters or long-standing commercial disputes.
Practical accounting implication: Where an acquisition settles a pre-existing relationship, the unfavorable or favorable portion of that relationship may need to be separated from the business combination because it represents settlement of an existing contractual or legal position rather than consideration transferred for the acquiree.
Illustration: Entity A acquires Entity B for EUR 100 million. Before the acquisition, the parties had a long-term supply agreement with above-market pricing. The off-market element is valued at EUR 5 million and may be accounted for separately from the business combination, as it relates to the pre-existing arrangement rather than the acquired business itself.
Remuneration
Issue: Business combinations frequently include retention bonuses, deferred compensation arrangements or equity-linked incentives designed to retain key management personnel or former owners after the acquisition.
Practical accounting implication: Where payments depend on continued employment or future service, they are treated as compensation expense rather than purchase consideration. This distinction often becomes particularly relevant in founder-led acquisitions where former owners continue operating the business after closing.
Illustration: Entity A acquires Entity B and agrees to pay the former owner EUR 10 million after two years if they remain employed. Because payment depends on future service, it is generally treated as post-combination compensation expense rather than purchase consideration or goodwill.
Acquisition-Related
Costs
Issue: Acquisitions commonly involve legal fees, advisory fees, valuation costs, due diligence expenses and other transaction-related expenditures incurred during the deal process.
Practical accounting implication: These acquisition-related costs are generally expensed as incurred rather than included in goodwill. In practice, groups often need separate tracking of transaction-related expenditures across multiple advisors and entities.
Illustration: Entity A incurs EUR 2 million in legal, tax and financial advisory costs while acquiring Entity B. These costs are generally expensed as incurred and are not included within the consideration transferred or goodwill calculation.
Share
Awards
Issue: In many acquisitions, the acquirer replaces existing share-based payment awards of the acquiree with new awards issued by the acquiring group, commonly arising in founder-led businesses, technology companies and private equity transactions where management retention is commercially important.
Practical accounting implication: Separation between the portion of replacement awards relating to pre-acquisition service and the portion relating to future service after the acquisition must be done. The pre-acquisition portion affects purchase consideration, while future service elements are recognized as compensation expense over the remaining vesting or service period.
Illustration: Entity A replaces Entity B’s unvested employee share options with new group awards. The portion relating to pre-acquisition service is generally included in purchase consideration, while the portion relating to future service is recognized as compensation expense over the vesting period.
Other
Arrangements
Issue: Business combinations sometimes include put options, call options or forward contracts over non-controlling interests (“NCI”), particularly in staged acquisitions or transactions involving founder rollover structures.
Practical accounting implication: These arrangements require recognition of a separate financial liability or equity component outside the purchase consideration accounting because future payments for non-controlling interests do not always represent acquisition consideration.
Illustration: Entity A acquires 80% of Entity B and simultaneously enters into a forward agreement to purchase the remaining 20% after three years. Depending on the contractual structure and economic substance, the arrangement may require recognition of a financial liability separate from the business combination accounting.
Leaver
Clauses
Issue: Business combinations frequently include good leaver and bad leaver provisions for management shareholders or continuing founders which determine the amount payable to management depending on future employment status, resignation circumstances or post-acquisition performance conditions.
Practical accounting implication: Good leaver and bad leaver clauses often require assessment of whether payments represent compensation for future service or contingent purchase consideration, particularly where continued employment or forfeiture conditions exist.
Illustration: Entity A acquires Entity B and agrees to make additional payments to management shareholders if they remain employed for three years after closing. Because the payment is forfeited if they leave earlier, it is generally recognized as post-combination compensation expense rather than additional purchase consideration.
Judgment
Areas
Issue: Certain acquisition arrangements contain characteristics of both compensation and purchase consideration, particularly where founders remain involved in post-acquisition or earn-outs include service conditions.
Practical accounting implication: Assessment of contractual terms, employment conditions and linkage to seller payments is often required to determine the appropriate accounting treatment. These arrangements frequently involve significant judgment and close coordination between transaction, legal and accounting teams.
Illustration: A founder receives an earn-out only if EBITDA targets and future employment conditions are met. The employment-linked portion is generally recognized as compensation expense, while the EBITDA-linked portion may be treated as contingent purchase consideration.
NCI
Awards
Issue: Business combinations involving unvested share-based payment awards may also affect measurement of non-controlling interests and purchase consideration, particularly relevant in acquisitions involving management incentive plans or employee equity participation structures.
Practical accounting implication: Distinction between amounts attributable to pre-acquisition service and future post-acquisition service may affect purchase consideration, compensation expense and measurement of non-controlling interests.
Illustration: Entity A acquires Entity B, which has vested and unvested employee share options. The portion relating to pre-combination service is generally included in purchase consideration, while the portion relating to future service is recognized as compensation expense over the remaining vesting period.
Conclusion
Many
acquisition accounting issues arise because legal agreements,
valuation inputs and accounting conclusions are not aligned early
enough during the transaction process. Early coordination and timely
purchase price allocation assessments can help reduce
post-acquisition adjustments and reporting inconsistencies. Clear
identification of separately accounted transactions also helps reduce
audit discussions and unexpected impacts on opening balance sheet,
equity and earnings positions.
About Group Accounting Partner
Group Accounting Partner is a modern, AI-enabled accounting advisory boutique specializing in group accounting, consolidation, and financial reporting for PE/VC-backed companies and international mid-market groups.