US Acquisitions of UK Companies - The Accounting Conundrum

US companies completing an acquisition of a UK company can find it a stressful process, but being aware of the accounting considerations can help ensure compliance…

With acquisitions from the US continuing to be one of the largest contributors to UK foreign direct investment, it is clear that the M&A route to expansion is not in decline. However, US headquartered companies must consider many new implications when undergoing an international transaction. The accounting treatment and recognition of the acquisition is often towards the bottom of the list of priorities, but is an area we sometimes see handled incorrectly.

When reporting under US Generally Accepted Accounting Principles (US GAAP) a company is required to adhere to US purchase accounting rules following an acquisition. This leads to adjustments being made to recognise the purchase transaction and the assets and liabilities acquired. If the company you have acquired is registered in the UK, then these rules can heavily contradict the reporting standards the entity is required to apply, so keeping your UK trial balance compliant can be an unexpected challenge.

Most commonly, the purchase entries are recorded on a push down basis which requires the recognition of any intangible assets or revaluations on the trial balance of the acquired entity, rather than the company which purchased them. It is therefore important to consider the impact on your UK financial statements, particularly if you are subject to an audit.

What is the best approach?

As a US headquartered company, you will want your monthly consolidation to be accurate and compliant with US GAAP requirements but, at the same time, you do not want to cause any issues with your UK statutory reporting. There are a couple of options regarding how to approach this to try and achieve the best of both worlds:

  • Firstly, you can recognise the entries in the UK trial balance knowing it is not compliant with UK GAAP. This enables a smooth monthly consolidation process and requires minimal maintenance. However, there would have to be a process where the purchase accounting entries are reversed before each year end statutory filing to ensure compliance with UK reporting standards. Fundamentally, this means you must maintain two sets of ledgers which can be costly and ultimately become complicated after a few years.
  • Alternatively, you can leave the UK trial balance as unadjusted and choose to post the purchase accounting entries through the consolidation separately. This can either be done using a separate ledger, as a top side adjustment, or by making manual adjustments to the consolidation. This will make for a smooth UK year end reporting process and should still enable you to record the necessary entries into the consolidation.

Completing an acquisition can be a stressful and time consuming process, but by considering the implications on your UK statutory reporting before your year end, you ensure your annual compliance will be as efficient as possible. If you are acquiring a UK company and would like to understand the reporting requirements in more detail, contact a representative below:

Louise Morriss, BFP ACA FCCA
Managing Director
Tel: +44 (0)20 7430 5892
Email: lmorriss@fl-crs.com

Nick Whitehead ACCA
Audit Manager
Tel: +44(0)20 7430 5931
Email: nwhitehead@fl-crs.com

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