New Revenue Rule Sows Short-Term Risk in M&A Deals

Dealmakers with foresight will avoid surprises as international accounting rules shift.

Making a corporate transaction happen is challenging enough, involving many players and a tangle of financial, legal and regulatory considerations. Now dealmakers can add accounting rules to that mix, because of a new rule that changes how companies recognize revenue.

Investors and deal teams will want to have a clear understanding of the rule’s potential effects, and keep a close eye on the impact it may have on valuation metrics so they can avoid mispricing assets, double-paying earn-outs and inviting legal action.

The new rule seeks to align US and European standards for the ways publicly traded companies report their revenue. It emanates from the International Accounting Standards Board and the Financial Accounting Standards Board, the two most important organizations promulgating accounting standards. When the two groups announced the change in 2014, they said it would remedy a flaw that had allowed accounting differences to produce different revenue figures for similar transactions.