Accounting Ratios

Acquisition Accounting

Our Acquisition Accounting model aims to highlight companies which are writing-down the book value of acquired targets to inflate future profits. It will be triggered if there is a concurrent acquisition and large rise in deferred tax assets in any of the past three years. Around 10% of companies globally trigger the model in any given year although this will include some false positives. The key to understanding what adjustments have been made is to compare the balance sheet of the acquired company before and after it has been consolidated into the acquirer’s financials. Sometimes adjustments are detailed in the note relating to acquisitions in an acquirer’s financials, but this is rare. Alternatively, the information may be available because the acquired entity was previously listed or it was included in the financials of the divesting company. This can be compared to the information provided by the acquiring company. Often, however, no financial information is available in which case analysts should scrutinise deferred tax assets for any major movements, or ask management.

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