1. AICPA Practice Aid: Mergers and Acquisition Disputes
G. William Kennedy, Ph.D., CPA/ABV
Managing Director
FTI Consulting, Inc.

2. When Do Shareholder Disputes Occur?
Shareholder Class Action
Minority
Shareholder
Buyout
Minority
Shareholder
Squeeze out
Minority
Shareholder
Dissent
Former
Shareholder
Dispute
M&A
Transaction
Buyer Benefit of the Bargain/
Breach/Fraud
Material Adverse Change
Purchase Price Adjustment
Letter Of Intent

3. AICPA Mergers and Acquisition Disputes Practice Aid
The AICPA Practice Aid, Mergers and Acquisition Disputes was issued in early 2012
The Practice Aid was authored by the AICPA Mergers and Acquisitions Dispute Resolution Taskforce
To supplement the Practice Aid, Taskforce activities included authoring articles for the AICPA Journal of Accountancy and providing presentations at AICPA National Forensic and Valuation Conference on M&A Disputes services provided by CPA’s

4. AICPA M&A Dispute Resolution Taskforce
The Taskforce was comprised of 5 attorneys representing the ABA M&A Committee and 12 CPA’s representing the AICPA Forensic and Litigation Services Committee
Members of the Taskforce were selected for their expertise in practice area of M&A disputes
Taskforce activities included reviewing and commenting on the
ABA’s Model Stock Purchase Agreement and the
ABA’s Model Asset Purchase Agreement

5. Introduction and Scope of Practice Aid
The Practice Aid was prepared for the CPA practitioner who serves in the role of the neutral accountant, consultant, or expert witness in engagements involving M&A purchase price disputes
Focus of the Practice Aid:
Theoretical
Legal
Accounting basis

6. Chapter 1: Overview of Merger and Acquisition Transactions and Disputes

7. The Purchase and Sale Agreement

8. The Purchase and Sale Agreement
Legal document memorializing the agreement of the parties
Purchase price and post-close adjustment mechanisms (e.g. working capital/balance sheet true-ups)
Provisions governing earnouts (if applicable)
Representations and warranties of parties
Indemnification provisions
Offers protection but can also present hazards

9. Representations, Warranties, and Covenants
To gain comfort in the valuation of the target, Buyers often require certain assurances from Seller.
Financial statements provided by management during due diligence are prepared in accordance with GAAP
Material information with respect to the business has been disclosed (e.g. litigation, environmental hazards, status of key customer relationships, significant contracts, etc.)
No undisclosed Material Adverse Changes have occurred
Operation of business in ordinary course

10. Determining the Purchase Price

11. The Purchase Price
Reflection of investment value specific to transacting parties
Reflects “bargained for”:
Anticipated stream of future earnings or cash flows
Measure of capital necessary to support operation in the normal course
Often incorporates synergistic considerations

12. The Purchase Price Market Approach (Financial Element x Multiple)
Financial element can be earnings measure (e.g. EBITDA) or balance sheet measure (e.g. assets) depending on business
Multiple – Based on multiples derived from companies determined to be guideline comparable companies
Income Approach
Discounted cash flow valuation
Required internal rate of return (IRR) based on earnings projection
Cost Approach
Not applicable in most deals

13. Concluding a Purchase Price
While relevant, valuations of the parties do not always result in the precise purchase price agreed upon.
A number of factors may influence the ultimate purchase price determination.
The ultimate purchase price is the result of the negotiation between the parties.

14. Chapter 2: Post Closing Purchase Price Adjustments

15. Post Closing Purchase Price Adjustments
Introduction-Post Closing Purchase Price Adjustments
Background of a Purchase Price Dispute
The Role of a CPA in a Post- Acquisition Dispute
Post-Acquisition Dispute: An Overview
Illustration of a hypothetical Seller’s perspective and Buyer’s perspective

16. Background of a Purchase Price Dispute
An acquisition price may reflect a negotiated or implicit valuation multiple of earnings/EBITDA between a Buyer and a Seller
As a consequence of the transaction, there is a negotiated mechanism in the purchase agreement to “true-up” the balance sheet acquired by the Buyer
Usually, the parties are entitled to the following post-closing adjustments:
GAAP adjustments
Other “dollar for dollar” adjustments provided for in the agreement
The Buyer may additionally or alternatively be entitled to:
“Benefit of the bargain” damages, if there is a material misrepresentation of the financial statements by the Seller

17. The Role of a CPA in a Post-Acquisition Dispute
As an Expert
As an Arbitrator
As a Mediator
As Advisor to the Attorney as Arbitrator

18. Post-Acquisition Dispute – An Overview
Seller’s Representation
“GAAP” vs. “ Consistency”
Subsequent Events
Comparison of the Seller’s perspective vs. Buyer’s perspective

19. Seller’s Representation
“The financial statements present fairly, in all material respects, the financial position of the business, as of the respective dates thereof and covered by said statements in accordance with generally accepted accounting principles consistently applied throughout the period involved.”

20. “GAAP” vs. “Consistency”
The most hotly contested issue in a post-acquisition dispute
Seller’s position is that a consistent/past practice, which results in a GAAP presentation, is a winning strategy at trial
Buyer’s position is that Seller’s past practice is not GAAP and seriously understates the reserve/accrual/presentation
If Seller’s past practice/methodology does not result in a GAAP presentation, then GAAP would probably trump consistency (depends on the facts and circumstances of the case)

21. Subsequent Events A hotly contested issue
In general, the Arbitrator would consider what is known or knowable at the date of the closing balance sheet. In addition, the Arbitrator is often asked to consider:
What is known or knowable at the date of the preparation of the closing balance sheet, or “report date”
Whether later subsequent events indicate that the Seller’s position is unreasonable regarding what was known or knowable

22. Illustration of a Hypothetical Seller’s Perspective vs
Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective
Seller’s
Past practice/consistency will result in a GAAP presentation/Seek a specific “carve out” of problem accounts
Extensive access to Buyer’s books & records, ability to make copies, interview personnel
Seek to negotiate a basket or threshold for post-closing adjustments and indemnity claims

23. Illustration of a Hypothetical Seller’s Perspective vs
Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective
Seller’s, Continued
Limit escrow
Seller’s accountants should prepare closing balance sheet
Consistency is retroactive to the Target Balance Sheet (TBS) and offsetting to claims in the CBS
Define losses to be dollar for dollar, exclude lost profits and diminution of value and a multiple of EBITDA
Define purchase price as a multiple of EBITDA

24. Illustration of a Hypothetical Seller’s Perspective vs
Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective
Buyers
Negotiate a mechanism in the contract to increase or decrease the purchase price based upon EBITDA fluctuation before the close
Losses would include lost profits, diminution in value, and a multiple of EBITDA or other relevant measures
GAAP trumps consistency
Asserts a very conservative GAAP position/no “carve out” of any accounts

25. Illustration of a Hypothetical Seller’s Perspective vs
Illustration of a Hypothetical Seller’s Perspective vs. Buyer’s Perspective
Buyers, Continued
Limit the Seller’s access to Buyer’s books & records/copies/interviews
Limit basket/threshold issues of any kind
Set up adequate escrow
Buyer’s accountants should prepare closing balance sheet
Buyer seeks a specified amount of net assets

26. Chapter 3: Earnout Provisions and Disputes

27. What is an Earnout?
A contingent element of the acquisition’s purchase price determined post-closing based on the target business performance against certain contractually defined criteria or benchmarks.

28. Illustration of Earnout as Component of
What is an Earnout?
Illustration of Earnout as Component of
Total Purchase Price
Closing Consideration – 12/31/ $100
+/- Net Working Capital Variance from Peg – 2/28/
+ Earnout Amount – 12/31/
Total Purchase Price $115
Where 2010 EBITDA was $22 million, and the Earnout Amount is defined by the Earnout Agreement to equal 5x EBITDA during 2010 in excess of $20 million.

29. Why do Parties to Deals Utilize Earnouts?
Effective negotiating tool when differing perspectives on value and/or outlook for the target business
20%
Growth
10 %
Growth

30. Why Do Earnouts Appeal to Sellers?
Protect Seller from failing to realize value in their business.
May allow Sellers to obtain greater consideration that they might receive otherwise.
Can be advantageous in difficult economic climates (such as today).
May allow Seller to control its own destiny when Seller management will continue to be involved in business post- closing.

31. Why Do Earnouts Appeal to Buyers?
Protect Buyer from overpaying for the target business.
Effectively Seller financing – reduces cash necessary at closing.
Can distinguish Buyer’s bid when there are multiple suitors for target.
Indicates confidence of Seller.
Motivation of Seller management when Seller management will continue to be involved in business post-closing.

32. Why Don’t Parties Utilize Earnouts?
Shared concerns of the Buyer and Seller
Ability to “move on” post-closing.
Difficulty of administration post-close.
Challenge of negotiating for all contingencies.
Fear of post-acquisition disputes.
Buyer-Specific Considerations
May restrict integration of target.
May indicate uncertainty.
Concern of compensating Seller for Buyer enhancements.
Fear of manipulation of earnout by Seller management.
Seller-Specific Considerations
Lack of control of business.
Lack of custody of records.
Fear of manipulation of earnout.
Concern that value in business will not be realized.

33. Mechanics of Earnouts

34. Financial Benchmarks: Income Statement Measures
Seller’s Negotiating Preference
Financial Benchmarks: Income Statement Measures
Buyer’s Negotiating Preference

35. Common Disputes Involving Earnouts

36. Measurement of Business Performance
Post-closing Accounting
Post-closing Conduct of Business

37. Areas of Dispute Regarding Operation of Target
When business is operated by Buyer post-closing…
Perceived management of business to minimize performance measures and in turn the earnout.
Alleged deviation from consistent historical operating norms.
Alleged failure to invest in the business / provide for adequate capital.
Alleged failure to pursue opportunities.
Alleged impairment of earnout due to discontinuation of business.
Alleged shifting of sales or customer relationships from target to other Buyer entities.
When business is operated by Seller management post-closing…
Perceived management of business to maximize performance measures and in turn the earnout.

38. Disputes Regarding Accounting Areas Prone to Dispute in Earnout
Costs of transaction
Post-closing capital investments
Goodwill amortization
Intercompany overhead allocations
Depreciation
Discontinued operations
Extraordinary items
What should / should not be included when measuring the target’s performance against earnout benchmarks?

39. Valuation of Earnouts in M&A Transactions

40. Valuation of Earnouts
Old Standard – any expected contingent consideration would be recorded when earned
Revised Standard (SFAS 141R) – any expected contingent consideration is measured at Fair Value
Recognized at the acquisition date
Re-measured annually until all contingent consideration is paid

41. Valuation of Earnouts, Continued
Sample Facts:
Deal price – $1.8 billion
EBITDA – $100.0 million
Contingent Consideration Earnout:
50 percent of every dollar of EBITDA that exceeded $100.0 million
Term of Earnout – 2 years
Earnout Cap – $40.0 million

42. Valuation of Earnouts, Continued
Scenario Approach:
Example:
Buyer’s Projected EBITDA:
Year 1
Year 2
Scenario Likelihood
EBITDA (Best Case)
$150.0
$175.0
15.0%
Earn-out bonus
25.0
37.5
EBITDA (Base Case)
120.0
125.0
50.0%
10.0
12.5
EBITDA (Worst Case) 70 75
35.0%
Weighted average earn-out bonus
8.8
11.9
Discount rate
Present value factor [a]
0.9325
0.8109
Present value of earn-out payment
$8.2
$9.6
Value of contingent consideration
$17.8
Year 1
Year 2
EBITDA
$120.0
$125.0
Earn-out bonus
10.0
12.5
Discount rate
15.0%
Present value factor [a]
0.9325
0.8109
Present value of earn-out payment
$9.3
$10.1
Value of contingent consideration
$19.4
[a] Calculated using the “mid-year convention,” which assumes that cash flows will be received evenly throughout the projection period rather than at the end of the period.

43. Chapters 4 & 5: Material Adverse Change Clauses and Representation and Warranty Disputes

44. Material Adverse Change, Measuring Damages, and Related Pitfalls

45. Standard Material Adverse Change Clause
Purchase and Sale Agreements typically include a Material Adverse Change (“MAC”) clause containing language similar to the following:
Material Adverse Change:
Any event, development, circumstance, change or effect that is or would reasonably be expected to be materially adverse to the business, financial condition or results of the operations of the Acquired Company

46. Standard Material Adverse Change Clause, Continued
Purchase and Sale Agreements typically include a Material Adverse Change (“MAC”) clause containing language similar to the following:
Representation of Seller
Since date XX, there has not been any Material Adverse Change in the business, operations, properties, prospects, assets, or condition of any Acquired Company, and no event has occurred or circumstance exits that may result in such Material Adverse Change.

47. What is a Material Adverse Change (MAC)?
IBP, Inc. v. Tyson Foods, Inc.
Based on VC Strine’s ruling in this case, a MAC may have been sustained if:
Dramatic downturn in earnings from the date of the signing of the SPA and before the closing.
There is a downturn in the business that is disproportionate to the industry.
The downturn is durationally-significant (or over a commercially reasonable period), meaning years and not months (is the downturn a blip or a trend?), and
The change in the business in unknown to the Buyer.

48. Benefit of the Bargain Damages
A measure that awards the plaintiff the difference between the gain had the misrepresentations been true and what the plaintiff actually received.1
1 Litigation Service Handbook, Fourth Edition, 18.7

49. Measuring Damages: Indemnity Claims
Indemnity Claim: A dollar-for-dollar measure of the difference between what was “bargained for” versus what was received if affect earnings into the future.

50. Measuring Damages: Example #1
Assumptions:
$10 MM of undisclosed and unrecorded one-time liability associated with environmental remediation costs
Potential liability known to Seller during negotiations, but not disclosed
Not probable/reasonably estimable at time of negotiations or at time of close
Purchase price of $750 MM
EBITDA of $150 MM
5x Multiple

51. Measuring Damages: Example #1
Observations on Measuring Damages:
Buyer did not contemplate these costs in its valuation
Based on fact pattern, non-recurring impact on future earnings
Appropriate measure of damages likely dollar-for-dollar to reflect gain Seller would have received “but for” misrepresentation/failure to disclose
Reduce purchase price by $10 million to $740 MM

52. Measuring Damages: Example #2
Assumptions
Significant customer lost just prior to closing
Customer loss not disclosed to the Buyer

53. Measuring Damages: Example #2
CPA should consider:
Value of the customers to the business (i.e. contribution margin, operating profit, or customer EBITDA)
Target company’s customer turnover rate
Can customer be replaced?
Impact on long-term capital structure
Will loss impact only a few periods or extend into perpetuity?

54. Measuring Damages: Example #2
Observations on Measuring Damages:
If part of ordinary customer turnover, possible that no damages incurred.
If unprofitable customer, possible that no damages incurred.
If profitable customer with finite life with the Company, damages may be appropriate over customer life.
If profitable customer into the future, damages measured by valuation excluding cash flow from customer may be appropriate (e.g. impact on earnings x deal multiple)

55. Pitfalls to Avoid in Assessing Damages
Analyze PSA and contemporaneous documents carefully to understand Buyer/Seller motivations and key data to parties.
Assess situations involving double recovery carefully.
Indemnity claim v. working capital claim
Interplay of contractual overlays v. GAAP working capital requirements
Consult with counsel in matters requiring contract interpretation.

56. Pitfalls to Avoid in Assessing Damages, Continued
One time losses do not result in permanent earnings impairments and should not result in damages at a multiple.
Only claims resulting in ongoing or permanent impairment to the target company’s earnings warrant consideration of “at the multiple” benefit of the bargain damages.
A post-close analysis of the deal may establish that Buyer received benefit of its bargain irrespective of an alleged breach.

57. Case Study

58. Facts of the Case
Valassis and ADVO are in the direct mail advertising business. Each company had sales in excess of $1B. The combined entity will exceed $2.65B in sales.
Late in 2005 Valassis commenced merger discussions with ADVO.
On July 7, 2006, Valassis and ADVO signed the SPA, whereby, Valassis would pay $37/share in cash.

59. Facts of the Case, Continued
PRIOR to the signing of the SPA, ADVO represented:
Forecasted operating income for FY2006 of $68 million;
The integration of their SDR computer system was progressing as planned;
That the April & May 2006 financial statements were materially correct.
The SPA is signed on July 5, 2006.

60. Facts of the Case, Continued
AFTER the signing of the SPA:
ADVO disclosed that April and May’s 2006 financial statements were misstated by $2.6M;
August 10, 2006, ADVO adjusted its $68 million forecasted operating income to $54.8 million, nearly identical to an internal April forecast of $54.5 million;
Actual FY results ending 9/30/06 were $37.9 million, some $30 million below expectations.
Negotiations stalemated. On October 31, 2006 Valassis filed suit to rescind the merger.

61. Assignment Investigate the following allegations:
Financially speaking, did ADVO’s business suffer a material adverse change? More specifically:
Was ADVO’s EBITDA materially misstated?
Did ADVO sustain an dramatic downturn?
Was ADVO performing disproportionately below its peers in the industry?
Was ADVO’s downturn known to the buyer prior to closing?
Did Valassis obtain the benefit of its bargain?

62. Demonstration of Dramatic Downturn

63. ADVO’s Recent Operating Income is Below the Historical Mean
Declined 70% From Q to Q4 2006
($) in Millions
25M
Mean = $19.5
$22.4
$22.1
$21.6
$21.6
$20.7
$20.0
$19.8
$21.3
20M
$19.0
$18.7
$18.5
15M
$12.6
(1)
$14.1
$14.1
$11.6
(2)
10M
$7.0
(3) 5M Q1 Q2 Q3 Q4
2003
2004
2005
2006

64. ADVO’s Material Misrepresentation

65. ADVOS’s Fiscal Year 2006 Operating Income Forecasts
($) in Millions
7/6/2006
Merger Agreement
$76.1
(Original Budget)
80M
$68.6
$68.0
70M
$65.0
60M
$54.5
$54.8
50M
$37.9
40M
30M
20M
10M
4/14/2006
5/4/2006
5/10/2006
6/23/2006
8/10/2006
Actual (unaudited)

66. ADVO’s Operating Below Industry Expectations

67. ADVO’s Performance is Disproportionate to the Industry
(4.3)% Change
($) in Millions
$38.1
$38.1
40M
$37.3
$37.4
$37.4
$37.2
$36.3
$36.6
$35.8
$37.1
35M
$35.9
$35.3
$35.3
$35.1
$32.2
30M
Time between Q1 & Q4
$25.6
$25.9
25M
$21.6
$21.3
$23.1
$23.2
$20.6
$21.6
20M
$18.5
$18.7
15M
$14.1
$14.1
10M
Industry Average*
ADVO
$10.3
$9.2
(69.5)% Change
$6.3
(2) 5M Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4
2003
2003
2004
2004
2005
2005
2006
2006

68. Valassis Did Not Receive the Benefit of its Bargain
Purchase Price Overpayment Calculation
In Millions (except multiples)
Pre-Signing Forecasted Fiscal '06 Op. Income - Misrepresentation
$68.0
Less: Pre-Signing Forecasted Fiscal '06 Op. Income – Realistic
(54.5)
Operating Income Misrepresentation
$13.5
% of Misrepresented Operating Income
19.9%
ADVO '06 EBITDA (Valassis/Bear Stearns Projection)
$119.0
Less: Misrepresentation
(13.5)
Corrected ADVO '06 EBITDA
$105.8
EV/EBITDA Purchase Price Multiple
 9.0x
Adjusted Enterprise Value
$950
Less: Actual Enterprise Value Purchase Price
(1,291.3)
Purchase Price Overpayment
$(341.8)
% of Actual Purchase Price
26.5%
9.0x Multiple

69. Valassis Did Not Receive the Benefit of its Bargain - ADVO Misled Valassis into Overpaying by $300 - $400 Million ($) in Millions
Multiple of EBITDA Based on Guideline Companies
Value at July 5, 2006
$1,291
FY 2006 EBITDA
$105.5
Multiple
9.0x
Value at August 10, 2006
950
($342)
Income Approach
(Free Cash Flow)
Value at July 5, 2006
$1,080
Value at August 10, 2006
676
($404)
(1)
(2)
(3)
(2)

70. Chapter 6: The Role of the Accounting Neutral

71. Role of the Accounting Neutral
Overview: The Role of the Accounting Neutral in M&A
The Purchase Price Agreement: The Accounting Neutral’s Role is Created and Defined
The Engagement Process: Accounting Neutral and Buyer/Seller Considerations
Key Considerations During the Arbitration Process
Common Working Capital Dispute Items Adjudicated by the Accounting Neutral
The Accounting Neutral’s Final Opinion and Overall Engagement Performance

72. The Role of a CPA in a Post-Acquisition Dispute
CPA Roles
Expert Consultant
Arbitrator
Mediator
Advisor to the Attorney as Arbitrator

73. Overview
Certified Public Accountants are often asked to serve in the role of neutral in resolving disputes between parties arising from merger and acquisition transactions.
The most common scenarios are those in which the accountant will resolve purchase price disputes and earn-out disputes.
Applicable sale/purchase agreements contract clauses include:
Purchase Price
Working Capital or other adjustments
Earn-out provisions
Financial representations and warranties

74. What is the Accounting Neutral’s Role?
A variety of terms are applied in purchase/sale agreements:
Expert Determination
Arbitrator
Arbitrating Accountant
Independent Accountant
Neutral Accountant
Bottom line: It is the neutral accountant’s role to render a decision on the disputed items. But where does one start?

75. Typical Arbitration Process
Common elements of the arbitration process:
Generally, there are no set guidelines for how to conduct the process
Should consider that some contracts may refer to third-party guidelines such as AAA or CPR Institute of Dispute Resolution rules
The actual process may take various forms depending on what the parties agree to (i.e. baseball arbitration)
Preliminary Conference
Discovery
Written Statements
Interrogatories
Hearings/Conferences
Decision/Award

76. The Purchase Price Agreement: The Accounting Neutral’s Role is Created and Defined

77. Drafting Acquisition Documents
Anticipate Potential Areas Of Dispute
Know Client’s Interests
Predict Potential Liabilities/Claims
Dispute Notification

78. The Dispute Resolution Provision
Forum/Jurisdiction
Discovery
Timeframe
Segregation of Issues
Cost Shifting/Fee Shifting

79. The Engagement Process: Accounting Neutral and Buyer/Seller Considerations

80. Accounting Neutral’s Engagement Process
Parties/counsel to obtain Accounting Neutral candidate resumes
Conduct interviews of Accounting Neutral candidates
Contact Accounting Neutral candidate references
Inquire about Accounting Neutral candidate fee structure
Confer with opposing party/counsel to determine top candidate choices

81. Neutral’s Considerations: Accounting Neutral’s Engagement Letter
Common elements of neutral engagement letters include:
Identification of the contract from which the dispute arose
Identification of the specific disputed issues within the neutral's scope
Confirmation of absence of known conflicts of interest and disclosure of existing or prior relationships
Right to resign if conflicts arise that would impair independence or impartiality
Disclaimer that the services are not an audit

82. Neutral’s Considerations: Accounting Neutral’s Engagement Letter, Cont.
Common elements of neutral engagement letters include (cont.):
Hold-harmless clause giving the accounting neutral’s quasi-judicial immunities
Identification of the neutral individual and team members
Description of agreed upon format/process for the proceeding
Description of the form of award/report the neutral will issue (baseball arbitration vs. ability to dictate a different number)
Description of fee and billing arrangements – also state that fees will be collected before issuing the decision

83. Parties/Counsel’s Considerations: Accounting Neutral’s Engagement Letter
Accounting Neutral’s Scope
Issues To Be Resolved
Schedule
Description of the form of award/report to be issued
Costs – Controlling the Accounting Neutral
Conflicts

84. Preliminary Conference
Gain an understanding of the disputed issues
Discuss expected procedures
Set schedule for the proceedings with specific dates and locations, if necessary

85. Hearings/Conferences
Does there need to be a hearing?
Mixed in practice as to whether or not there will be a hearing.
Adds a significant cost component
Often has a significant impact on the timing of the decision
What is the perceived value?
The parties can agree to a hearing up front or can agree to address the need for a hearing later in the process.
A common approach is to allow for a hearing if either of the parties or the neutral requests one.

86. Common Adjustment Dispute Items Adjudicated by the Accounting Neutral

87. Post-Acquisition Disputes – An Overview
“GAAP” vs. “ Consistency”
Subsequent Events
Earn-outs
Common Financial Statement Account Disputed Items
Comparison of the Seller’s perspective vs. Buyer’s perspective

88. Common Financial Statement Disputed Items Adjudicated by Accounting Neutral
Revenue Recognition
Accounts Receivable Reserves
Inventory: Excess/Obsolete Issues
Asset Depreciation
Capitalized Assets
Accounts Payable
Accrued Liabilities: Warranty Reserves, Contingent Liabilities

89. The Accounting Neutral’s Final Opinion and Overall Engagement Performance

90. Reporting
Form of decision letter should be as agreed upon by the parties per the engagement letter.
The form of the final report can take many forms:
One final number
Final numbers for each disputed item
Numeric finding for each disputed item including the basis or reasons for the neutral’s decision- “reasoned report”
Arbitrator should consider ruling that the final decision not be released until all fees have been collected.
Fee Allocation- final decision should provide a final fee allocation.
Subsequent to the final decision, Arbitrator can allow for the consideration of any clerical, mathematical, or other errors of factual nature brought to attention by any interested parties.

91. The Role of the Accounting Neutral: Concluding Remarks

92. The Role of the Accounting Neutral - Concluding Remarks
Carefully consider the language drafted in the purchase price agreement regarding the role of the Accounting Neutral.
Review and consider the qualifications of the Accounting Neutral before engagement.
Accounting Neutral must consider the following before accepting the engagement: 1) Conflicts, 2) Appropriate level of expertise, and 3) Engagement letter language

93. The Role of the Accounting Neutral - Concluding Remarks, Continued
The actual process and timeline for arbitration will vary.
Accounting Neutral may opt to perform his or her own analysis and procedures, exclusive of the parties written submissions.
Most disputes pertain to GAAP vs. “Consistency”, Subsequent Events, and Revenue Recognition.
Accounting Neutral will typically render a “reasoned report” at the request of the parties.
Accounting Neutral needs to be aware of the professional standards and laws that govern this type of work.

94. Questions
Sample pie chart – 3D Pie

95. Thank You for Your Time