Prior to 2009, merger and acquisition (M&A) transaction costs were capitalized and recorded as part of the purchase price of a business combination. But with the issuance of FASB 141-Revised (which became effective in late 2008 or 2009), things changed dramatically. Under the revised Generally Accepted Accounting Principles (GAAP) guidelines, direct M&A transaction costs now needed to be treated separately from the business combination and expensed as occurred. This was a big change and a big topic of conversation almost 20 years ago. It also had a significant impact on the bottom line of many company’s P&Ls. Even today, many CPAs and acquisition teams struggle with the accounting and tax treatment of acquisition costs. Below we will discuss the various types of merger and acquisition transaction costs and the general accounting and tax treatment.

Merger & Acquisition Costs Explained

For accounting purposes, costs associated with an acquisition can be divided in three buckets:

1. Direct costs of the transaction which may include due diligence services, accountants, attorneys, investment bankers, etc.
• BOOK TREATMENT: Transaction costs are not considered part of the fair value exchanged between the buyer and seller and are therefore expensed as incurred.
• TAX TREATMENT: The tax treatment of these costs is not as straight forward. The timing and nature of the expenditure impact the treatment. For example, costs incurred during the investigative phase of an engagement but before a letter-of-intent is signed may be currently deductible while costs incurred to pursue the transaction after a letter-of-intent is signed are generally capitalized. These capitalized costs are added to the tax basis of the assets and typically amortized of the life of the underlying asset(s).
2. Financing costs or debt issuance costs, which may need to be segregated from direct transaction costs, include the cost to issue debt that is included in the opening balance sheet.
• BOOK TREATMENT: Debt issuance costs are not expensed. These costs are “deferred” or netted against the proceeds of the debt liability and amortized of the term of debt.
• TAX TREATMENT: Tax treatment is generally the same as the book treatment.
3. Equity or Stock Issuance Costs relate to fees paid to obtaining new capital by issuing stock that is classified as permanent equity.  
• BOOK TREATMENT: Stock issuance costs should be considered a reduction of the related proceeds and recorded net with the amount received in equity.  These costs are not amortized.
• TAX TREATMENT: Tax treatment is generally the same as the book treatment.

Many times it can be difficult to identify the nature or purpose of certain fees. For example, fees paid to an investment banker for debt financing and advisory fees in connection with an acquisition.  In these cases, it may make sense to determine a reasonable allocation basis or engage a professional to perform a transaction cost analysis.

Please note that this is not intended to be a comprehensive assessment of the treatment of all transaction costs associated with a business combination. But it should provide some insight about the significant differences between the GAAP and Tax treatment of these costs.

Speak with a Meaden & Moore expert today to learn more.