With the competitive business landscape, some companies may consider engaging in mergers and acquisitions to grow, diversify, or gain a competitive advantage. Whether it’s combining forces with another business or acquiring one outright, this can create significant opportunities, but it also brings complex accounting challenges that require careful attention.
Before engaging in any merger or acquisition, it’s important for companies to understand the accounting process behind it to ensure compliance, transparency, and successful integration.
What is a Merger and Acquisition?
Mergers and acquisitions refer to strategic business moves that involve combining or purchasing companies. While often used interchangeably, they have distinct differences:
- Merger: This occurs when two companies combine to form a new, single entity. Typically, both companies are dissolved, and a new business is created.
- Acquisition: An acquisition happens when one company purchases another. The acquired company may either continue to operate independently or be absorbed entirely into the buyer’s operations.
What Benefits Do Mergers and Acquisitions Bring to Companies?
Singapore offers a highly conducive environment for mergers and acquisitions, supported by regulatory innovation and targeted government incentives. Some of the reasons why companies consider engaging in mergers and acquisitions include:
Alternative Financing Through SPACs
The Special Purpose Acquisition Companies (SPACs) has opened up a dynamic new pathway for private companies in Singapore to merge and enter public markets. SPACs offer a compelling alternative to traditional IPOs, particularly in volatile market conditions.
Through a SPAC, capital is raised via an IPO, followed by the identification and acquisition of a target private company. This structure allows target companies to negotiate a fixed valuation, minimising exposure to the unpredictable pricing swings often seen in traditional IPOs. SPAC deals also offer greater flexibility in structuring terms, which can be tailored to suit both parties.
Furthermore, experienced SPAC sponsors can bring additional strategic value, including access to capital, a broad investor network, and support in strengthening the company’s management team.
This alternative financing framework enhances Singapore’s appeal as a leading hub for mergers and acquisitions, especially for companies seeking strategic growth and long-term access to capital markets.
Enterprise Financing Scheme Through Mergers & Acquisitions
The Singapore government actively supports M&A activity through financial assistance schemes like the Enterprise Financing Scheme – Merger & Acquisition (EFS – M&A).
Extended from 1 April 2022 to 31 March 2026, the scheme now includes support for domestic mergers and acquisitions transactions. It helps local enterprises grow through acquisitions, particularly in emerging sectors or complementary industries, by improving their access to financing.
The M&A Scheme
First introduced in 2010, the Mergers and Acquisitions (M&A) Scheme provides tax benefits to companies that acquire ordinary shares of another business. The scheme, which has been extended until 31 December 2030, is especially advantageous for SMEs aiming to expand through acquisitions.
Key benefits of the M&A Scheme include:
- M&A Allowance: For qualifying share acquisitions made from April 2016 onwards, the maximum value of the acquisition eligible for relief is S$40 million. Companies can claim an M&A allowance of 25% of the acquisition value, capped at S$10 million for all qualifying acquisitions within the basis period for each Year of Assessment (YA). The allowance must be written down in equal amounts over a five-year period.
- Double Tax Deduction on Transaction Costs: For qualifying share acquisitions made between 17 February 2012 and 31 December 2025, businesses can claim a double tax deduction on transaction costs, up to a cap of S$100,000. Qualifying expenses include legal fees, valuation services, accounting or tax advisory fees, and other professional services directly related to the acquisition.
The Mergers and Acquisitions Accounting Process
The accounting process for mergers and acquisitions involves several critical steps that ensure a smooth financial transition.
1. Valuation and Deal Structuring
At the outset, the acquiring company must determine the fair value of the target business. This is typically achieved through a combination of well-established valuation techniques:
- Discounted Cash Flow (DCF) Method: Projects future cash flows of the target and discounts them to present value, ideal for businesses with predictable revenue streams.
- Comparable Company Analysis: Compares the target to similar publicly traded companies using valuation multiples, such as EV/EBITDA or P/E ratios.
- Precedent Transactions: Analyses similar historical merger and acquisition deals to gauge market expectations and fair transaction value.
Once the acquiring company has identified what their offer for the target company will be, they will structure the deal. It’s important to note that in Singapore, there are two different acquisition methods: share sale and business sale. A share sale refers to acquiring the issued shares of the target company, whereas a business sale involves acquiring the target company’s assets and liabilities.
Having a professional accountant in your advisory team can help you determine the acquisition’s implications for your company’s financial health.
2. Due Diligence
Due diligence is a critical investigative phase where the buyer examines the target company’s financial, legal, and operational standing. This includes:
- Verifying the accuracy of financial statements
- Reviewing existing contracts, leases, and obligations
- Assessing potential legal or tax exposures
- Identifying off-balance-sheet liabilities
- Evaluating operational synergies and integration risks
The goal is to identify any potential issues, validate assumptions made during the valuation process, and ensure that the proposed deal terms are justified and sustainable.
3. Purchase Price Allocation (PPA)
After the transaction closes, the purchase price is allocated to the acquired company’s identifiable assets and liabilities based on their fair values. This process determines the amount attributed to goodwill and typically requires input from valuation experts.
4. Consolidation and Integration
The acquirer integrates the target’s financials with its own, consolidating balance sheets, income statements, and cash flow statements. Adjustments for fair value, deferred taxes, and goodwill are also accounted for during this phase.
5. Post-Acquisition Accounting
Following the acquisition, ongoing responsibilities include testing goodwill for impairment, amortising acquired intangible assets, and updating deferred tax balances. These adjustments are essential for maintaining transparency and ensuring compliance with accounting standards. This also provides stakeholders with a clear picture of how the acquisition has influenced key financial metrics, including any accretion or dilution to earnings per share.
Common Challenges with Mergers and Acquisitions Accounting
Even with the best intentions, merger and acquisition accounting can present serious hurdles. These include:
- Estimating Fair Values: Determining the fair value of intangible assets, such as brand reputation or proprietary technology, is highly subjective and often complex.
- Goodwill Impairment: Overpaying for an acquisition can lead to inflated goodwill balances. If the acquired business underperforms, companies may need to write down the goodwill, which can affect their financial statements and investor perceptions.
- Deferred Taxes: Merging companies from different tax jurisdictions can create deferred tax assets and liabilities that are tricky to manage without deep expertise.
- Integration Issues: Combining different accounting systems, policies, and reporting standards can be chaotic, particularly when companies operate under varying regulatory frameworks.
Best Practices for Successful Mergers and Acquisitions Accounting
Ensuring best practices in the accounting process can significantly improve the success and sustainability of a merger or acquisition. These practices include the following:
- Involve Accounting Experts Early: Engaging accounting professionals at the due diligence stage enables the identification of potential issues, such as inconsistent financial records or misclassified liabilities, early on. This proactive approach enables more accurate deal structuring and mitigates the risk of post-deal surprises.
- Conduct Comprehensive Due Diligence: In-depth financial and operational reviews are essential. Evaluating assets, liabilities, revenue streams, and tax exposures helps buyers make informed decisions and avoid inheriting hidden risks or compliance issues.
- Ensure Accurate Fair Value Assessments: Retaining qualified valuation experts ensures that all assets and liabilities are measured at fair value. Accurate valuations are crucial for accurate purchase price allocation and help mitigate the risk of future goodwill impairments or financial restatements.
- Plan for Seamless Integration: Successful post-acquisition integration requires aligning accounting policies, standardising procedures, and upgrading financial systems. Additionally, training staff and ensuring clear communication across teams contribute to a smooth transition, operational continuity, and regulatory compliance.
Work with Accounting Experts for Your Planned Mergers and Acquisitions
Accurate accounting for mergers and acquisitions is essential to unlock the true value of any deal. Companies that invest in proper accounting services for their mergers and acquisitions potentially have a better chance of achieving their strategic goals while maintaining financial health.
However, the complexities of accounting for mergers and acquisitions require deep technical expertise, experience, and precision.
At Ackenting Group (AG), we offer expert accounting services that Singapore businesses can trust. Our team can give you practical insights into the accounting aspects of mergers and acquisitions, from what possible methods can be used for seamless accounting integration to maintaining compliance. Partner with AG to ensure your M&A journey is professionally managed, strategically guided, and compliant with Singapore’s regulatory standards.
Aside from our accounting services, we also offer bookkeeping, auditing, and business incorporation services for SMEs.
For more accounting insights, check out our guide on whether to DIY or upgrade your business’s accounting and how to unlock business potential with affordable accounting services.
