Big-ticket M&A fees will face tougher scrutiny under new global accounting standards
City law firms look set to face greater scrutiny on bills thanks to new accounting rules that mean M&A fees will directly hit clients’ bottom line.
The new regulations, to be rolled out from next July, will see all deal costs — including legal fees — detailed as separate expenses directly impacting the profit and loss accounts. Currently, these fees sit on the balance sheet.
The changes, drawn up by the International Accounting Standards Board and the US Financial Accounting Standards Board, mean that the costs of legal and financial advisory fees racked up on major M&A deals — often amounting to millions of pounds — will be subject to greater scrutiny with shareholders able to see the direct impact of deal costs on profits.
The new regime will push companies to account for deal fees as an expense in the year incurred, rather than ‘capitalised’ costs of an acquisition, which can be spread over many years or deferred as goodwill.
George Bull (pictured), the head of Baker Tilly’s professional practices group, said: “At the moment deal costs can be capitalised and written off over many years. The changes will mean deal costs will directly affect the profits of a company. This will mean directors will want to focus on the headline costs and fees when it comes to how it is presented to the public.”
The regulations, which will affect all listed companies in the
Freshfields Bruckhaus Deringer London head Tim Jones said: “It may well make a difference if these costs are going directly onto the profit and loss sheet and are more visible. It could also make budgeting for general counsel much harder if previously they could have capitalised the costs of a major deal — it will make budgets much more lumpy.”
Ashurst corporate partner Paul Gadd added: “To some extent this will mean there is more scrutiny of costs if shareholders were unaware, but GCs can put pressure on costs without needing an accounting standard to do it.”