We were instructed to determine the correct net asset position within a disputed set of completion accounts
Whilst our instructions were clear and unambiguous, the SPA was far from perfect.
The accounting hierarchy for the preparation of completion accounts is a crucial aspect of any SPA and many boilerplate agreements include sellers’ and buyers’ hierarchies.
Seller – typically prefers completion accounts to be prepared on a basis consistent with prior years (enables known accounting treatments to be used, even where these may be aggressive).
Buyer – prefers UK GAAP (generally accepted accounting practices) to take precedence (enables them to amend historic accounting if necessary).
In this case certain clauses within the SPA contradicted each other or relied on consistency where there was none. Although the accounting hierarchy clause was clear, stating that Accounting Bases (historic actual) were to rule over Accounting Practice (laws and convention), this was contradicted elsewhere in the document where Accounting Practice was to take priority.
As expert this can make for testing times.
The parties’ submissions made it clear that they considered consistency to be the deciding factor with regard to accounting treatment. All well and good. However, it became clear from the submissions that historic accounting practice had been anything but consistent. In some areas neither party appeared to know what the historic position was.
One of the most significant items related to the valuation of stock and work in progress. In this area the SPA was unambiguous – the valuation was to be prepared in accordance with the adjusted figures within the Information Memorandum. The Information Memorandum was prepared by the accountant representing the seller in the dispute and included eight years’ worth of adjustments to stock figures (all of which were unexplained).
The seller’s accountant explained the adjustments but it was clear that even these adjustments had not been prepared on a consistent basis. Thus, in order to follow the wording of the SPA, the expert needed to be consistently inconsistent over an eight year period (and there was no consistency to the inconsistency).
How consistently inconsistent should you be?
The easiest solution in this situation is to ask the parties to provide their interpretation of the SPA and hope that they agree. Unfortunately the buyer failed to engage properly with the process so that option failed. The seller’s accountant failed to identify the inconsistency within the approach adopted.
We were conscious of the need for a swift resolution so held a conference call with both parties’ accounting representatives to gather as much information as possible. Following this we were able to make our determination using an approach to interpolate and address the inconsistency.
As is often the case, one party attempted to introduce new items into the determination part way through. Our engagement letters list out the items in dispute when we are first instructed to avoid this situation arising. In this case the late introduction of new items was interesting since the party which prepared the completion accounts decided to dispute them!
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