Page 38 - M & A Disputes

Carve-Outs Not in Accordance With GAAP

Certain unique issues may arise regarding carve-outs in transactions. These carve-outs are typically
items that are known by one or both parties not to be accounted for in accordance with GAAP. Normal-
ly, the carve-outs are items in which the parties have realized that there may be issues that could lead to
disagreement; therefore, the parties seek to agree on how these items will be handled in the agreement
itself. Practitioners need to analyze the acquisition agreement and determine if any special carve-outs
have been identified. The agreement’s language will dictate how the carve-out should be handled related
to any purchase price dispute. Parties could agree on the value of specific items prior to closing for items
such as inventory obsolescence, warranty and accounts receivable reserves, and so on.

Additionally, the agreement may elaborate on the use of account carve-outs that are exceptions to GAAP
for certain account balances, such as inventory, accounts receivable, deferred taxes, accruals, and so on.

Common Areas of Working Capital Disputes

Working capital balance disputes may arise in many areas. The following list includes areas where
working capital disputes commonly occur:

a. Accounts receivable

i. Adequacy of allowances

ii. Consistency of allowances (methodology, percentages, and amount)

iii. Hindsight issues

b. Accounts payable

i. Complete recording

ii. Cut-off procedures and consistency

iii. General reserves

iv. Materiality

c. Inventories

i. Allowances for obsolescence

ii. Excess inventory

iii. Inventory counts

iv. Issues such as GAAP, consistency, past practices, hindsight, and so on

v. Interim versus year-end valuation procedures

d. Revenue recognition

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