Did You Get What You Paid For?

Generally Accepted Accounting Principles (GAAP) are a framework of accounting standards, rules and procedures defined by the professional accounting industry. No single reference source exists for all of GAAP; briefly, the sources of GAAP are:

  • Accounting principles promulgated by the American Institute of Certified Public Accountants (“AICPA”) including Financial Accounting Standards of the Financial Accounting Standards Board (“FASB”), FASB Interpretations, Accounting Principles Board (“APB”) Opinions, and AICPA Accounting Research Bulletins.
  • Pronouncements of AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and Technical Bulletins issued by the FASB and the Emerging Issues Task Force.
  • AICPA Accounting Interpretations and practices that are widely recognized and prevalent in the industry.
  • AICPA Issues Papers, pronouncements, textbooks, literature and articles.

GAAP provides a range of reasonable alternatives for identical transactions. M&A transactions values are negotiated based on historic and/or projected financial results, and only GAAP prepared statements will suffice. However, in the Middle Market, GAAP prepared statements don’t always exist.

The situation is more complicated for both Buyers and Sellers when providing and accepting the representations and warranties of the financial statements. Buyers must be prepared to deeply scrutinize the financial statements.