Post-acquisition disputes often arise when parties disagree on whether the terms of the sales and purchase agreement (SPA) were properly applied in calculating a closing date working capital or earnings metric during a specified period. Typically, SPAs mandate that closing working capital and/or earnout metrics be calculated in accordance with U.S. Generally Accepted Accounting Principles (GAAP) or IFRS, and applied consistent with “past practice.” For those areas of GAAP requiring the application of judgments and use of estimates, it can be difficult to ascertain whether and to what extent judgments and estimates applied to calculate a closing date working capital or earnout metric accurately reflect past practice.

If an independent accountant is retained to resolve the dispute, they will often require the parties to produce pre-acquisition documentation to help determine which of the parties’ positions accurately reflect past practice. But there are times when past practice does not include preparing and/or retaining underlying documentation due to, for example, a lack of formal policies and financial controls, materiality, or the loss of key employees around the close of the transaction, making such documentation unavailable. Without supporting documentation, it becomes much more challenging to determine which competing position aligns with past practice when both positions are within the confines of GAAP, which can result in significant and unintended changes in the ultimate purchase price through post-close purchase price adjustment mechanisms.

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