Research On The Causes And Consequences Of Accounting Mismatch In Enterprises After Earn-out Agreement In M&A

In the case that performance commitment is difficult to meet the demand of M&A market,Earn-out payment,as a kind of innovative substitute contract,has been widely used for M&A activities by our enterprises.The two major characteristics of Earn-out payment are delay and contingent,which requires the acquirer to pay the fixed amount according to certain proportion of the total transaction price,and then pay the remaining amount in installments according to the achievement of preset Earn-out assessment indicators to play the role of cushion or even avoid risks.However,the clauses of this maj or contractual arrangement are complex in the actual implementation,with multiple elements and stages,and there are still some defects.Once the composition clause is designed improperly,it is easy to induce the dilemma of M&A,bring accounting mismatches between the contingent consideration and goodwill in the follow-up measurement process,and bring risks to the long-term sustainable development of enterprises.Since the accounting treatment in M&A transactions has become the focus of practical supervision,it is necessary to carry out the theoretical research on accounting mismatches after M&A by Earn-out.This paper selects the case of accounting mismatch induced by the Earn-out acquisition of Kerr by Xiwang Food,and comprehensively analyzes the causes,performance and consequences of accounting mismatch.In this case,accounting mismatch is closely related to the improper design of composition clauses of Earn-out payment.Specifically,at the beginning of the assessment period,the high EBITDA evaluation index pushes up the revenue valuation through signal transmission and forms high goodwill;the low contingent consideration ratio is difficult to spread valuation risk,which lays a hidden danger for the subsequent accounting mismatch.During the assessment period,improper matching incentive provisions cannot comprehensively and effectively stimulate the target party’s personnel,and the effect of merger and integration is not good;and the all-cash payment increases the follow-up fundraising pressure,so the accounting mismatch of Xiwang Food is finally induced.This paper finds that because the target performance in the Earn-out assessment period falls short of expectations,Xiwang Food makes use of the loopholes in the measurement method and measurement cycle of Chinese standards on the corresponding items of contingent consideration and goodwill.On the one hand,it takes half-year as the measurement period to reduce the book value of the contingent consideration on the liability side and increase the reported profit for the period;on the other hand,it takes the year as the measurement period,does not timely withdraw the impairment of goodwill in the current period,and delay the time point of the impairment of goodwill,so as to achieve accounting mismatch and maintain the"false prosperity" for a period.The accounting mismatch not only increases the long-term financial risk of Xiwang Food,affect its ability of long-term development and the realization of long-term shareholder wealth,but also has an impact on the benign development of the capital market.The theoretical significance of this paper lies in deeply analyzing the causes and consequences of accounting mismatch by taking case study as the main form and combining Earn-out payment with accounting mismatch,which enriches the theoretical literature in related fields.The practical significance of this paper lies in enhancing the application effect of Earn-out payment in M&A activities in China,and meeting the practical needs of related subjects to eliminate accounting mismatch after M&A.After analyzing the causes and performance of accounting mismatch of Xiwang Food after M&A,this paper reveals the potential design defects of composition clauses of Earn-out payment and the loopholes in the follow-up processing of Earn-out payment,and puts forward some suggestions to reasonably design the Earn-out payment scheme,revise and improve the relevant accounting standards,and optimize the whole-process supervision.