Wiley GAAP 2008

Accounting for Leveraged Buyouts

One of the most complex accounting issues to have arisen over the past several decades has been the appropriate accounting for a leveraged buyout (LBO). At the center of this issue is the question of whether a new basis of accountability has been created by the LBO transaction. If so, then a step‐up in the reported value of assets and/or liabilities is warranted. If not, the carryforward bases of the predecessor entity continues to be reported in the company's financial statements.

The EITF has addressed leveraged buyouts, first in 86‐16, then in 88‐16 and 90‐12. The EITF's conclusion was that partial or complete new basis accounting is appropriate only when the transaction is characterized by a change in control of voting interest. EITF 88‐16 established a series of mechanical tests by which this change in interest is to be measured. Three groups of interests were identified: shareholders in the newly created company, management, and shareholders in the old company (who may or may not also have an interest in the new company). Depending upon the relative interests of these groups in the old entity (OLDCO) and in the new enterprise (NEWCO), there will be either, (1) a finding that the transaction was a purchase (new basis accounting applies) or (2) that it was a recapitalization or a restructuring (carryforward basis accounting applies).

Among the tests that the EITF decreed to determine proper accounting for any given LBO transaction is the “monetary ...