Meaning
Accounting definitions in definitive purchase agreements specify the exact historical accounting principles, practices, and conventions utilized by an acquired entity. Establishing target GAAP creates a contractual benchmark for calculating working capital adjustments, net debt levels, and closing financial statements. The scope of this accounting reference requires consistent application of past accounting choices even where those choices deviate from general industry practice or acquirer accounting standards.
Contractual reliance on target balance sheet methodologies protects sellers from post-closing accounting adjustments driven purely by buyer accounting policy shifts.
Baseline Standard
Historical accounting records provide the operational baseline for constructing target working capital pegs during deal negotiations. Application of target GAAP ensures that closing working capital calculations use identical accounting methodologies as historical financial statements. Modifying valuation methodologies mid-transaction distorts closing purchase price adjustments.
Consistency Covenant
Purchase agreements contain strict representations requiring financial statements prepared between signing and closing to maintain historical accounting rigor. Compliance with target GAAP prohibits target company management from altering write-off policies, inventory reserves, or expense accrual timing to inflate short-term working capital. Sellers must maintain past accounting practices until final ownership transfer.
Dispute Mechanism
Post-closing purchase price adjustment disputes frequently turn on whether target closing calculations adhered to agreed accounting parameters. Reference to target GAAP guides independent accounting arbitrators in evaluating disputed inventory write-downs or liability accruals. Arbitrators reject buyer adjustments that enforce buyer accounting preferences over established target historical practices.
