Business Combination Costs

7-1702 Business Combinations

a. A business combination occurs when an entity acquires net assets that constitute a business or acquires equity interests of one or more other entities and obtains control over the entity or entities. The new entity carries on the activities of the previously separate, independent enterprises (see FASB Statement No. 141).

b.' Once an auditor becomes aware of a business combination whether it be through a merger, consolidation, acquisition, divestiture, etc., he/she should take the following steps:

(1) Contact the contractor immediately to obtain information on the situation.

(2) Request that the contractor keep DCAA advised of all related transactions and activities as they occur.

(3) Remind the contractor of the FAR and CAS requirements concerning affected costs, including the requirement that unallowable costs together with directly associated costs be identified and excluded from any claim applicable to the Government.

(4) Maintain contact between and among the affected FAOs to assure a complete exchange of information, and to ensure that consistent audit action is being taken. Where there is a Contract Audit Coordinator (CAC) or a Corporate Home Office Auditor (CHOA) (see 15-200), overall coordination responsibility should reside therein.

(5) Contact the ACO and the major buying commands to ensure that they are aware of the circumstances. There should be a complete exchange of information with emphasis on items such as advance agreements and novation agreements.

(6) Evaluate the benefits of having a CAC or CHOA conference or a meeting of the auditors cognizant of the specific organizational units involved in the change.