SS&C Technologies : Investment Accounting Impacts for Insurers in Asset Management M&A

By most accounts, the flurry of M&A activity in the asset management world shows no signs of abating. Banks, insurers and asset management enterprises are vying for deals that will enable them to multiply AUM, gain scale, expand distribution and diversify their offerings.

That said, the success of an acquisition is never assured at the start of negotiations. SS&C has helped asset management and insurance clients navigate literally hundreds of acquisitions, mergers and strategic partnership agreements. We've captured the key lessons from that experience in a whitepaper, "Accelerating Success in Asset Management Acquisitions." In it, we outline the top 10 considerations that parties to a deal need to address to proceed smoothly and expeditiously toward business as usual, with virtually no disruption to the end client experience. The market's verdict on the success of a transaction may well depend on how the combined entities account for these factors.

One of the more complex issues is accurate accounting for the acquired entity's investment portfolios. The transfer of assets will have a big impact on middle- and back- office investment accounting systems, particularly if either party is part of an insurance enterprise. Insurers are required to maintain multiple accounting bases along with tax from US or Foreign Taxing Authorities. For the accounting book of record (ABOR), the acquiring entity must establish the appropriate cost basis of the acquired assets for pro forma accounting purposes. When a US insurance company's assets are acquired, investment accounting is typically treated as an ongoing concern for STAT purposes, meaning the assets retain their original acquisition dates and amortized cost. Under GAAP and IFRS, a new cost basis for the assets needs to be established at fair value as of the closing date of the deal. In GAAP terms, the step-up to fair value is referred to as Purchase GAAP or "PGAAP."

PGAAP accounting is a common requirement for both the acquiror and acquiree. A publicly-traded buyer must prepare PGAAP financial statements for the acquired company following US GAAP or International Financial Reporting Standards.

However, a privately-owned acquirer may also want to prepare PGAAP financial statements to aid in monitoring the performance of the purchased business.

Under PGAAP, every item is treated as if it was purchased on the PGAAP date and valued at fair market value. The existing GAAP basis would carry the investments at historical book value. Both the purchaser and the purchased entity must agree on the PGAAP accounting policy, in consultation with their auditors. Some legacy investment accounting systems may have limitations on the number of accounting bases that can be supported, which can lead to delays or errors resulting from manual workarounds or offline processes. Today's more advanced platforms that can support unlimited accounting bases will allow more flexibility and ensure greater accuracy.

Finally, from an ABOR perspective, adjustments in asset values will also be needed to reflect the "financial impact" of converting assets from one accounting system to another, which will inevitably have different amortized cost or book value methodologies. In addition to quantifying the required adjustments, it is equally critical to understand and be able to explain the reasoning for them to senior management and auditors.

Check back next week as we tackle the tax implications of an asset management acquisition. We also have discussions planned on the operational and data integration issues involved. In the meantime, you can get a comprehensive overview of the factors that define a successful acquisition by downloading the full whitepaper.

Alternative Investments, Asset Management, Insurance

asset management , M&A , investment accounting