On Dec. 3, the Delaware Supreme Court released a landmark decision regarding purchase price adjustments and, specifically, how a seller’s misapplication of accounting rules can leave the buyer on the hook for dozens. of millions.
Golden Rule Financial Corporation, a health insurance company, has reached an agreement to buy USHEALTH Group for $750 million, subject to a purchase price adjustment after the tangible net worth close. The parties’ agreement attached an “accounting principles” appendix and specified that tangible net worth should be determined “in accordance with accounting principles, applied consistently.” After the closing, the buyer discovered that the seller had been constantly putby applying a relatively new accounting principle called ASC 606. When the buyer calculated the numbers, the seriousness of the seller’s error became apparent: if the purchase price adjustment was calculated using the method (incorrect) of the seller, the tangible net worth would be $35 million. If, however, ASC 606 was applied correctly, the tangible net worth would be $73.7 million. In other words, the seller’s accounting error created a $38.7 million change in the purchase price adjustment.