With the gradual reopening of the economy, the mergers and acquisitions market is gradually recovering. What’s next?

Prior to the pandemic, the Canadian mergers and acquisitions (M&A) market was very stable and even on the rise. The Canadian outlook was very favourable for sellers. However, the pandemic caused disruptions in the M&A world, and several firms suspended or cancelled deals.

In a recent webinar, our experts discussed the current state of the market and their financing issue predictions with a special guest, Éric Doyon, Managing Partner at Walter Capital Partners.

Unprecedented economic impacts

Nine out of ten transactions were taken off the market or put on hold due to the lack of medium- and long-term financial performance visibility on companies, leading to global uncertainties and the preservation of cash resources.

There is no doubt about the need for every entrepreneur to be vigilant in this uncertain economy, but better days are ahead. With the gradual deconfinement of economic activity, businesses will be able to revisit their M&A plans and even take advantage of opportunities that may arise.

Proactivity and innovation: essential for recovery

In Canada, we are currently in the recovery and revitalization phase. With the reopening of the U.S. and Canadian economies, after a few months of crisis, we are already seeing some recovery in the transactional market.

In spite of the major difficulties encountered, some companies have proven to be resilient and others have shown strong growth. Several organizations, especially in the retail sector, were proactive, thinking outside the box and repositioning their Web activities, which, for some, drove a 200-300% sales increase. As a result, many are now re-evaluating their priorities in order to further invest in an online sales platform for future success.

Our viewpoint: our predictions for the future

We are seeing some demand in the market and are already witnessing the resumption of transactions, leading to business continuity. With entrepreneurs’ confidence and a more optimistic outlook, including the recovery of North American stock exchanges, as well as several attractive business opportunities, the M&A market will gradually pick up again.

However, we expect a change in the structure of transactions, as selling price values and earnouts will become increasingly common. It is still not certain what role the effects of COVID-19 will play in lenders’ and investors’ analyses. They will possibly be more careful in selecting transactions, but, to date, these partners have been very flexible in order to support entrepreneurs, despite the context.

As mergers and acquisitions gain momentum, investors and lenders will continue to focus on companies with strong management teams and a proven business model operating in growth sectors. Entrepreneurs will therefore have to demonstrate how well the company and the management team navigated through the crisis, mainly in terms of agility, flexibility, cost control and loyalty.

On the other hand, an entrepreneur who decides to sell today must approach this step with a certain open-mindedness. Valuations will be under pressure, since we are seeing a decrease in the available leverage in transaction structures, which will require much more operational and financial creativity.

We remain optimistic about long-term transaction volumes. With the pandemic stabilizing, many buyers will be ready to do business: there is still a lot of capital available in the market. However, it is important for an entrepreneur to avoid making hasty operating decisions that would maximize short-term profits and transaction value at the expense of long-term value creation.

Please view our webinar for more information on the return of M&A and financing.

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The Grant Thornton International IFRS team has published COVID-19 – Accounting Considerations for CFOs: Government Grants.

As a response to the COVID-19 global pandemic, governments around the world are implementing measures to help businesses and economies get through it. The nature of government grants can take on various forms, such as below market rate loans, short-time working subsidies, relief funds, income-based tax credits, to name just a few.

While many forms of government assistance should be accounted for by applying IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, others should be addressed by other standards, such as IAS 12 Income Taxes. Entities will therefore need to assess the economic substance of any government assistance they are receiving to determine what is the appropriate accounting treatment.

The publication COVID-19 – Accounting Considerations for CFOs: Government Grants addresses four key questions to consider prior to determining the appropriate accounting treatment for government grants:

  • Is the government assistance in the scope of IAS 20 or another standard?
  • What is the correct recognition and measurement?
  • Is it recognized in the correct period?
  • How should the assistance received from governments be presented in the financial statements?

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The International Accounting Standards Board (IASB) has issued a collection of narrow scope amendments to IFRS. The collection includes amendments to three standards as well as Annual Improvements to IFRS Standards, which addresses non-urgent (but necessary) minor amendments to four standards.

The changes are summarised in this Adviser Alert.

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Flash – February 2019 (updated: June 2020) – ASPE

Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement

Section 3856, Financial Instruments, currently provides an exception in paragraph 23 that requires retractable preferred shares issued in a tax planning arrangement under specific sections of the Canadian Income Tax Act (ITA) to be presented as equity and measured at par, stated or assigned value.

Following publication of two Exposure Drafts in 2014 and 2017 and various discussions on the comments received, in December 2018, the Accounting Standards Board of Canada (AcSB) published the definitive amendments to Sections 3856 and 3251, Equity, to amend the balance sheet classification of retractable preferred shares issued in a tax planning arrangement. These amendments will result in significant changes in the accounting for these shares.

Accordingly, some of the preferred shares now classified as equity under the previously described liability classification exception will remain classified as equity if they meet certain conditions. However, we expect many preferred shares will be reclassified as liabilities and measured at their redemption amount.

These amendments are relevant to private enterprises that report under Part II of the CPA Canada Handbook – Accounting and apply ASPE and are applicable for fiscal years beginning on of after January 1, 2021 (in April 2020, the AcSB deferred the application date from 2020 to 2021).

Download the document below.