What is immaterial for general financial reporting purposes, however, may be very material to a buyer and seller when the effect is real cash. Many interim reporting practices that are GAAP are very subjective, and can lead to disputes between the buyer and seller because of their subjectivity. If interim reporting practices are to be used, I suggest the way in which they are to be used be very carefully specified in the purchase and sale agreement. Furthermore, test calculations of the specified amount and the closing amount may be helpful. If interim reporting practices are not used, the contract should specify that GAAP used at a fiscal year end are to be employed.
Many financial statements have multiple, immaterial GAAP departures.
These departures can become highly contentious when they result in real dollar purchase-price adjustments. if the specified amount is calculated based on normal reporting practices that include the GAAP departures, and the actual amount is calculated using GAAP, rigidly applied to everything, the change of accounting principles, not the economics of the transaction, will change the purchase price. GAAP departures of this type may be especially prevalent in relatively small divisions or subsidiaries of large companies. SFAS 43 requires an approach that is frequently not followed and usually increases the liability. Many leases are accounted for as operating leases, although they are capital leases under the SFAS 13 tests. The effect is difficult to predict because a capital lease creates both an asset and a liability.