Is it right to 'make profits look better' to increase M&A?

Thinking about the role of accounting rules through the debate over goodwill amortization

1. Consultation with Mr. Mizuno

Mr. Mizuno, I've recently seen the term 'review of goodwill amortization' in the news.

When a company engages in M&A, it often records the brand power, technical capabilities, and customer base of the acquired company as an asset called 'goodwill'.

Under Japanese accounting standards, this goodwill is expensed little by little over a certain period.

However, some startups and economic organizations have argued that:

'If goodwill is expensed every year, the profits of the acquired company look smaller'

'As a result, companies become reluctant to engage in M&A'

and have expressed the opinion that the system should be changed to one where goodwill is not amortized annually.

However, this article points out that such discussions on revision are 'off the mark from the start'.

What exactly is the problem?

2. A brief overview

First, let's briefly summarize what goodwill is.

For example, suppose you acquire a company with net assets of 6 billion yen for 10 billion yen.

In this case, the difference of 4 billion yen is 'goodwill'.

The reason for paying an amount higher than the net assets is that the company has value that is difficult to reflect on the books.

For example, things like the following:

Brand power
Technical capabilities
Relationships with customers
Excellent human resources
Sales networks
Future growth potential

In other words, goodwill can be said to be the amount paid in anticipation of the profits that the acquired company will generate in the future.

Under Japanese accounting standards, this goodwill is, in principle, expensed little by little over a maximum period of 20 years.

If goodwill of 4 billion yen is amortized over 10 years, 400 million yen will be an expense every year.

Even if the actual operating profit is 1 billion yen, if there is 400 million yen in goodwill amortization, the accounting profit becomes 600 million yen.

For this reason, if goodwill amortization is eliminated, profits after acquisition can easily appear larger.

However, what we should be careful about here is that even if goodwill amortization is eliminated, the acquired business itself does not grow.

What changes is mainly how profit is perceived.

What this article takes issue with is:

'Changing to accounting rules that make it harder for profits to decrease because we want to increase M&A'

This way of thinking.

Accounting standards are not a policy to support corporate growth.

They are a yardstick for accurately conveying the reality of a company's assets and profits to investors and financial institutions.

The article argues that if you want to promote M&A, you should deal with it through other policies such as tax incentives, subsidies, and financing support.

3. Expert Opinion

'What is truly important after M&A' from the perspective of a Labor and Social Security Attorney

From the standpoint of a Labor and Social Security Attorney, what is important in M&A is not just the accounting treatment at the time of acquisition.

Rather, how human resources and organizations are integrated afterward largely determines the success or failure of the acquisition.

The background to companies paying high prices for acquisitions includes not only technology, customers, and brands, but also the experience and capabilities of the employees working there.

However, if the following problems occur after the acquisition, the expected value will be lost.

・Excellent employees resign
・Dissatisfaction arises from differences in wages and evaluation systems
・Corporate cultures do not match, causing conflict within the organization
・Roles and command structures become unclear
・There is insufficient explanation regarding changes in working conditions
・A psychological wall is created between the acquiring and acquired sides

For example, even if you evaluate the technical capabilities of the acquired company and purchase it at a high price, if key engineers resign one after another, there is a possibility that those technical capabilities cannot be maintained.

In this case, even if goodwill remains on the books, the actual value may have declined.

Therefore, the following human resources and labor-related responses are important after an M&A.

Organize working conditions

The acquiring company and the acquired company may have different salaries, bonuses, retirement benefits, working hours, holidays, and welfare benefits.

Suddenly unifying systems can lead to disadvantages for employees and backlash.

First, it is necessary to organize the differences in systems, and if changes are to be made, sufficient explanation and a phased approach are required.

Clarify the evaluation system

If employees do not know 'who will evaluate them and by what criteria' after an acquisition, they will feel anxious about the future.

It is necessary to clarify evaluation criteria and the philosophy behind promotions, and to ensure that the operation does not disadvantage employees from the acquired company.

Prevent the outflow of key personnel

If the value of an M&A depends on specific engineers or sales representatives, their resignation could mean that the initially anticipated synergies may not be realized.

It is necessary to consider not only financial aspects but also treatment, including roles, authority, career paths, and work styles.

Carefully communicate management policies

For employees, an M&A is a major environmental change.

'What will happen to the company?'

'Will my employment be protected?'

'Will my job change?'

These kinds of anxieties arise.

If management does not provide information, rumors and misunderstandings will spread, leading to a decline in workplace productivity and trust.

It is important to repeatedly and carefully explain the purpose of the M&A and future policies.

In short, goodwill is not just an accounting figure.

This includes a great deal of value tied to people, such as employee knowledge, experience, skills, and relationships with customers.

Even if you change accounting standards to make profits look larger immediately after an acquisition, if the integration of personnel and organization fails, the value of the goodwill will be lost.

In that sense, what is truly necessary for successful M&A is not just changes in accounting treatment, but post-acquisition human resources management and organizational operations.

4. Closing

A word from Mr. Mizuno

If goodwill amortization is eliminated, profits immediately after an acquisition will appear larger.

However, that does not mean the M&A itself will be successful.

Accounting standards are a yardstick for measuring the reality of a company.

If that yardstick is conveniently changed for the policy purpose of increasing M&A, there is a risk that investors and financial institutions will be unable to correctly judge the reality of companies.

And ultimately, it is people and organizations that determine growth after an acquisition.

Rather than buying a company at a high price, it is more important how you protect and nurture the talent, technology, and customer relationships of the acquired company.

Mr. Mizuno concluded by saying this:

"M&A does not end with buying a company. Goodwill only becomes true value when people and organizations can demonstrate their capabilities after the acquisition. It is more important to manage the company carefully after the acquisition than to change how profits appear."

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