Completion accounts and the determination of applicable accounting policies

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In Shafi v Rutherford [1] the Court of Appeal considered the completion accounts clause in a share purchase agreement, by which the final consideration was to be determined.

The clause in question required – as is common – that the completion accounts be prepared in accordance with the accounting policies, principles, practices and procedures adopted by the target company in the preparation of its last annual accounts. During the process of preparing and agreeing the completion accounts, a dispute arose as to the proper treatment of some equipment leases and an expert was appointed to determine the issue. The expert found that the target’s previous accounting practice of treating the leases as operating leases rather than finance leases was incorrect and did not comply with applicable accounting standards. The expert went on to hold that he was bound by the terms of the completion accounts clause to treat the leases in the same way that they had been dealt with in the last accounts, thus preventing him from applying the correct policy now.

The parties disputed the enforceability of the expert’s determination and the matter reached the Court of Appeal.

The Court of Appeal, upholding the High Court, ruled that the expert had made a mistake and that his determination was unenforceable. It held that the wording of the completion accounts clause required the completion accounts to be prepared applying the correct accounting policy, supplemented if necessary, by reference to the practices adopted by the target. It did not mean that the accounts should be drawn up on the basis of policies adopted by the target, regardless of whether those policies were correct or not.

WM comment
If the parties to a share purchase agreement wish the completion accounts clause to be consistent with the policies adopted by the target in its last annual accounts, even if those accounting policies do not comply with all accounting standards, this will need to be expressly stated.

[1] [2014] EWCA Civ 1186