NO. 1204-001 ⏐ JUNE 30, 2005
Financial
Accounting Series
EXPOSURE DRAFT
Proposed Statement of
Financial Accounting Standards
Business Combinations
a replacement of FASB Statement No. 141
This Exposure Draft of a proposed Statement of Financial
Accounting Standards is issued by the Board for public comment.
Written comments should be addressed to:
Technical Director
File Reference No. 1204-001
Comment Deadline: October 28, 2005
Financial Accounting Standards Board
of the Financial Accounting Foundation
Responses from interested parties wishing to comment on the Exposure Draft must be
received in writing by October 28, 2005. Interested parties should submit their comments
by email to director@fasb.org, File Reference 1204-001. Those without email may send
their comments to the “Technical Director―File Reference 1204-001” at the address at
the bottom of this page. Responses should not be sent by fax. Please send only one
comment letter to either the FASB or the International Accounting Standards Board
(IASB). The FASB and the IASB will share and consider jointly all comment letters
received.
All comments received are considered public information. Those comments will be posted
to the FASB’s website and will be included in the project’s public record.
Any individual or organization may obtain one copy of this Exposure Draft without
charge until October 28, 2005, on written request only. Please ask for our Product Code
No. E181. For information on applicable prices for additional copies and copies requested
after October 28, 2005, contact:
Order Department
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
Copyright © 2005 by Financial Accounting Standards Board. All rights reserved.
Permission is granted to make copies of this work provided that such copies are for
personal or intraorganizational use only and are not sold or disseminated and provided
further that each copy bears the following credit line: “Copyright © 2005 by Financial
Accounting Standards Board. All rights reserved. Used by permission.”
Financial Accounting Standards Board
of the Financial Accounting Foundation
401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116
Proposed Statement of Financial Accounting Standards
Business Combinations
a replacement of FASB Statement No. 141
June 30, 2005
CONTENTS
Notice for Recipients of This Exposure Draft ........................................................page iii
Summary ................................................................................................paragraphs I–XIII
Background ..........................................................................................................III–V
Reasons for Issuing This Proposed Statement ..................................................VI–VII
Main Features of This Proposed Statement ..........................................................VIII
Significant Changes to Statement 141 ..................................................................... IX
Benefits and Costs.............................................................................................. X–XII
Effective Date ........................................................................................................XIII
Objective ...........................................................................................................................1
Scope.................................................................................................................................2
Key Terms.........................................................................................................................3
Identifying a Business Combination.............................................................................4–7
The Acquisition Method .............................................................................................8–70
Identifying the Acquirer......................................................................................10–16
Determining the Acquisition Date ......................................................................17–18
Measuring the Fair Value of the Acquiree..........................................................19–27
Consideration Transferred ............................................................................21–26
Contingent Consideration .......................................................................25–26
Costs Incurred in Connection with a Business Combination..............................27
Measuring and Recognizing the Assets Acquired and the
Liabilities Assumed ..........................................................................................28–51
Guidance for Measuring and Recognizing Particular Assets
Acquired and Liabilities Assumed..............................................................33–41
Valuation Allowances...................................................................................34
Contingencies That Meet the Definition of Assets or Liabilities ...........35–36
Liabilities Associated with Restructuring or Exit Activities ........................37
Leases......................................................................................................38–39
Intangible Assets.....................................................................................40–41
Assets Acquired and Liabilities Assumed That Are Not
Recognized at Fair Value as of the Acquisition Date .................................42–51
Assets Held for Sale......................................................................................43
Deferred Taxes .......................................................................................44–46
Operating Leases...........................................................................................47
i
Paragraph
Numbers
Employee Benefit Plans................................................................................48
Goodwill .................................................................................................49–51
Additional Guidance for Applying the Acquisition Method to
Particular Types of Business Combinations ....................................................52–61
Business Combinations Involving Only Mutual Entities....................................53
Business Combinations Achieved by Contract Alone .......................................54
Business Combinations Achieved in Stages .................................................55–57
Business Combinations in Which the Acquirer Holds Less
Than 100 Percent of the Equity Interests in the Acquiree at
the Acquisition Date .........................................................................................58
Business Combinations in Which the Consideration
Transferred for the Acquirer’s Interest in the Acquiree Is
Less Than the Fair Value of That Interest ..................................................59–61
Measurement Period ...........................................................................................62–68
Assessing What Is Part of the Exchange for the Acquiree .................................69–70
Disclosures................................................................................................................71–81
Effective Date and Transition ...................................................................................82–87
Subsequent Recognition of Acquired Deferred Tax Benefits...................................86
Not Used ........................................................................................................................87
Withdrawal of Other Pronouncements............................................................................88
Appendix A: Implementation Guidance .............................................................A1–A136
Appendix B: Background Information, Basis for Conclusions, and
Alternative Views ............................................................................................. B1–B212
Appendix C: Continuing Authoritative Guidance ................................................ C1–C31
Appendix D: Amendments to Existing Pronouncements .....................................D1–D42
Appendix E: Impact on Related Authoritative Literature........................................E1–E6
Appendix F: Differences between the IASB’s and the FASB’s
Exposure Drafts ..................................................................................................... F1–F3
ii
Notice for Recipients
of This Exposure Draft
The International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) (the Boards) invite comments on all matters in this Exposure
Draft, particularly on the questions set out below. Comments are most helpful if they:
a.
b.
c.
d.
Comment on the questions as stated
Indicate the specific paragraph or paragraphs to which the comments relate
Contain a clear rationale
Include any alternative the Boards should consider.
Respondents need not comment on all of the questions presented and are encouraged
to comment on additional issues as well.
Respondents should submit one comment letter to either the IASB or the FASB. The
Boards will share and consider jointly all comment letters received. Respondents must
submit comments in writing by October 28, 2005.
Until a final Statement based on this Exposure Draft becomes effective, FASB
Statement No. 141, Business Combinations, remains effective.
Question 1—Objective, Definition, and Scope
The proposed objective of this Exposure Draft is:
. . . that all business combinations be accounted for by applying the
acquisition method. A business combination is a transaction or other event
in which an acquirer obtains control of one or more businesses (the
acquiree). In accordance with the acquisition method, the acquirer
measures and recognizes the acquiree, as a whole, and the assets acquired
and liabilities assumed at their fair values as of the acquisition date.
[paragraph 1]
That objective provides the basic elements of the acquisition method of accounting
for a business combination (formerly called the purchase method) by describing:
a.
b.
What is to be measured and recognized. An acquiring entity would measure and
recognize the acquired business at its fair value, regardless of the percentage of the
equity interests of the acquiree it holds at the acquisition date. That objective also
provides the foundation for determining whether specific assets acquired or
liabilities assumed are part of an acquiree and would be accounted for as part of the
business combination.
When to measure and recognize the acquiree. Recognition and measurement of a
business combination would be as of the acquisition date, that is, the date the
acquirer obtains control of the acquiree.
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c.
The measurement attribute as fair value, rather than as cost accumulation and
allocation. The acquiree and the assets acquired and liabilities assumed would be
measured at fair value as of the acquisition date, with limited exceptions.
Consequently, the consideration transferred in exchange for the acquiree, including
contingent consideration, would also be measured at fair value as of the acquisition
date.
That objective and definition of a business combination would apply to all business
combinations in the scope of this Statement, including business combinations:
a.
b.
c.
d.
e.
Involving only mutual entities
Achieved by contract alone
Achieved in stages (commonly called step acquisitions)
In which the acquirer holds less than 100 percent of the equity interests in the
acquiree at the acquisition date
In which the primary beneficiary initially consolidates a variable interest entity that
is a business.
(See paragraphs 52–58 and paragraphs B19–B30 and B45–B47 of the basis for
conclusions.)
Question 1—Are the objective and the definition of a business combination appropriate
for accounting for all business combinations? If not, for which business combinations are
they not appropriate, why would you make an exception, and what alternative do you
suggest?
Question 2—Definition of a Business
This Exposure Draft proposes to define a business as follows:
A business is an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing either:
(1) A return to investors
(2) Dividends, lower costs, or other economic benefits directly and
proportionately to owners, members, or participants. [paragraph
3(d)]
Paragraphs A2–A7 of Appendix A provide additional guidance for applying this
definition. This Exposure Draft would nullify the definition of a business in EITF Issue
No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of
Productive Assets or of a Business,” and in FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities. (See paragraphs B32–B40.)
Question 2—Are the definition of a business and the additional guidance appropriate and
sufficient for determining whether the assets acquired and the liabilities assumed
constitute a business? If not, how would you propose to modify or clarify the definition or
additional guidance?
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Questions 3–7—Measuring the Fair Value of the Acquiree
This Exposure Draft proposes that in a business combination that is an exchange of
equal values, the acquirer should measure and recognize 100 percent of the fair value of
the acquiree as of the acquisition date. This applies even in business combinations in
which the acquirer holds less than 100 percent of the equity interests in the acquiree at that
date. In those business combinations, the acquirer would measure and recognize the
noncontrolling interest as the sum of the noncontrolling interest’s proportional interest in
the acquisition-date values of the identifiable assets acquired and liabilities assumed plus
the goodwill attributable to the noncontrolling interest. (See paragraphs 19 and 58 and
paragraphs B154–B155.)
Question 3—In a business combination in which the acquirer holds less than 100 percent
of the equity interests of the acquiree at the acquisition date, is it appropriate to recognize
100 percent of the acquisition-date fair value of the acquiree, including 100 percent of the
values of identifiable assets acquired, liabilities assumed, and goodwill, which would
include the goodwill attributable to the noncontrolling interest? If not, what alternative do
you propose and why?
This Exposure Draft proposes that a business combination is usually an arm’s-length
transaction in which knowledgeable, unrelated willing parties are presumed to exchange
equal values. In such transactions, the fair value of the consideration transferred by the
acquirer on the acquisition date is the best evidence of the fair value of the acquirer’s
interest in the acquiree, in the absence of evidence to the contrary. Accordingly, in most
business combinations, the fair value of the consideration transferred by the acquirer
would be used as the basis for measuring the acquisition-date fair value of the acquirer’s
interest in the acquiree. However, in some business combinations, either no consideration
is transferred on the acquisition date or the evidence indicates that the consideration
transferred is not the best basis for measuring the acquisition-date fair value of the
acquirer’s interest in the acquiree. In those business combinations, the acquirer would
measure the acquisition-date fair value of its interest in the acquiree and the acquisitiondate fair value of the acquiree using other valuation techniques. (See paragraphs 19 and
20, paragraphs A8–A26, and paragraphs B56–B99.)
Question 4—Do paragraphs A8–A26 provide sufficient guidance for measuring the fair
value of an acquiree? If not, what additional guidance is needed?
This Exposure Draft proposes a presumption that the best evidence of the fair value
of the acquirer’s interest in the acquiree would be the fair values of all items of
consideration transferred by the acquirer in exchange for that interest measured as of the
acquisition date, including:
a.
b.
c.
Contingent consideration
Equity interests issued by the acquirer
Any noncontrolling equity investment in the acquiree that the acquirer owned
immediately before the acquisition date.
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(See paragraphs 20–25 and paragraphs B23, and B60–B64.)
Question 5—Is the acquisition-date fair value of the consideration transferred in
exchange for the acquirer’s interest in the acquiree the best evidence of the fair value of
that interest? If not, which forms of consideration should be measured on a date other
than the acquisition date, when should they be measured, and why?
This Exposure Draft proposes that after initial recognition, contingent consideration
classified as:
a.
b.
Equity would not be remeasured
Liabilities would be remeasured with changes in fair value recognized in income
unless those liabilities are in the scope of FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. Those liabilities would be accounted
for after the acquisition date in accordance with that Statement.
(See paragraph 26 and paragraphs B74–B86.)
Question 6—Is the accounting for contingent consideration after the acquisition date
appropriate? If not, what alternative do you propose and why?
This Exposure Draft proposes that the costs that the acquirer incurs in connection
with a business combination (also called acquisition-related costs) should be excluded
from the measurement of the consideration transferred for the acquiree because those
costs are not part of the fair value of the acquiree and are not assets. Such costs include
finder’s fees; advisory, legal, accounting, valuation, other professional or consulting fees;
the cost of issuing debt and equity instrument; and general administrative costs, including
the costs of maintaining an internal acquisitions department. The acquirer would account
for those costs separately from the business combination accounting. (See paragraph 27
and paragraphs B93–B99.)
Question 7—Do you agree that the costs that the acquirer incurs in connection with a
business combination are not assets and should be excluded from the measurement of the
consideration transferred for the acquiree? If not, why?
Questions 8 and 9—Measuring and Recognizing the Assets Acquired and the
Liabilities Assumed
This Exposure Draft proposes that an acquirer measure and recognize as of the
acquisition date the fair value of the assets acquired and liabilities assumed as part of the
business combination, with limited exceptions. (See paragraphs 28–41 and paragraphs
B100–B142.) That requirement would result in the following significant changes to
accounting for business combinations:
a.
Receivables (including loans) acquired in a business combination would be
measured at fair value. Therefore, the acquirer would not recognize a separate
valuation allowance for uncollectible amounts as of the acquisition date.
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b.
c.
d.
This Statement would amend FASB Statement No. 5, Accounting for Contingencies,
to exclude from its scope assets or liabilities arising from contingencies acquired or
assumed in a business combination. Assets and liabilities arising from contingencies
that are acquired or assumed as part of a business combination would be measured
and recognized at fair value at the acquisition date if the contingency meets the
definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of
Financial Statements, even if it does not meet the recognition criteria in Statement 5.
After initial recognition, contingencies would be accounted for in accordance with
applicable generally accepted accounting principles, except for those that would be
accounted for in accordance with Statement 5 if they were acquired or incurred in an
event other than a business combination. Those contingencies would continue to be
measured at fair value with changes in fair value recognized in income in each
reporting period.
Costs associated with restructuring or exit activities that do not meet the recognition
criteria in FASB Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, as of the acquisition date are not liabilities at the acquisition
date. Therefore, the acquirer would recognize those costs as expenses of the
combined entity in the postcombination period in which they are incurred.
Particular research and development assets acquired in a business combination that
previously were required to be written off in accordance with FASB Interpretation
No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted
for by the Purchase Method, would be recognized and measured at fair value.
Question 8—Do you believe that these proposed changes to the accounting for business
combinations are appropriate? If not, which changes do you believe are inappropriate,
why, and what alternatives do you propose?
This Exposure Draft proposes limited exceptions to the fair value measurement
principle. Therefore, some assets acquired and liabilities assumed (for example, those
related to deferred taxes, assets held for sale, or employee benefits) would continue to be
measured and recognized in accordance with other generally accepted accounting
principles rather than at fair value. (See paragraphs 42–51 and paragraphs B143–B155.)
Question 9—Do you believe that these exceptions to the fair value measurement principle
are appropriate? Are there any exceptions you would eliminate or add? If so, which ones
and why?
Questions 10–12—Additional Guidance for Applying the Acquisition Method to
Particular Types of Business Combinations
This Exposure Draft proposes that for purposes of applying the acquisition method,
the fair value of the consideration transferred by the acquirer would include the
acquisition-date fair value of the acquirer’s noncontrolling equity investment in the
acquiree that the acquirer owned immediately before the acquisition date. Accordingly, in
a business combination achieved in stages (step acquisition), the acquirer would
remeasure its noncontrolling equity investment in the acquiree at fair value as of the
acquisition date and recognize any gain or loss in income. If, before the business
vii
combination, the acquirer recognized changes in the value of its noncontrolling equity
investment in other comprehensive income (for example, the investment was designated
as available-for-sale), the amount that was recognized in other comprehensive income
would be reclassified and included in the calculation of any gain or loss as of the
acquisition date. (See paragraphs 55 and 56 and paragraphs B156–B160.)
Question 10—Is it appropriate for the acquirer to recognize in income any gain or loss on
previously acquired noncontrolling equity investments on the date it obtains control of the
acquiree? If not, what alternative do you propose and why?
This Exposure Draft proposes that in a business combination in which the
consideration transferred for the acquirer’s interest in the acquiree is less than the fair
value of that interest (referred to as a bargain purchase), any excess of the fair value of the
acquirer’s interest in the acquiree over the fair value of the consideration transferred for
that interest would reduce goodwill until the goodwill related to that business combination
is reduced to zero, and any remaining excess would be recognized in income on the
acquisition date. (See paragraphs 59–61 and paragraphs B168–B182.) However, this
Exposure Draft would not permit the acquirer to recognize a loss at the acquisition date if
the acquirer is able to determine that a portion of the consideration transferred represents
an overpayment for the acquiree. The Boards acknowledge that an acquirer might
overpay to acquire a business, but they concluded that it is not possible to measure such an
overpayment reliably at the acquisition date. (See paragraph B183.)
Question 11—Do you agree with the proposed accounting for business combinations in
which the consideration transferred for the acquirer’s interest in the acquiree is less than
the fair value of that interest? If not, what alternative do you propose and why?
Question 12—Do you believe that there are circumstances in which the amount of an
overpayment could be measured reliably at the acquisition date? If so, in what
circumstances?
Question 13—Measurement Period
This Exposure Draft proposes that an acquirer recognize adjustments made during
the measurement period to the provisional values of the assets acquired and liabilities
assumed as if the accounting for the business combination had been completed at the
acquisition date. Thus, comparative information for prior periods presented in financial
statements would be adjusted, including any change in depreciation, amortization, or other
income effect recognized as a result of completing the initial accounting. (See paragraphs
62–68 and paragraphs B161–B167.)
Question 13—Do you agree that comparative information for prior periods presented in
financial statements should be adjusted for the effects of measurement period
adjustments? If not, what alternative do you propose and why?
viii
Question 14—Assessing What Is Part of the Exchange for the Acquiree
This Exposure Draft proposes that an acquirer assess whether any portion of the
transaction price (payments or other arrangements) and any assets acquired or liabilities
assumed or incurred are not part of the exchange for the acquiree. Only the consideration
transferred by the acquirer and the assets acquired or liabilities assumed or incurred that
are part of the exchange for the acquiree would be included in the business combination
accounting. (See paragraphs 69 and 70, paragraphs A87–A109, and paragraphs B111–
B117.)
Question 14—Do you believe that the guidance provided is sufficient for making the
assessment of whether any portion of the transaction price or any assets acquired and
liabilities assumed or incurred are not part of the exchange for the acquiree? If not, what
other guidance is needed?
Question 15—Disclosures
This Exposure Draft proposes broad disclosure objectives that are intended to ensure
that users of financial statements are provided with adequate information to enable them
to evaluate the nature and financial effects of business combinations. Those objectives are
supplemented by specific minimum disclosure requirements. In most instances, the
objectives would be met by the minimum disclosure requirements that follow each of the
broad objectives. However, in some circumstances, an acquirer might be required to
disclose additional information necessary to meet the disclosure objectives. (See
paragraphs 71–81 and paragraphs B184–B191.)
Question 15—Do you agree with the disclosure objectives and the minimum disclosure
requirements? If not, how would you propose amending the objectives or what disclosure
requirements would you propose adding or deleting, and why?
Questions 16–18—The IASB’s and the FASB’s Convergence Decisions
This Exposure Draft is the result of the Boards’ projects to improve the accounting
for business combinations. The first phase of those projects led to the issue of IFRS 3 and
FASB Statement 141. In 2002, the FASB and the IASB agreed to reconsider jointly their
guidance for applying the purchase method of accounting, which this Exposure Draft calls
the acquisition method, for business combinations. An objective of the joint effort is to
develop a common and comprehensive standard for the accounting for business
combinations that could be used for both domestic and cross-border financial reporting.
Although the Boards reached the same conclusions on the fundamental issues addressed in
this Exposure Draft, they reached different conclusions on only a few limited matters.
Therefore, the IASB’s version and the FASB’s version of this Exposure Draft provide
different guidance on those few limited matters. Appendix F provides a comparison, by
paragraph, of the different guidance provided by each Board. Most of the differences arise
because each Board decided to provide business combinations guidance that is consistent
with its other existing standards. Even though those differences are candidates for future
ix
convergence projects, the Boards do not plan to eliminate those differences before final
standards on business combinations are issued.
This joint Exposure Draft would resolve a difference between IFRS 3 and Statement
141 relating to the criteria for recognizing an intangible asset separately from goodwill.
Both Boards concluded that an intangible asset must be identifiable (that is, arising from
contractual-legal rights or separable) to be recognized separately from goodwill. In its
deliberations that led to Statement 141, the FASB concluded that, when acquired in a
business combination, all intangible assets (except for an assembled workforce) that are
identifiable can be measured with sufficient reliability to warrant recognition separately
from goodwill. In addition to the identifiability criterion, IFRS 3 and IAS 38 required that
an intangible asset acquired in a business combination be reliably measurable to be
recognized separately from goodwill. Paragraphs 35–41 of IAS 38 provide guidance for
determining whether an intangible asset acquired in a business combination is reliably
measurable. IAS 38 presumes that the fair value of an intangible asset with a finite useful
life can be measured reliably. Therefore, a difference between IFRS 3 and Statement 141
would arise only if the intangible asset has an indefinite life. The IASB decided to
converge with the FASB in this Exposure Draft by (a) eliminating the requirement that an
intangible asset be reliably measurable to be recognized separately from goodwill and
(b) precluding the recognition of an assembled workforce acquired in a business
combination as an intangible asset separately from goodwill. (See paragraph 40.)
Question 16—Do you believe that an intangible asset that is identifiable can always be
measured with sufficient reliability to be recognized separately from goodwill? If not,
why? Do you have any examples of an intangible asset that arises from legal or
contractual rights and has both of the following characteristics:
a.
b.
The intangible asset cannot be sold, transferred, licensed, rented, or exchanged
individually or in combination with a related contract, asset, or liability
Cash flows that the intangible asset generates are inextricably linked with the cash
flows that the business generates as a whole?
For the joint Exposure Draft, the Boards considered the provisions of IAS 12 Income
Taxes and FASB Statement No. 109, Accounting for Income Taxes, relating to an
acquirer’s deferred tax benefits that become recognizable because of a business
combination. IAS 12 requires the acquirer to recognize separately from the business
combination accounting any changes in its deferred tax assets that become recognizable
because of the business combination. Such changes are recognized in postcombination
profit and loss or equity. On the other hand, Statement 109 requires any recognition of an
acquirer’s deferred tax benefits (through the reduction of the acquirer’s valuation
allowance) that results from a business combination to be accounted for as part of the
business combination, generally as a reduction of goodwill. The FASB decided to amend
Statement 109 to require the recognition of any changes in the acquirer’s deferred tax
benefits (through a change in the acquirer’s previously recognized valuation allowance) as
a transaction separately from the business combination. As amended, Statement 109
would require such changes in deferred tax benefits to be recognized either in income
from continuing operations in the period of the combination or directly to contributed
capital, depending on the circumstances. Both Boards decided to require disclosure of the
x
amount of such acquisition-date changes in the acquirer’s deferred tax benefits in the
notes to the financial statements. (See paragraphs D18 and paragraphs B145–B150.)
Question 17—Do you agree that any changes in acquirer’s deferred tax benefits that
become recognizable because of the business combination are not part of the fair value of
the acquiree and should be accounted for separately from the business combination? If
not, why?
The Boards reconsidered disclosure requirements in IFRS 3 and Statement 141 for
purposes of convergence. For some of the disclosures, the Boards decided to converge.
However, divergence continues to exist for some disclosures as described in Appendix F.
The Boards concluded that some of this divergence stems from differences that are
broader than the business combinations project.
Question 18—Do you believe it is appropriate for the IASB and the FASB to retain those
disclosure differences? If not, which of the differences should be eliminated, if any, and
how should this be achieved?
Question 19—Style of This Exposure Draft
This Exposure Draft was prepared in a style similar to the style used by the IASB in
its standards whereby paragraphs in “bold type” state the main principles. All paragraphs
have equal authority.
Question 19—Do you find stating the principles in bold type helpful? If not, why? Are
there any paragraphs you believe should be in bold type, but are in plain type, or vice
versa?
Public Roundtable Meetings
The Boards plan to hold public roundtable meetings with constituents to discuss
issues related to this Exposure Draft and the Exposure Draft, Consolidated Financial
Statements, Including Accounting and Reporting of Noncontrolling Interests in
Subsidiaries. Those roundtable meetings are scheduled to be held on October 27, 2005 in
Norwalk, Connecticut, and on November 9, 2005 in London, England. The Boards would
like those who participate in the meetings to be drawn from a wide variety of constituents,
including investors, preparers of financial statements, auditors, valuation experts, analysts
and others. If you wish to participate in the roundtable meetings, you must notify the
Boards by September 15, 2005 by sending an email to director@fasb.org. You must
specify the location of the roundtable meeting you would prefer to attend. Each
roundtable can accommodate a limited number of participants. The Boards may not be
able to accommodate all requests to participate. You will be notified about whether you
were selected to participate by September 30, 2005.
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Proposed FASB Statement No. 141, Business Combinations (revised 200X) (proposed
Statement) is set out in paragraphs 1–88 and Appendices A and C–E. All the paragraphs
have equal authority. Paragraphs in bold type state the main principles. Terms defined in
paragraph 3 are underlined the first time they appear in the proposed Statement.
xii
Summary
I.
A business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses (the acquiree). The objective of this proposed Statement
is that all business combinations be accounted for by applying the acquisition method. In
accordance with the acquisition method, the acquirer measures and recognizes the
acquiree, as a whole, and the assets acquired and liabilities assumed at their fair values as
of the acquisition date.
II. This proposed Statement would replace FASB Statement No. 141, Business
Combinations. In addition, this proposed Statement would be required to be applied at the
same time as Proposed Statement of Financial Accounting Standards, Consolidated
Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in
Subsidiaries.
Background
III. This proposed Statement is being issued as part of a joint effort by the International
Accounting Standards Board (IASB) and the Financial Accounting Standards Board
(FASB) (referred to as the “Boards”) to improve financial reporting while promoting the
international convergence of accounting standards. The Boards believe that developing a
common set of high-quality financial accounting standards improves the comparability of
financial information around the world and simplifies the accounting for entities that issue
financial statements in accordance with international accounting standards and U.S.
generally accepted accounting principles or reconcile from one set of standards to the
other.
IV. The Boards each decided to address the financial accounting for business
combinations in two phases. The IASB and the FASB deliberated the first phase
separately. The FASB concluded the first phase in June 2001 by issuing Statement 141.
The IASB concluded the first phase in March 2004 by issuing IFRS 3 Business
Combinations. The Boards’ primary conclusion in the first phase was that virtually all
business combinations are acquisitions. Accordingly, the Boards decided to require the
use of one method of accounting for business combinations—the purchase method (called
the acquisition method in this proposed Statement).
V. The second phase of the project addresses the guidance for applying the acquisition
method. The IASB and the FASB began deliberating the second phase of their projects at
about the same time. The Boards decided that a significant improvement could be made to
financial reporting if they had similar standards for accounting for business combinations.
Thus, they decided to conduct the second phase of the project as a joint effort with the
objective of reaching the same conclusions.
Reasons for Issuing This Proposed Statement
VI. This proposed Statement seeks to improve financial reporting by requiring the
acquisition method be applied to more business combinations, including those involving
only mutual entities and those achieved by contract alone. The Boards believe that
xiii
applying a single method of accounting to all business combinations will result in more
comparable and transparent financial statements.
VII. This proposed Statement would require an acquirer to recognize an acquired
business at its fair value at the acquisition date rather than at its cost. It also would require
the acquirer to measure and recognize the individual assets acquired and liabilities
assumed at their fair values at the acquisition date, with limited exceptions. The Boards
concluded that requiring the recognition of the acquiree and the assets acquired and
liabilities assumed at fair value as of the acquisition date improves the relevance and
reliability of financial information. This is true even in business combinations in which
the acquirer obtains control of a business by acquiring less than 100 percent of the equity
interests in the acquiree or in business combinations achieved in stages (step acquisitions).
Relevance and reliability are characteristics that make financial information more useful
to users.
Main Features of This Proposed Statement
VIII. This proposed Statement would retain the fundamental requirements in
Statement 141 that require the acquisition method of accounting for all business
combinations and for an acquirer to be identified for every business combination. It also
would retain the guidance in Statement 141 for identifying and recognizing intangible
assets separately from goodwill. Additionally, this proposed Statement would require:
a.
b.
c.
d.
e.
The acquirer to measure the fair value of the acquiree, as a whole, as of the
acquisition date.
For purposes of applying the acquisition method, the consideration transferred by the
acquirer in exchange for the acquiree to be measured at its fair value as of the
acquisition date calculated as the sum of:
(1) The assets transferred by the acquirer, liabilities incurred by the acquirer, and
equity interests issued by the acquirer, including contingent consideration, and
(2) Any noncontrolling equity investment in the acquiree owned by the acquirer
immediately before the acquisition date.
The acquirer to assess whether any portion of the transaction price paid and any
assets acquired or liabilities assumed or incurred are not part of the exchange for the
acquiree. Only the consideration transferred or the assets acquired or liabilities
assumed or incurred that are part of the exchange for the acquiree would be
accounted for as part of the business combination accounting.
The acquirer to account for acquisition-related costs incurred in connection with the
business combination separately from the business combination (generally as
expenses).
The acquirer to measure and recognize the acquisition-date fair value of the assets
acquired and liabilities assumed as part of the business combination, with limited
exceptions. Those exceptions are:
(1) Goodwill would be measured and recognized as the excess of the fair value of
the acquiree, as a whole, over the net amount of the recognized identifiable
assets acquired and liabilities assumed. If the acquirer owns less than 100
xiv
f.
g.
h.
i.
percent of the equity interests in the acquiree at the acquisition date, goodwill
attributable to the noncontrolling interest would be recognized.
(2) Long-lived assets (or disposal group) classified as held for sale, deferred tax
assets or liabilities, and particular assets or liabilities related to the acquiree’s
employee benefit plans would be measured in accordance with other generally
accepted accounting principles.
(3) If the acquiree is a lessee to an operating lease, no asset or related liability
would be recognized if the lease is at market terms.
The acquirer to recognize separately from goodwill an acquiree’s intangible assets
that are identifiable (that is, arise from contractual-legal rights or are separable),
including research and development assets acquired in a business combination. This
Statement would supersede FASB Interpretation No. 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method,
which required research and development assets acquired in a business combination
that have no alternative future use to be measured at their fair value and expensed at
the acquisition date.
The acquirer to exclude from the accounting for a business combination any changes
in the amount of its deferred tax benefits that are recognizable (through the increase
or reduction of the acquirer’s valuation allowance) as a result of that business
combination. Statement 109 would be amended to require such changes in deferred
tax benefits to be recognized either in income from continuing operations in the
period of the combination or directly to contributed capital, depending on the
circumstances.
In a business combination in which the acquisition-date fair value of the acquirer’s
interest in the acquiree exceeds the fair value of the consideration transferred for that
interest (referred to as a bargain purchase), the acquirer to account for that excess by
reducing goodwill until the goodwill related to that business combination is reduced
to zero and then by recognizing any remaining excess in income.
The acquirer to recognize any adjustments made during the measurement period to
the provisional values of the assets acquired and liabilities assumed as if the
accounting for the business combination had been completed at the acquisition date.
Thus, comparative information for prior periods presented in financial statements
would be adjusted.
Significant Changes to Statement 141
IX. The main changes between this proposed Statement and Statement 141 are described
below:
Scope
a.
The requirements of this proposed Statement would be applicable to business
combinations involving only mutual entities, business combinations achieved by
contract alone, and the initial consolidation of variable interest entities that are
businesses.
xv
Definition of a Business Combination
b.
This proposed Statement would amend the definition of a business combination
provided in Statement 141. This proposed Statement defines a business combination
as “a transaction or other event in which an acquirer obtains control of one or more
businesses.”
Definition of a Business
c.
This proposed Statement would provide a definition of a business and additional
guidance for identifying when a group of assets constitutes a business. This
proposed Statement would nullify the definitions provided in EITF Issue No. 98-3,
“Determining Whether a Nonmonetary Transaction Involves Receipt of Productive
Assets or of a Business,” and FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities.
Measuring the Fair Value of the Acquiree
d.
e.
f.
g.
This proposed Statement would require business combinations to be measured and
recognized as of the acquisition date at the fair value of the acquiree, even if the
business combination is achieved in stages or if less than 100 percent of the equity
interests in the acquiree are owned at the acquisition date. Statement 141 required
that a business combination be measured and recognized on the basis of the
accumulated cost of the combination.
This proposed Statement would require the costs the acquirer incurs in connection
with the business combination to be accounted for separately from the business
combination accounting. Statement 141 required direct costs of the business
combination to be included in the cost of the acquiree.
This proposed Statement would require all items of consideration transferred by the
acquirer to be measured and recognized at fair value at the acquisition date.
Therefore, this proposed Statement would require the acquirer to recognize
contingent consideration arrangements at fair value as of the acquisition date.
Subsequent changes in the fair value of contingent consideration classified as
liabilities would be recognized in income, unless those liabilities are in the scope of,
and therefore accounted for, in accordance with, FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities.
This proposed Statement would require the acquirer in a business combination in
which the acquisition-date fair value of the acquirer’s interest in the acquiree
exceeds the fair value of the consideration transferred for that interest (referred to as
a bargain purchase) to account for that excess by first reducing the goodwill related
to that business combination to zero, and then by recognizing any excess in income.
Statement 141 requires that excess to be allocated as a pro rata reduction of the
amounts that would have been assigned to particular assets acquired.
xvi
Measuring and Recognizing the Assets Acquired and the Liabilities Assumed
h.
i.
j.
k.
This proposed Statement would require the assets acquired and liabilities assumed to
be measured and recognized at their fair values as of the acquisition date, with
limited exceptions. Statement 141 required the cost of an acquisition to be allocated
to the individual assets acquired and liabilities assumed based on their estimated fair
values. However, Statement 141 also provided guidance for measuring some assets
and liabilities that was inconsistent with fair value measurement objectives. Thus,
those assets or liabilities may not have been recognized at fair value as of the
acquisition date in accordance with Statement 141.
This proposed Statement would amend FASB Statement No. 5, Accounting for
Contingencies, to exclude from its scope assets or liabilities arising from
contingencies acquired or assumed in a business combination. This proposed
Statement would require assets and liabilities arising from contingencies that are
acquired or assumed as part of a business combination to be measured and
recognized at their fair value at the acquisition date if the contingency meets the
definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of
Financial Statements, even if it does not meet the recognition criteria in Statement 5.
After initial recognition, contingencies would be accounted for in accordance with
applicable generally accepted accounting principles, except for those that would be
accounted for in accordance with Statement 5 if they were acquired or incurred in an
event other than a business combination. Those contingencies would continue to be
measured at fair value with changes in fair value recognized in income in each
reporting period. Statement 141 permitted deferral of the recognition of
preacquisition contingencies until the Statement 5 recognition criteria were met and
subsequent changes were recognized as adjustments to goodwill.
This proposed Statement would prohibit costs associated with restructuring or exit
activities that do not meet the recognition criteria in FASB Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, as of the
acquisition date from being recognized as liabilities assumed. Rather, they would be
recognized as postcombination expenses of the combined entity when incurred.
Previously, EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a
Purchase Business Combination,” permitted costs that would result from a plan to
exit an activity of an acquiree to be recognized as liabilities assumed at the
acquisition date if specific criteria were met.
This proposed Statement would require the acquirer in business combinations in
which the acquirer holds less than 100 percent of the equity interests in the acquiree
at the acquisition date, to recognize the identifiable assets and liabilities at the full
amount of their fair values, with limited exceptions, and goodwill as the difference
between the fair value of the acquiree, as a whole, and the fair value of the
identifiable assets acquired and liabilities assumed. Statement 141 did not change
the accounting for a step acquisition described in AICPA Accounting
Interpretation 2, “Goodwill in a Step Acquisition,” of APB Opinion No. 17,
Intangible Assets. That Interpretation stated that when an entity acquires another
entity in a series of purchases, the entity should identify the cost of each investment,
the fair value of the underlying assets acquired, and the goodwill for each step
xvii
l.
m.
n.
acquisition. Statement 141 did not provide guidance for measuring the
noncontrolling interests’ share of the consolidated subsidiary’s assets and liabilities
at the acquisition date.
Acquisitions of additional noncontrolling equity interests after the business
combination would not be permitted to be accounted for using the acquisition
method. In accordance with Proposed Statement, Consolidated Financial
Statements, Including Accounting and Reporting of Noncontrolling Interests in
Subsidiaries, acquisitions (or dispositions) of noncontrolling equity interests after
the business combination would be accounted for as equity transactions.
The acquirer would be required to recognize separately from goodwill the
acquisition-date fair value of research and development assets acquired in a business
combination. This Statement supersedes Interpretation 4, which required research
and development assets acquired in a business combination that have no alternative
future use to be measured at their fair value and expensed at the acquisition date.
The acquirer would be required to account for any changes in the amount of its
deferred tax benefits that are recognizable (through the increase or reduction of the
acquirer’s valuation allowance on its previously existing deferred tax assets) as a
result of a business combination separately from that business combination. This
Statement would amend Statement 109 to require such changes in the amount of the
deferred tax benefits to be recognized either in income from continuing operations in
the period of the combination or directly to contributed capital, depending on the
circumstances. Statement 109 had required that a reduction of the acquirer’s
valuation allowance as a result of a business combination be recognized through a
corresponding reduction to goodwill or certain noncurrent assets or an increase in
negative goodwill.
Benefits and Costs
X. The Boards have striven to issue a proposed Statement with common requirements
that will fill a significant need and for which the costs imposed to apply it, as compared
with other alternatives, are justified in relation to the overall benefits of the resulting
information. The Boards concluded that this proposed Statement would, for the reasons
previously noted, make several improvements to financial reporting that would benefit
investors, creditors, and other users of financial statements.
XI. The Boards sought to reduce the costs of applying this proposed Statement. This
proposed Statement would (a) require particular assets and liabilities (for example, those
related to deferred taxes, assets held for sale, and employee benefits) to continue to be
measured and recognized in accordance with existing generally accepted accounting
principles rather than at fair value and (b) require its provisions to be applied
prospectively rather than retrospectively. The Boards acknowledged that those two steps
may diminish some benefits of improved reporting provided by this proposed Statement.
However, the Boards concluded that the complexities and related costs that would result
from imposing a fair value measurement requirement at this time to all assets acquired and
liabilities assumed in a business combination and requiring retrospective application of the
provisions of this proposed Statement are not justified.
xviii
XII. In addition, improving the consistency of the procedures used in accounting for
business combinations, including international consistency, should help alleviate concerns
that an entity’s competitive position as a potential bidder is affected by differences in
accounting for business combinations. Consistency in the accounting procedures also can
reduce the costs to prepare financial statements, especially for entities with global
operations. Moreover, such consistency also will enhance comparability of information
among entities, which can lead to a better understanding of the resulting financial
information and reduce the costs to users of analyzing that information.
Effective Date
XIII. This proposed Statement would apply prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual period beginning
on or after December 15, 2006. Earlier application would be encouraged. However, this
proposed Statement would be applied only at the beginning of an annual period that
begins on or after the date on which this proposed Statement is issued. If this proposed
Statement is applied before its effective date, that fact would be disclosed and Proposed
Statement, Consolidated Financial Statements, Including Accounting and Reporting of
Noncontrolling Interests in Subsidiaries, would be applied at the same time.
xix
Proposed Statement of Financial Accounting Standards
Business Combinations
a replacement of FASB Statement No. 141
June 30, 2005
OBJECTIVE
1.
This Statement requires that all business combinations be accounted for by applying
the acquisition method. A business combination is a transaction or other event in which
an acquirer obtains control of one or more businesses (the acquiree). In accordance with
the acquisition method, the acquirer measures and recognizes the acquiree, as a whole,
and the assets acquired and liabilities assumed at their fair values as of the acquisition
date.
STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING
SCOPE
2.
An entity shall apply this Statement when accounting for business combinations.
However, this Statement does not apply to:
a.
b.
c.
Formations of joint ventures
Combinations involving only entities or businesses under common control (see
paragraphs C25–C31 of Appendix C)
Combinations between not-for-profit organizations or the acquisition of a for-profit
business by a not-for-profit organization.
KEY TERMS
3.
The following terms are used with specific meanings and are integral to
understanding and applying this Statement.
a.
b.
c.
d.
The acquiree is the business or businesses the acquirer obtains control of in a
business combination.
The acquirer is the entity that obtains control of the acquiree.
The acquisition date is the date the acquirer obtains control of the acquiree.
A business is an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing either:
(1) A return to investors
(2) Dividends, lower costs, or other economic benefits directly and proportionately
to owners, members, or participants.
1
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
A business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses.
Control has the meaning of controlling financial interest in paragraph 7 of Proposed
Statement of Financial Accounting Standards, Consolidated Financial Statements,
Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries.
Contingencies is defined in paragraph 1 of FASB Statement No. 5, Accounting for
Contingencies.
For purposes of this Statement, the term equity interests is used broadly to mean
ownership interests of investor-owned entities and owner, member, or participant
interests of mutual entities.
Fair value is used with the same meaning as in Proposed Statement of Financial
Accounting Standards, Fair Value Measurements. That proposed Statement defines
fair value as “the price at which an asset or liability could be exchanged in a current
transaction between knowledgeable, unrelated willing parties.”1
Goodwill is the future economic benefits arising from assets that are not individually
identified and separately recognized.
An asset is identifiable if it either:
(1) Is separable, that is, capable of being separated or divided from the entity and
sold, transferred, licensed, rented, or exchanged, either individually or together
with a related contract, asset, or liability, regardless of whether the entity
intends to do so
(2) Arises from contractual or other legal rights, regardless of whether those rights
are transferable or separable from the entity or from other rights and
obligations.
Impracticable is used with the same meaning as impracticability in paragraph 11 of
FASB Statement No. 154, Accounting Changes and Error Corrections.
A mutual entity is an entity other than an investor-owned entity that provides
dividends, lower costs, or other economic benefits directly and proportionately to its
owners, members, or participants.
For purposes of this Statement, the term owners is used broadly to include holders of
equity interests of investor-owned entities and owners, members, or participants of
mutual entities.
Noncontrolling interest is used with the same meaning as in paragraph 5(e) of
Proposed Statement, Consolidated Financial Statements, Including Accounting and
Reporting of Noncontrolling Interests in Subsidiaries.
IDENTIFYING A BUSINESS COMBINATION
4.
A business combination is a transaction or other event in which an acquirer
obtains control of one or more businesses.
5.
A transaction or other event is accounted for as a business combination only if the
assets acquired and liabilities assumed constitute a business (an acquiree). Paragraphs A2–
1
The FASB plans to issue a final Statement on fair value measurements in the fourth quarter of 2005. The
definition of fair value may change in that final Statement.
2
A7 of Appendix A provide guidance for identifying whether the assets acquired and
liabilities assumed constitute a business. If the assets acquired and liabilities assumed do
not constitute a business, the acquirer shall account for the transaction as an asset
acquisition. The accounting for an asset acquisition is set out in paragraphs C2–C7.
6.
In a business combination, an acquirer might:
a.
b.
c.
Acquire the equity interests of a business
Acquire some or all of an entity’s assets (net assets) that constitute a business
Assume some or all of the liabilities of an acquiree.
An acquirer might obtain control of an acquiree:
d.
e.
f.
g.
h.
i.
By transferring cash, cash equivalents, or other assets (including net assets that
constitute a business)
By issuing equity interests
By providing more than one type of consideration
By contract alone (see paragraph 54)
Without transferring any consideration
Without a transaction involving the acquirer. One example is a business combination
that occurs when an entity (the acquiree) repurchases its own shares and, as a result,
an existing investor (the acquirer) obtains control of that entity. Another example is
a business combination that occurs when an acquirer obtains control of an acquiree
through the lapse of minority veto rights that previously kept the acquirer from
controlling the acquiree even though the acquirer held the majority voting interest in
the acquiree.
7.
A business combination may be structured in a variety of ways for legal, taxation, or
other reasons. Accordingly, the provisions of this Statement apply equally to business
combinations in which:
a.
b.
c.
One or more businesses are merged with or become subsidiaries of an acquirer
One entity transfers net assets or its owners transfer their equity interests to another
entity or the owners of another entity
All entities transfer net assets or the owners of those entities transfer their equity
interests to a newly formed entity (some of which are referred to as roll-up or puttogether transactions).
All those transactions are business combinations regardless of:
d.
e.
f.
Whether the acquiree is incorporated
The form of consideration transferred in exchange for the acquiree
Whether a group of former owners of one of the combining entities retains or
receives a majority of the voting rights of the combined entity.
3
THE ACQUISITION METHOD
8.
All business combinations shall be accounted for by applying the acquisition
method.
9.
The acquisition method has four steps:
a.
b.
c.
d.
Identifying the acquirer
Determining the acquisition date
Measuring the fair value of the acquiree
Measuring and recognizing the assets acquired and the liabilities assumed.
Identifying the Acquirer
10.
An acquirer shall be identified for all business combinations.
11. The guidance in Proposed Statement, Consolidated Financial Statements, Including
Accounting and Reporting of Noncontrolling Interest in Subsidiaries, and FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, as amended by paragraph D28 of this Statement, shall be used to identify the
acquirer, which is the entity that obtains control of the acquiree. If an acquirer cannot be
determined based solely on the guidance in Proposed Statement, Consolidated Financial
Statements, Including Accounting and Reporting of Noncontrolling Interests in
Subsidiaries, paragraphs 12–16 shall be considered in making that determination.
However, the primary beneficiary of a variable interest entity is always the acquirer for
purposes of this Statement. The determination of which party, if any, is the primary
beneficiary of a variable interest entity shall be made only in accordance with
Interpretation 46(R), not on the basis of the guidance in paragraphs 12–16.
12. The form of the consideration transferred may provide evidence about which entity
is the acquirer. For example:
a.
b.
c.
In a business combination effected solely through the transfer of cash or other assets
or by incurring liabilities, the entity that transfers the cash or other assets or incurs
the liabilities is likely to be the acquirer.
In a business combination effected through an exchange of cash or other assets for
voting equity interests, the entity that gives up the cash or other assets is likely to be
the acquirer.
In a business combination effected through an exchange of equity interests, the
entity that issues the equity interests is normally the acquirer. However, in some
business combinations, commonly called reverse acquisitions, the issuing entity is
the acquiree. Paragraphs A111–A136 provide guidance for accounting for reverse
acquisitions. Commonly in an exchange of equity interests, the acquirer is the larger
entity; however, the facts and circumstances surrounding a combination sometimes
indicate that a smaller entity acquires a larger entity. Therefore, in identifying the
4
acquirer in a business combination effected through an exchange of equity interests,
all pertinent facts and circumstances shall be considered, in particular:
(1) The relative voting rights in the combined entity after the business
combination—All else being equal, the acquirer is the combining entity whose
owners as a group retained or received the largest portion of the voting rights
in the combined entity. In determining which group of owners retained or
received the largest portion of the voting rights, consideration shall be given to
the existence of any unusual or special voting arrangements and options,
warrants, or convertible securities.
(2) The existence of a large minority voting interest in the combined entity when
no other owner or organized group of owners has a significant voting
interest—All else being equal, the acquirer is the combining entity whose
single owner or organized group of owners holds the largest minority voting
interest in the combined entity.
(3) The composition of the governing body of the combined entity—All else being
equal, the acquirer is the combining entity whose owners or governing body
has the ability to elect or appoint a voting majority of the governing body of
the combined entity.
(4) The terms of the exchange of equity interests—All else being equal, the
acquirer is the combining entity that pays a premium over the precombination
market value of the equity securities of the other combining entity or entities.
13. If the fair value of one of the combining entities is significantly greater than that of
the other combining entity or entities, the entity with the greatest fair value is likely to be
the acquirer.
14. If the business combination results in the management of one of the combining
entities being able to dominate the selection of the management team of the resulting
combined entity, the entity whose management is able to dominate is likely to be the
acquirer.
15. In a business combination involving more than two entities, determining the acquirer
shall include a consideration of, among other things, which of the combining entities
initiated the combination and whether the assets, revenues, or income of one of the
combining entities significantly exceeds those of the others.
16. If a new entity is formed to issue equity interests to effect a business combination,
one of the combining entities that existed before the business combination shall be
identified as the acquirer based on the evidence available. The guidance in paragraphs 11–
15 shall be used to identify the acquirer.
5
Determining the Acquisition Date
17.
The acquisition date is the date the acquirer obtains control of the acquiree.
18. The acquirer generally obtains control of the acquiree on the closing date, which is
the date that the acquirer transfers the consideration, acquires the assets, and assumes the
liabilities of the acquiree. In some cases, the acquisition date may precede the closing date
of the business combination or the date the business combination is finalized in law. All
pertinent facts and circumstances surrounding a business combination shall be considered
in assessing when the acquirer has obtained control of the acquiree. For example, the
acquisition date may precede the closing date if a written agreement provides that the
acquirer obtains control of the acquiree on a date before the closing date.
Measuring the Fair Value of the Acquiree
19. The acquirer shall measure the fair value of the acquiree, as a whole, as of the
acquisition date.
20. Business combinations are usually arm’s-length exchange transactions in which
knowledgeable, unrelated willing parties exchange equal values. Therefore, in the absence
of evidence to the contrary, the exchange price (referred to as the consideration transferred
in this Statement) paid by the acquirer on the acquisition date is presumed to be the best
evidence of the acquisition-date fair value of the acquirer’s interest in the acquiree. In
some business combinations, either no consideration is transferred on the acquisition date
or the evidence indicates that the consideration transferred is not the best basis for
measuring the acquisition-date fair value of the acquirer’s interest in the acquiree. In those
business combinations, the acquirer should measure the acquisition-date fair value of its
interest in the acquiree using other valuation techniques. Paragraphs A8–A26 provide
additional guidance for performing the fair value measurement described in this
paragraph.
Consideration Transferred
21. For the purpose of applying the acquisition method, the fair value of the
consideration transferred in exchange for the acquirer’s interest in the acquiree is
calculated as the sum of:
a.
b.
The acquisition-date fair values of the assets transferred by the acquirer, liabilities
assumed or incurred by the acquirer, and equity interests issued by the acquirer.
Examples include cash, other assets, contingent consideration (see paragraph 25), a
business or a subsidiary of the acquirer, common or preferred equity instruments,
options, warrants, and member interests of mutual entities; and
The acquisition-date fair value of any noncontrolling equity investment in the
acquiree that the acquirer owned immediately before the acquisition date (see
paragraph 56).
6
22. The consideration transferred may include assets or liabilities of the acquirer that
have carrying amounts that differ from their fair values at the acquisition date (for
example, nonmonetary assets or a business of the acquirer). In that case, the acquirer shall
remeasure those transferred assets or liabilities to their fair values as of the acquisition
date and recognize any gains or losses in income. However, if those assets or liabilities are
transferred to the acquiree and, therefore, remain within the combined entity after the
business combination, the acquirer shall eliminate any gains or losses on those transferred
assets or liabilities in the consolidated financial statements.
23. If the information necessary to measure the fair value of some or all of the
consideration transferred is not available at the acquisition date, the measurement period
guidance in paragraphs 62–68 applies.
24. The acquirer shall assess whether any portion of the transaction price includes
payments or other arrangements that are not consideration transferred in exchange for the
acquiree. Paragraphs 69 and 70 provide guidance for making that assessment. Only the
consideration transferred in exchange for the acquiree shall be accounted for as part of the
business combination.
Contingent Consideration
25. As described in paragraph 21(a), the fair value of the consideration transferred in
exchange for the acquiree includes the acquisition-date fair value of any obligations of the
acquirer to transfer additional assets or equity interests if specified future events occur or
conditions are met (commonly called contingent consideration). For example, the acquirer
may agree to transfer additional equity interests, cash, or other assets to the former owners
of the acquiree after the acquisition date if the acquiree meets specified financial or
nonfinancial targets in the future. The acquirer shall measure and recognize the fair value
of such contingent consideration as of the acquisition date and shall classify that
obligation as either a liability or equity on the basis of other generally accepted accounting
principles. An arrangement to transfer additional assets or equity interests if specified
events or conditions occur may be incorporated in an acquirer’s share-based payment
awards exchanged for awards held by the acquiree’s employees. The acquirer shall
measure the portion of such awards included in consideration transferred for the acquiree
in accordance with paragraphs A102–A109.
26. After initial recognition, the acquirer shall account for changes in the fair value of
contingent consideration that do not qualify as measurement period adjustments (see
paragraphs 62–68) as follows:
a.
b.
Contingent consideration classified as equity shall not be remeasured.
Contingent consideration classified as liabilities that:
(1) Are financial instruments and within the scope of FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
paragraph D21 of this Statement, shall be accounted for in accordance with
that Statement.
7
(2)
Are not within the scope of Statement 133 shall be measured at fair value with
changes in the fair value recognized in income in each reporting period.
Costs Incurred in Connection with a Business Combination
27. Costs the acquirer incurs in connection with a business combination (also called
acquisition-related costs) are not part of the consideration transferred in exchange for the
acquiree. For example, such costs include finder’s fees, advisory, legal, accounting,
valuation, other professional or consulting fees, general administrative costs, including the
costs of maintaining an internal acquisitions department, and costs of registering and
issuing debt and equity securities. The acquirer shall not include such costs in the measure
of the fair value of the acquiree or the assets acquired or liabilities assumed as part of the
business combination. The acquirer shall account for acquisition-related costs, separately
from the business combination, in accordance with generally accepted accounting
principles.
Measuring and Recognizing the Assets Acquired and the Liabilities Assumed
28. The acquirer shall measure and recognize as of the acquisition date the assets
acquired and liabilities assumed as part of the business combination. Except as
provided in paragraphs 42–51, the identifiable assets acquired and liabilities
assumed shall be measured at fair value and recognized separately from goodwill.
29. As part of the business combination accounting, the acquirer recognizes assets
acquired or liabilities assumed that are part of the exchange for the acquiree and meet the
definition of assets and liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The assets and liabilities the acquirer recognizes as part of the
business combination may include assets and liabilities the acquiree had not recognized
previously in its financial statements. For example, the acquirer often recognizes the
acquired identifiable intangible assets that were internally developed by the acquiree and
did not meet the criteria for recognition in the acquiree’s financial statements. The
acquirer does not recognize any assets or liabilities other than the assets acquired or the
liabilities assumed as part of the business combination.
30. A business combination does not affect the measurement of the acquirer’s assets and
liabilities, except for those assets or liabilities that are not recognized at fair value by the
acquirer before the business combination and are part of the consideration transferred in
exchange for the acquiree (see paragraph 22).
31. If the information necessary to measure the fair value of some or all of the assets
acquired or liabilities assumed is not available at the acquisition date, the measurement
period guidance in paragraphs 62–68 applies.
32. The acquirer shall assess whether any of the assets acquired or liabilities assumed or
incurred are not part of the exchange for the acquiree (that is, not included in the business
combination accounting). Paragraphs 69 and 70 provide guidance for making that
assessment.
8
Guidance for Measuring and Recognizing Particular Assets Acquired and Liabilities
Assumed
33. Paragraphs 34–41 provide guidance for measuring and recognizing particular assets
acquired and liabilities assumed at fair value as of the acquisition date.
Valuation Allowances
34. The acquirer shall not recognize a separate valuation allowance as of the acquisition
date for assets required to be recognized at fair value in accordance with this Statement.
For example, an acquirer would recognize receivables (including loans) acquired in a
business combination at fair value as of the acquisition date and would not recognize a
separate valuation allowance for uncollectible receivables at that date. Uncertainty about
collections and future cash flows is included in the fair value measure.
Contingencies That Meet the Definition of Assets or Liabilities
35. The acquirer shall recognize, separately from goodwill, the acquisition-date fair
value of assets and liabilities arising from contingencies that were acquired or assumed as
part of the business combination. Therefore, the acquirer shall recognize as of the
acquisition date an asset or a liability for a contingency acquired in a business
combination if it meets the definition of an asset or a liability in Concepts Statement 6
even if that contingency does not meet the recognition criteria in Statement 5, as amended
by this Statement.
36.
After initial recognition, contingencies shall be accounted for as follows:
a.
A contingency that would be accounted for in accordance with Statement 5 if it were
acquired or incurred in an event other than a business combination shall continue to
be measured at fair value with any changes in fair value recognized in income in
each reporting period.
All other contingencies shall be accounted for in accordance with generally accepted
accounting principles. For example:
(1) A contingency that is a financial instrument shall be accounted for in
accordance with applicable financial instrument guidance.
(2) A contingency that is an asset or liability arising from an insurance contract
shall be accounted for in accordance with FASB Statement No. 60, Accounting
and Reporting by Insurance Enterprises, as amended (including the intangible
asset, if any, recognized for the difference between the amounts recognized on
the acquisition date at fair value and the amounts that would be recognized in
accordance with Statement 60).
b.
Liabilities Associated with Restructuring or Exit Activities
37. The acquirer shall recognize, separately from goodwill, the acquisition-date fair
value of liabilities for restructuring or exit activities acquired in a business combination
only if they meet the recognition criteria in FASB Statement No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, as of the acquisition date. Costs
9
associated with restructuring or exit activities that do not meet the recognition criteria in
Statement 146 as of the acquisition date are not liabilities at the acquisition date and,
therefore, are recognized separately from the business combination, generally as
postcombination expenses of the combined entity when incurred. For example, costs the
acquirer expects to incur in the future pursuant to its plan to exit an activity of an acquiree,
involuntarily terminate the employment of an acquiree’s employees, or relocate
employees of an acquiree are not assumed liabilities of the acquiree and, therefore, are not
accounted for as part of the business combination.
Leases
38. In accordance with FASB Statement No. 13, Accounting for Leases, as interpreted
by FASB Interpretation No. 21, Accounting for Leases in a Business Combination, as
amended by paragraph D27 of this Statement, a lease of the acquiree (regardless of
whether the acquiree is the lessee or lessor) retains the lease classification determined by
the acquiree at the lease inception, unless the provisions of a lease are modified as a result
of the business combination in a way that would require the acquirer to consider the
revised agreement a new lease agreement in accordance with paragraph 9 of Statement 13.
In that circumstance, the acquirer would classify the new lease according to the criteria set
forth in Statement 13 on the basis of the conditions of the modified lease.
39. The acquirer shall account for the acquiree’s operating leases in which the acquiree
is the lessee in accordance with paragraph 47. For all other leases, the acquirer shall
measure and recognize separately the asset and any related liability embodied in a lease at
their acquisition-date fair values. After initial recognition, assets and liabilities related to
leases shall be accounted for in accordance with other generally accepted accounting
principles.
Intangible Assets
40. The acquirer shall recognize, separately from goodwill, the acquisition-date fair
value of intangible assets acquired in a business combination that are identifiable. For
purposes of this Statement, an assembled workforce shall not be recognized as an
intangible asset separately from goodwill. Paragraphs A27–A61 provide additional
guidance about measuring and recognizing intangible assets acquired in a business
combination.
41. As part of a business combination, an acquirer may reacquire a right that it had
previously granted to the acquiree to use the acquirer’s recognized or unrecognized
intangible assets (such as a right to use the acquirer’s trade name under a franchise
agreement or a right to use the acquirer’s technology under a technology licensing
agreement). Such a right is an identifiable intangible asset that shall be recognized
separately from goodwill as part of the business combination accounting. If the contract
giving rise to the reacquired right includes pricing terms that are favorable or unfavorable
when compared with pricing for current market transactions for the same or similar items,
the acquirer shall recognize a settlement gain or loss. Paragraph A92 provides guidance
for measuring that settlement gain or loss. After initial recognition, reacquired rights shall
10
be amortized over the remaining contractual period of the precombination contract that
granted those rights.
Assets Acquired and Liabilities Assumed That Are Not Recognized at Fair Value as of the
Acquisition Date
42. The following assets acquired and liabilities assumed shall be measured and
recognized as of the acquisition date as follows.
Assets Held for Sale
43. The acquirer shall measure and recognize, separately from goodwill, an acquired
long-lived asset (or disposal group) that is classified as held for sale as of the acquisition
date in accordance with paragraphs 30–32 of FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, at fair value less cost to sell in
accordance with paragraphs 34 and 35 of that Statement.
Deferred Taxes
44. The acquirer shall measure and recognize, separately from goodwill, a deferred tax
asset or liability in accordance with FASB Statement No. 109, Accounting for Income
Taxes, as amended by paragraph D17 of this Statement.
45. Statement 109, as amended by this Statement, sets out the subsequent accounting for
deferred tax assets (including valuation allowances) and liabilities that were acquired in a
business combination.
46. The acquirer shall account for the potential tax effects of temporary differences and
carryforwards of an acquiree that exist at the acquisition date and income tax uncertainties
related to the acquisition (for example, an uncertainty related to the tax basis of an
acquired asset that ultimately will be agreed to by the taxing authority or positions taken
in prior tax returns of the acquiree) in accordance with the provisions of Statement 109, as
amended.
Operating Leases
47. If the acquiree is the lessee to an operating lease, the acquirer shall not recognize
separately the asset and related liability embodied in the lease. If the acquiree is the lessor
to an operating lease, the acquirer shall measure and recognize the asset subject to the
operating lease at its acquisition-date fair value in accordance with paragraph 39. The
acquirer also shall assess whether each of the acquiree’s operating leases are at market
terms as of the acquisition date, regardless of whether the acquiree is the lessee or lessor.
If an operating lease is not at market terms as of the acquisition date, the acquirer shall
recognize:
a.
An intangible asset if the terms of the operating lease are favorable relative to
market terms.
11
b.
A liability if the terms of the operating lease are unfavorable relative to market
terms.
Employee Benefit Plans
48. The acquirer shall measure and recognize, separately from goodwill, any asset or
liability related to the acquiree’s employee benefit plans that is within the scope of FASB
Statement No. 87, Employers’ Accounting for Pensions, as amended by paragraph D15 of
this Statement, or No. 106, Employers’ Accounting for Postretirement Benefits Other
Than Pensions, as amended by paragraph D16 of this Statement, in accordance with
paragraph 74 of Statement 87 or paragraphs 86–88 of Statement 106.
Goodwill
49. Except as provided by paragraph 61, the acquirer shall measure and recognize
goodwill as of the acquisition date as the excess of the fair value of the acquiree, as a
whole, over the net amount of the recognized identifiable assets acquired and liabilities
assumed. This requirement applies even if the acquirer owns less than 100 percent of the
equity interests in the acquiree at the acquisition date (that is, even if a noncontrolling
interest in the acquiree exists at the acquisition date).
50. The amount recognized as goodwill includes synergies and other benefits that are
expected from combining the activities of the acquirer and acquiree. Because goodwill is
measured as a residual, the amount recognized as goodwill also includes (a) intangible
assets that do not meet the criteria in paragraph 40 for recognition separately from
goodwill and (b) any difference between the fair values of the assets acquired and
liabilities assumed and the amount recognized in accordance with paragraphs 42–48.
51. After initial recognition, the acquirer shall measure goodwill at the amount
recognized as of the acquisition date less any accumulated impairment losses. Goodwill
shall not be amortized. The acquirer shall test goodwill for impairment in accordance with
FASB Statement No. 142, Goodwill and Other Intangible Assets, as amended by
paragraph D22 of this Statement.
Additional Guidance for Applying the Acquisition Method to Particular Types of
Business Combinations
52. Paragraphs 53–61 provide additional guidance for applying the acquisition method
to the following types of business combinations:
a.
b.
c.
d.
e.
Business combinations involving only mutual entities
Business combinations achieved by contract alone
Business combinations achieved in stages
Business combinations in which the acquirer holds less than 100 percent of the
equity interests in the acquiree at the acquisition date
Business combinations in which the consideration transferred for the acquirer’s
interest in the acquiree is less than the fair value of that interest.
12
Business Combinations Involving Only Mutual Entities
53. In a business combination involving only mutual entities in which the only
consideration exchanged is the member interests of the acquiree for the member interests
of the acquirer (or the member interests of the newly combined entity), the amount equal
to the fair value of the acquiree shall be recognized as a direct addition to capital or
equity, not retained earnings.
Business Combinations Achieved by Contract Alone
54. In rare circumstances, an acquirer (a) obtains control of an acquiree by contract
(b) transfers no consideration for control of the acquiree or for the net assets of the
acquiree, and (c) obtains no equity interests in the acquiree, either on the acquisition date
or previously. An example of such a business combination is one in which two businesses
are brought together to form a dual listed corporation. This type of business combination
is referred to as a business combination achieved by contract alone in this Statement. In
such a business combination, the fair value of the acquiree shall be attributed to the
noncontrolling interests of the acquiree (that is, the equity holders of the acquiree) in the
consolidated financial statements of the acquirer.
Business Combinations Achieved in Stages
55. A business combination in which an acquirer holds a noncontrolling equity
investment in the acquiree immediately before obtaining control of that acquiree is a
business combination achieved in stages. This type of business combination is also
commonly called a step acquisition.
56. As described in paragraph 21(b), for purposes of applying the acquisition method,
the fair value of the consideration transferred by the acquirer includes the acquisition-date
fair value of any noncontrolling equity investment in the acquiree that the acquirer owned
immediately before the acquisition date. In a business combination achieved in stages, the
acquirer shall remeasure its noncontrolling equity investment in the acquiree at fair value
as of the acquisition date and recognize any gain or loss in income. If, before the business
combination, the acquirer recognized changes in the value of its noncontrolling equity
investment in other comprehensive income (for example, the investment was classified as
available-for-sale), the amount that was recognized in other comprehensive income shall
be reclassified and included in the calculation of any gain or loss as of the acquisition
date.
57. Once an acquirer has obtained control of an acquiree, subsequent acquisitions (or
dispositions) of any noncontrolling interests in the acquiree shall be accounted for as
equity transactions in accordance with Proposed Statement, Consolidated Financial
Statements, Including Accounting and Reporting of Noncontrolling Interests in
Subsidiaries.
13
Business Combinations in Which the Acquirer Holds Less Than 100 Percent of the Equity
Interests in the Acquiree at the Acquisition Date
58. In a business combination in which the acquirer holds less than 100 percent of the
equity interests in the acquiree at the acquisition date, the acquirer shall:
a.
b.
c.
d.
Recognize identifiable assets acquired and liabilities assumed at their acquisition
date values measured in accordance with paragraphs 28–48.
Recognize goodwill at the amount measured in accordance with paragraph 49.
Allocate the amount of goodwill determined in accordance with paragraph 49 to the
acquirer and the noncontrolling interest. Paragraphs A62 and A63 provide additional
guidance for allocating goodwill between the acquirer and the noncontrolling
interest.
Measure and recognize the noncontrolling interest as the sum of the noncontrolling
interest’s proportional interest in the identifiable assets acquired and liabilities
assumed plus the noncontrolling interest’s share of goodwill, if any.
Business Combinations in Which the Consideration Transferred for the Acquirer’s Interest
in the Acquiree Is Less Than the Fair Value of That Interest
59. In rare circumstances, the acquisition-date fair value of the acquirer’s interest in the
acquiree exceeds the fair value of the consideration transferred for that interest (as might
be the case, for example, in a business combination that is a forced sale in which the seller
is acting under compulsion). This type of business combination is referred to as a bargain
purchase in this Statement. However, this type of business combination may occur also
because of the requirements in paragraphs 43–48 to measure and recognize particular
assets acquired or liabilities assumed in accordance with other generally accepted
accounting principles rather than at fair value.
60. If the fair value of the acquirer’s interest in the acquiree initially is determined to
exceed the fair value of the consideration transferred for that interest, the acquirer shall
assess whether it has correctly identified all assets acquired and liabilities assumed and
shall review the procedures used to measure and remeasure, if necessary, all of the
following:
a.
b.
c.
d.
The acquisition-date fair value of the acquiree
The acquisition-date fair value of the acquirer’s interest in the acquiree
The acquisition-date fair value of the consideration transferred
The acquisition-date values of the identifiable assets acquired and liabilities assumed
recognized in accordance with the requirements of this Statement.
The objective of this review is to ensure that appropriate consideration has been given to
all available information in performing the measurements.
61. If, after performing any remeasurements required by paragraph 60, the fair value of
the acquirer’s interest in the acquiree still exceeds the fair value of the consideration
transferred for that interest, the acquirer shall account for that excess by reducing the
14
amount of goodwill that otherwise would be recognized in accordance with paragraph 49.
If the goodwill related to that business combination is reduced to zero, any remaining
excess shall be recognized as a gain attributable to the acquirer on the acquisition date.
Paragraphs A64–A70 provide additional guidance and examples for applying this
requirement.
Measurement Period
62. The measurement period is the period after the acquisition date during which
the acquirer may adjust the provisional amounts recognized at the acquisition date
in accounting for a business combination. The measurement period provides the
acquirer a reasonable time to obtain the information necessary to identify and
measure the following:
a.
b.
c.
d.
The acquisition-date fair value of the acquiree
The acquisition-date fair value of the acquirer’s interest in the acquiree
The acquisition-date fair value of the consideration transferred for the acquiree
The acquisition-date values of the assets acquired and liabilities assumed
recognized in accordance with the requirements of this Statement.
63. If any of those measurements can be determined only provisionally by the end of the
reporting period in which the business combination occurs, the acquirer shall report those
provisional amounts in its financial statements.
64. During the measurement period, the acquirer shall adjust the provisional amounts
recognized at the acquisition date to reflect any new information obtained about facts and
circumstances that existed as of the acquisition date that, if known, would have affected
the measurement of the amounts recognized as of that date. During the measurement
period, the acquirer also shall recognize additional assets or liabilities if new information
is obtained about facts and circumstances that existed as of the acquisition date and, if
known, would have resulted in the recognition of those assets and liabilities as of that
date.
65. The measurement period ends as soon as the acquirer receives the necessary
information about facts and circumstances that existed as of the acquisition date or learns
the information is not obtainable. However, the measurement period shall not exceed one
year from the acquisition date.
66. Generally, adjustments to the provisional amounts recognized for identifiable assets
and liabilities during the measurement period are recognized through an offsetting
adjustment to goodwill. However, the offsetting adjustment (or part of the offsetting
adjustment) may be to an asset or liability other than goodwill. For example, assume that
an acquirer’s contingent consideration obligation is directly related to the value of an
acquired intangible asset and, during the measurement period, the acquirer obtains new
information about the fair value of that intangible asset as of the acquisition date. In this
case, the adjustment to the provisional amount recognized for that asset may be offset (or
15
partially offset) by a corresponding adjustment to the provisional amount recognized for
the contingent consideration liability.
67. The acquirer shall recognize any adjustments to the provisional values during the
measurement period as if the accounting for the business combination had been completed
at the acquisition date. Thus, comparative information for prior periods presented in
financial statements shall be adjusted, including any change in depreciation, amortization,
or other income effect recognized as a result of completing the initial accounting.
Paragraphs A71–A86 provide additional guidance and illustrative examples for applying
the measurement period requirements.
68. After the end of the measurement period, the accounting for a business combination
shall be restated only to correct an error in accordance with Statement 154.
Assessing What Is Part of the Exchange for the Acquiree
69. The acquirer shall assess whether any portion of the transaction price
(payments or other arrangements) and any assets acquired or liabilities assumed or
incurred are not part of the exchange for the acquiree. Only the consideration
transferred and the assets acquired or liabilities assumed or incurred that are part of
the exchange for the acquiree shall be included in the business combination
accounting. Any portion of the transaction price or any assets acquired or liabilities
assumed or incurred that are not part of the exchange for the acquiree shall be
accounted for separately from the business combination.
70. Examples of payments or other arrangements that are not part of the exchange for
the acquiree include:
a.
b.
c.
Payments that effectively settle preexisting relationships between the acquirer and
acquiree (see paragraphs A91–A97)
Payments to compensate employees or former owners of the acquiree for future
services (see paragraphs A98–A101)
Payments to reimburse the acquiree or its former owners for paying the acquirer’s
costs incurred in connection with the business combination.
Paragraphs A87–A109 provide guidance for assessing whether a portion of the transaction
price and any assets and liabilities are not part of the exchange for the acquiree.
DISCLOSURES
71. The acquirer shall disclose information that enables users of its financial
statements to evaluate the nature and financial effect of business combinations that
occur:
a.
b.
During the reporting period
After the balance sheet date but before the financial statements are issued.
16
72. To meet the objective in paragraph 71, the acquirer shall disclose the following
information for each material business combination that occurs during the reporting
period:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
The name and a description of the acquiree.
The acquisition date.
The percentage of voting equity instruments acquired.
The primary reasons for the business combination, including a description of the
factors that contributed to the recognition of goodwill.
The acquisition-date fair value of the acquiree and the basis for measuring that
value.
The acquisition-date fair value of the consideration transferred, including the fair
value of each major class of consideration, such as:
(1) Cash
(2) Other tangible or intangible assets, including a business or subsidiary of the
acquirer
(3) Contingent consideration
(4) Debt instruments
(5) Equity or member interests of the acquirer, including the number of
instruments or interests issued or issuable, and the method of determining the
fair value of those instruments or interests
(6) The acquirer’s previously acquired noncontrolling equity investment in the
acquiree in a business combination achieved in stages.
The amounts recognized as of the acquisition date for each major class of assets
acquired and liabilities assumed in the form of a condensed balance sheet (see
paragraph A110).
The maximum potential amount of future payments (undiscounted) the acquirer
could be required to make under the terms of the acquisition agreement. If there is
no limitation on the maximum potential amount of future payments, that fact shall be
disclosed.
In a business combination in which the consideration transferred for the acquiree is
less than fair value, the amount of any gain recognized in accordance with paragraph
61, the line item in the income statement in which the gain is recognized, and a
description of the reasons why the acquirer was able to achieve a gain.
In a business combination achieved in stages, the amount of any gain or loss
recognized in accordance with paragraph 56 and the line item in the income
statement in which that gain or loss is recognized.
In a business combination in which the acquirer and acquiree have a preexisting
relationship:
(1) The nature of the preexisting relationship
(2) The measurement of the settlement amount of the preexisting relationship, if
any, and the valuation method used to determine the settlement amount
(3) The amount of any settlement gain or loss recognized and the line item in the
income statement in which that gain or loss is recognized.
The amount of costs incurred in connection with the business combination, the
amount recognized as an expense and the line item or items in the income statement
in which those expenses are recognized.
17
73.
The acquirer also shall disclose the information required by:
a.
Paragraphs 72(e)–(l) in aggregate for individually immaterial business combinations
that are material collectively.
Paragraph 72 if a material business combination is completed after the balance sheet
date but before the financial statements are issued unless disclosure of any of the
information is impracticable. If disclosure of any of the information required by
paragraph 72 is impracticable, that fact and the reasons shall be disclosed.
b.
74. An acquirer that is a public business enterprise, as described in paragraph 9 of FASB
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, shall also disclose the following information for each material business
combination that occurs during the reporting period or in the aggregate for individually
immaterial business combinations that are material collectively and occur during the
reporting period.
a.
b.
The amounts of revenue and net income of the acquiree since the acquisition date
included in the consolidated income statement for the reporting period.
The following supplemental pro forma information:
(1) The results of operations2 of the combined entity for the current reporting
period as though the acquisition date for all business combinations that
occurred during the year had been as of the beginning of the annual reporting
period.
(2) If comparative financial statements are presented, the results of operations of
the combined entity for the comparable prior reporting period as though the
acquisition date for all business combinations that occurred during the current
year had occurred as of the beginning of the comparable prior annual reporting
period.
If disclosure of any of the information required by this paragraph is impracticable, that
fact and the reasons shall be disclosed.
75. The acquirer shall disclose information that enables users of its financial
statements to evaluate the financial effects of adjustments recognized in the current
reporting period relating to business combinations that were effected in the current
or previous reporting periods.
2
For this disclosure, results of operations means revenue, income before extraordinary items and the
cumulative effect of accounting changes, net income, and earnings per share. In determining the pro forma
amounts, income taxes, interest expense, preferred share dividends, and depreciation and amortization of
assets shall be adjusted to the accounting base recognized for each in recording the combination. Pro forma
information related to results of operations of periods prior to the combination shall be limited to the results
of operations for the immediately preceding period. Disclosure also shall be made of the nature and amount
of any material, nonrecurring items included in the reported pro forma results of operations.
18
76. To meet the objective in paragraph 75, the acquirer shall disclose the following
information for each material business combination or in the aggregate for individually
immaterial business combinations that are material collectively:
a.
b.
c.
d.
If the amounts recognized in the financial statements for the business combination
have been determined only provisionally:
(1) The reasons why the initial accounting for the business combination is not
complete.
(2) The assets acquired or the liabilities assumed for which the measurement
period is still open.
(3) The nature and amount of any measurement period adjustments recognized
during the reporting period.
A reconciliation of the beginning and ending balances of liabilities for contingent
consideration and contingencies that are required to be remeasured to fair value after
initial recognition in accordance with paragraphs 26(b)(2) and 36, showing
separately the changes in fair value during the reporting period and amounts paid or
otherwise settled.
A description of the discrete event or circumstance that occurred after the acquisition
date that resulted in deferred tax assets acquired as part of the business combination
being recognized as income within 12 months after the acquisition date (see
paragraph 86).
Paragraph not used.
77. The acquirer shall disclose information that enables users of its financial
statements to evaluate changes in the carrying amount of goodwill during the
reporting period.
78. To meet the objective in paragraph 77, if the total amount of goodwill is significant
in relation to the fair value of the acquiree, the acquirer shall disclose the following
information for each material business combination that occurs during the reporting
period:
a.
b.
79.
The total amount of goodwill and the amount that is expected to be deductible for
tax purposes
The amount of goodwill by reportable segment, if the combined entity is required to
disclose segment information in accordance with Statement 131, unless such
disclosure is impracticable. For example, if the assignment of goodwill to reporting
units as required by Statement 142 has not been completed as of the date the
financial statements are issued, disclosure of this information would be
impracticable.
The acquirer also shall disclose the information required by paragraph 78:
a. In aggregate for individually immaterial business combinations that are material
collectively.
b. If a material business combination is completed after the balance sheet date but before
the financial statements are issued unless such disclosure is impracticable. If
19
disclosure of any of the information required by paragraph 78 is impracticable, that
fact and the reasons shall be disclosed.
80. The acquirer shall disclose a reconciliation of the carrying amount of goodwill at the
beginning and end of the reporting period as required by Statement 142, as amended.
81. If the specific disclosures required by this and other Statements do not meet the
objectives set out in paragraphs 71, 75, or 77, the acquirer shall disclose any additional
information necessary to meet those objectives.
EFFECTIVE DATE AND TRANSITION
82. This Statement shall apply prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual period beginning on or after
December 15, 2006. Earlier application is encouraged. However, this Statement shall be
applied only at the beginning of an annual period that begins on or after this Statement is
issued. If this Statement is applied before the effective date, that fact shall be disclosed
and Proposed Statement, Consolidated Financial Statements, Including Accounting and
Reporting of Noncontrolling Interests in Subsidiaries, shall be applied at the same time.
83. Except as provided in paragraph 86, assets and liabilities that arose from business
combinations whose acquisition dates preceded the application of this Statement shall not
be adjusted upon application of this Statement.
84. Entities that have not applied Statement 142 in its entirety shall apply that Statement
in its entirety at the same time that they apply this Statement.
85. Entities, such as mutual entities, that have not applied Statement 141 and FASB
Statement No. 147, Acquisitions of Certain Financial Institutions, and have had one or
more business combinations that were accounted for using the purchase method shall
apply the transition provisions in paragraphs C13–C24.
Subsequent Recognition of Acquired Deferred Tax Benefits
86. For business combinations in which the acquisition date was before this Statement is
applied:
a.
b.
The acquirer shall apply the requirements of Statement 109, as amended by
paragraph D17 of this Statement, prospectively. Therefore, the acquirer shall not
adjust the accounting for prior business combinations for the subsequent recognition
of acquired deferred tax benefits (that is, by elimination of that valuation allowance)
unless the rebuttable presumption in paragraph 30 of Statement 109, as amended by
this Statement, applies in the current period.
The acquirer shall recognize, as a reduction to income tax expense (or credited
directly to contributed capital in accordance with paragraph 26 of Statement 109),
tax benefits that are recognized more than one year after the acquisition date (that is,
by elimination of that valuation allowance).
20
87.
Paragraph not used.
WITHDRAWAL OF OTHER PRONOUNCEMENTS
88.
This Statement replaces Statement 141.
The provisions of this Statement need
not be applied to immaterial items.
21
Appendix A
IMPLEMENTATION GUIDANCE
CONTENTS
Paragraph
Numbers
Introduction....................................................................................................................A1
Definition of a Business (Application of Paragraph 3(d)) ......................................A2–A7
Measuring the Fair Value of the Acquiree (Application of Paragraphs 19–27) ...A8–A26
Measuring the Fair Value of the Acquiree Using the Consideration
Transferred....................................................................................................A9–A17
Example 1: Acquisition of Less Than 100 Percent of the Equity
Interests of an Acquiree ........................................................................A12–A13
Example 2: Acquisition of Less Than 100 Percent of the Equity
Interests of an Acquiree in a Business Combination Achieved in Stages .....A14
Example 3: Acquisition of Less Than 100 Percent of the Equity
Interests of an Acquiree with Evidence of a Control Premium ............A15–A17
Measuring the Fair Value of the Acquiree Using Valuation Techniques.....A18–A26
Market Approach ....................................................................................A20–A21
Income Approach....................................................................................A22–A23
Special Considerations in Applying the Market and Income
Approaches to Mutual Entities..............................................................A24–A26
Intangible Assets (Application of Paragraphs 40 and 41) ..................................A27–A61
Research and Development Assets ........................................................................A27
Recognition of Intangible Assets Separately from Goodwill .......................A28–A34
Examples of Intangible Assets That Are Identifiable ...................................A35–A61
Marketing-Related Intangible Assets......................................................A37–A41
Trademarks, Trade Names, Service Marks, Collective
Marks, and Certification Marks ......................................................A38–A40
Internet Domain Names .............................................................................A41
Customer-Related Intangible Assets.......................................................A42–A49
Customer Lists ...........................................................................................A43
Order or Production Backlog .....................................................................A44
Customer Contracts and the Related Customer Relationships .........A45–A47
Noncontractual Customer Relationships....................................................A48
Examples Illustrating Customer Contract and Customer Relationship
Intangible Assets Acquired in a Business Combination ..........................A49
Artistic-Related Intangible Assets ..........................................................A50–A51
Contract-Based Intangible Assets ...........................................................A52–A55
Servicing Contracts such as Mortgage Servicing Contracts ............A53–A54
Employment Contracts...............................................................................A55
Technology-Based Intangible Assets......................................................A56–A61
Computer Software and Mask Works...............................................A57–A58
Databases, Including Title Plants......................................................A59–A60
22
Paragraph
Numbers
Trade Secrets Such as Secret Formulas, Processes, or Recipes.................A61
Initial Calculation and Allocation of Goodwill in a Business Combination
in Which the Acquirer Holds Less Than 100 Percent of the Equity Interests
in an Acquiree at the Acquisition Date (Application of Paragraph 58)............A62–A63
Example 4: Initial Calculation and Allocation of Goodwill to the
Acquirer and Noncontrolling Interests in the Acquiree.......................................A63
Business Combinations in Which the Consideration Transferred for
the Acquirer’s Interest in the Acquiree Is Less Than the Fair Value
of That Interest (Application of Paragraphs 59–61) .........................................A64–A70
Example 5: Business Combinations in Which the Consideration
Transferred for 100 Percent of the Equity Interests in the Acquiree
Is Less Than the Fair Value ........................................................................A64–A66
Example 6: Business Combinations in Which the Consideration
Transferred for Less Than 100 Percent of the Equity Interests in
the Acquiree Is Less Than the Fair Value...................................................A67–A70
Measurement Period (Application of Paragraphs 62–68 and 76(a)) ..................A71–A86
Example 7: Lawsuit ......................................................................................A72–A74
Example 8: Disposal of an Asset during the Measurement Period...............A75–A76
Consideration Transferred and Contingent Consideration ...........................A77–A83
Example 9: Contingent Payout Based on Future Earnings.....................A78–A80
Example 10: Contingent Payout Based on the Outcome of a
Lawsuit..................................................................................................A81–A83
Example 11: Illustration of Paragraphs 64 and 76(a)—Incomplete
Appraisal .....................................................................................................A84–A86
Assessing What Is Part of the Exchange for the Acquiree (Application of
Paragraphs 69 and 70).....................................................................................A87–A109
Example 12: Regulatory Asset Acquired That Is Included in
the Business Combination Accounting.......................................................A89–A90
Effective Settlement of Preexisting Relationships between the Acquirer
and Acquiree in a Business Combination ...................................................A91–A97
Example 13: Effective Settlement of a Supply Contract as a Result
of a Business Combination ...................................................................A94–A96
Example 14: Effective Settlement of a Contract between the
Acquirer and Acquiree in Which the Acquirer Had Recognized a
Liability before the Business Combination....................................................A97
Arrangements to Pay for Employee Services .............................................A98–A101
Example 15: Arrangement That Is Part of the Exchange for the
Acquiree............................................................................................A100–A101
Acquirer Share-Based Payment Awards Exchanged for Awards
Held by the Employees of the Acquiree .................................................A102–A109
23
Paragraph
Numbers
Example 16: Acquirer Replacement Awards, for Which No
Services Are Required after the Acquisition Date, Are Exchanged
for Awards of the Acquiree, for Which the Required Services
Were Rendered before the Acquisition Date ...............................................A105
Example 17: Acquirer Replacement Awards, for Which Services
Are Required after the Acquisition Date, Are Exchanged for
Awards of the Acquiree, for Which the Required Services Were
Rendered before the Acquisition Date.........................................................A106
Example 18: Acquirer Replacement Awards, for Which Services
Are Required After the Acquisition Date, Are Exchanged for
Awards of the Acquiree, for Which the Requisite Service Period
Was Not Completed before the Acquisition Date.............................A107–A108
Example 19: Acquirer Replacement Awards, for Which No
Services Are Required after the Acquisition Date, Are Exchanged
for Awards of the Acquiree, for Which the Requisite Service Period
Was Not Completed before the Acquisition Date........................................A109
Illustration of Disclosure Requirements (Application of Paragraphs 71 and 72)......A110
Reverse Acquisitions (Application of Paragraph 12(c)).................................A111–A136
Fair Value of the Acquiree........................................................................A113–A115
Preparation and Presentation of Consolidated Financial Statements........A116–A118
Noncontrolling Interest .............................................................................A119–A120
Earnings per Share ....................................................................................A121–A124
Example 20: Reverse Acquisition.............................................................A125–A136
Calculating the Fair Value of the Acquiree ...................................................A128
Measuring Goodwill ......................................................................................A129
Consolidated Balance Sheet at September 30, 20X6..........................A130–A131
Earnings per Share ..............................................................................A132–A133
Noncontrolling Interest .......................................................................A134–A136
24
Appendix A
IMPLEMENTATION GUIDANCE
This appendix is an integral part of the Statement.
Introduction
A1. This appendix discusses generalized situations and provides examples that
incorporate simplified assumptions to illustrate how to apply some of the provisions of
this Statement.
Definition of a Business (Application of Paragraph 3(d))
A2. A business is defined as an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing either (a) a return to investors
or (b) dividends, lower costs, or other economic benefits directly and proportionately to
owners, members, or participants (paragraph 3(d)). A business consists of inputs and
processes applied to those inputs that have the ability to create outputs. Although
businesses usually have outputs, outputs are not required for an integrated set to qualify
as a business. The three elements of a business are defined as follows:
a.
b.
c.
Input: Any economic resource that creates, or has the ability to create, outputs when
one or more processes are applied to it. Examples include long-lived assets
(including intangible assets or rights to use long-lived assets), intellectual property,
ability to obtain access to necessary materials or rights, and employees.
Process: Any system, standard, protocol, convention, or rule that when applied to
an input, or inputs, creates or has the ability to create outputs. Examples include
strategic management processes, operational processes, and resource management
processes. These processes typically are documented; however, an organized
workforce having the necessary skills and experience following rules and
conventions may provide the necessary processes that are capable of being applied
to inputs to create outputs. (Accounting, billing, payroll, and other administrative
systems typically are not processes that are used to create outputs.)
Output: The result of inputs and processes applied to those inputs that provide or
have the ability to provide a return to investors or dividends, lower costs, or other
economic benefits directly and proportionately to owners, members, or participants.
A3. To be capable of being conducted and managed for the purposes defined, an
integrated set of activities and assets requires two essential elements—inputs and
processes applied to those inputs, which together are or will be used to create outputs.
However, a business need not include all of the inputs or processes that the seller used in
operating that business if a willing party is capable of acquiring the business and
continuing to produce outputs, for example, by integrating the business with its own
inputs and processes. Paragraph 5 of Proposed FASB Statement, Fair Value
Measurements, states that willing parties are “presumed to be marketplace participants
representing unrelated buyers and sellers that are (a) knowledgeable, having a common
25
level of understanding about factors relevant to the asset or liability and the transaction,
and (b) willing and able to transact in the same market(s), having the legal and financial
ability to do so.”
A4. The nature of the elements of a business varies by industry and by the structure of
an entity’s operations (activities), including the entity’s stage of development.
Established businesses often have many, and different, kinds of inputs, processes, and
outputs, whereas new businesses often have few inputs and processes, and sometimes
only a single output (product). Nearly all businesses also have liabilities, but a business
need not have any liabilities.
A5. An integrated set of activities and assets in the development stage may not have
outputs. In that case, other factors should be assessed to determine whether the set is a
business. Those factors would include whether the set:
a.
b.
c.
d.
Has begun planned principal activities
Has employees, intellectual property, and other inputs and processes that could be
applied to those inputs
Is pursuing a plan to produce outputs
Has the ability to obtain access to customers that will purchase the outputs.
A6. The determination of whether a particular set of assets and activities is a business
should be based on whether the integrated set is capable of being conducted and managed
as a business by a willing acquirer. Thus, in evaluating whether a particular set is a
business, it is not relevant whether a seller operated the set as a business or whether the
acquirer intends to operate the set as a business.
A7. If goodwill is present in a particular set of assets and activities then, in the absence
of evidence to the contrary, the set shall be presumed to be a business. However, a
business need not have goodwill.
Measuring the Fair Value of the Acquiree (Application of Paragraphs 19–27)
A8. As noted in paragraph 19, the acquirer is required to measure the fair value of the
acquiree, as a whole, as of the acquisition date. The objective of measuring the fair value
of the acquiree is to estimate the price at which 100 percent of the acquiree could be
exchanged in a current transaction between knowledgeable, unrelated willing parties
when neither party is acting under compulsion.
Measuring the Fair Value of the Acquiree Using the Consideration Transferred
A9. In the absence of evidence to the contrary, the acquisition-date fair value of the
consideration transferred is presumed to be the best basis for measuring the fair value of
the acquirer’s interest in the acquiree on that date.
A10. In a business combination between willing parties in which the acquirer purchases
100 percent of the equity interests or net assets that constitute a business (an acquiree),
the fair value of the consideration transferred usually is more clearly evident and reliably
26
measurable than the fair value of the acquiree in the absence of evidence to the contrary.
Therefore, the acquirer usually should use the acquisition-date fair value of the
consideration transferred in exchange for the acquiree to measure the fair value of the
acquiree on that date.
A11. If the acquirer purchases less than 100 percent of the equity interests of an acquiree
on the acquisition date (either in a single transaction or multiple transactions), the
acquisition-date fair value of the consideration transferred is usually the best basis for
measuring the fair value of the acquirer’s interest in the acquiree on that date. However,
the consideration transferred by itself most likely is not representative of the fair value of
the acquiree as a whole. The following examples illustrate how the fair value of
consideration transferred for less than 100 percent of the equity interests of an acquiree,
together with other available information, might be used to estimate the fair value of the
acquiree as a whole.
Example 1: Acquisition of Less Than 100 Percent of the Equity Interests of an Acquiree
A12. Acquirer Company (AC) offers to purchase all of the 10 million outstanding shares
of Target Company (TC) for CU10.00 per share, provided that at least 80 percent of TC’s
shares are tendered. Shares of TC are publicly traded and widely dispersed. On the
acquisition date, 90 percent of TC’s shares are tendered and acquired by AC for CU90
million. In the week before the announcement of the offer, TC’s shares were trading at
CU8.85–CU9.15 per share. During the first week after the acquisition date, the
remaining 1 million outstanding shares of TC continue to trade with significantly lower
volume and greater volatility (at prices ranging from CU8.50 to CU13.00 per share).
A13. In this example, the consideration transferred by AC for 90 percent of the equity
interests of TC is determined to be the best basis for estimating the fair value of TC as
CU100 million (10 million shares × CU10.00). First, there is no evidence to suggest that
the price of CU10.00 per-share exchanged for the 90 percent interest is not representative
of the price that knowledgeable, unrelated willing parties would pay at the acquisition
date in exchange for a 100 percent ownership interest in TC. In fact, AC offered to pay
CU10.00 for all of the outstanding shares. Second, because the shares were widely
dispersed, there is no evidence that it would be necessary to pay an amount other than CU
10.00 per share to obtain 100 percent of the shares.
Example 2: Acquisition of Less Than 100 Percent of the Equity Interests of an Acquiree in a
Business Combination Achieved in Stages
A14. Assume the same facts as in paragraph A12, except that AC owns 100,000 shares
(1 percent) of TC that it originally purchased at CU8.50 per share. The shares are
classified as available-for-sale securities and carried at fair value. For the reasons
described in paragraph A13, the amount paid (CU10.00 per share) to obtain a 90 percent
interest (an additional 8.9 million shares) continues to be the best basis for measuring the
fair value of TC as CU100 million. However, in accordance with the provisions of
paragraph 56, AC recognizes a gain of CU150,000 [(CU10.00 – CU8.50) × 100,000
shares] on its original 1 percent noncontrolling equity investment in income. The
27
carrying amount of CU1 million for that 1 percent investment, like the CU89 million
investment for the 8.9 million shares acquired, is eliminated in consolidation.
Example 3: Acquisition of Less Than 100 Percent of the Equity Interests of an Acquiree with
Evidence of a Control Premium
A15. Assume that a single Founding Shareholder (FS) owns 60 percent of TC’s shares,
and the remaining 40 percent of TC’s 10 million shares are widely dispersed and have
been publicly trading in the CU9.85–CU10.15 range. Also assume that FS desires to sell
its controlling 60 percent interest in TC, and, on the basis of its knowledge of the
industry, FS identifies AC as the highest bidder if FS was interested in making TC
available for sale to all potential buyers. Following private negotiations, AC buys all of
FS’s holdings in TC for CU81 million (CU13.50 per share), a premium of about CU3.50
per share over the market price of the publicly traded noncontrolling shares on the
acquisition date. During the first week following the acquisition, the noncontrolling
shares of TC traded in a range of CU8.50–CU13.00. AC willingly paid a premium over
the market price of the publicly traded shares on the basis of its assessment that:
a.
b.
TC, as a whole, would be worth between CU110 million and CU130 million to
other marketplace participants (based on market comparisons of companies similar
to TC and its best estimate as to the likely synergies that those marketplace
participants might be able to achieve).
AC can extract synergies similar to those of other marketplace participants, as well
as generate additional savings by making proprietary technology available to TC.
A16. At issue is whether the consideration transferred by AC for the less than 100
percent equity interest, by itself, can be presumed to provide the best basis for measuring
the fair value of TC (that is, the fair value that knowledgeable, unrelated willing parties
would exchange for a 100 percent equity interest in TC).
A17. In this example, AC has information that suggests that CU135 million is not
necessarily representative of the amount that other knowledgeable, unrelated willing
parties would pay for TC as a whole. Moreover, the market prices for the noncontrolling
shares at the acquisition date (CU9.85 – CU10.15 per share) and during the first week
following the acquisition (CU8.50 – CU13.00) suggest that CU13.50 per share is not
representative of the fair value of TC, as a whole. In this case, the fair value of TC may
be estimated on a preliminary basis to be CU121 million based on (a) the CU81 million
paid for the controlling 60 percent interest plus CU40 million for the value of the
noncontrolling shares ([4 million × CU10.00]) and (b) the fact that CU121 million falls
within the CU110 million–CU130 million range used in AC’s preliminary assessments of
the value of TC. However, before AC concludes that CU121 million is its best estimate
of the fair value of TC, consistently with the objective of measuring the fair value for 100
percent of the equity interests in the acquiree and with the guidance in Proposed
Statement, Fair Value Measurements, AC should refine its initial estimate of fair value
using other relevant valuation techniques, as appropriate. Thus, AC might refine its
preliminary assessment of the fair value of TC using, for example, the market and income
approaches discussed in paragraphs A20–A23.
28
Measuring the Fair Value of the Acquiree Using Valuation Techniques
A18. In some circumstances, the measurement of the fair value of the acquiree should not
be based on the consideration transferred. These circumstances include the following:
a.
b.
c.
The acquirer does not transfer any consideration on the acquisition date (for
example, a business combination in which an entity (the acquiree) repurchases its
own shares and, as a result, an existing investor (the acquirer) obtains control of that
entity).
There is evidence that the transaction is not an exchange of equal values by willing
parties (for example, a business combination in which the seller is acting under
duress).
The fair value of the total consideration transferred is not more reliably measurable
than the fair value of the acquiree (for example, a business combination in which
two private business entities or two mutual entities combine through an exchange of
equity or member interests and the fair value of the acquiree is more clearly evident
and, thus, more reliably measurable than the fair value of the equity or member
interests transferred by the acquirer).
A19. When the measurement of the fair value of the acquiree is not based on the
consideration transferred, that measurement should be based on observable prices for a
business that is similar to the acquiree, if such information is available. Otherwise, fair
value should be estimated using multiple techniques that are relevant and for which
reliable data are available. The results of the multiple techniques would then be
evaluated considering the relevance and reliability of the inputs used to estimate the fair
value of the acquiree. The techniques applied and evaluated might be the market
approach, the income approach, or several variations of each on the basis of the relevance
of the approach and the extent of the available data.
Market Approach
A20. In applying the market approach, the basic steps are (a) define and assess the
available marketplace data (and adjust, if necessary) to derive one or more valuation
ratios and (b) apply the appropriate valuation ratios to the acquiree. As applied to
measuring the fair value of a business for the purposes of applying this Statement, the
market approach typically is based on prices of publicly traded equity shares or prices in
other business combinations involving comparable businesses for which the terms of the
arrangements are disclosed. Identifying comparable businesses requires judgments about
the degree to which operational, market, financial, and nonfinancial factors are similar
between the acquiree and comparable businesses. Factors to be considered in making this
assessment might include products and services (operational factors); markets served,
competitors, and position within the industry (market factors); capital structure and
historical and forecast financial performance (financial factors); and the depth of
management, the expertise of personnel, and the maturity of the business (nonfinancial
factors). Other factors might be considered, depending on the nature of the business being
valued.
29
A21. Ideally, marketplace data are based on other entities within the same industry. In
the absence of that information, marketplace data might be based on economically similar
businesses. Thus, the degree of comparability between other businesses and the acquiree
varies and it may be necessary to adjust the valuation ratios to reflect differences. Such
adjustments should be consistent with the objective of measuring fair value.
Income Approach
A22. In applying an income approach, the basic steps involve estimating the value of
future cash flows or other income-related valuation measures such as residual income.
Paragraph 7(b) of Proposed FASB Statement, Fair Value Measurements, summarizes key
aspects of the income approach and states:
The income approach uses valuation techniques to convert future
amounts (for example, cash flows or earnings) to a single present amount
(discounted). The estimate of fair value is based on the value indicated by
marketplace expectations about those future amounts.
A23. Appendix A of that proposed Statement discusses the use of present value
techniques to estimate fair value.
Special Considerations in Applying the Market and Income Approaches to Mutual Entities
A24. When two mutual entities combine, the fair value of the acquiree may be more
reliably measurable than the fair value of member interests transferred by the acquirer. In
a business combination involving only mutual entities in which the only consideration is
an exchange of the acquirer’s member interests for the acquiree’s member interests, the
fair value of the acquiree and the fair value of the member interests exchanged as
consideration are presumed to be equal.
A25. Mutual entities, although similar in many ways to other businesses, have distinct
characteristics that arise primarily because the members of a mutual entity are both
customers and owners. Members of mutual entities generally expect to receive benefits
for their membership, often in the form of reduced fees charged for goods and services or
patronage dividends. The portion of patronage dividends allocated to each member is
often based on the amount of business the member did with the mutual entity during the
year.
A26. A fair value measurement of a mutual entity should include the assumptions that
marketplace participants would make about future member benefits as well as any other
relevant assumptions marketplace participants would make about the mutual entity. For
example, in determining the fair value of a mutual entity, an estimated cash flow model
may be used. In that case, the cash flows should be based on the expected cash flows of
the mutual entity, which are likely to include adjustments for member benefits, such as
the cost of reduced fees charged for goods and services.
30
Intangible Assets (Application of Paragraphs 40 and 41)
Research and Development Assets
A27. An acquirer recognizes and measures the acquisition-date fair value of all
identifiable intangible and tangible assets acquired in a business combination that are
used in research and development activities regardless of whether there is an alternative
future use for those assets. After initial recognition, the provisions of Statement 142, as
amended by paragraph D22 of this Statement, and FASB Statement No. 2, Accounting for
Research and Development Costs, as amended by paragraph D9 of this Statement, apply.
Recognition of Intangible Assets Separately from Goodwill
A28. In accordance with paragraph 40, the acquirer recognizes separately from goodwill
the acquisition-date fair value of intangible assets acquired in a business combination that
are identifiable. An intangible asset is identifiable if it arises from contractual or other
legal rights (the contractual-legal criterion) or is separable (separability criterion).
Intangible assets that meet the contractual-legal criterion are identifiable even if the asset
is not transferable or separable from the acquiree or from other rights and obligations.
For example:
a.
b.
c.
An acquiree leases a manufacturing facility under an operating lease that has terms
that are favorable relative to market prices. The lease terms explicitly prohibit
transfer of the lease (through either sale or sublease). The amount by which the
lease terms are favorable relative to market prices is an intangible asset that meets
the contractual-legal criterion for recognition separately from goodwill, even
though the lease contract cannot be sold or otherwise transferred.
An acquiree owns and operates a nuclear power plant. The license to operate that
power plant is an intangible asset that meets the contractual-legal criterion for
recognition separately from goodwill, even if it cannot be sold or transferred apart
from the acquired power plant. An acquirer may recognize the fair value of the
operating license and the fair value of the power plant as a single asset for financial
reporting purposes if the useful lives of those assets are similar.
An acquiree owns a technology patent. It has licensed that patent to others for their
exclusive use outside the United States in exchange for which the acquired business
receives a specified percentage of future non-U.S. revenue. Both the technology
patent and the related license agreement meet the contractual-legal criterion for
recognition separately from goodwill even if selling or exchanging the patent and
the related license agreement apart from one another would not be practical.
A29. The separability criterion means that the acquired intangible asset is capable of
being separated or divided from the acquiree and sold, transferred, licensed, rented, or
exchanged, either individually or together with a related contract, asset, or liability.
Exchange transactions provide evidence that an intangible asset is separable from the
acquiree and might provide information that can be used to estimate its fair value. An
acquired intangible asset meets the separability criterion if there is evidence of exchange
transactions for that type of asset or an asset of a similar type (even if those exchange
31
transactions are infrequent and regardless of whether the acquirer is involved in them).
For example, customer and subscriber lists are frequently licensed and thus meet the
separability criterion. Even if an acquiree believes its customer lists have different
characteristics from other customer lists, the fact that customer lists are frequently
licensed generally means that the acquired customer list meets the separability criterion.
A30. An intangible asset that meets the separability criterion should be recognized
separately from goodwill even if the acquirer does not intend to sell, license, or otherwise
exchange that asset. The separability criterion is met because the asset is capable of
being separated from the acquiree or combined entity and sold, transferred, licensed,
rented, or otherwise exchanged for something else of value. For example, because an
acquired customer list is generally capable of being licensed, it meets the separability
criterion regardless of whether the acquirer intends to license it.
A31. An intangible asset that is not separable from the acquiree or combined entity
individually meets the separability criterion if it is separable in combination with a
related contract, asset, or liability. For example:
a.
b.
Deposit liabilities and related depositor relationship intangible assets are exchanged
in observable exchange transactions. Therefore, the depositor relationship
intangible asset should be recognized separately from goodwill.
An acquiree owns a registered trademark, a related secret formula, and unpatented
technical expertise used to manufacture the trademarked product. To transfer
ownership of a trademark, the owner is also required to transfer everything else
necessary for the new owner to produce a product or service indistinguishable from
that produced by the former owner. Because the unpatented technical expertise
must be separated from the acquiree or combined entity and sold if the related
trademark is sold, it meets the separability criterion.
A32. An acquirer subsumes into goodwill the value of any acquired intangible asset that
is not identifiable as of the acquisition date. For example, an acquirer may attribute value
to the potential contracts the acquiree is negotiating with prospective new customers at
the acquisition date. Because those potential contracts are not identifiable intangible
assets at the acquisition date, they are not recognized separately from goodwill. The value
of those contracts should not be reclassified from goodwill for events that occur after the
acquisition date. However, the acquirer should assess the facts and circumstances
surrounding events occurring shortly after the acquisition to determine whether a
separately recognizable intangible asset existed at the acquisition date.
A33. After initial recognition, intangible assets acquired in a business combination are
accounted for in accordance with the provisions of Statement 142. However, as described
in paragraph 8 of Statement 142, the accounting for some acquired intangible assets after
initial recognition is prescribed by other Statements.
A34. The identifiability criterion is used to determine whether an intangible asset should
be recognized separately from goodwill. It does not provide guidance for measuring the
fair value of an intangible asset. That criterion does not restrict the assumptions used in
32
estimating the fair value of an intangible asset. For example, assumptions that
marketplace participants would consider, such as expectations of future contract
renewals, are considered in arriving at a fair value measurement even though those
renewals do not meet the identifiability criterion. EITF Issue No. 02-7, “Unit of
Accounting for Testing Impairment of Indefinite-Lived Intangible Assets,” provides
guidance for determining whether indefinite-lived intangible assets should be combined
into a single unit of accounting for purposes of testing for impairment if they are operated
as a single asset and, as such, essentially are inseparable from one another. That
guidance also is relevant for determining the unit of accounting when estimating the fair
values of intangible assets acquired in a business combination.
Examples of Intangible Assets That Are Identifiable
A35. The following are examples of identifiable intangible assets acquired in a business
combination. Some of the examples may have characteristics of assets other than
intangible assets. Accordingly, those assets should be accounted for on the basis of their
substance. These examples are not intended to be all-inclusive.
A36. Intangible assets designated with the symbol # are those that arise from contractual
or other legal rights. Those designated with the symbol * do not arise from contractual or
other legal rights but are separable. Intangible assets designated with the symbol # might
also be separable; however, separability is not a necessary condition for the asset to meet
the contractual-legal criterion.
Marketing-Related Intangible Assets
A37. Marketing-related intangible assets are those assets that are primarily used in the
marketing or promotion of products or services. Examples of marketing-related
intangible assets are:
a.
b.
c.
d.
e.
Trademarks, trade names, service marks, collective marks, certification marks #
Trade dress (unique color, shape, or package design) #
Newspaper mastheads #
Internet domain names #
Noncompetition agreements. #
Trademarks, trade names, service marks, collective marks, and certification marks #
A38. Trademarks are words, names, symbols, or other devices used in trade to indicate
the source of a product and to distinguish it from the products of others. A service mark
identifies and distinguishes the source of a service rather than a product. Collective marks
are used to identify the goods or services of members of a group. Certification marks are
used to certify the geographical origin or other characteristics of a good or service.
A39. Trademarks, trade names, service marks, collective marks, and certification marks
may be protected legally through registration with governmental agencies, continuous use
in commerce, or by other means. Provided it is protected legally through registration or
other means, a trademark or other mark acquired in a business combination is an
33
intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other
mark acquired in a business combination can be recognized separately from goodwill
provided the separability criterion is met, which would normally be the case.
A40. The terms brand and brand name are often used as synonyms for trademarks and
other marks. However, the former are general marketing terms that are typically used to
refer to a group of complementary assets such as a trademark (or service mark) and its
related trade name, formulas, recipes, and technological expertise. An entity is not
precluded from recognizing, as a single asset apart from goodwill, a group of
complementary intangible assets commonly referred to as a brand if the assets that make
up that group have similar useful lives.
Internet domain names #
A41. An Internet domain name is a unique alphanumeric name that is used to identify a
particular numeric Internet address. Registration of a domain name creates an association
between that name and a designated computer on the Internet for the period of the
registration. Those registrations are renewable. A registered domain name acquired in a
business combination meets the contractual-legal criterion.
Customer-Related Intangible Assets
A42. Examples of customer-related intangible assets are:
a.
b.
c.
d.
Customer lists *
Order or production backlog #
Customer contracts and related customer relationships #
Noncontractual customer relationships. *
Customer lists *
A43. A customer list consists of information about customers, such as their names and
contact information. A customer list also may be in the form of a database that includes
other information about the customers, such as their order histories and demographic
information. A customer list does not generally arise from contractual or other legal
rights. However, customer lists are frequently leased or exchanged. Therefore, a customer
list acquired in a business combination normally meets the separability criterion.
However, a customer list acquired in a business combination would not meet the
separability criterion if the terms of confidentiality or other agreements prohibit an entity
from selling, leasing, or otherwise exchanging information about its customers.
Order or production backlog #
A44. An order or production backlog arises from contracts such as purchase or sales
orders. An order or production backlog acquired in a business combination meets the
contractual-legal criterion, even if the purchase or sales orders are cancelable.
34
Customer contracts and the related customer relationships #
A45. If an entity establishes relationships with its customers through contracts, those
customer relationships arise from contractual rights. Therefore, customer contracts and
the related customer relationships acquired in a business combination meet the
contractual-legal criterion. This will be the case even if confidentiality or other
contractual terms prohibit the sale or transfer of a contract separately from the acquiree.
A46. A customer contract intangible asset and the related customer relationship
intangible asset may represent two distinct intangible assets. Both the useful lives and the
pattern in which the economic benefits of the two assets are consumed may differ.
A47. A customer relationship exists between an entity and its customer if (a) the entity
has information about the customer and has regular contact with the customer and (b) the
customer has the ability to make direct contact with the entity. Customer relationships
meet the contractual-legal criterion when an entity has a practice of establishing contracts
with its customers, regardless of whether a contract exists at the acquisition date.
Customer relationships also may arise through means other than contracts, such as
through regular contact by sales or service representatives. As noted in paragraph A44, an
order or a production backlog arises from contracts such as purchase or sales orders, and
therefore is also considered a contractual right. Consequently, if an entity has customer
relationships with its customers through these types of contracts, the customer
relationships also arise from contractual rights and, therefore, meet the contractual-legal
criterion.
Noncontractual customer relationships *
A48. If a customer relationship acquired in a business combination does not arise from a
contract, the relationship may be separable. Exchange transactions for the same asset or a
similar asset provide evidence of separability of a noncontractual customer relationship
and might also provide information about exchange prices that should be considered
when estimating fair value.
Examples illustrating customer contract and customer relationship intangible assets acquired in a
business combination
A49. The following examples illustrate the recognition of customer contract and
customer relationship intangible assets acquired in a business combination.
a. AC acquires TC in a business combination on December 31, 20X5. TC has a fiveyear agreement to supply goods to Customer. Both TC and AC believe that Customer
will renew the supply agreement at the end of the current contract. The supply
agreement is not separable. The supply agreement, whether cancelable or not, meets
the contractual-legal criterion. Additionally, because TC establishes its relationship
with Customer through a contract, the customer relationship with Customer meets the
contractual-legal criterion. In determining the fair value of the customer relationship,
AC considers assumptions such as the expected renewal of the supply agreement.
35
b.
AC acquires TC in a business combination on December 31, 20X5. TC
manufactures goods in two distinct lines of business: sporting goods and
electronics. Customer purchases both sporting goods and electronics from TC. TC
has a contract with Customer to be its exclusive provider of sporting goods.
However, there is no contract for the supply of electronics to Customer. Both TC
and AC believe only one overall customer relationship exists between TC and
Customer.
The contract to be Customer’s exclusive supplier of sporting goods, whether
cancelable or not, meets the contractual-legal criterion. Additionally, because TC
establishes its relationship with Customer through a contract, the customer
relationship with Customer meets the contractual-legal criterion. Because there is
only one customer relationship with Customer, the fair value of that relationship
incorporates assumptions regarding TC’s relationship with Customer related to both
sporting goods and electronics. However, if both AC and TC believe there were
separate customer relationships with Customer—one for sporting goods and another
for electronics—the customer relationship with respect to electronics would be
assessed by AC to determine whether it meets the separability criterion for
identification as an intangible asset.
c.
AC acquires TC in a business combination on December 31, 20X5. TC does
business with its customers solely through purchase and sales orders. At December
31, 20X5, TC has a backlog of customer purchase orders from 60 percent of its
customers, all of whom are recurring customers. The other 40 percent of TC’s
customers also are recurring customers. However, as of December 31, 20X5, TC
does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60 percent of TC’s customers, whether cancelable or not,
meet the contractual-legal criterion. Additionally, because TC has established its
relationship with 60 percent of its customers through contracts, those customer
relationships meet the contractual-legal criterion. Because TC has a practice of
establishing contracts with the remaining 40 percent of its customers, its
relationship with those customers also arises through contractual rights and,
therefore, meets the contractual-legal criterion, even though TC does not have
contracts with those customers at December 31, 20X5.
d.
AC acquires TC, an insurer, in a business combination on December 31, 20X5. TC
has a portfolio of one-year motor insurance contracts that are cancelable by
policyholders. Annual renewal rates are reasonably predictable. Because TC
establishes its relationships with policyholders through insurance contracts, the
customer relationship with policyholders meets the contractual-legal criterion. In
determining the fair value of the customer relationship intangible asset, AC
considers estimates of renewals and cross-selling. Statement 142 applies to the
customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance
contracts, AC considers estimates of cancellations by policyholders. Statement 60,
36
as amended by paragraph D13 of this Statement, requires an expanded presentation
that splits the fair value of acquired insurance contracts into two components:
(1) A liability measured in accordance with the insurer’s accounting policies for
insurance contracts that it issues
(2) An intangible asset, representing the fair value of the contractual rights and
obligations acquired, to the extent that the liability does not reflect that fair
value. This intangible asset is excluded from the scope of Statement 142 and
FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. After the business combination, AC is required to measure
that intangible asset on a basis consistent with the measurement of the related
insurance liability.
Artistic-Related Intangible Assets
A50. Examples of artistic-related intangible assets are:
a.
b.
c.
d.
e.
Plays, operas, ballets #
Books, magazines, newspapers, other literary works #
Musical works such as compositions, song lyrics, advertising jingles #
Pictures, photographs #
Video and audiovisual material, including motion pictures or films, music videos,
television programs. #
A51. Artistic-related assets acquired in a business combination meet the identifiability
criterion if they arise from contractual or legal rights such as those provided by copyright.
Copyrights can be transferred either in whole through assignments or in part through
licensing agreements. In determining the fair value of an intangible asset protected by
copyright, consideration is given to the existence of any assignments or licenses of the
acquired copyrights. An acquirer is not precluded from recognizing a copyright intangible
asset and any related assignments or license agreements as a single asset, provided they
have similar useful lives.
Contract-Based Intangible Assets
A52. Contract-based intangible assets represent the value of rights that arise from
contractual arrangements. Customer contracts are one particular type of contract-based
intangible asset. If the terms of a contract give rise to a liability (which might be the case
if the terms of an operating lease or customer contract are unfavorable relative to market
prices), that liability is recognized as a liability assumed. Examples of contract-based
intangible assets are:
a.
b.
c.
d.
e.
f.
g.
Licensing, royalty, standstill agreements #
Advertising, construction, management, service or supply contracts #
Lease agreements (whether the acquiree is the lessee or lessor) #
Construction permits #
Franchise agreements #
Operating and broadcast rights #
Servicing contracts such as mortgage servicing contracts #
37
h.
i.
Employment contracts #
Use rights such as drilling, water, air, mineral, timber cutting, and route authorities.
#3
Servicing contracts such as mortgage servicing contracts #
A53. Contracts to service financial assets are one type of contract-based intangible asset.
Although servicing is inherent in all financial assets, it becomes a distinct asset by one of
the following:
a.
b.
When contractually separated from the underlying financial asset by sale or
securitization of the assets with servicing retained
Through the separate purchase and assumption of the servicing.
A54. If mortgage loans, credit card receivables, or other financial assets are acquired in a
business combination with servicing retained, the inherent servicing rights are not a
separate intangible asset because the fair value of those servicing rights is included in the
measurement of the fair value of the acquired financial asset.
Employment contracts #
A55. Employment contracts that are beneficial contracts from the perspective of the
employer are one type of contract-based intangible asset because the pricing of those
contracts is favorable relative to market prices.
Technology-Based Intangible Assets
A56. Examples of technology-based intangible assets are:
a.
b.
c.
d.
e.
Patented technology #
Computer software and mask works #
Unpatented technology *
Databases, including title plants *
Trade secrets, such as secret formulas, processes, recipes. #
3
Certain use rights may have characteristics of assets other than intangible assets. For example, certain
mineral rights are considered tangible assets based on the consensus in EITF Issue No. 04-2, “Whether
Mineral Rights Are Tangible or Intangible Assets.” Accordingly, use rights should be accounted for based
on their substance.
38
Computer software and mask works #
A57. If computer software and program formats acquired in a business combination are
protected legally, such as by patent or copyright, they meet the contractual-legal criterion
for identification as intangible assets.
A58. Mask works are software permanently stored on a read-only memory chip as a
series of stencils or integrated circuitry. Mask works may have legal protection. Mask
works with legal protection that are acquired in a business combination meet the
contractual-legal criterion for identification as intangible assets.
Databases, including title plants *
A59. Databases are collections of information, often stored in electronic form (such as on
computer disks or files). A database that includes original works of authorship may be
entitled to copyright protection. If a database acquired in a business combination is
protected by copyright, it meets the contractual-legal criterion. However, a database
typically includes information created as a consequence of an entity’s normal operations,
such as customer lists, or specialized information such as scientific data or credit
information. Databases that are not protected by copyright can be, and often are,
exchanged, licensed, or leased to others in their entirety or in part. Therefore, even if the
future economic benefits from a database do not arise from legal rights, a database
acquired in a business combination meets the separability criterion.
A60. Title plants constitute a historical record of all matters affecting title to parcels of
land in a particular geographical area. Title plant assets are bought and sold in exchange
transactions (either in whole or in part) or are licensed. Therefore, title plant assets
acquired in a business combination meet the separability criterion.
Trade secrets such as secret formulas, processes, recipes #
A61. A trade secret is “information, including a formula, pattern, recipe, compilation,
program, device, method, technique, or process that (1) derives independent economic
value, actual or potential, from not being generally known and (2) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy.”4 If the future
economic benefits from a trade secret acquired in a business combination are legally
protected, that asset meets the contractual-legal criterion. Otherwise, trade secrets
acquired in a business combination are identifiable only if the separability criterion is
met, which is likely to be the case.
4
Melvin, Simensky, and Lanning Bryer, The New Role of Intellectual Property in Commercial Transactions
(New York: John Wiley & Sons, 1998), page 293.
39
Initial Calculation and Allocation of Goodwill in a Business Combination in Which
the Acquirer Holds Less Than 100 Percent of the Equity Interests in an Acquiree at
the Acquisition Date (Application of Paragraph 58)
A62. In accordance with paragraph 58, in a business combination in which the acquirer
holds less than 100 percent of the equity interests in the acquiree at the acquisition date,
the acquirer allocates the amount of goodwill determined in accordance with paragraph
49 to the acquirer and the noncontrolling interests. The amount of goodwill allocated to
the acquirer shall be measured as the difference between the acquisition-date fair value of
the acquirer’s equity interest in the acquiree and the acquirer’s share in the acquisitiondate fair value of the separately recognized assets acquired and liabilities assumed. The
remainder of the goodwill shall be allocated to the noncontrolling interests. The goodwill
allocated to the acquirer shall not exceed the total goodwill calculated in accordance with
paragraph 49. The acquisition-date fair value of the acquirer’s equity interest in the
acquiree includes the fair value of any equity interests the acquirer owned immediately
before the acquisition date. The following example illustrates those requirements.
Example 4: Initial Calculation and Allocation of Goodwill to the Acquirer and
Noncontrolling Interests in the Acquiree
A63. On January 1, 20X5, AC acquires 80 percent of the equity interests in TC for
CU160. There is no evidence to suggest that this transaction is not an exchange of equal
values. Therefore, the consideration transferred of CU160 is presumed to be the fair value
of the 80 percent interest acquired by AC. Through valuation techniques, the fair value of
TC as a whole is determined to be CU195. As of the acquisition date, the fair value of the
separately recognizable identifiable assets acquired is CU210 and the fair value of the
liabilities assumed is CU60. On the basis of those facts, the amount of goodwill is
measured as follows:
CU
Fair value of TC
195
Less: net amount of the fair values of the separately recognized
identifiable assets acquired and liabilities assumed [CU210 – CU60]
(150)
Goodwill
45
As described in paragraph A62, the amount of goodwill allocated to AC and to the
noncontrolling interests of TC is calculated as follows:
CU
Fair value of AC’s 80 percent interest in TC
160
Less: AC’s share of the fair value of the identifiable net assets acquired
(80 percent × [CU210 – CU60])
(120)
Goodwill allocated to AC
40
Goodwill allocated to the noncontrolling interests in TC [CU45 – CU40]
5
40
Business Combinations in Which the Consideration Transferred for the Acquirer’s
Interest in the Acquiree Is Less Than the Fair Value of That Interest (Application of
Paragraphs 59–61)
Example 5: Business Combinations in Which the Consideration Transferred for 100
Percent of the Equity Interests in the Acquiree Is Less Than the Fair Value
A64. On January 1, 20X5, AC acquires 100 percent of the equity interests of TC in
exchange for AC’s shares with a value of CU190. Because of a regulatory requirement,
the former owner of TC did not have sufficient time to market TC to multiple potential
buyers. The management of AC initially measures the acquisition-date fair value of the
separately recognizable identifiable assets acquired at CU250 and the fair value of the
liabilities assumed at CU50. Management of AC estimates the fair value of TC to be
between CU215–CU230. Because the fair value of TC exceeds the fair value of the
consideration transferred, AC reviews the procedures it used to identify and measure the
assets acquired and liabilities assumed and to measure the fair values of both the
consideration transferred and TC on the acquisition date and decides that they were
appropriate. Nonetheless, management of AC also engages an independent valuation firm
to review its estimates. That firm, using multiple valuation techniques, determines that
the fair value of TC as a whole is CU225 because of economies of scale that any likely
acquirer could achieve in TC’s operations. On the basis of those facts, the amount of
goodwill and the gain on the bargain purchase are measured as follows:
CU
Fair value of TC
225
Less: net amount of the fair values of the separately recognized
identifiable assets acquired and liabilities assumed [CU250 – 50]
(200)
Goodwill that tentatively would be recognized under paragraph 49
25
Fair value of TC
Less: fair value of the consideration transferred for TC
Excess of the fair value of TC over the fair value of the consideration
transferred for TC
Less: reduction of tentative goodwill (to zero)
Adjusted “gain” on bargain purchase for any excess remaining after
reducing goodwill to zero
225
(190)
35
(25)
10
A65. Alternatively, because the fair value of the consideration transferred for TC of
CU190 is less than the fair value of the separately recognized identifiable assets acquired
and liabilities assumed of CU200 [CU250 – 50], the amount of the gain may be
calculated as follows:
Fair value of the consideration transferred for TC
Less: net amount of the fair values of the separately recognized
identifiable assets acquired and liabilities assumed [CU250 – 50]
Gain on bargain purchase
41
CU
190
(200)
10
A66. AC would record its acquisition of TC in its consolidated financial statements as
follows:
Identifiable assets acquired (at fair value)
Goodwill
Liabilities assumed (at fair value)
Equity (for issuing shares of AC)
Gain on the bargain purchase
CU250
0
CU50
190
10
Example 6: Business Combinations in Which the Consideration Transferred for Less Than
100 Percent of the Equity Interests in the Acquiree Is Less Than the Fair Value
A67. Consider the same facts as in the previous example, except that AC acquires 80
percent of the equity interests in TC for CU152 in AC’s shares. If the goodwill measured
in accordance with paragraph 49 is reduced to zero, any remaining excess is recognized
as a gain attributable to the acquirer on the acquisition date. No gain is attributable to the
noncontrolling interest. On the basis of those facts, the amount of goodwill and the gain
on bargain purchase are measured as follows:
AC’s
TC, as a
Whole Interest
CU
CU
Fair value of TC (and related 80 percent controlling
and 20 percent noncontrolling interests)
Less: net amount of the fair values of the separately
recognized identifiable assets acquired and
liabilities assumed [CU250 – 50]
Goodwill that tentatively would be recognized under
paragraph 49 (and tentative allocations)5
Fair value of AC’s 80 percent interest in TC
[CU225 × .80]
Less: fair value of the consideration transferred for
AC’s interest
Excess of the fair value of AC’s interest in TC over
the consideration exchanged for that interest
Less: adjustment to reduce goodwill that tentatively
would have been recognized under paragraph 49
[CU25 × .80]
Adjusted “gain” for the 80 percent interest acquired
in a bargain purchase after reducing goodwill to
zero
5
Noncontrolling
Interest
CU
225
180
45
(200)
(160)
(40)
25
20
5
180
(152)
28
(20)
8
In a business combination in which the consideration transferred for a less than 100 percent equity interest
in the acquiree is less than the fair value of that interest, goodwill measured in accordance with paragraph
49 is allocable to the acquirer and noncontrolling interests based on their relative equity interests since
presumably the acquirer did not pay a control premium to obtain its interest.
42
A68. In this case, goodwill of CU25 that otherwise would be attributable to AC and the
noncontrolling interest is reduced to zero.
A69. Alternatively, because the fair value of the consideration transferred for AC’s 80
percent interest in TC of CU152 is less than the fair value of AC’s 80 percent interest in
the separately recognized identifiable assets acquired and liabilities assumed of CU160
[(CU250 – 50) × .80], the amount of the gain on AC’s purchase of the 80 percent interest
may be calculated as follows:
CU
Fair value of the consideration transferred for AC’s 80 percent interest
in TC
Less: net amount of the fair values of the separately recognized
identifiable assets acquired and liabilities assumed
[(CU250 – 50) × .80]
Gain on bargain purchase of 80 percent interest
152
(160)
8
A70. AC would record its acquisition of TC in its consolidated financial statements as
follows:
Identifiable assets acquired (at fair value)
Goodwill
Liabilities assumed (at fair value)
Equity (for issuing shares of AC)
Gain on the bargain purchase
Equity—noncontrolling interest [(CU250 – CU50) × .20]
CU250
0
CU50
152
8
40
Measurement Period (Application of Paragraphs 62–68 and 76(a))
A71. During the measurement period, the acquirer adjusts the provisional amounts
recognized at the acquisition date or recognizes additional assets or liabilities to reflect
any new information obtained about facts and circumstances that existed as of the
acquisition date that, if known, would have affected the measurement or recognition of
the amounts as of that date. Some factors to consider in determining whether new
information should result in a measurement period adjustment to the provisional amounts
recognized are:
a.
b.
c.
The timing of the receipt of subsequent information. Generally, new information
that is obtained shortly after the acquisition date is more likely to reflect
circumstances that existed at the acquisition date.
The type of subsequent information. An actual exchange with a third party
generally provides the best evidence of fair value.
The size of the adjustment and the ability to identify the reason for the adjustment.
Significant gains and losses that do not have identifiable causes and that are
recognized shortly after the acquisition date may be an indication of circumstances
that existed at the acquisition date.
43
Example 7: Lawsuit
A72. AC acquires TC on December 31, 20X5. One of the liabilities assumed in the
business combination is a liability for a lawsuit against TC. At the acquisition date, AC
initially measures the fair value of the liability on the basis of the information obtained
during the due diligence procedures and recognizes a provisional fair value for the
liability of CU95,000. Within the measurement period, AC discovers information about
the lawsuit against TC. AC determines that the information relates to facts that existed as
of the acquisition date, and AC revises its fair value measure of the liability as of the
acquisition date to CU80,000.
A73. In this example, the adjustment to the fair value of the liability (CU15,000
reduction) would be accounted for as part of completing the initial accounting in the
business combination because the new information (a) is obtained within the
measurement period and (b) relates to facts and circumstances that existed as of the
acquisition date. The adjustment would result in an offsetting adjustment to goodwill.
A74. In contrast, instead assume that a lawsuit is settled late in the measurement period
for an amount that is different from the initial estimate. After assessing all of the facts
and circumstances causing the difference, AC determines there is no new information
about facts that existed at the acquisition date. In that case, the difference would not be
an adjustment to the initial accounting for the business combination, but instead would be
recognized as an adjustment to income of the postcombination period.
Example 8: Disposal of an Asset during the Measurement Period
A75. AC acquires TC on September 15, 20X5. AC measures and recognizes a
provisional fair value of CU1,000 for TC’s specialized (nonwasting) Asset A. AC also
seeks an independent appraisal of the fair value of Asset A. On December 15, 20X5, AC
sells Asset A to Third Party Co. for CU1,750. The sale provides information about the
fair value of Asset A. Depending on the circumstances, the adjustment or adjustments to
the provisional fair value of Asset A (CU750 increase) would be accounted for as part of
completing the initial accounting for the business combination, as current-period income
or, perhaps, partly as each. That determination would depend on whether the sale at
CU1,750 is indicative of the fair value that existed at the acquisition date or indicative of
an increase in value that resulted from events and circumstances that occurred after the
acquisition date.
A76. In this example, also assume that before agreeing to sell Asset A to Third Party Co.,
AC receives the independent appraisal indicating a fair value of Asset A of CU1,500 as
of the acquisition date. In these circumstances, AC would adjust the fair value of Asset A
to the appraised value of CU1,500 as of the acquisition date. The CU500 adjustment to
Asset A would result in an offsetting adjustment to goodwill. The incremental CU250
would be recognized as a gain on the sale of Asset A.
44
Consideration Transferred and Contingent Consideration
A77. The measurement period guidance also applies to the consideration transferred,
including contingent consideration. The objective of the measurement period in relation
to the consideration transferred is the same, that is, to provide the acquirer a reasonable
time to obtain the information necessary to measure the items of consideration transferred
on the basis of facts and circumstances that existed at the acquisition date. Subsequent
changes in the fair value of consideration transferred, especially contingent consideration,
usually result from events and changes in circumstances that occur after the acquisition
date and, therefore, should not be recognized as measurement period adjustments.
Example 9: Contingent Payout Based on Future Earnings
A78. AC acquires TC on December 31, 20X5, for cash and contingent consideration.
The contingent consideration arrangement provides that if TC’s 20X6 earnings exceed
CU100,000, TC’s former owners will receive CU10,000 on March 31, 20X7.
A79. At the acquisition date, AC had obtained information about the historical
profitability of TC and projected its future cash flows and profitability on the basis of
AC’s assessment of economic conditions, TC’s prospects, and its plans for TC. On the
basis of that information, AC recognizes a provisional fair value of its liability for the
contingent consideration of CU3,700. Three months after the acquisition, TC
unexpectedly obtains a profitable contract from a new customer, and first quarter 20X6
earnings are substantially greater than AC’s projections for TC as of the acquisition date.
AC determines that the fair value of its liability is now CU7,000.
A80. In this example, the increase in the liability for the contingent consideration should
be recognized in income in the first quarter 20X6. AC had the information necessary to
measure the liability as of the acquisition date on the basis of the circumstances that
existed at that time. In this case, the change in projections (and the increased likelihood
of the contingent consideration payment) is identifiable with an event that occurred after
the acquisition date.
Example 10: Contingent Payout Based on the Outcome of a Lawsuit
A81. AC acquires TC on December 31, 20X5, for cash and contingent consideration.
The fair value of the contingent consideration liability depends on assessments about the
outcome of a lawsuit against TC that AC assumes in the combination. The values of the
liabilities for the lawsuit and for the contingent consideration are directly related. A
decrease in the fair value of the liability for the lawsuit leads to an equal increase in the
fair value of the liability for the contingent consideration. However, if the lawsuit results
in a judgment or settlement of CU200,000 or more, TC’s former owners will receive no
additional consideration.
A82. At the acquisition date, AC measures and recognizes a provisional fair value of the
liability for the lawsuit at CU95,000 and a provisional fair value of the liability for the
contingent consideration at CU3,000 on the basis of the information obtained during the
45
due diligence procedures. After the acquisition date and during the measurement period,
AC discovers information in the records about the lawsuit that relates to facts that existed
as of the acquisition date. On the basis of that information, AC revises its estimates of
the fair value of the liability for the lawsuit to CU93,000 and the fair value of the liability
for the contingent consideration to CU5,000.
A83. In this example, the adjustments to the liabilities should be accounted for as part of
completing the initial accounting for the business combination because the new
information was (a) obtained during the measurement period and (b) related to facts and
circumstances that existed as of the acquisition date. The adjustments equally affect the
fair values of the contingent consideration and the liability for the lawsuit. Therefore, in
this example the offsetting adjustments result in no change to the amount recognized for
goodwill.
Example 11: Illustration of Paragraphs 64 and 76(a)—Incomplete Appraisal
A84. AC acquires TC on September 30, 20X5. AC seeks an independent appraisal for an
item of property, plant, and equipment acquired in the combination. However, the
appraisal was not completed by the time AC completed its 20X5 annual financial
statements. AC recognized in its 20X5 annual financial statements a provisional fair
value for the asset of CU30,000. The item of property, plant, and equipment had a
remaining useful life at the acquisition date of five years. Four months after the
acquisition date, AC received the independent appraisal, which estimated the asset’s fair
value at the acquisition date at CU40,000.
A85. As described in paragraph 64, AC is required to recognize any adjustments to
provisional values as a result of completing the initial accounting for the business
combination as if the initial accounting for the business combination had been completed
at the acquisition date. In its 20X6 financial statements, AC presents a current period
balance sheet and a two year comparative income statement. Therefore, in the 20X6
financial statements, an adjustment is made to the opening carrying amount of the item of
property, plant, and equipment. That adjustment is measured as the fair value adjustment
at the acquisition date of CU10,000 less the additional depreciation that would have been
recognized had the asset’s fair value at the acquisition date been recognized from that
date (CU500 for three months’ depreciation). The carrying amount of goodwill also is
adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X5
comparative information is adjusted to include additional depreciation of CU500.
A86. In accordance with paragraph 76(a), AC discloses:
a.
b.
In its 20X5 financial statements, that the initial accounting for the business
combination has not been completed, and explains why this is the case.
In its 20X6 financial statements, the amounts and explanations of the adjustments to
the provisional values recognized during the current reporting period. Therefore,
AC discloses that the fair value of the item of property, plant, and equipment at the
acquisition date has been increased by CU10,000 with a corresponding decrease in
46
goodwill. The 20X5 comparative information is adjusted to include additional
depreciation of CU500.
Assessing What Is Part of the Exchange for the Acquiree (Application of
Paragraphs 69 and 70)
A87. In accordance with paragraph 69, the acquirer assesses whether any portion of the
transaction price and any assets acquired or liabilities assumed or incurred are not part of
the exchange for the acquiree. Because only the consideration transferred and the assets
acquired or liabilities assumed or incurred that are part of the exchange for the acquiree
are included in the business combination accounting any portion that is not part of the
exchange for the acquiree is accounted for separately from the business combination.
A88. Judgment is required to determine whether a portion of the transaction price paid, or
the assets acquired and liabilities assumed or incurred, are part of the exchange for the
acquiree. A transaction or event arranged primarily for the economic benefit of the
acquirer or the combined entity is not part of the exchange for the acquiree and is
accounted for separately from the business combination. One arranged primarily for the
benefit of the acquiree or its former owners generally is part of the exchange and is
included in the business combination accounting. The acquirer should consider the
following factors, which are neither mutually exclusive nor individually conclusive, to
determine whether a transaction or event is arranged primarily for the economic benefit
of the acquirer or combined entity, rather than for the acquiree or its former owners.
a.
b.
c.
The reasons for the transaction or event—Understanding the reasons why the
parties to the combination (the acquirer, the acquiree, and their owners, directors,
managers, and their agents) entered into a particular transaction or arrangement may
provide insight into whether it should be accounted for as part of the exchange for
the acquiree. For example, if a transaction is arranged primarily for the economic
benefit of the acquirer or combined entity with little or no benefit received by the
acquiree or its former owners, that portion of the transaction price paid (and any
related assets or liabilities) is unlikely to be part of the exchange for the acquiree
and would be accounted for separately from the business combination.
Who initiated the transaction or event—Understanding who initiated the transaction
or event may also provide insight into whether it should be accounted for as part of
the exchange for the acquiree. For example, a transaction or other event that is
initiated by the acquirer may be entered into for the purpose of providing future
economic benefits to the acquirer or combined entity with little or no benefit
received by the acquiree or its former owners. On the other hand, a transaction or
arrangement initiated by the owners of the acquiree is unlikely to be for the benefit
of the acquirer or combined entity.
The timing of the transaction or event—The timing of the transaction or event may
also provide insight into whether it should be accounted for as part of the exchange
for the acquiree. For example, a transaction between the acquirer and the acquiree
that take place during the negotiations of the terms of a business combination may
be entered into in contemplation of the business combination for the purpose of
47
providing future economic benefits to the acquirer or combined entity with little or
no benefit received by the acquiree or its former owners.
Example 12: Regulatory Asset Acquired That Is Included in the Business Combination
Accounting
A89. To induce the acquisition of WB (Weak Bank) by SB (Strong Bank), as a condition
of the combination between WB and SB, a regulatory authority agrees to provide
financial assistance in the form of cash, a receivable, or guarantees. That assistance is
transferred to SB (the combined entity) upon the closing of the combination agreement.
The regulatory authority, as part of its mission and public purpose, has an interest in
supporting the soundness of financial institutions, which includes protecting the interests
of the depositors of WB. From the perspective of the regulatory body, the assistance
provided to induce WB and SB to combine is in the furtherance of its mission.
A90. In this case, the transaction was not arranged primarily to achieve economic
benefits favorable to the acquirer or combined entity. If SB did not receive the financial
assistance, it might not have acquired WB or would have paid less to acquire WB
(presumably by an amount equal to the financial assistance). Thus, SB is indifferent
whether it pays less to acquire WB or if it pays more to acquire WB and also receives the
financial assistance. Thus, that assistance would be an asset acquired at the acquisition
date that is recognized as part of accounting for the business combination. The portion of
the consideration transferred for the financial assistance is also accounted for as part of
the business combination accounting even though it is transferred to the former owners of
WB not to the regulator that provided it.
Effective Settlement of Preexisting Relationships between the Acquirer and Acquiree in a
Business Combination
A91. The acquirer and acquiree may have a relationship that existed before the business
combination was contemplated. For purposes of this Statement, those relationships are
called preexisting relationships. A preexisting relationship between the acquirer and
acquiree may be contractual (for example, vendor and customer or licensor and licensee),
or noncontractual (for example, plaintiff and defendant).
A92. In general, the effective settlement of a preexisting relationship between the
acquirer and acquiree should be accounted for in the same way whether it is settled as
part of a business combination or separately from a business combination. Therefore, if
the business combination results in the effective settlement of a preexisting relationship,
the acquirer recognizes a gain or loss and measures it as follows:
a.
b.
A noncontractual preexisting relationship (such as a lawsuit) should be measured at
fair value.
A contractual preexisting relationship should be measured as the lesser of the
following:
(1) The amount by which the contract is favorable or unfavorable from the
perspective of the acquirer when compared with pricing for current market
transactions for the same or similar items.
48
(2)
Any stated settlement provisions in the contract available to the counterparty
to whom the contract is unfavorable.
To the extent that (2) is less than (1), the difference should be included as part of
the business combination accounting. Also, an unfavorable contract is not
necessarily a loss contract for the acquirer.
A93. A preexisting relationship may be a contract between the acquirer and the acquiree
in which the acquirer had previously granted to the acquiree the right to use the acquirer’s
recognized or unrecognized intangible assets (for example, a right to use the acquirer’s
trade name under a franchise agreement). In that case, paragraph 41 requires that the
acquirer recognize an intangible asset for that right separately from goodwill as part of
the business combination accounting. However, if the contract includes terms that are
favorable or unfavorable when compared with pricing for current market transactions for
the same or similar items, the acquirer should recognize a gain or loss separately from the
business combination for the effective settlement of the contract. The gain or loss is
measured in accordance with paragraph A92.
Example 13: Effective Settlement of a Supply Contract as a Result of a Business Combination
A94. AC purchases electronic components from TC under a five-year supply contract at
fixed rates. Currently, the fixed rates are higher than rates at which AC could purchase
similar electronic components from another supplier. The supply contract includes
provisions that AC can terminate the contract before the end of the initial 5-year term
only by paying a CU6 million penalty. With 3 years remaining under the supply contract,
AC pays CU50 million to acquire TC, which is the fair value of TC based on what other
marketplace participants would be willing to pay.
A95. Included in the total fair value of TC is CU8 million related to the fair value of the
supply contract with AC. The CU8 million represents a CU3 million component that is
“at-market” because the pricing is comparable to pricing for current market transactions
for the same or similar items (selling effort, customer relationships, and so forth) and a
CU5 million component for pricing that is unfavorable to AC. TC has no other
identifiable assets or liabilities related to the supply contract, and AC has not recognized
any assets or liabilities related to the supply contract before the business combination.
A96. In this example, AC recognizes separately from the business combination a
settlement loss of CU5 million (the lesser of the stated settlement amount and the amount
by which the contract is unfavorable to the acquirer).
Example 14: Effective Settlement of a Contract between the Acquirer and Acquiree in Which
the Acquirer Had Recognized a Liability before the Business Combination
A97. The amount recognized by AC as a gain or loss for the effective settlement of the
preexisting relationship will be affected if AC had previously recognized an amount in its
financial statements related to that preexisting relationship. Assume the same facts as in
Example 13 except that before the business combination AC had recognized a CU6
million liability on the supply contract. AC recognizes a CU1 million settlement gain on
49
that contract at the acquisition date (the CU5 million measured loss on the contract less
the CU6 million loss previously recognized) in income.
Arrangements to Pay for Employee Services
A98. Judgment is often required to determine whether arrangements to pay for employee
services (compensation arrangements) should be accounted for as part of the exchange
for the acquiree or separately from the business combination. To assist in that
determination, it is important to understand whether the transaction includes payments or
other arrangements for the economic benefit of the acquirer or combined entity with little
or no benefit received by the acquiree or its former owners. To the extent that it is, that
portion of the transaction price (and any related liabilities) should be accounted for
separately from the business combination. As described in paragraph A88, understanding
the reasons for the arrangement, who initiated the arrangement, and when the
arrangement was entered into may also assist in determining whether the arrangement
should be accounted for as part of the business combination accounting or separately.
A99. If it is not clear whether an arrangement to pay for employee services should be
accounted for as part of the exchange for the acquiree or separately from the business
combination, the following indicators also should be considered:
a.
b.
c.
d.
Continuing employment—If future payments are automatically forfeited if
employment ends, the arrangement may be compensation for postcombination
services that will benefit the combined entity and should be accounted for
separately from the business combination. In contrast, if future payments are not
affected by employment termination, the arrangement may be part of the
consideration transferred for the acquiree.
Duration of continuing employment—An employment agreement with an
employment period coinciding with or longer than the future payment period may
indicate that the arrangement is compensation for postcombination services that will
benefit the combined entity and should be accounted for separately from the
business combination accounting.
Level of payment—Reduced payments to owners who do not become employees
may indicate that the incremental payments to selling owners who become
employees are payments for postcombination services that will benefit the
combined entity and should be accounted for separately from the business
combination accounting. In contrast, payments in excess of reasonable levels paid
to employees with similar responsibilities may indicate that the payment is part of
the consideration transferred for the acquiree.
Formula for determining consideration—Contingent payments that are based on
multiples of future earnings, future cash flows, or other similar performance
measures may indicate that the formula is intended to verify the fair value of the
acquiree and, therefore, should be accounted for as part of the business
combination. In contrast, contingent payments based on percentages of earnings
may indicate a profit-sharing arrangement that should be accounted for separately
from the business combination.
50
Example 15: Arrangement That Is Part of the Exchange for the Acquiree
A100. TC hired a candidate as its new CEO under a 10-year contract. The contract
required TC to pay the candidate CU5 million in the event that TC is acquired before
(a) the contract expires or (b) the termination of CEO’s employment for specified causes
within the control of TC. AC acquires TC eight years later. CEO remained an employee
of TC through the acquisition date and, thus, will receive the additional payment under
the existing contract.
A101. AC is required to assess whether a portion of the consideration transferred and the
related liability incurred—required payment of CU5 million—is part of the exchange for
the acquiree that should be included in the business combination accounting. The
employment agreement was entered into by TC to secure the employment of CEO and by
CEO to secure payment and security. The employment agreement was also entered into
before the negotiations of the combination began. Thus, there is no reason to believe that
the agreement was arranged primarily to achieve economic benefits for AC. Therefore,
the consideration transferred and the related liability for the payment to CEO should be
regarded as part of the exchange for the acquiree and included in the business
combination accounting.
Acquirer Share-Based Payment Awards Exchanged for Awards Held by the Employees of
the Acquiree
A102. In a business combination, an acquirer may exchange its share-based payment
awards (replacement awards) for awards held by employees of the acquiree. Exchanges
of share options or other equity instruments in conjunction with a business combination
are modifications of share-based payment awards for the purposes of FASB Statement
No. 123 (revised 2004), Share-Based Payment. If the acquirer is obligated to replace the
acquiree’s awards, all or a portion of the acquirer’s replacement awards shall be included
in the measurement of the consideration transferred by the acquirer in the business
combination, as explained in the following paragraph.
A103. For the purpose of determining the portion of a replacement award that is part of
the consideration exchanged for the acquiree, the share-based payment awards issued by
the acquirer and acquiree shall be measured using the fair value-based measurement
method of Statement 123(R). The portion of the replacement award that is part of the
consideration transferred in exchange for the acquiree shall be determined as follows:
a.
b.
On the acquisition date, the acquirer recognizes an expense in postcombination
income for any excess of (1) the fair value-based measure of the acquirer’s
replacement award over (2) the fair value-based measure of the replaced acquiree
awards.
The remaining fair value-based measure of the acquirer’s replacement award is the
amount that remains after deducting the excess, if any, recognized in
postcombination consolidated net income under (a). Of this amount, the portion
attributable to past services is regarded as part of the consideration transferred in
exchange for the acquiree. The portion, if any, attributable to future services is not
51
c.
d.
part of the consideration transferred and is an expense to be recognized in
postcombination income. The guidance in (c) and (d) shall be followed to
determine the portion of the remaining fair value-based measure of the replacement
award attributable to past and future services. Depending on the circumstances, the
acquirer recognizes the replacement award as a liability or an equity instrument, as
required in accordance with Statement 123(R).
Of the remaining fair value-based measure of the replacement award, the portion
attributable to past services is equal to the remaining fair value-based measure of
the replacement award (or settlement) multiplied by the ratio of the past service
period to the total service period. The total service period is the period that begins
with the service inception date for the award of the acquiree and ends with the
service completion date for the replacement award. The past service period ends
and the future service period begins on the acquisition date. (The amount, if any,
which represents compensation expense to be recognized in postcombination
consolidated net income is the remaining fair value-based measure of the
replacement award (or settlement) multiplied by the ratio of the future service
period to the total service period.)
The requisite service period of awards issued by the acquirer shall reflect any
explicit, implicit, and derived service periods (consistent with the requirements of
Statement 123(R)).
A104. The following examples illustrate the application of these provisions in
circumstances in which AC issues replacement awards of CU100 (fair value-based
measure) at the acquisition date for TC awards of CU100 (fair value-based measure) at
the acquisition date. Because the fair value-based measure of replacement awards equals
the fair value-based measure of the replaced awards, there is no excess value recognized
as acquisition date expense in accordance with paragraph A103(a). Therefore, in
accordance with paragraph A103(b), the remaining fair value-based measure of the
replacement awards is CU100.
Example 16: Acquirer Replacement Awards, for Which No Services Are Required after the
Acquisition Date, Are Exchanged for Awards of the Acquiree, for Which the Required Services
Were Rendered before the Acquisition Date
A105. AC exchanges replacement awards for which no services are required after the
acquisition of TC for share-based payment awards of TC, for which the required services
were rendered before the business combination. When originally granted, the sharebased payment awards of TC had a requisite service period of four years. The required
services were rendered before the business combination. Because no future service is
required for AC’s replacement award, the AC replacement award represents part of the
consideration transferred by AC in the business combination. Thus, 100 percent of the
award is regarded as equity interest in the acquiree, and the CU100 replacement award is
included as part of the consideration transferred by AC.
52
Example 17: Acquirer Replacement Awards, for Which Services Are Required after the
Acquisition Date, Are Exchanged for Awards of the Acquiree, for Which the Required Services
Were Rendered before the Acquisition Date
A106. AC exchanges replacement awards that require three years of future service for
share-based payment awards of TC, for which the requisite service period was completed
before the business combination. When originally granted, the share-based payment
awards of TC had a requisite service period of four years. The TC employees had
rendered a total of seven years of service as of the acquisition date. Because all requisite
service was rendered, the TC awards represent an equity interest. However, because the
replacement awards require three years of future services, a portion of the replacement
award is to be attributed to compensation cost in accordance with the provisions of
paragraph A103(b). In this case, the total service period is 10 years—the period that
begins with the service inception date for the acquiree’s award and ends with the service
completion date for the replacement award. The portion attributable to past services is
equal to the remaining fair value-based measure of the replacement award (CU100)
multiplied by the ratio of the past service period (seven years) to the total service period
(10 years). Thus, CU70 would be attributable to the past service period and CU30 to the
future service period.
Example 18: Acquirer Replacement Awards, for Which Services Are Required after the
Acquisition Date, Are Exchanged for Awards of the Acquiree, for Which the Requisite Service
Period Was Not Completed before the Acquisition Date
A107. AC exchanges replacement awards that require one year of future service for
share-based payment awards of TC, for which the requisite service period was not
completed before the business combination. When originally granted, the awards of TC
had a requisite service period of four years. As of the acquisition date the TC employees
had rendered a total of two years’ service; thus, two years of service after the acquisition
date would be required. Because all required service has not been rendered, the TC
awards represent an equity interest in part (50 percent, two of the required four years of
service rendered as of the acquisition date).
A108. The replacement awards require only one year of future service. Thus, because
two years of service have been rendered, the total requisite service period is three years.
Normally, the portion attributable to past services would be equal to the remaining fair
value of the replacement award (CU100) multiplied by the ratio of the past requisite
service period (two years) to the total requisite service period (three years). Thus, CU67
would be attributable to the past services (and therefore, would be part of the
consideration transferred for the acquiree) and CU33 to the future services. However, in
accordance with paragraph A103(b), because the amount of the acquirer’s replacement
award attributable to past services (CU67) exceeds the amount of the replaced acquirer’s
awards attributable to those services (CU50, or CU100 × 2 ÷ 4 years), the excess (CU17)
is not part of the consideration transferred. Rather, that excess is an expense to be
recognized in postcombination financial statements. Thus, CU50 would be attributable to
past services (and included as part of the consideration transferred for the acquiree) and
CU50 to future services.
53
Example 19: Acquirer Replacement Awards, for Which No Services Are Required after the
Acquisition Date, Are Exchanged for Awards of the Acquiree, for Which the Requisite Service
Period Was Not Completed before the Acquisition Date
A109. Assume the same facts as in the previous example except that AC exchanges
replacement awards that require no service after the business combination. Like the
previous example, the portion that could be attributable to past services cannot exceed the
amount of the replaced TC awards attributable to those services. Thus, CU50 (which is
calculated as CU100 × 2 ÷ 4 years) is attributable to the past services and is part of the
consideration transferred for the acquiree, and CU50 is expense to be recognized in
postcombination financial statements. Because this replacement award has no requisite
service period associated with it, the entire CU50 would be recognised as an expense
immediately.
Illustration of Disclosure Requirements (Application of Paragraphs 71 and 72)
A110. The following example of some of the disclosure requirements of this Statement
is presented for illustrative purposes only, and, therefore, may not be representative of
actual transactions.
Footnote X: Acquisitions
On June 30, 20X2, Alpha acquired 100 percent of the outstanding common shares of
Beta. Beta is a provider of data networking products and services in Canada and Mexico.
As a result of the acquisition, Alpha is expected to be the leading provider of data
networking products and services in those markets. It also expects to reduce costs through
economies of scale.
The fair value of Beta on June 30, 20X2, was CU9,400, determined on the basis of the
consideration paid. Alpha’s consideration included CU6,000 of cash, 100,000 common
shares valued at CU2,400, and a contingent future payment arrangement with a fair value
of CU1,000 at the acquisition date. The fair value of the 100,000 common shares issued
was determined on the basis of the closing market price of Alpha’s common shares at the
acquisition date. The future payment arrangement is contingent on the levels of revenue
that Omega, an unconsolidated equity investment owned by Beta, achieves over the 12month period following the acquisition. The maximum potential undiscounted amount of
all future payments that Alpha could be required to make under the future payment
arrangement is CU2,000.
Alpha incurred CU500 of third-party expenses related to the acquisition of Beta. Those
expenses are included in the selling, general, and administrative expenses in Alpha’s
consolidated statement of income.
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the acquisition date.
54
At June 30, 20X2
Current assets
Property, plant, and equipment
Intangible assets subject to amortization
Intangible assets not subject to amortization
Goodwill
Total assets acquired
Current liabilities
Long-term debt
Total liabilities assumed
Net assets acquired
CU
2,400
1,500
2,500
2,400
2,200
11,000
(1,100)
(500)
(1,600)
9,400
Reverse Acquisitions (Application of Paragraph 12(c))
A111. In some business combinations, commonly called reverse acquisitions, the
acquirer is the entity whose equity interests have been acquired and the issuing entity is
the acquiree. For example, a private entity might initiate a combination and arrange to
have itself “acquired” by a smaller public entity as a means of obtaining a stock exchange
listing. Although the public entity that issues equity interests is regarded as the legal
parent and the private entity is regarded as the legal subsidiary, the private entity that
initiated and arranged the combination is the acquirer if it is determined to have obtained
control of the public entity in accordance with the requirements of paragraphs 11–16.
Therefore, for financial reporting purposes in a reverse acquisition, the legal parent is the
acquiree and the legal subsidiary is the acquirer.
A112. The requirement in this Statement that for an acquirer to measure and recognize
the fair value of the acquiree and the values of the assets acquired and liabilities assumed
on the acquisition date applies to reverse acquisition accounting. In a reverse acquisition,
the legal subsidiary is the acquirer that measures and recognizes the legal parent, which is
the acquiree. Paragraphs A113–A136 provide guidance for applying the acquisition
method to reverse acquisitions.
Fair Value of the Acquiree
A113. In accordance with paragraph 20 of this Statement, the acquisition-date fair value
of the consideration transferred by the acquirer is presumed to be the best basis for
measuring the fair value of the acquirer’s interest in the acquiree on that date, in the
absence of evidence to the contrary. If the consideration transferred by the acquirer is not
the best evidence of the fair value of the acquiree, the acquirer should use other valuation
techniques to measure directly the fair value of the acquiree (see paragraphs A18–A26).
When equity interests are issued as part of the consideration transferred in a business
combination, the fair value of those equity interests is measured as of the acquisition date.
55
A114. In a reverse acquisition, the consideration is deemed to have been transferred by
the legal subsidiary (that is, the acquirer for financial reporting purposes) in the form of
equity interests issued to the owners of the legal parent (that is, the acquiree for financial
reporting purposes). If the fair value of the equity interests of the legal subsidiary
(acquirer) is used to determine the fair value of the consideration transferred for the
acquiree, a method of calculating the fair value of the consideration is to determine the
number of equity interests the legal subsidiary (acquirer) would have had to issue to
provide the same percentage equity interest of the combined entity to the owners of the
legal parent (acquiree) as they have in the combined entity as a result of the reverse
acquisition. The fair value of the number of equity interests so calculated can be used as
the fair value of consideration transferred for the acquiree in the combination.
A115. If the fair value of the consideration transferred by the acquirer (that is, the fair
value of the equity interests of the legal subsidiary) is not the best basis for measuring the
fair value of the acquiree (legal parent), the acquirer should use other valuation
techniques. In a reverse acquisition, the fair value of the issued equity interests of the
legal parent (acquiree) as of the acquisition date, based on prices of the legal parent’s
publicly traded equity shares, may provide the best basis for measuring the fair value of
the legal parent (acquiree).
Preparation and Presentation of Consolidated Financial Statements
A116. Consolidated financial statements prepared following a reverse acquisition are
issued under the name of the legal parent, but described in the notes as a continuation of
the financial statements of the legal subsidiary (that is, the acquirer for financial reporting
purposes). Because such consolidated financial statements represent a continuation of the
financial statements of the legal subsidiary:
a.
b.
c.
d.
The assets and liabilities of the legal subsidiary (acquirer) are measured and
recognized in those consolidated financial statements at their precombination
carrying amounts.
The retained earnings and other equity balances recognized in those consolidated
financial statements are the retained earnings and other equity balances of the legal
subsidiary (acquirer) immediately before the business combination.
The amount recognized as issued equity interests in those consolidated financial
statements shall be determined by adding the issued equity of the legal subsidiary
(acquirer) immediately before the business combination to the fair value of the legal
parent (acquiree) determined in accordance with paragraphs A113–A115. However,
the equity structure appearing in those consolidated financial statements (that is, the
number and type of equity interests issued) reflects the equity structure of the legal
parent (acquiree), including the equity interests issued by the legal parent to effect
the combination.
Comparative information presented in those consolidated financial statements is
that of the legal subsidiary (acquirer).
A117. Reverse acquisition accounting applies only in the consolidated financial
statements, and not in the separate financial statements.
56
A118. Consolidated financial statements prepared following a reverse acquisition reflect
the values measured in accordance with this Statement for the assets and liabilities of the
legal parent (that is, the acquiree for financial reporting purposes). Therefore, the fair
value of the assets and liabilities of the legal parent are recognized in accordance with
paragraphs 28–51 of this Statement.
Noncontrolling Interest
A119. In a reverse acquisition, some of the owners of the legal subsidiary (acquirer) may
not exchange their equity interests for equity interests of the legal parent (acquiree).
Although the entity in which those owners hold equity interests (the legal subsidiary)
acquired another entity (the legal parent), those owners are treated as a noncontrolling
interest in the consolidated financial statements prepared after the reverse acquisition.
This is because the owners of the legal subsidiary that do not exchange their equity
interests for equity interests of the legal parent have an interest only in the results and net
assets of the legal subsidiary, and not in the results and net assets of the combined entity.
Conversely, the owners of the legal parent, notwithstanding that the legal parent is the
acquiree for financial reporting purposes, have an interest in the results and net assets of
the combined entity.
A120. Because the assets and liabilities of the legal subsidiary are measured and
recognized in the consolidated financial statements at their precombination carrying
amounts, the noncontrolling interest reflects the noncontrolling shareholders’
proportionate interest in the precombination carrying amounts of the legal subsidiary’s
net assets. This is unique to a reverse acquisition.
Earnings per Share
A121. As noted in paragraph A116(c), the equity structure appearing in the consolidated
financial statements prepared following a reverse acquisition reflects the equity structure
of the legal parent (acquiree), including the equity interests issued by the legal parent to
effect the business combination.
A122. For the purpose of calculating the weighted-average number of common shares
outstanding (the denominator) during the period in which the reverse acquisition occurs:
a.
b.
The number of common shares outstanding from the beginning of that period to the
acquisition date shall be deemed to be the number of common shares issued by the
legal parent (acquiree) to the owners of the legal subsidiary (acquirer)
The number of common shares outstanding from the acquisition date to the end of
that period shall be the actual number of common shares of the legal parent
(acquiree) outstanding during that period.
A123. The basic earnings per share disclosed for each comparative period before the
acquisition date that is presented in the consolidated financial statements following a
reverse acquisition shall be calculated by dividing the income of the legal subsidiary
attributable to common shareholders in each of those periods by the number of common
57
shares issued by the legal parent to the owners of the legal subsidiary in the reverse
acquisition.
A124. The calculations outlined in paragraphs A132 and A133 assume that there were
no changes in the number of the legal subsidiary’s issued common shares during the
comparative periods and during the period from the beginning of the period in which the
reverse acquisition occurred to the acquisition date. The calculation of earnings per share
shall be appropriately adjusted to take into account the effect of a change in the number
of the legal subsidiary’s issued common shares during those periods.
Example 20: Reverse Acquisition
A125. This example illustrates the accounting for a reverse acquisition in which Entity
A, the entity issuing equity instruments and, therefore, the legal parent, is acquired in a
reverse acquisition by Entity B, the legal subsidiary, on September 30, 20X6. This
example ignores the accounting for any income tax effects.
A126. The following are the balance sheets of Entity A and Entity B immediately before
the business combination:
Entity A
(Legal
Parent,
Acquiree)
CU
500
1,300
1,800
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Owners’ equity
Retained earnings
Issued equity
100 common shares
60 common shares
Total owners’ equity
Total liabilities and owners’ equity
Entity B
(Legal
Subsidiary,
Acquirer)
CU
700
3,000
3,700
300
400
700
600
1,100
1,700
800
1,400
300
—
1,100
1,800
—
600
2,000
3,700
A127. The following is other information used in this example:
a.
On September 30, 20X6, Entity A issues 2½ shares in exchange for each common
share of Entity B. All of Entity B’s shareholders exchange their shares in Entity B.
Therefore, Entity A issues 150 common shares in exchange for all 60 common
shares of Entity B.
58
b.
c.
The fair value of each common share of Entity B at September 30, 20X6, is CU40.
The quoted market price of Entity A’s common shares at that date is CU16.
The fair values of Entity A’s identifiable assets and liabilities at September 30,
20X6, are the same as their carrying amounts, except that the fair value of Entity
A’s noncurrent assets at September 30, 20X6, is CU1,500.
Calculating the Fair Value of the Acquiree
A128. As a result of the issue of 150 common shares by Entity A (legal parent,
acquiree), Entity B’s shareholders own 60 percent of the issued shares of the combined
entity (that is, 150 of 250 issued shares). The remaining 40 percent are owned by Entity
A’s shareholders. If the business combination had taken the form of Entity B issuing
additional common shares to Entity A’s shareholders in exchange for their common
shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership
interest in the combined entity to be the same. Entity B’s shareholders would then own 60
of the 100 issued shares of Entity B and, therefore, 60 percent of the combined entity. As
a result, the fair value of the consideration transferred by Entity B and the fair value of
the Entity A is CU1,600 (that is, 40 shares each with a fair value of CU40). If the fair
value of the consideration transferred by Entity B is determined not to be the best
evidence of the fair value of Entity A, then other valuation techniques should be used to
measure the fair value of Entity A directly. The fair value of Entity A could be measured
directly based on the fair value of Entity A’s shares outstanding.
Measuring Goodwill
A129. Goodwill is measured as the excess of the fair value of the acquiree, Entity A,
over the net amount of Entity A’s recognized identifiable assets and liabilities. Therefore,
goodwill is measured as follows:
CU
Fair value of Entity A (legal parent, acquiree)
Net recognized values of Entity A’s identifiable assets and
liabilities
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Goodwill
59
500
1,500
(300)
(400)
CU
1,600
(1,300)
300
Consolidated Balance Sheet at September 30, 20X6
A130. The following is the consolidated balance sheet immediately after the business
combination:
Current assets [CU700 + CU500]
Noncurrent assets [CU3,000 + CU1,500]
Goodwill
Total assets
CU
1,200
4,500
300
6,000
Current liabilities [CU600 + CU300]
Noncurrent liabilities [CU1,100 + CU400]
Total liabilities
900
1,500
2,400
Owners’ equity
Retained earnings
Issued equity
250 common shares [CU600 + CU1,600]
Total owners’ equity
Total liabilities and owners’ equity
1,400
2,200
3,600
6,000
A131. In accordance with paragraph A116(c), the amount recognized as issued equity
interests in the consolidated financial statements (CU2,200) is determined by adding the
issued equity of the legal subsidiary immediately before the business combination
(CU600) and the fair value of the legal parent (acquiree) measured in accordance with
paragraph A113–A115 (CU1,600). However, the equity structure appearing in the
consolidated financial statements (that is, the number and type of equity interests issued)
must reflect the equity structure of the legal parent, including the equity interests issued
by the legal parent to effect the combination.
Earnings per Share
A132. Assume that Entity B’s net income for the annual period ending December 31,
20X5, was CU600, and that the consolidated net income for the annual period ending
December 31, 20X6, is CU800. Assume also that there was no change in the number of
common shares issued by Entity B during the annual period ending December 31, 20X5,
and during the period from January 1, 20X6, to the date of the reverse acquisition on
September 30, 20X6. Earnings per share for the annual period ended December 31,
20X6, is calculated as follows:
60
Number of shares deemed to be outstanding for the period from January
1, 20X6, to the acquisition date (that is, the number of common shares
issued by Entity A (legal parent, acquiree) in the reverse acquisition)
Number of shares outstanding from the acquisition date to December 31,
20X6
Weighted-average number of common shares outstanding
[(150 × 9 ÷ 12) + (250 × 3 ÷12)]
Earnings per share [800 ÷ 175]
150
250
175
CU4.57
A133. Restated earnings per share for the annual period ending December 31, 20X5, is
CU4.00 (that is, the net income of Entity B of 600 divided by the number of common
shares issued by Entity A in the reverse acquisition).
Noncontrolling Interest
A134. Assume the same facts as above, except that only 56 of Entity B’s 60 common
shares are exchanged. Because Entity A issues 2½ shares in exchange for each common
share of Entity B, Entity A issues only 140 (rather than 150) shares. As a result, Entity
B’s shareholders own 58.3 percent of the issued shares of the combined entity (that is,
140 shares of 240 issued shares). The fair value of the consideration transferred for Entity
A, the acquiree, is calculated by assuming that the combination had taken place in the
form of Entity B issuing additional common shares to the shareholders of Entity A in
exchange for their common shares in Entity A. In calculating the number of shares that
would have to be issued by Entity B, the noncontrolling interest is ignored. The majority
shareholders own 56 shares of Entity B. For this to represent a 58.3 percent equity
interest, Entity B would have had to issue an additional 40 shares. The majority
shareholders would then own 56 out of the 96 issued shares of Entity B and, therefore,
58.3 percent of the combined entity. As a result, the fair value of the consideration
transferred for Entity A, the acquiree, is CU1,600 (that is, 40 shares each with a fair value
of CU40). This is the same amount as when all 60 of Entity B’s common shares are
tendered for exchange. The fair value of Entity A, the acquiree, does not change if some
of Entity B’s shareholders do not participate in the exchange.
A135. The noncontrolling interest is represented by the four shares of the total 60 shares
of Entity B that are not exchanged for shares of Entity A. Therefore, the noncontrolling
interest is 6.7 percent. The noncontrolling interest reflects the noncontrolling
shareholders’ proportionate interests in the precombination carrying amounts of the net
assets of Entity B, the legal subsidiary. Therefore, the consolidated balance sheet is
adjusted to show a noncontrolling interest of 6.7 percent of the precombination carrying
amounts of Entity B’s net assets (that is, CU134 or 6.7 percent of CU2,000).
61
A136. The consolidated balance sheet at September 30, 20X6, reflecting the
noncontrolling interest is as follows:
Current assets [CU700 + CU500]
Noncurrent assets [CU3,000 + CU1,500]
Goodwill
Total assets
CU
1,200
4,500
300
6,000
Current liabilities [CU600 + CU300]
Noncurrent liabilities [CU1,100 + CU400]
Total liabilities
900
1,500
2,400
Owners’ equity
Retained earnings [CU1,400 × 93.3 percent]
Issued equity
240 common shares [CU560 + CU1,600]
Noncontrolling interest
Total owners’ equity
Total liabilities and owners’ equity
62
1,306
2,160
134
3,600
6,000
Appendix B
BACKGROUND INFORMATION, BASIS FOR CONCLUSIONS, AND
ALTERNATIVE VIEW
CONTENTS
Paragraph
Numbers
Introduction............................................................................................................. B1–B2
Background Information....................................................................................... B3–B17
Statements 141 and 142—Objectives and Significant Steps ............................ B4–B6
Statement 141(R)—Objectives and Significant Steps .................................... B7–B17
Second Phase—Guidance for Applying the Acquisition Method ............ B8–B12
Third Phase—Combinations Involving Only Mutual Entities................ B13–B17
Basis for Conclusions ....................................................................................... B18–B203
Fundamental Principles ................................................................................ B19–B25
Definition of a Business Combination.......................................................... B26–B31
Change in Terminology ................................................................................... B31
Definition of a Business................................................................................ B32–B40
Scope............................................................................................................. B41–B43
Joint Ventures and Combinations between Entities under
Common Control ........................................................................................... B42
Not-for-Profit Organizations............................................................................ B43
Methods of Accounting for Business Combinations .................................... B44–B47
Methods of Accounting for Business Combinations Involving
Only Mutual Entities............................................................................. B45–B47
Application of the Acquisition Method ...................................................... B48–B183
Identifying the Acquirer.......................................................................... B49–B52
Convergence and Clarification of Statements 141’s Guidance
for Identifying the Acquirer ..................................................................... B50
Identifying the Acquirer in Business Combinations Involving
Only Mutual Entities....................................................................... B51–B52
Determining the Acquisition Date and Documentation Requirement .... B53–B55
Measuring the Fair Value of the Acquiree.............................................. B56–B99
Consideration of Basic Principles of Accounting for Acquisitions
of Assets.......................................................................................... B57–B59
Using the Fair Value of Consideration to Measure the Fair Value
of the Acquiree................................................................................ B60–B64
Using Other Valuation Techniques to Measure the Fair Value
of the Acquiree................................................................................ B65–B69
Measuring Specific Items and Determining Whether They Are
Part of the Consideration Transferred for the Acquiree.................. B70–B99
Measurement Date for Equity Securities .................................... B71–B73
Contingent Consideration, Including Subsequent Accounting... B74–B86
63
Paragraph
Numbers
Equity Shares or Member Interests of the Acquirer Issued as
Consideration ............................................................................ B87–B90
Share-Based Compensation Replacement Awards of the
Acquirer .................................................................................... B91–B92
Costs Incurred in Connection with a Business Combination...... B93–B99
Measuring and Recognizing the Assets Acquired and the Liabilities
Assumed............................................................................................ B100–B155
Principle for Measuring and Recognizing Assets Acquired
and Liabilities Assumed.............................................................. B101–B105
Guidance for Recognizing the Assets Acquired and Liabilities
Assumed...................................................................................... B106–B117
An Item that Is an Asset or a Liability at the Acquisition
Date ....................................................................................... B107–B110
Determining Whether Assets Acquired and Liabilities
Assumed Are Part of the Exchange for the Acquiree ........... B111–B117
Guidance for Particular Assets Acquired and Liabilities
Assumed...................................................................................... B118–B142
Valuation Allowances............................................................. B119–B121
Contingencies That Meet the Definitions of Assets or
Liabilities .............................................................................. B122–B134
Subsequent Measurement of Contingencies ........................... B135–B141
Recognition of Research and Development Assets ........................... B142
Exceptions to the Fair Value Measurement Principle................... B143–B155
Assets Held for Sale........................................................................... B144
Deferred Taxes........................................................................ B145–B150
Operating Leases..................................................................... B151–B152
Employee Benefit Plans..................................................................... B153
Goodwill ................................................................................. B154–B155
Recognizing Gains or Losses on Noncontrolling Equity
Investments ....................................................................................... B156–B160
Measurement Period ........................................................................... B161–B167
Business Combinations in Which the Consideration Transferred for
the Acquirer’s Interest in the Acquiree Is Less Than the Fair Value
of That Interest (Bargain Purchases)................................................. B168–B182
Distinguishing a Bargain Purchase from Measurement Errors..... B172–B177
Distinguishing a Bargain Purchase from a “Negative Goodwill
Result”......................................................................................... B178–B182
Business Combinations in Which the Consideration Transferred for
the Acquirer’s Interest in the Acquiree Is More Than the Fair Value
of That Interest (Overpayments).................................................................. B183
Disclosures................................................................................................ B184–B191
Disclosure of Information about Postcombination Revenue and Net
Income of Acquiree........................................................................... B187–B191
Effective Date and Transition ................................................................... B192–B196
64
Paragraph
Numbers
Effective Date and Transition for Combinations Involving Only
Mutual Entities.................................................................................. B194–B196
Benefits and Costs..................................................................................... B197–B203
Alternative View............................................................................................. B204–B212
Required Use of Fair Value to Measure and Remeasure Particular
Items........................................................................................................ B205–B209
Separate Display of Remeasurement Gains and Losses ........................... B210–B211
Use of the Acquisition Method for Particular Combinations Involving
Mutual Entities............................................................................................. B212
65
Appendix B
BACKGROUND INFORMATION, BASIS FOR CONCLUSIONS, AND
ALTERNATIVE VIEW
Introduction
B1. This basis for conclusions summarizes the FASB Board’s considerations in reaching
the conclusions in this Statement (Statement 141(R)). It includes the reasons why the
Board accepted particular approaches and rejected others. Individual Board members
gave greater weight to some factors than to others. The IASB’s considerations and
conclusions on the issues addressed jointly by the FASB and the IASB, which are similar
in most but not necessarily all respects, are summarized in the basis for conclusions to
[draft] IFRS 3 Business Combinations (revised 200X).
B2. This Statement carries forward without reconsideration the primary conclusions
reached in FASB Statement No. 141, Business Combinations. They include the
requirements to use the purchase method of accounting (which this Statement now refers
to as the acquisition method), to identify an acquirer for all business combinations, and the
criteria for recognizing an intangible asset separately from goodwill. Thus, the sections of
Statement 141 that discuss the basis for those conclusions remain relevant but because the
Board is not redeliberating or seeking comments on those conclusions, this Statement does
not repeat those sections of Statement 141.
Background Information
B3. The Board added the project on accounting for business combinations to its agenda
in August 1996. Its overall objective was to improve the transparency of accounting and
reporting of business combinations, including the accounting for goodwill and other
intangible assets. In 1999, the Board decided to conduct the project in phases. Since then,
separate phases of the project have progressively focused on specific objectives within
that overall objective:
a.
b.
c.
The first phase was completed in June 2001 with the concurrent issuance of
Statement 141 and FASB Statement No. 142, Goodwill and Other Intangible Assets.
(The second and third phases commenced immediately after the issuance of
Statements 141 and 142.)
The second and third phases address issues related to the application of the
acquisition method, including how that method should be applied to combinations
involving only mutual entities and business combinations achieved in stages (step
acquisitions). This Statement is a result of the Board’s deliberations on those issues
and revises Statement 141 to incorporate the decisions reached on those issues.
The fourth phase addresses the accounting for combinations involving not-for-profit
organizations, which is expected to result in the issuance of an Exposure Draft in the
second half of 2005 that will seek comments on the proposed accounting for those
combinations.
66
Statements 141 and 142—Objectives and Significant Steps
B4. Paragraphs B5–B7 of Statement 141 noted several of the specific reasons for
undertaking the business combination project. Those reasons are (paraphrased):
a.
b.
c.
Merger and acquisition activity increased. The increase in merger and acquisition
activity brought greater attention to the fact that two transactions that are
economically similar may be accounted for by different methods (either the poolingof-interests [pooling] method or the purchase method). Those methods could
produce dramatically different financial statement results and impair the
representational faithfulness and the comparability of financial statements.
The differences in the pooling and purchase methods affected competition in markets
for mergers and acquisitions. Entities that could not meet all of the conditions for
applying the pooling method believed that they faced an uneven playing field in
competing for acquisitions with entities that could apply that method. That
perception and the resulting attempts to expand the application of the pooling
method placed considerable tension on the interpretation and application of the
provisions of APB Opinion No. 16, Business Combinations. The volume of
inquiries fielded by the staffs of the FASB and the Securities and Exchange
Commission (SEC) and the auditing profession was evidence of that tension.
Cross-border differences in accounting standards for business combinations and the
rapidly accelerating movement of capital flows globally heightened the need for
accounting standards to be comparable internationally. Promoting international
convergence in accounting standards is part of the Board’s mission, and many
members of the Financial Accounting Standards Advisory Council (FASAC) cited
the opportunity to promote greater international comparability in the standards for
business combinations as a reason for adding this project to the Board’s agenda.
(FASAC had consistently ranked a possible project on business combinations as a
high priority for a number of years.)
B5. The Canadian Accounting Standards Board conducted a business combinations
project concurrently with the first phase of the FASB’s project. The goal of that
concurrent effort was to establish common standards on business combinations and
intangible assets. In 2001, the Canadian Accounting Standards Board concurrently
adopted their standards and issued new Handbook Sections 1581, Business Combinations,
and 3062, Goodwill and Other Intangible Assets, which are consistent with Statements
141 and 142.
B6. The fundamental issues included in Statement 141 focused on (a) eliminating the
alternative methods of accounting for business combinations, (b) providing guidance for
identifying the acquirer, and (c) providing criteria and guidance for recognizing intangible
assets acquired in a business combination. Statement 142 addresses the accounting for
acquired goodwill and other intangible assets, including their subsequent measurement.
Paragraphs B10–B17 of Statement 141 discussed the significant steps undertaken in
conducting the first phase of the project on accounting for business combinations.
67
Statement 141(R)—Objectives and Significant Steps
B7. Paragraphs B8–B17 discuss the objectives and significant steps during the Board’s
conduct of the second and third phases of its project that led to Statement 141(R).
Second Phase—Guidance for Applying the Acquisition Method
B8. At its outset, the objective of the second phase of the project was to consider the
existing guidance on the application of the acquisition method of accounting with the
objective of improving the completeness, relevance, and comparability of financial
information about business combinations provided in financial statements. Shortly after
commencing this phase, the FASB and the IASB agreed to reconsider jointly their
guidance for applying the acquisition method of accounting for business combinations.
Thus, consistent with the objective of this phase, the Board conducted this phase of the
project jointly with the IASB with the goal of developing a single high-quality accounting
standard that could be used for both international and domestic financial reporting.
B9. In the second phase of the project, the Board considered the purchase method
procedures that Statement 141 carried forward, without reconsideration, from Opinion 16
and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. The Board also addressed other related issues that it did not consider during
its deliberations in the first phase. They include accounting for business combinations
through means other than a purchase of its net assets or equity interests and business
combinations achieved in stages (step acquisitions). The Board’s deliberations related to
business combinations achieved in stages led to the Board comprehensively reconsidering
the accounting and reporting of noncontrolling interests and the issuance of FASB
Statement No. 1XX, Consolidated Financial Statements, Including Accounting and
Reporting of Noncontrolling Interests in Subsidiaries, which was issued concurrently with
this Statement. The Board also considered disclosure requirements consistent with its
objective of improving the relevance of information reported to investors, creditors, and
other users of financial statements.
B10. The two Boards shared staff and other resources and coordinated their deliberations
of issues; however, for the most part, the Boards separately deliberated the issues within
this joint project. The FASB deliberated the issues at 43 public decision-making
meetings. In addition, the Board met jointly with the IASB at public meetings held in
September 2002, October 2003, and April 2004.
B11. The IASB also has been conducting its project on business combinations in multiple
phases. The first phase of its project resulted in the issuance of IFRS 3 in March 2004 and
revisions to IAS 36 Impairment of Assets and IAS 38 Intangible Assets. The scope of the
IASB’s first phase was similar to Statements 141 and 142 and reached similar conclusions
on the major issues. The second phase of the IASB’s project is addressing issues not
addressed in their first phase. Those include issues related to the:
68
a.
b.
Application of the acquisition method
Accounting for combinations involving two or more mutual entities, and entities
brought together by contract alone without purchasing net assets or equity interests.
In April 2002, the IASB commenced part (a) of its second phase and, as discussed in
paragraph B8, agreed to conduct that part as a joint project with the FASB. (In 2004, the
IASB decided to also include part (b) in the scope of the joint project, thus, further
aligning its scope with that of Statement 141(R).) A forthcoming phase of the IASB’s
project on business combinations will address issues about the accounting for
circumstances in which separate entities or businesses are brought together to form a joint
venture, and combinations involving entities under common control.
B12. Throughout the project, the Boards and their staff received technical support from
members of the FASB’s business combinations resource group comprising individuals
with accounting, auditing, valuation, and related financial reporting expertise in business
combinations. In 2003, the FASB expanded the resource group to gain additional council
from financial analysts and other users of financial statements. The Board and some
IASB members held educational meetings with resource group members in April and
August 2003. In addition, throughout the project, the Board held educational meetings
with FASAC and other constituents and industry groups to benefit from their insight and
expertise on specific project and industry-related issues. To gain additional information
about the benefits and costs of this Statement, in September and October 2004, the Board
also conducted field visits with five companies that recently completed a business
combination.
Third Phase—Combinations Involving Only Mutual Entities
B13. Another objective of the FASB’s project was to consider and develop guidance on
the application of the acquisition method for combinations involving only mutual entities.
During its deliberations leading to Statement 141, the Board concluded that those
combinations should be accounted for using the acquisition method. However, as noted in
paragraphs 60 and B217 of Statement 141 and paragraphs 48(c) and 52 of Statement 142,
the Board decided to defer the effective date of those Statements for combinations
involving only mutual entities until it issued interpretative guidance about how mutual
entities should apply the acquisition method. At its outset, the Board conducted this third
phase of the project jointly with the Canadian Accounting Standards Board. The Board
(and the Canadian Accounting Standards Board) decided to use a “differences-based”
approach for addressing the issues in this phase and for identifying circumstances
particular to mutual entities that may require additional guidance. That approach
presumed that the provisions and guidance of Statements 141 and 142 would apply to
combinations involving only mutual entities, unless the economic conditions or other
circumstances of the combination were found to be so different to warrant a different
accounting treatment or further guidance.
B14. In October 2001, the Board held a roundtable discussion meeting with
representatives of different types of mutual entities to discuss the characteristics of mutual
69
entities and how they differ from other business entities and the present accounting for
business combinations. The Board learned that mutual entities have many common
characteristics to other business entities and some distinguishing characteristics. The
Board also learned that the economic motivations driving combinations involving only
mutual entities, such as, to provide constituents with a broader range of or access to
services and cost savings through economies of scale, are similar to those driving
combinations between other business entities. In particular, the Board learned that:
a.
b.
c.
Although mutual entities generally do not have shareholders in the traditional sense
of investor-owners, they are effectively “owned” by their members and are in
business to serve their members or other stakeholders. Like other businesses,
mutual entities strive to provide their members with a financial return or benefits;
however, a mutual entity generally does that by focusing on providing its members
with its products and services at lower prices. For example, in the case of credit
unions, the benefit may be a lower interest rate on a borrowing than might be
obtainable through an investor-owned financial institution. In a wholesale buying
cooperative, the benefit might be realized in lower net costs, after consideration of
patronage dividends.
Although the interests of members of a mutual entity generally are not transferable
as are most investor-ownership interests, like other ownership interests they usually
include a right to share in the net assets of the mutual entity in the event of its
liquidation or conversion.
Although a higher percentage of combinations among mutual entities happen
without an exchange of cash or other readily measurable consideration, that
circumstance is not unique to mutual entities. Business combinations without an
exchange of cash or other readily measurable consideration also happen between
other entities, particularly combinations of private companies.
B15. Following that October 2001 meeting, the Board deliberated the related issues about
combinations involving only mutual entities at eight of its public decision-making
meetings. Among the more significant of the identified differences considered and
deliberated are:
a.
b.
The existence of members or other stakeholders rather than shareholders (equity
investors in the traditional sense) and
The higher percentage of business combinations involving only mutual entities in
which there is no exchange of cash or other readily measurable consideration that
could provide evidence for measuring the fair value of the acquiree.
B16. After considering those differences and the related issues, the Board concluded that
combinations between mutual entities are economically similar to combinations between
other business entities and that there is no need to issue separate application guidance for
those business combinations. As a result, in December 2003, the Board:
a.
Affirmed its decision that the fair value of an acquired mutual entity and the
calculation of the related goodwill should be consistent with decisions reached in the
second phase of the project
70
b.
c.
Decided to provide broadly applicable guidance for determining the fair value of an
acquiree that would apply to all entities and some specific guidance for considering
benefits to members when measuring the fair value of an acquired mutual entity
Decided to include in this Statement the results of its deliberations and conclusions
on both the second and third phases of the project on business combinations. Thus,
Statement 141(R) provides accounting standards and interpretive guidance that is
applicable for business combinations between business and mutual entities.
B17. In January 2004, the Board held a meeting with representatives of organizations of
cooperative and other mutual entities to discuss its tentative conclusions and specific
concerns raised about the benefits and costs of implementing this Statement, including
regulatory and other public policy concerns. To gain additional information about the
benefits and costs of this Statement, in September and October 2004, the Board also
conducted field visits with three mutual entities (a credit union, a mutual bank, and a
cooperative) that recently merged with a similar entity. Each of those combinations was
accomplished without an exchange of cash or other readily measurable consideration.
Basis for Conclusions
B18. The FASB and IASB concurrently deliberated each of the fundamental issues
considered in the second phase of the project and reached the same conclusions on all of
those fundamental issues.6 The application of some provisions of this Statement may
differ, however, because of differences in:
a.
b.
c.
Other accounting standards of the Boards to which this Statement refers. For
example, recognition and measurement requirements for a few particular assets
acquired (for example, a deferred tax asset) and liabilities assumed (for example, an
employee benefit obligation) refer to existing generally accepted accounting
principles (GAAP) rather than fair value measures.
Disclosure practices of the Boards. For example, the FASB requires particular
unaudited supplementary information or particular disclosures of public companies
only. The IASB has no similar requirements for unaudited information and does not
distinguish between public and nonpublic entities.
Particular transition provisions for changes to past accounting practices of U.S. and
non-U.S. companies that previously differed.
Appendix F describes the substantive differences that remain.
6
The FASB worked concurrently with the Canadian Accounting Standards Board in considering the issues
in applying the acquisition method to combinations between mutual entities and they reached the same
conclusions on those issues. The IASB considered and deliberated those issues in 2004 and also reached the
same conclusions.
71
Fundamental Principles
B19. This Statement carries forward without reconsideration the primary provisions of
Statement 141, including its requirement that all business combinations be accounted for
by applying the acquisition method.
B20. In developing this Statement, the Board examined the inconsistencies that have
resulted from applying existing guidance to account for acquisitions of businesses. The
Board observed that those practices were based on a process that involves accumulating
and allocating costs as if a business combination was one transaction in a series of
investments. The use of that process for acquisitions that occur in different ways was a
primary cause of many inconsistencies in the measurement of assets acquired and
liabilities assumed. If a business combination was achieved in stages (a step acquisition),
that process involved accumulating the costs or carrying amounts of earlier purchases of
interests in an entity, which may have occurred years or decades ago. Those amounts
were added to the current costs to purchase incremental interests in the acquiree on the
acquisition date. The accumulated amounts of those purchases were then allocated to the
assets acquired and liabilities assumed.7 Allocating the accumulated amounts generally
resulted in recognizing the identifiable assets and liabilities of the acquiree at a mixture of
some current exchange prices and some carryforward book values for each earlier
purchase rather than the fair values of those assets and liabilities on the acquisition date.
B21. Those practices have long been criticized by users of financial statements as
resulting in information that lacks consistency, understandability, and usefulness.8 The
Board agreed that no useful purpose is served by reporting the assets or liabilities of a
newly acquired business using a mixture of their fair values at the date acquired and the
acquirer’s historical costs or carrying amounts. The Board concluded that those amounts
that relate to transactions and events occurring before the business is included in the
consolidated financial statements of the acquirer are not relevant to those who use the
financial statements of the acquirer.
7
AICPA Accounting Interpretation 2, “Goodwill in a Step Acquisition,” of APB Opinion No. 17, Intangible
Assets, had required that when an entity acquires another entity through a series of purchases (step
acquisition), the acquiring entity should identify the cost of each investment, the fair value of the underlying
assets acquired, and the goodwill for each step acquisition. That guidance was inconsistent with the
conclusion in paragraph 9 of Statement 141 that “a business combination occurs when an entity acquires net
assets that constitute a business or acquires equity interests of one or more other entities and obtains control
over that entity or entities” (footnotes omitted and emphasis added). It also is inconsistent with this
Statement’s principle that “the identifiable assets acquired and liabilities assumed in a business combination
should be recognized at their fair values on the date control is obtained” (see paragraph B23(b)).
8
In response to a September 1991 FASB Discussion Memorandum, Consolidation Policy and Procedures,
an organization representing lending officers said:
[We believe] that the assets and liabilities of the [acquiree] subsidiary reported in
the consolidation should reflect the full values established by the exchange transaction in
which they were purchased. . . . [We believe] the current practice of reporting individual
assets and liabilities at a mixture of some current exchange prices and some carryforward
book values is dangerously misleading. [Emphasis added.]
72
B22. The Board also observed the criticisms of the information resulting from the
application of that cost accumulation and allocation process to acquisitions of businesses
that resulted in ownership of less than all of the equity interests in the acquiree. In those
circumstances, the application of the cost accumulation and allocation process also
resulted in identifiable assets and liabilities being assigned amounts that generally were
other than their acquisition-date fair values.9 In addition, generally only a partial interest
in the goodwill asset was recognized.10 If, on the other hand, all of the interests in the
business were acquired in a single purchase, the process of assigning that current purchase
price (which typically would be equal to the fair value of the acquiree) generally resulted
in the assets and liabilities being measured and recognized at their acquisition-date fair
values.
B23. The Board also agreed with constituents that said the principles underlying standards
should strive to reflect the underlying economics of transactions and events. The Board
concluded that financial reporting and the relevance of information it provides for all
business combinations could be significantly improved by developing and consistently
applying fundamental principles that focus on the underlying economic circumstances that
exist on the date a business is acquired. Thus, the decisions in this Statement are guided
by the Board’s decision to apply the following fundamental principles in recognizing all
business combinations.
a.
b.
The acquirer obtains control of the acquiree at the acquisition date and, therefore,
becomes responsible and accountable for all of the acquiree’s assets, liabilities, and
activities, regardless of the percentage of its ownership in the acquiree. The Board
concluded that obtaining control of a business is a remeasurement event regardless
of how control is obtained. Thus, to provide information that is both relevant and
reliable, the acquirer’s accounting for those assets, liabilities, and activities begins at
the acquisition date and if the acquirer held a noncontrolling equity investment in the
acquired entity, its accounting for that investment comes to an end.
The identifiable assets acquired and liabilities assumed in a business combination
should be recognized at their fair values on the date control is obtained. The Board
concluded that that faithfully reflects the underlying economic circumstances at that
date and, thus, improves the relevance and comparability of the information
reported.
9
In its 1993 Position Paper, Financial Reporting in the 1990s and Beyond, the Association for Investment
Management and Research (AIMR) said:
An even more difficult situation arises when Firm B acquires less than total
ownership of Firm A. Under current practice, only the proportionate share of Firm A’s
assets and liabilities owned by Firm B are revalued, but all of Firm A’s assets and
liabilities—partially revalued, partially not—are consolidated with those of Firm B, none
of whose assets and liabilities have been revalued. What a mélange! The result is a
combination of historic and current values that only a mystic could sort out with
precision. [Page 28, emphasis added.]
10
In his 1927 text, Accounting: Its Principles and Problems, Henry Rand Hatfield notes that “although the
[acquirer] has only a fractional interest therein, it seems needlessly inconsistent in regard to the single asset
goodwill to show only [the acquirer’s] part of its value and to neglect entirely that portion representing the
equity of the outstanding [minority] stockholders” (New York: D. Appleton and Company, page 448).
73
c.
d.
The total amount to be recognized for the acquiree should be the fair value of the
acquiree as a whole. The Board concluded that that faithfully and consistently
reflects the underlying economic value of the acquiree, regardless of the ownership
interest in the acquiree at the acquisition date or whether control was achieved in
stages (involving two or more purchases of equity interests in the acquiree), or
without a purchase on the acquisition date and, thus, improves the relevance and
comparability of the information reported.
Business combinations generally are exchange transactions in which
knowledgeable, unrelated willing parties are presumed to exchange equal values.
Therefore, the Board concluded that “in the absence of evidence to the contrary, the
exchange price (referred to as the consideration transferred in this Statement) paid
by the acquirer on the acquisition date is presumed to be the best evidence of the
acquisition-date fair value of the acquirer’s interest in the acquiree” (paragraph 20)
and should be used as a basis for measuring the fair value of the acquiree.
B24. The Board concluded that by focusing on those principles this Statement will result
in significant improvements in financial reporting without imposing undue costs. In
particular, the Board believes this Statement’s emphasis on accounting for business
combinations at the acquisition date (rather than on a basis of tracking and accumulating
past costs) is consistent with its commitment to develop neutral standards that result in
accounting for similar transactions and circumstances similarly. In the past, the
accounting and reporting for the underlying assets and liabilities of the acquiree (and for
the acquiree’s subsequent activities) differed significantly depending merely on whether
some or all of the equity interests in the acquiree was purchased, or how the acquisition
was achieved, for example, through a series of purchases of equity interests ultimately
leading to control, a single purchase of equity interests resulting in control, or a change in
control on the acquisition date without a purchase of equity interests. In accordance with
this Statement, the underlying assets and liabilities of all businesses that are acquired
through a change in control will be measured and recognized similarly—based on the
underlying economic circumstances surrounding that business and its assets and liabilities
at the acquisition date.
B25. In its consideration of the benefits and costs of any new standard, the Board is
mindful that its standards should emphasize fundamental principles and strive to avoid
exceptions, particularly exceptions that add undue complexities and costs. The Board
concluded that this Statement’s focus on the fundamental principles in paragraph B23
accomplishes that objective. It also believes that the exceptions to those principles have
been appropriately limited to those that are necessary, at this time, to avoid undue
complexities and costs and to bring about this Statement’s significant improvements in a
way that minimizes disruptions to the continuity of reporting practice.
Definition of a Business Combination
B26. This Statement reflects the Board’s decision to broaden the definition of a business
combination to include all transactions and events in which control of a business is
obtained. Paragraph 3(e) defines a business combination as “a transaction or other event
74
in which an acquirer obtains control of one or more businesses” (emphasis added).
Previously, paragraph 9 of Statement 141 said:
For purposes of applying this Statement, a business combination occurs
when an entity acquires net assets that constitute a business or acquires
equity interest of one or more other entities and obtains control over that
entity or entities. This Statement does not address transactions in which
control is obtained through means other than an acquisition of net assets or
equity interest. . . . [Footnote references omitted.]
Paragraph B23 of Statement 141 explained that at that time:
The Board affirmed the decision it made in developing the 1999
Exposure Draft that [Statement 141] would not address transactions,
events, or circumstances that result in one entity obtaining control over
another entity through means other than the acquisition of net assets or
equity interests. Therefore, [Statement 141 did] not change current
accounting practice with respect to those transactions. For example, if a
previously unconsolidated majority-owned entity is consolidated as a result
of control being obtained by the lapse or elimination of participating veto
rights that were held by minority stockholders, a new basis for the
investment’s total carrying amount is not recognized under current
practice. Instead, only the display of the majority-owned investment in the
consolidated financial statements is changed. The majority-owned entity is
consolidated rather than reported as a single investment accounted for by
the equity method. That treatment is consistent with the practice for
accounting for step acquisitions, in which a parent obtains control of a
subsidiary through two or more purchases of the investee-subsidiary’s
stock. . . . [Emphasis added.]
B27. An objective of the second phase of its project leading to this Statement was to
reconsider whether the accounting for a change in control resulting in the acquisition of a
business should differ based on the means in which control is obtained. Although
business combinations typically occur when an acquirer purchases the net assets or
controlling equity interest of one or more businesses, the Board acknowledged, as it did in
Statement 141, that control of a business may be obtained in several ways. One of those
ways is a business combination in which an acquirer obtains control upon an event that
does not involve a current purchase of equity interests in that business. Paragraph 6 of
this Statement notes a specific example: a change in control through the lapse of minority
veto rights that previously kept the acquirer from controlling the acquiree even though the
acquirer held the majority voting interest in the acquiree. Paragraph 6 of this Statement
notes another example: a change in control that occurs upon an entity (the acquiree)
repurchasing some of its own shares and, as a result, an existing investor (the acquirer)
obtains control of that entity.
B28. The Board concluded that all changes of control in which an entity acquires a
business are economically similar transactions or events. Consistent with the first
75
fundamental principle noted in paragraph B23, the Board decided that to improve the
consistency of accounting guidance and the relevance, completeness, and comparability of
the resulting information about the assets, liabilities, and activities of that business, the
definition of a business combination in Statement 141 should be expanded to make it
applicable to all transactions or other events that result in an entity obtaining control of a
business.
B29. The FASB considered several suggestions for improving the definition of a business.
Those suggestions included whether to adopt the definition of a business combination in
IFRS 3, which the IASB issued in March 2004. IFRS 3 defined a business combination as
“the bringing together of separate entities or businesses into one reporting entity.” That
definition is sufficiently broad to encompass all transactions or other events in the scope
of this Statement. As noted in paragraphs BC47 and BC49 of IFRS 3, at that time the
IASB:
. . . decided that it should not, in the first phase of its Business
Combinations project, rule out the possibility of a combination occurring
(other than a combination involving the formation of a joint venture) in
which one of the combining entities does not obtain control of the other
combining entity or entities. Such combinations are sometimes referred to
as ‘true mergers’ or ‘mergers of equals’.
. . . concluded that the IFRS arising from the first phase of the project
should require all business combinations to be accounted for by applying
the purchase method. However, . . . the Board committed itself to exploring
in a future phase of its Business Combinations project whether the ‘fresh
start’ method might be applied to some combinations.
B30. The FASB observed, however, that the definition of a business combination in
IFRS 3 was too broad for its purposes and inconsistent with the conclusions reached at the
time it issued Statement 141. That is because it would allow for the inclusion of one or
more businesses without the reporting entity (acquirer) obtaining control of the business.
Paragraph B84 of Statement 141 explained that in cases that might be defined as
transactions in which an acquirer cannot be identified:
The Board concluded that the advantages of using the fresh-start
method . . . (primarily enhanced representational faithfulness) were
outweighed by the disadvantages of having two methods of accounting
(particularly the potential for accounting arbitrage but also the difficulties
of drawing unambiguous and nonarbitrary boundaries between the
methods). The Board further concluded that an alternative to the purchase
method of accounting for those combinations was not needed because it is
possible to apply the purchase method to them.
The Board affirmed that decision and decided against adopting the broader definition of a
business combination in IFRS 3 in part because that would be inconsistent with that
decision and could raise false expectations on the part of FASB’s constituents that the
Board would reconsider the fresh-start alternative as part of this project. In December
76
2004, the IASB also reconsidered its definition of a business combination and decided to
adopt the definition used in this Statement.
Change in Terminology
B31. Because the Board decided to broaden the definition of a business combination
beyond purchases of net assets or equity interests, a business combination could occur in
the absence of a purchase. Accordingly, the Board decided to replace the term purchase
method, which was previously used to describe the method of accounting for business
combinations, with the term acquisition method.
Definition of a Business
B32. Paragraph 5 of this Statement notes that “a transaction or other event is accounted
for as a business combination only if the assets acquired and liabilities assumed constitute
a business (an acquiree).” Paragraph 3(d) of this Statement defines a business as:
. . . [A]n integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing either:
(1)
(2)
A return to investors
Dividends, lower costs, or other economic benefits directly and
proportionately to owners, members, or participants.
B33. Previously, EITF Issue No. 98-3, “Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a Business,” contained the
guidance for identifying whether a group of net assets constitutes a business. Some
constituents, including some FASB resource group members, noted that particular aspects
of the definition and related guidance in Issue 98-3 seemed unnecessarily restrictive and
open to misinterpretations. They suggested that the Board reconsider that definition and
guidance as part of this phase of the project. The Board agreed. In addition to
considering how its definition and guidance might be improved, the FASB and the IASB
jointly decided that they should consider whether to adopt the same definition.
B34. The Board began by asking resource group members and other constituents to
identify problems in applying the existing definition in Issue 98-3. Resource group
members noted that the EITF framework generally is functioning well for purposes of
distinguishing between acquisitions of integrated groups of assets that are mature
businesses and those groups of assets that are not businesses. They noted, however, that
Issue 98-3 sometimes is interpreted inconsistently and perceived to be overly restrictive,
especially when applied to businesses in the early stages of development.
B35. The Board then considered the suitability of the existing definition and guidance. In
its deliberations, the Board considered the guidance in paragraph 6 of Issue 98-3 and the
EITF’s consensus, which said:
A business is a self-sustaining integrated set of activities and assets
conducted and managed for the purpose of providing a return to investors.
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A business consists of (a) inputs, (b) processes applied to those inputs, and
(c) resulting outputs that are used to generate revenues. For a transferred
set of activities and assets to be a business, it must contain all of the inputs
and processes necessary for it to continue to conduct normal operations
after the transferred set is separated from the transferor, which includes
the ability to sustain a revenue stream by providing its outputs to
customers. [Emphasis added.]
B36. The Board observed that the term self-sustaining in the existing definition and the
requirement in the quoted italicized sentence were leading to unnecessarily restrictive
interpretations about whether an integrated group of assets constitutes a business. It also
concluded that other aspects of the EITF guidance required clarification, in particular the
parts of paragraph 6 of Issue 98-3 that said:
A transferred set of activities and assets fails the definition of a
business if it excludes one or more of the above items [inputs, processes,
and outputs] such that it is not possible for the set to continue normal
operations and sustain a revenue stream by providing its products and/or
services to customers. However, if the excluded item or items are only
minor (based on the degree of difficulty and the level of investment
necessary to obtain access to or to acquire the missing item(s)), then the
transferred set is capable of continuing normal operations and is a business.
The assessment of whether excluded items are only minor should be made
without regard to the attributes of the transferee and should consider such
factors as the uniqueness or scarcity of the missing element, the time
frame, the level of effort, and the cost required to obtain the missing
element. If goodwill is present in a transferred set of activities and assets, it
should be presumed that the excluded items are minor and that the
transferred set is a business. . . .
The level of working capital or the adequacy of financing necessary to
conduct normal operations in the transferred set is not an indicator either
way as to whether the set meets the definition of a business. Likewise, if
the planned principal operations of the transferred set have commenced, the
presence and/or expectation of continued operating losses while the set
seeks to achieve the level of market share necessary to attain profitability is
not an indicator of whether or not the set is a business. However, if the
transferred set is in the development stage and has not commenced planned
principal operations, the set is presumed not to be a business. [Emphasis
added.]
B37. To address the perceived deficiencies and misinterpretations, the FASB decided to
modify the existing definition of a business and clarify the related guidance. The more
significant modifications to the guidance of Issue 98-3 were to:
a.
Replace self-sustaining in the definition with the notion that the integrated set of
activities and assets must be capable of being conducted and managed for the
purpose of either providing a return to investors, or dividends, lower costs, or other
78
b.
c.
d.
e.
f.
economic benefits directly and proportionately to owners, members, or participants.
The Board concluded that focusing on the capability to achieve the purposes of the
business helps avoid the overly restrictive interpretations that existed in accordance
with the former guidance.
Clarify the meanings of the terms inputs, processes, and outputs. The Board
concluded that clarifying the meanings of those key terms, together with other
modifications, helps eliminate the need for extensive detailed guidance and the kinds
of misinterpretations that sometimes stem from such guidance.
Clarify that inputs and processes applied to those inputs are essential and that
although the resulting outputs normally are present, resulting outputs need not be
present. Therefore, an integrated set of assets could qualify as a business if the
integrated set of activities and assets is capable of being conducted and managed to
produce the resulting outputs. The Board concluded that, together with item (a),
clarifying that outputs need not be present for an integrated set to be a business helps
avoid the overly restrictive interpretations that existed in accordance with the former
guidance. The Board believes that this clarification also helps eliminate the need for
extensive detailed guidance and assessments about whether a missing input, process,
or output is minor.
Clarify that a business need not include all of the inputs or processes that the seller
used in operating that business if a willing acquirer is capable of continuing to
produce outputs, for example, by integrating the business with its own inputs and
processes. The Board believes that this clarification also helps avoid the need for
extensive detailed guidance and assessments about whether a missing input or
process is minor.
Eliminate the presumption that an integrated set in the development stage is not a
business merely because it has not yet commenced its planned principal operations,
focusing instead on the definition of a business and whether the integrated set is
capable of being conducted and managed to produce the resulting outputs. The
Board concluded that elimination of this presumption is consistent with focusing on
assessing the capability to achieve the purposes of the business (item (a)) and helps
avoid the overly restrictive interpretations that existed with the former guidance.
Eliminate the guidance for assessing whether a missing input or process is minor.
The Board concluded that as a result of the improvements to the definition of a
business and clarifications to its related guidance, there no longer is a need for this
part of the former guidance.
B38. The Board also considered whether to retain guidance similar to the presumption in
Issue 98-3 that an asset group is a business if goodwill is present. Some of the FASB
resource group members suggested that that presumption results in circular logic that is
not especially useful guidance in practice. Some Board members agreed and indicated
that they would prefer to eliminate that presumption. Other Board members noted that
such a presumption could be useful in avoiding restrictive interpretations of the definition
of a business that would hinder their stated intent of applying this Statement’s guidance to
economically similar transactions. FASB members also observed that members of the
IASB prefer to retain the goodwill presumption, and, thus, to further convergence, the
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Board concluded that this Statement’s implementation guidance also should retain that
presumption.11
B39. Some Board members indicated that they believe that the guidance in this Statement
is appropriate for all asset acquisition transactions and expressed a preference for
expanding the scope of this Statement to acquisitions of asset groups. They noted that
doing so would avoid the need to distinguish between those groups that are businesses and
those that are not. However, other Board members noted that broadening the scope of this
Statement beyond acquisitions of businesses would require further research and
deliberation of additional issues and delay the implementation of this Statement’s
improvements to practice. The Board agreed and decided not to extend the scope of this
Statement to acquisitions of all asset groups.
B40. Consistent with the decision to apply this Statement to all acquisitions of asset
groups that are businesses and the objective of improving the consistency of the
procedures applied to all business combinations, the Board decided to amend FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, to clarify that the initial consolidation of a variable interest entity that is a
business is a business combination that is to be accounted for in accordance with the
provisions of this Statement.
Scope
B41. This Statement, like Statement 141, excludes from its scope the formation of a joint
venture, combinations involving businesses under common control, combinations between
not-for-profit organizations, and acquisitions of a for-profit business by a not-for-profit
organization.
Joint Ventures and Combinations between Entities under Common Control
B42. The Board, like the IASB, decided to continue to exclude from the scope of this
Statement and its definition of a business combination (a) the formation of a joint venture
and (b) combinations involving entities or businesses that are under common control. The
Board is not aware of developments since the issuance of Statement 141 that suggest that
issues surrounding the accounting for those events, which do not involve an acquirer
obtaining control of an acquiree, need to be addressed prior to issuing this Statement.
Rather, the Board continues to believe that those issues should be addressed in future
projects that address whether, and, if so, when to apply a new basis of accounting.
11
The FASB and the IASB considered the definition of a business and related guidance concurrently. Before
issuing IFRS 3 in March 2004, the IASB did not have a definition of a business or guidance similar to that in
Issue 98-3. Consistent with the suggestions of respondents to its Exposure Draft that led to IFRS 3, the
IASB decided to adopt a definition of a business and limited guidance when it issued IFRS 3 that was based
on the deliberations of the Boards as of March 2004. The definition and guidance in IFRS 3, although
similar to that in this Statement, was modified based on the further deliberations and joint decisions of the
Boards after the issue of IFRS 3 in March 2004.
80
Not-for-Profit Organizations
B43. The Board also decided to exclude from the scope of this Statement business
combinations between not-for-profit organizations or acquisitions of for-profit businesses
by not-for-profit organizations. The Board observed that one of the fundamental
principles (paragraph B23(d)) underlying decisions reached in this Statement does not
apply in combinations involving not-for-profit colleges, universities, hospitals, religious
organizations, and other charitable organizations. That is, it cannot be presumed that
combinations involving organizations that serve a public interest are necessarily exchange
transactions in which willing parties are presumed to exchange equal values. Thus, the
Board is addressing the accounting for combinations involving not-for-profit
organizations in a separate project. It plans to issue an Exposure Draft in the second half
of 2005 that will address and seek comments on the proposed accounting for those
combinations. The IASB does not have a separate project addressing business
combinations between not-for-profit organizations because standards of the IASB do not
address not-for-profit organizations.
Methods of Accounting for Business Combinations
B44. In Statement 141, the Board adopted a single-method approach for accounting for
business combinations in Statement 141, which is fundamentally different from the
approaches that existed under Opinion 16. The single-method approach required by
Statement 141 reflects the Board’s conclusion that virtually all business combinations are
acquisitions and, thus, all business combinations should be accounted for in the same
fundamental way that other asset acquisitions are accounted for—based on the values
exchanged. This Statement carries forward that conclusion. Paragraphs B25–B85 of
Statement 141 discussed the basis for that conclusion, including the reasons for requiring
the acquisition method and rejecting the pooling method and the fresh-start method. The
IASB addressed the accounting for business combinations and issued IFRS 3 in March
2004. That IFRS, like Statement 141, requires the use of a single method in accounting
for business combinations.
Methods of Accounting for Business Combinations Involving Only Mutual Entities
B45. As discussed in paragraphs B13–B17, during its deliberations leading to
Statement 141, the Board considered and concluded that combinations involving only
mutual entities also should be accounted for using the acquisition method but decided not
to mandate its use until the Board considered particular implementation questions raised
about the application of that method. During the Board’s deliberations leading to this
Statement, some representatives of mutual entities reiterated concerns expressed during
the development of Statement 141 about requiring all combinations of mutual entities to
be accounted for using the acquisition method. Many of those constituents reiterated
public policy concerns similar to those discussed in paragraphs B69–B76 of
Statement 141. For example, some said that eliminating the pooling method could impede
desirable combinations and reduce the amount of capital flowing into their industries.
They suggested, for example, that the requirement to identify an acquirer could impede
81
mergers of neighboring mutual entities when both the fact and appearance of a merger of
equals are of paramount importance to their directors, members, and communities.
B46. Others expressed concern that combinations of credit unions could be impeded
because of particular laws and regulatory requirements. They noted that regulatory
agencies currently evaluate the financial soundness of credit unions on the basis of their
accumulated retained earnings rather than their total equity capitalization. In accordance
with the pooling method, the recorded amount of the retained earnings of each of the
combining credit unions is carried forward and, thus, becomes the aggregate retained
earnings of the combined entity. In accordance with the acquisition method, however,
when an acquirer issues equity shares or member interest for those of the acquiree, the
retained earnings (and any other capital) of the acquiree is reflected as an increase to the
equity of the acquiring credit union but not as part of its retained earnings. The Board
acknowledges those concerns. However, despite that information, the Board retained its
view that, as noted in paragraph B76 of Statement 141, “its public policy goal is to issue
accounting standards that result in neutral and representationally faithful financial
information and that eliminating the pooling method is consistent with that goal.”
B47. During its deliberations leading to this Statement, the Board met with
representatives of mutual banks, credit unions, cooperatives, and other mutual entities in
October 2001 and January 2004. On both occasions, a few of the participants suggested a
preference for the fresh-start method as an alternative to the acquisition method for
particular mergers, particularly those mergers for which it is especially difficult to identify
the acquirer. On both occasions, however, those participants acknowledged the costs and
practical difficulties that a fresh-start alternative would impose, especially on entities with
recurring combinations. For the reasons noted in paragraphs B80–B85 of Statement 141,
the Board affirmed the conclusion reached in Statement 141 that the disadvantages of two
methods of accounting for business combinations outweigh the advantages of the freshstart method as an alternative for particular mergers. Accordingly, this Statement carries
forward the provision of Statement 141 that requires that all business combinations,
including mergers of mutual entities, be accounted for as acquisitions.
Application of the Acquisition Method
B48. Paragraph 9 of this Statement identifies four steps in applying the acquisition
method of accounting for a business combination. They are:
a.
b.
c.
d.
Identifying the acquirer
Determining the acquisition date
Measuring the fair value of the acquiree
Measuring and recognizing the assets acquired and the liabilities assumed.
Identifying the Acquirer
B49. Paragraph 10 of this Statement carries forward without reconsideration the provision
in Statement 141 that requires identification of an acquirer in every business combination.
Paragraphs B88–B96 of Statement 141 discussed the considerations and deliberations
82
leading to the Board’s conclusions and guidance in Statement 141 for identifying the
acquirer.
Convergence and clarification of Statement 141’s guidance for identifying the acquirer
B50. IFRS 3 and Statement 141 included similar but not identical guidance for identifying
the acquirer; however, because the guidance is worded differently, the Boards were
concerned that differences in identifying the acquirer could arise. Therefore, as part of the
effort to develop a common standard on accounting for business combinations, the Boards
decided to develop common guidance for identifying the acquirer that could be applied
internationally. For example, the FASB and the IASB decided to include in paragraph 11
of this Statement an explicit reference to its other Statements and Interpretations that
provide guidance for identifying the acquirer. That guidance, although previously implicit,
was not in Statement 141. The intent of the Boards is to conform and clarify their
guidance but not change the substance of the provisions for identifying an acquirer
previously provided in IFRS 3 and Statement 141.
Identifying the acquirer in business combinations involving only mutual entities
B51. The Board considered whether differences between mutual entities and investorowned entities or differences between combinations of mutual entities and combinations
of investor-owned entities justify different or additional guidance for identifying the
acquirer in combinations of mutual entities. The Board did not note any such differences.
As a result, the Board affirmed that the provision of Statement 141 that requires the
identification of an acquirer should apply to all business combinations, including those
involving only mutual entities.
B52. The Board also concluded that the indicators for identifying the acquirer in a
business combination are applicable to mutual entities and that no additional indicators are
needed to identify the acquirer in those combinations. The Board acknowledged that
difficulties may arise in identifying the acquirer in combinations of two virtually equal
mutual entities but observed that those difficulties also arise in combinations of two
virtually equal investor-owned entities. Based on its field visits, the Board concluded that
those difficulties, which are not unique to mutual entities, can be resolved in practice.
Determining the Acquisition Date and Documentation Requirement
B53. The Board decided to make three modifications to Statement 141’s acquisition date
guidance. First, this Statement carries forward and clarifies the acquisition-date guidance
to make explicit that the acquisition date is the date that the acquirer obtains control of the
acquiree. Second, as part of the FASB’s and the IASB’s efforts to develop a common
standard for business combinations, the acquisition-date documentation requirements for
purposes of assigning goodwill to reporting units in accordance with the provisions of
Statement 142 that previously were included in Statement 141 have been moved to
Statement 142 through an amendment of that Statement (paragraph D22(h)).
B54. Third, the Board also decided to eliminate the “convenience” exception that
Statement 141 carried forward from Opinion 16 and the reporting alternative permitted by
83
Accounting Research Bulletin No. 51, Consolidated Financial Statements. Previously an
acquirer could designate “an effective date other than the date assets or equity interests are
transferred or liabilities are assumed or incurred [which required] adjusting the cost of an
acquired entity and net income otherwise reported to compensate for recognizing income
before consideration is transferred” (Statement 141, paragraph 48). Paragraph 11 of
ARB 51 said:
When a subsidiary is purchased during the year, there are alternative
ways of dealing with the results of its operations in the consolidated
income statement. One method . . . is to include the subsidiary in the
consolidation as though it had been acquired at the beginning of the year,
and to deduct at the bottom of the consolidated income statement the
preacquisition earnings. . . . Another method of prorating income is to
include in the consolidated statement only the subsidiary’s revenue and
expenses subsequent to the date of acquisition.
B55. The Board concluded that to faithfully represent an acquirer’s financial position and
results of operations, the acquirer should account for all business combinations at the
acquisition date. That is, its financial position should reflect the assets acquired and
liabilities assumed at the acquisition date—not before they are obtained or assumed.
Moreover, the acquirer’s financial statements for the period should include only the cash
inflows and outflows, revenues and expenses, and other effects of the acquiree’s
operations after the acquisition date.
Measuring the Fair Value of the Acquiree
B56. Paragraph 19 of this Statement requires that the acquirer in a business combination
“measure the fair value of the acquiree, as a whole, as of the acquisition date.” Like
Statement 141, this Statement reflects the Board’s conclusion in Statement 141 that
virtually all business combinations are acquisitions. Thus, like Statement 141, this
Statement reflects the Board’s belief that, in concept, all acquisitions of assets and groups
of assets or net assets should be accounted for similarly. Acquisitions of businesses,
therefore, should be accounted for in the same way as acquisitions of other assets—based
on the values exchanged at the acquisition date—regardless of the manner in which the
business is acquired.
Consideration of basic principles of accounting for acquisitions of assets
B57. As discussed in paragraph B87 of Statement 141, it is a longstanding basic principle
of accounting that “an asset acquisition should be measured on the basis of the values
exchanged and that measurement of the values exchanged should be based on the fair
value of the consideration given or the fair value of the net assets acquired, whichever is
more reliably measurable.” Paragraphs 4–6 of Statement 141 described the general
concepts for initial recognition and measurement (that had been included in paragraph 67
of Opinion 16 (1970)):
Initial recognition. Assets are commonly acquired in exchange
transactions that trigger the initial recognition of the assets acquired and
84
any liabilities assumed. If the consideration given in exchange for the asset
(or net assets) acquired is in the form of assets surrendered (such as cash),
the assets surrendered are derecognized at the date of acquisition. If the
consideration given is in the form of liabilities incurred or equity interests
issued, the liabilities incurred and equity interests issued are initially
recognized at the date of acquisition (Opinion 16, paragraph 67).
Initial measurement. Like other exchange transactions generally,
acquisitions are measured on the basis of the fair values exchanged. In
exchange transactions, the fair values of the net assets acquired and the
consideration paid are assumed to be equal, absent evidence to the
contrary. Thus, the “cost”2 of an acquisition to the acquiring entity is equal
to the fair values exchanged and no gain or loss is generally recognized.
Exceptions to that general condition include (a) the gain or loss that is
recognized if the fair value of noncash assets given as consideration differs
from their carrying amounts on the acquiring entity’s books and (b) the
extraordinary gain that is sometimes recognized by the acquiring entity if
the fair value of the net assets acquired in a business combination exceeds
the cost of the acquired entity. . . (Opinion 16, paragraph 67).
Exchange transactions in which the consideration given is cash are
measured by the amount of cash paid. However, if the consideration given
is not in the form of cash (that is, in the form of noncash assets, liabilities
incurred, or equity interests issued), measurement is based on the fair value
of the consideration given or the fair value of the asset (or net assets)
acquired, whichever is more clearly evident and, thus, more reliably
measurable (Opinion 16, paragraph 67). [Emphasis added.]
____________________________________
2
Cost is a term that is often used to refer to the amount at which an entity initially
recognizes an asset at the date it is acquired, whatever the manner of acquisition.
[Emphasis added.]
B58. The Board observed that those basic principles also are consistent with the general
concepts acknowledged in APB Opinion No. 29, Accounting for Nonmonetary
Transactions. Paragraph 18 of Opinion 29 states that:
. . . in general accounting for nonmonetary transactions should be based
on the fair values of the assets (or services) involved which is the same
basis as that used in monetary transactions. Thus, the cost [initial basis] of
a nonmonetary asset acquired in exchange for another nonmonetary asset is
the fair value of the asset surrendered to obtain it, and a gain or loss should
be recognized on the exchange. The fair value of the asset received should
be used to measure the cost [initial basis] if it is more clearly evident than
the fair value of the asset surrendered. Similarly, a nonmonetary asset
received in a nonreciprocal transfer should be recorded at the fair value of
the asset received. [Emphasis added; footnote reference omitted.]
The Board concluded that this Statement’s objective of measuring the business received at
its fair value is consistent with those general concepts for acquisitions of assets.
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Moreover, the Board concluded that measurement principle—that is, measuring the
business at its fair value—should apply whether the business is acquired in an exchange
transaction or through other means. Thus, this Statement rejects the past practice of
measuring the acquiree in part at current exchange prices and in part at historical costs or
carrying amounts that had been a primary cause of the inconsistencies discussed in
paragraphs B20–B22.
B59. The Board acknowledges, however, that applying high-level principles without
sufficient guidance sometimes results in difficulties in practice and that those application
difficulties could lead to undue implementation costs. For example, applying the principle
that the fair value of the acquiree, as a whole, should be based on the fair value of the
consideration transferred or the fair value of the business (net assets) acquired, whichever
is more reliably measurable, could lead to difficulties in judging which is more reliably
measurable and inconsistencies in making such judgments. Moreover, strict application of
that principle could impose unnecessary cost to independently determine the fair values of
both the consideration transferred and the acquiree for purposes of judging which is more
reliably measurable. Thus, to help reduce the costs of implementing this Statement and to
promote greater consistency in the measurement techniques used in measuring the fair
value of an acquiree, the Board decided that this Statement should provide guidance for
applying its fair value measurement principle.
Using the fair value of consideration to measure the fair value of the acquiree
B60. As noted in paragraph 20, the Board observed that “business combinations are
usually arm’s length exchange transactions in which knowledgeable, unrelated willing
parties exchange equal values.” Therefore, the Board believes that, similar to present
practice for acquisitions of 100 percent of the equity interests in a business, in most cases
indirectly measuring the fair value of a business based on evidence of the fair value of the
consideration transferred remains a useful, if not preferable, measurement technique. The
Board concluded and paragraph 20 of this Statement specifies that “in the absence of
evidence to the contrary, the exchange price (. . . consideration transferred . . .) paid by the
acquirer on the acquisition date is presumed to be the best evidence of the acquisition-date
fair value of the acquirer’s interest in the acquiree.” Thus, the fair value of that
consideration is presumed to be the fair value of the acquiree as a whole in an acquisition
of 100 percent of the equity interest in an acquiree, in the absence of evidence to the
contrary.
B61. The Board also concluded that in acquisitions of less than 100 percent of the equity
interests of the acquiree, it often is appropriate for the acquirer to measure the fair value of
the acquiree, as a whole, based on the fair value of the cash or other consideration
transferred for its interest together with other available information. The Board observed
that in the United States, perhaps because of desired tax consequences, such acquisitions
often involve purchases in excess of 80 percent and sometimes more than 90 percent of
ownership interest in the acquiree. In those circumstances, the Board believes that
collectively the fair values of cash, other assets, and contingent consideration exchanged
by the acquirer for an acquisition of a partial ownership interest provide presumptive
evidence of the fair value of that partial interest acquired and that in the absence of
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evidence to the contrary, that evidence, together with other available information, should
be the basis for estimating the fair value of the acquiree as a whole.
B62. The Board acknowledges, however, that an acquirer may obtain control of an
acquiree through a transaction involving considerably smaller percentages of the
acquiree’s equity interest or, in some cases, through an event that results in control
without a purchase of any equity interests on the acquisition date. Accordingly, this
Statement acknowledges that in those circumstances measuring the fair value of the
acquiree at the acquisition date will require the use of other valuation techniques.
B63. The Board believes that emphasizing the use of the fair value of the consideration as
a basis for measuring the fair value of the acquiree is appropriate for several reasons.
First, the Board observed that business combinations generally are exchange transactions
in which knowledgeable, unrelated willing parties are presumed to exchange equal values.
Thus, the Board believes that in the absence of evidence to the contrary it can be
presumed that the fair value of the consideration transferred is representative of the fair
value of the acquirer’s interest in the business. Second, the Board believes that evidence
of the fair value of discrete items of consideration transferred by the acquirer, such as
cash, promissory notes, and nonmonetary assets, generally is readily available to the
acquirer or obtainable at a lower cost and that the fair values of those items generally will
be equally if not more reliably measurable than directly measuring the fair value of the
business as a whole. The Board acknowledges that some companies, generally large
companies with active acquisition programs, may have valuation professionals on their
staffs who have the expertise and ability to reliably measure the fair value of a potential
acquiree and that the cost to perform those measures may not be excessive for those
particular companies. Nonetheless, the Board believes that presuming that in the absence
of evidence to the contrary a reliable measure can be determined on the basis of the fair
value of consideration transferred is a reasonable way to mitigate the costs to the many
companies that do not have such resources.
B64. The Board also believes that emphasis on use of the consideration transferred as an
appropriate basis for determining the fair value of the business as a whole often will avoid
or minimize:
a.
b.
Unproductive disputes in practice about whether the consideration transferred or
another valuation technique provides the best evidence and basis for estimating the
fair value of the business in those close-call circumstances in which both
measurement techniques provide sufficiently reliable estimates
Incremental costs, for example, to independently verify valuations of the business
that were performed by the acquirer as part of its due diligence but are not
necessarily audited.
Accordingly, to facilitate the implementation of this Statement in practice, the Board
concluded that this Statement should (a) retain the presumptive attitude in present practice
that the consideration transferred for the acquirer’s interest in the acquiree generally
provides the best basis for measuring that interest and (b) provide guidance illustrating
how the fair value of the consideration transferred for less than 100 percent of the equity
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interests of an acquiree, together with other available information, might be used to
estimate the fair value of the acquiree as a whole (paragraphs A9–A17).
Using other valuation techniques to measure the fair value of the acquiree
B65. The Board observes, however, that this Statement’s presumption and guidance,
which emphasize the use of the consideration transferred, is not intended to override this
Statement’s principle and requirement to measure and recognize the fair value of the
acquiree as a whole at the acquisition date. Moreover, paragraph 20 explicitly adds that
“in some business combinations, either no consideration is transferred or the evidence
indicates that consideration transferred is not the best basis for measuring the acquisitiondate fair value of the acquirer’s interest in the acquiree. In those business combinations,
the acquirer should measure the acquisition-date fair value of its interest in the acquiree
using other valuation techniques.”
B66. The Board acknowledges that in circumstances in which readily measurable
consideration is absent, the acquirer is likely to incur costs to determine its measure of the
fair value of the acquiree as a whole and incremental cost to have that measure
independently verified. The Board observed that in many of those circumstances
companies already incur such costs as part of their due diligence procedures. For
example, an acquisition of a privately held business by another privately held entity often
is accomplished by an exchange of equity shares that do not have observable market
prices. For purposes of determining the exchange ratio, those companies generally engage
advisors and valuation experts to assist them in valuing the acquiree as well as the equity
transferred by the acquirer in exchange for the shares of the acquiree. Similarly, a
combination of two mutual entities often is accomplished by an exchange of member
interests of the acquirer for all of the member interests of the acquiree. In many, but not
necessarily all, of those cases the directors and managers of the entities also assess the
relative fair values of the combining entities to ensure that the exchange of member
interests is equitable to the members of both entities.
B67. The Board believes that the incremental measurement costs that this Statement may
require are justified. The Board reached that conclusion based on its assessment of overall
improvements in financial information. Those improvements include the increased
relevance and understandability of information resulting from measuring all businesses
acquired as a whole at their acquisition-date fair value, which is consistent with reflecting
the change in economic circumstances that occurs at that date.
B68. The Board also concluded that, consistent with its objective of providing broadly
applicable measurement guidance, this Statement should provide particular guidance for
applying this Statement’s fair value measurement requirement when no consideration is
transferred or the consideration transferred is not the best evidence of or basis for
determining the acquisition-date fair value of the acquiree. Paragraphs A18–A23 of this
Statement provide that guidance and draw on guidance in Proposed Statement, Fair Value
Measurements, which was issued in June 2004, including guidance for using the market
approach and the income approach for measuring the fair value of an acquiree.
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B69. Thus, this Statement, together with that proposed Statement, provides broadly
applicable measurement guidance that is relevant and useful in measuring the fair value of
an acquiree. However, Board members had some concerns that without some discussion
of special considerations for measuring the fair value of mutual entities, some acquirers
may neglect to consider relevant assumptions that marketplace participants would make
about future member benefits when using a market or income approach. For example,
consider an acquired cooperative entity that operates at breakeven because of discounts
granted to its members. An entity acquiring such a cooperative entity should consider the
value of the member discounts in its determination of the fair value of the acquired entity.
Therefore, the Board also decided to provide specific guidance (paragraphs A24–A26)
that discusses special considerations when measuring the fair value of mutual entities.
Measuring specific items and determining whether they are part of the consideration transferred for
the acquiree
B70. Paragraphs B71–B99 discuss the Board’s considerations and decisions related to
issues raised about (a) the measurement of specific items of consideration that often are
transferred by acquirers and (b) whether particular costs incurred by acquirers in
connection with an acquisition are part of the consideration transferred for the acquiree.
(Paragraphs B111–B117 discuss considerations related to determining whether particular
assets acquired and liabilities assumed in connection with a business combination are part
of the exchange for the acquiree.)
Measurement date for equity securities
B71. In its deliberations of the measurement date for equity securities issued as
consideration in a business combination, the Board decided to resolve a longstanding
contradiction in the existing business combinations guidance. Paragraph 22 of
Statement 141, which was carried forward from Opinion 16, states that the market price
for a reasonable period before and after the date the terms of the acquisition are agreed to
and announced should be considered in determining the fair value of the securities issued.
However, paragraph 49 of Statement 141, which also was carried forward from
Opinion 16, states that the cost of an acquired entity should be determined as of the
acquisition date.
B72. In addressing this issue, the Board considered the reasons for the consensus reached
in EITF Issue No. 99-12, “Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination.” That consensus states
that the value of the acquirer’s marketable equity securities issued to effect a business
combination should be determined based on the market price of the securities over a
reasonable period of time before and after the terms of the acquisition are agreed to and
announced. The Board considered the arguments for the guidance developed by the EITF,
which include that (a) the announcement of a transaction, and related agreements,
normally binds the parties to the transaction such that the acquirer is obligated at that point
to issue the equity securities at the closing and, thus, the arrangement has characteristics
of an equity forward contract, and (b) if the parties are bound to the transaction at the
announcement date, the value of the underlying securities on that date best reflects the
value of the bargained exchange. The Board did not find those arguments compelling.
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Rather, the Board observed that to make the announcement of a recommended transaction
binding generally requires shareholders’ authorization or another binding event, which
also gives rise to the change in control of the acquiree. Thus, the Board decided on the
acquisition date.
B73. Additionally, the Board noted that the EITF’s consensus resulted in a “mixed”
measurement basis, because it required measuring equity securities on the announcement
date while all other forms of consideration transferred are measured at the acquisition
date. The Board decided that all forms of consideration transferred should be valued on
the same date and that date should be the date that the assets acquired and liabilities
assumed are measured. The Board also noted that measuring the equity securities on the
acquisition date avoids the complexities of the EITF guidance for those situations in
which the number of shares or other consideration transferred could change between the
announcement date and the acquisition date and that measuring equity securities on the
acquisition date would converge with IFRS 3. Moreover, the Board also observed that
negotiations between an acquirer and an acquiree typically provide for share adjustments
in the event of material events and circumstances between the agreement date and
acquisition date and that ongoing negotiations after announcements, which are not
unusual, provide evidence of the nonbinding nature of announcements. Lastly, the Board
also observed that the parties typically provide for cancellation options that they can use
in the event the number of shares to be issued at the acquisition date would not reflect an
exchange of relative fair values at that date.
Contingent consideration, including subsequent accounting
B74. Opinion 16 defined contingent consideration as “consideration that is issued or
issuable at the expiration of the contingency period or that is held in escrow pending the
outcome of the contingency.” In accordance with the guidance in Statement 141, which
was carried forward from Opinion 16 without reconsideration, obligations for the
acquirer’s agreement to make contingent payments usually were not recorded at the
acquisition date. Rather, they usually were recorded when the contingency was resolved
and consideration was issued or became issuable. In general, the issuance of additional
securities or distribution of additional cash or other assets upon resolution of
contingencies based on reaching particular earnings levels resulted in delayed recognition
of an additional element of cost of an acquired entity. In contrast, the issuance of
additional securities or distribution of additional assets at the resolution of contingencies
based on security prices did not change the recorded cost of an acquiree.
B75. The Board concluded that the cost accumulation and delayed recognition approach
to accounting for contingent consideration in Statement 141 and Opinion 16 is
unacceptable because it ignored the fact that the acquirer’s agreement to make contingent
payments is the obligating event in a business combination transaction. That approach
failed to recognize that upon promising to make contingent payments of cash or other
assets, an acquirer incurred an obligation that meets the four fundamental recognition
criteria identified in paragraph 63 of FASB Concepts Statement No. 5, Recognition and
Measurement in Financial Statements of Business Enterprises. That is:
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a.
b.
c.
d.
The obligation meets the definition of a liability (unless it can be settled in the
entity’s own equity shares).
The obligation has a relevant attribute (fair value) that is measurable with sufficient
reliability.
Information about the obligation is capable of making a difference in user decisions.
The information is representationally faithful, verifiable, and neutral.
The Board concluded that not recognizing the obligation of the acquirer at the acquisition
date for such future contingent payments would not fairly represent the economic
consideration exchanged at that date. The Board concluded that, consistent with the
general principle for recording a business combination, obligations for contingent
consideration should be measured and recognized at fair value on the acquisition date.
B76. The Board considered arguments of constituents that prefer to retain the guidance in
Statement 141 because of difficulties in measuring the fair value of contingent
consideration obligations at the acquisition date. Some constituents expressed concern
about the increased subjectivity that they believe such measurements introduce in the
financial statements and others argued that many or most contingent consideration
arrangements cannot be reliably measured. The Board believes, however, that the notion
that an entity’s directors and managers enter into such arrangements without assessing and
measuring the economic risk inherent in the agreement is inconsistent with prudent
business practices, which typically is evident in the due diligence procedures.
B77. Moreover, a contingent consideration arrangement is inherently part of the economic
considerations in the negotiations between the buyer and seller. Such arrangements
commonly are used by buyers and sellers to reach an agreement by sharing particular
specified economic risks related to uncertainties about future outcomes. Differences in
the views of the buyer and seller about those uncertainties often are reconciled by their
agreeing to share the risks in such ways that favorable future outcomes generally result in
additional payments to the seller and that unfavorable outcomes result in no or lower
payments. The Board observed that, often, the evidence surrounding those negotiations
also provides information useful in estimating the fair value of the contingent obligation
assumed by the acquirer.
B78. The Board acknowledges that measuring the fair values of some contingent
payments may be difficult, but it concluded that to delay recognition of or otherwise
ignore assets or liabilities that are difficult to measure would cause financial reporting to
be incomplete. As noted in paragraphs 79 and 80 of FASB Concepts Statement No. 2,
Qualitative Characteristics of Accounting Information, completeness affects the reliability
and relevance of information and, within the bounds of feasibility, is necessary to both of
those primary qualities. The Board concluded that excluding a measure of a liability (or
asset) related to a contingent payment arrangement diminishes the usefulness of financial
reporting and, perhaps worse, runs too high a risk of failing to faithfully represent the
economics of the business combination transaction. Furthermore, as discussed in
paragraph A28 of the proposed Statement on fair value measurement the Board noted that
uncertainties in the amount and timing of future cash flows to settle an obligation is
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incorporated directly in its fair value measurement, rather than its recognition, as required
by FASB Statement No. 5, Accounting for Contingencies.
B79. The Board also noted that some contingent consideration arrangements obligate the
acquirer to deliver its equity securities if specified future events occur. The Board
concluded that the classification of these instruments either as equity or as a liability
should be based on existing GAAP, such as FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity.
B80. The Board also decided that this Statement would have to address the subsequent
recognition and measurement of obligations for contingent payments of cash or other
consideration. Consistent with the accounting for other obligations that require an entity
to deliver its equity shares, the Board concluded that obligations for contingent payments
that are classified as equity should not be remeasured after the acquisition date. The
Board observed, however, that many of the obligations that are liabilities might not meet
the threshold for recognition if Statement 5 was applied to those liabilities after the
acquisition date. It noted that derecognition of those liabilities in accordance with
Statement 5 would result in recognition of a gain immediately after the acquisition date.
The Board concluded that that would not faithfully represent the economic position of the
acquirer immediately following the acquisition date or the changes in its financial
condition or performance and, thus, addressed the subsequent accounting for those
liabilities.
B81. The Board observed that two types of obligations exist for contingent payments of
cash or other consideration classified as liabilities: those that meet the definition of
derivative instruments and those that do not meet that definition. The Board noted that
many contingent consideration arrangements are similar or identical to contracts that are
otherwise subject to the requirements of FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. To improve transparency in reporting
particular instruments, the Board believes that all contracts that would be in the scope of
Statement 133 outside of a business combination should be subject to the requirements of
that Statement. Therefore, the Board agreed to eliminate the provision in paragraph 11(c)
of Statement 133 that excluded contingent consideration from the scope of that
Statement.12 Thus, in accordance with this Statement, liabilities for payments of
contingent consideration that are subject to the requirements of Statement 133 would be
remeasured, after the acquisition date, at fair value with changes in fair value reported in
accordance with Statement 133.
B82. In considering the subsequent accounting for contingent payments that are liabilities
but are not derivative instruments subject to Statement 133, as amended by this Statement,
the Board concluded that in concept all liabilities for contingent payments should be
accounted for similarly. Therefore, the Board decided that those liabilities for contingent
12
As stated in paragraph 288 of Statement 133, at the time that Statement was issued the Board “decided that
without further study it would be inappropriate to change the accounting for them [contingent consideration
arrangements] by the entity that accounts for the business combination.” That decision was made on the
basis that the accounting for those arrangements would be reconsidered in the business combinations
project.
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payments that are not derivative instruments also should be remeasured at fair value after
the acquisition date. The Board concluded that applying those provisions would faithfully
represent the fair value of the liability for the contingent payment of consideration that
remains a liability until settled.
B83. The Board also considered whether subsequent changes in the measurement of
liabilities for contingent consideration should be reflected as an adjustment to the
consideration transferred in the business combination (normally in goodwill). The Board
noted that the measurement objective of a business combination is to record the fair value
of the acquiree on the acquisition date and that measuring contingent consideration at its
fair value at that date furthers that objective. The Board acknowledged that in limited
circumstances in which particular information may not be available at the acquisition date,
a conclusive determination of the fair value of any liability for contingent consideration
may not be practicable. As discussed in paragraphs B161–B167, the Board decided that
this Statement should provide for provisional measurement of the fair value of assets
acquired or liabilities assumed, including liabilities for contingent payments, in those
circumstances. Thus, this Statement provides for adjustments during the measurement
period (after the acquisition date) to the provisional values of the assets acquired and
liabilities assumed as if the accounting for the business combination had been completed
at the acquisition date (paragraphs 62–68).
B84. Moreover, the Board concluded that except for adjustments to provisional estimates
of fair values at the acquisition date, subsequent changes in the fair value of a liability for
contingent consideration do not affect the acquisition-date fair value of the consideration
transferred or the acquiree. Rather, the Board believes those subsequent changes in value
generally13 are directly related to postcombination events and changes in circumstances
related to the combined entity. Thus, subsequent changes in value for postcombination
events and circumstances should not affect the measurement of the consideration
transferred or goodwill on the acquisition date.
B85. The Board also considered arguments that the approach agreed to by the Board will
result in:
a.
b.
Recognizing gains in the income statement when the specified milestone or event
requiring the contingent payment is not met (for example, the acquirer would record
a gain on the reversal of the liability if an earnings target in an earnout arrangement
is not met)
Subsequent changes in the value of many liabilities for contingent consideration that
many constituents believe are directly attributable to changes in the value of the
business acquired and, thus, should be capitalized as part of the acquired entity.
13
The Board also acknowledges, however, that some changes in fair value might result from events and
circumstances that in part may relate to a precombination period but the extent of the change is
indistinguishable from that part related to the postcombination period. The Board concluded that in those
limited circumstances the benefits in information that might result from making such fine distinctions in
practice would not justify the costs that such a requirement would impose.
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B86. The Board accepts the consequence that recognizing the fair value of a liability in a
business combination for contingent payments of consideration is likely to subsequently
result in a gain if smaller or no payments are required or in a loss if greater payments are
required. The Board believes that this is a consequence of companies entering into
contingent consideration arrangements whereby the underlying in the arrangement relates
to future changes in the value of a specified asset or liability or net income of the acquiree
after the acquisition date—that is, in the postcombination period of the acquirer
(combined entity). 14
Equity shares or member interests of the acquirer issued as consideration
B87. In considering the application of the acquisition method to mutual entities, the Board
considered the accounting and reporting for an acquisition in which an acquirer issues
equity shares or member interests as consideration in exchange for the equity shares or
member interests of an acquiree. The Board observed that in a business combination
between two investor-owned entities, if the acquirer issues equity shares as consideration
for all of the equity shares of an acquiree, the fair value of the acquiree (its equity or net
assets) is reported as an addition to equity of the acquirer—that is, generally as an increase
to the acquirer’s common stock (usually at par value) and paid-in capital (usually for the
excess of fair value over the par value of the common stock issued). Thus, the equity (net
assets) of the combined entity is increased from the acquisition of the acquiree (and the
fair value of its net assets), but retained earnings of the acquirer are unaffected.
B88. Some representatives of mutual entities suggested that a similar acquisition of a
mutual entity should be allowed to be reported as an increase in the retained earnings of
the acquirer (combined entity) as had been the practice in accordance with the pooling
method of accounting. The Board rejected that view. The Board believes that business
combinations between two investor-owned entities are economically similar to those
between two mutual entities in which the acquirer issues member interests for all the
member interests of the acquiree. Thus, the Board concluded that those similar
transactions should be similarly reported. Therefore, paragraph 53 of this Statement
clarifies that “in a business combination involving only mutual entities in which the only
consideration exchanged is the member interests of the acquiree for the member interests
of the acquirer (or the member interests of the newly combined entity), the amount equal
14
The Board also observed that liabilities for contingent payments may be related to contingencies
surrounding an outcome for a particular asset or other liability. In those cases, the effects of changes in
estimates of the fair value related to the liability for the contingent payment on income of the period may be
offset by changes in the value of the asset or other liability. Assume, for example, that after an acquisition
the combined entity reaches a very favorable settlement of pending litigation of the acquiree for which it had
a contingent consideration arrangement. If the combined entity is thus required to make a contingent
payment to the seller of the acquiree in an amount greater than the carrying amount (fair value) of the
liability to the seller, the effect of the increase in that liability and charge to income may be offset in part by
the reduction to the liability to the litigation claimant and the credit to income resulting from that favorable
settlement. Similarly, assume the acquirer is not required to make a contingent payment to the seller because
an acquired research and development project failed to materialize into a viable product. In that case, the
gain resulting from the elimination of the liability may be offset, in whole or in part, by an impairment
charge to the asset acquired.
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to the fair value of the acquiree shall be recognized as a direct addition to capital or
equity, not retained earnings.”
B89. The Board also considered more specific concerns of representatives of credit unions
about adverse economic consequences for those entities. Those representatives argued that
requiring the application of the acquisition method would impede consolidation within
that industry and, perhaps, misrepresent the financial soundness and regulatory capital of
two credit unions that combine their operations. They noted that in the United States,
applicable federal law defines net worth for credit unions as the “retained earnings balance
of the credit union, as determined under generally accepted accounting principles.”
Because the regulatory definition of net worth is narrower than equity under GAAP, they
expressed concern that the exclusion of the equity of an acquired credit union from
retained earnings of the combined entity could misrepresent a financially sound combined
entity as if it were not financially sound. Thus, they suggested that credit unions be
permitted to continue to apply the pooling method of accounting for their combinations or
be permitted to report the equity of an acquired mutual entity as an addition to retained
earnings of the combined entity. The Board was not persuaded by those arguments. The
Board believes that this Statement will not affect the ability of credit unions to restructure
and combine with other credit unions.
B90. Additionally, the Board has been told that the number of combinations between
credit unions in which the regulatory net worth calculation could be significantly impacted
is relatively small in any given year. The Board also noted that this Statement applies to
the general-purpose financial statements of all entities and that regulatory filings of credit
unions and other entities and the needs of their regulators are separate matters beyond the
purpose of those financial statements. Concepts Statement 2 states that a necessary and
important characteristic of accounting information is neutrality. In the context of business
combinations, neutrality means that the accounting standards should neither encourage nor
discourage business combinations but, rather, provide information about those
combinations that is fair and evenhanded. The Board concluded that its public policy goal
is to issue accounting standards that result in neutral and representationally faithful
financial information. The elimination of the pooling method for all entities by Statement
141 and the requirement that all entities, including mutual entities, report the resulting
increase in equity as a direct addition to equity (not retained earnings) is consistent with
the Board’s public policy goal.
Share-based compensation replacement awards of the acquirer
B91. Paragraphs A102–A109 provide guidance for those circumstances in which an
acquirer is obligated to exchange its share-based payment awards for those of an acquiree
in connection with a business combination. The Board observed that replacement awards
issued by an acquirer may be to benefit the employees of the acquiree for past services,
future services, or both. For several reasons, the Board decided that this Statement should
provide implementation guidance for these transactions. Those reasons include the
following:
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a.
b.
The difficulties in judging the extent to which replacement awards are for past
services (and, thus, part of the consideration for the business) or future services (and,
thus, not part of the consideration for the business)
The relative newness of both this Statement and FASB Statement No. 123 (revised
2004), Share-Based Payment, and implementation difficulties that might otherwise
be encountered in practice.
The Board believes the guidance in this Statement is consistent with the objective that the
measure of the consideration transferred for the business include those payments that are
for the business and exclude those payments that are not. Compensation payments for
future services to be rendered to the acquirer by former owners or officers and other
employees are not payments for the business acquired (paragraph 70(b)).
B92. The Board also acknowledged that although the guidance in this Statement is
consistent with the IASB’s basic guidance, some details are different. As noted in
paragraph A103(d) “the requisite service period of awards issued by the acquirer shall
reflect any explicit, implicit, and derived service periods (consistent with the requirements
of Statement 123(R)).” That requisite service period often, but not always, will result in
the same total service period as the IASB’s requirement that uses the total vesting period.
The Board decided to accept this divergence, since it stems from a difference in the
Boards’ other standards, which is a matter outside the scope of the joint project on
business combinations.
Costs incurred in connection with a business combination
B93. The Board considered whether, for purposes of measuring the fair value of the
acquiree, costs that an acquirer incurs in connection with a business combination are part
of the consideration transferred in exchange for the acquiree. Those costs (commonly
called acquisition-related costs) include an acquirer’s costs incurred in connection with a
business combination (a) for the services of lawyers, investment bankers, accountants, and
other third parties and (b) for issuing debt or equity instruments used to effect the business
combination (issue costs). Generally, acquisition-related costs are expensed. However,
issue costs are an exception. Currently, the accounting for issue costs in practice is mixed.
The Board is addressing issue costs in its project on liabilities and equity and has
tentatively decided that those costs should also be expensed as incurred. While some
Board members would have preferred to require that issue costs to effect a business
combination be expensed, the Board decided that the business combinations project was
not the place to make that decision. Therefore, the Board decided to allow mixed practices
for accounting for issue costs to continue until the project on liabilities and equity resolves
the issue broadly.
B94. The Board concluded that acquisition-related costs are not part of the fair value
exchange between the buyer and seller for the business. Rather, they are separate
transactions in which the buyer makes payments in exchange for services rendered. The
Board also observed that those costs, whether for services performed by external parties or
internal staff of the acquirer, generally do not represent assets of the acquirer at the
acquisition date, since they are consumed as the services are rendered.
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B95. Thus, this Statement specifies that the acquirer “shall not include such costs in the
measure of the fair value of the acquiree or the assets acquired or liabilities assumed as
part of the business combination [and] shall account for acquisition-related costs,
separately from the business combination, in accordance with applicable accounting
standards” (paragraph 27). As a result, this Statement resolves inconsistencies in
accounting for acquisition-related costs in accordance with the cost accumulation
approach that had been used in practice (and as required by paragraph 24 of Statement 141
and paragraph 76 of Opinion 16 and its related interpretation). In accordance with those
past practices, the cost of an acquired entity included direct costs incurred for an
acquisition of a business but excluded indirect costs. Those direct costs included out-ofpocket or incremental costs, for example, finder’s fees and fees paid to outside consultants
for accounting, legal, or valuation services for a successful acquisition, but direct costs
incurred in unsuccessful negotiations were expensed as incurred. Indirect costs included
recurring internal costs, such as maintaining an acquisition department, and although those
costs also could be directly related to a successful acquisition, they were expensed as
incurred.
B96. The Board’s conclusion also reflects that whether a business is acquired in a single
purchase, a series of purchases, or through other means, the objective of this Statement is
to measure the acquiree at its acquisition-date fair value. That attribute is not cost.
Moreover, those acquisition-related fees are not part of the cost of the acquiree; they are
costs for the services the acquirer receives.
B97. Some constituents argued that acquisition-related costs, including costs of due
diligence, are an unavoidable cost of the investment in a business. They suggested that
like other investment costs, since the acquirer intends to recover its due diligence cost
through the postacquisition operations of the business, that transaction cost is a cost that
should be capitalized as part of the total investment in the business. Some also argued that
the buyer specifically considers these costs in determining the amount that it is willing to
pay for the acquiree. The Board rejected those arguments. The Board found no
persuasive evidence indicating that the seller of a particular business is willing to accept
less than fair value as consideration for its business merely because a particular buyer may
or may not incur more (or less) acquisition-related costs than other potential buyers for
that business. Further, the Board concluded that the intent of a particular buyer, including
its plans to recover such costs, is a separate matter that is distinct from the fair value
measurement objective for the acquiree.
B98. The Board acknowledges that in accordance with current GAAP cost-accumulation
models would include some acquisition-related costs as part of the carrying amount of the
asset acquired. The Board also acknowledges that asset acquisitions are similar
transactions that in concept should be accounted for similarly, regardless of whether the
asset acquired is a separate asset or a group of assets that may or may not meet the
definition of a business. However, as noted in paragraph B39, the Board decided not to
extend the scope of this Statement to acquisitions of all asset groups. Therefore, the
Board accepts that, at this time, recognizing most acquisition-related costs as an expense
as incurred for services received in connection with a business combination (that are not
for the business acquired) differs from some accepted practices that allow particular
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acquisition-related costs to be included in the cost of an asset acquisition.
agreed, however, that this Statement improves financial reporting
inconsistencies in accounting for acquisition-related costs in connection
combination and by applying the fair value measurement objective
combinations consistent with the Board’s definition of fair value.
Board members
by eliminating
with a business
to all business
B99. The Board also considered concerns about the potential for abuse. Some
constituents noted that if acquirers can no longer capitalize acquisition-related costs as
part of the cost of the business acquired, they may use abusive practices to avoid
recognizing those costs as expenses. For example, some assert that a buyer might ask a
seller to make payments to the buyer’s vendors on its behalf and that the seller, to
facilitate the negotiations and sale of the business, might agree to make those payments
provided that the “total agreed price” to be paid to the seller upon closing of the business
combination includes an amount sufficient to reimburse the seller for payments it made on
the buyer’s behalf. If the disguised reimbursements were treated as part of the
consideration transferred for the business, those expenses might not be recognized by the
acquirer. Rather, the measure of the fair value of the business and the amount of goodwill
recognized for that business might be overstated. To mitigate such concerns, the Board
decided to clarify in this Statement that the portion of any payments to an acquiree (or its
former owners) in connection with a business combination that are payments for goods or
services that are not part of the acquired business should be assigned to those goods or
services and accounted for as if separately acquired. As discussed in paragraphs B111–
B117, the Board also decided that this Statement should specifically require an assessment
to determine whether any portion of the payment amounts transferred by the acquirer are
not part of the consideration transferred in exchange for the acquiree and the related assets
acquired and liabilities assumed or incurred. Paragraphs 69 and 70 provide guidance for
making that assessment.
Measuring and Recognizing the Assets Acquired and the Liabilities Assumed
B100. In developing this Statement, the Board considered the need for fundamental
principles to resolve inconsistencies that resulted from the existing purchase price
allocation process used by an acquirer in recognizing and assigning amounts to assets
acquired and liabilities assumed in a business combination.
Principle for measuring and recognizing assets acquired and liabilities assumed
B101. This Statement reflects the Board’s decisions to develop a standard (and related
application guidance) for measuring and recognizing assets acquired and liabilities
assumed in a business combination that:
a.
b.
Is consistent with the general principle of initially recognizing assets acquired and
liabilities assumed at their acquisition-date fair values, thereby improving the
relevance and comparability of the resulting information about the assets acquired
and liabilities assumed (paragraph B23(b))
Eliminates inconsistencies and other deficiencies of the purchase price allocation
process, including those in applying that process to acquisitions of businesses that
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c.
occur in stages in which the acquirer ultimately obtains the business without
purchasing all or perhaps any of the acquiree’s equity interest on the acquisition date
Can be applied in practice with a reasonably high degree of consistency and without
imposing undue costs.
B102. To achieve those objectives, the Board decided that, in principle, an acquirer
should be required to measure and recognize the assets and liabilities of the acquiree at
their fair values at the acquisition date. Thus, this Statement eliminates:
a.
b.
c.
The use of inconsistent measures for specified assets and liabilities that existed in
Statement 141 and Opinion 16
The practice that existed in Statement 141 of reducing the initial fair value based
estimates of particular assets acquired if the sum of those amounts assigned to assets
acquired and liabilities assumed exceeds the cost of the acquired entity15
The inconsistencies and deficiencies of the past practice of measuring assets and
liabilities of an acquiree that is not wholly owned at a mixture of some current
exchange prices and some carryforward book values (as discussed in paragraphs
B20–B24).
B103. Previously, the purchase price allocation process applied in accordance with
Statement 141 had required that an acquirer allocate the cost (rather than the fair value) of
an acquiree to the assets acquired and liabilities assumed. That allocation was generally
based on the estimated fair values of those assets and liabilities on the acquisition date, but
paragraph 37 of Statement 141 (Opinion 16, paragraph 88) required that particular assets
and liabilities be measured at current replacement costs, at net realizable values, or in
accordance with other GAAP. When it issued Statement 141, the Board acknowledged
that some of the guidance for applying the purchase price allocation process conflicted
with the general principle of recognizing assets acquired and liabilities assumed at their
fair value. However, the Board decided that Statement 141 should carry forward, without
reconsideration, the general guidance in paragraph 88 of Opinion 16 for assigning
amounts to assets acquired and liabilities assumed. It explained:
The Board recognizes that some of that guidance may be inconsistent
with the term fair value as defined in [Statement 141]. For example,
uncertainties about the collectibility of accounts or loans receivable would
affect their fair value. If accounts or loans receivable were assigned an
amount equal to their fair value, there would be no need to separately
recognize an allowance for uncollectible accounts. . . . The Board decided,
however, that it would consider those inconsistencies in a separate project
on issues related to the application of the purchase method. [Statement 141,
paragraph B100]
15
More specifically, paragraph 44 of Statement 141 stated that the “excess shall be allocated as a pro rata
reduction of the amounts that otherwise would have been assigned to all of the acquired assets except
(a) financial assets other than investments accounted for by the equity method, (b) assets to be disposed of
by sale, (c) deferred tax assets, (d) prepaid assets relating to pension or other postretirement benefit plans,
and (e) any other current assets” (footnotes omitted).
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In this Statement, the Board concluded that measuring assets acquired or liabilities
assumed at amounts other than their fair values at the acquisition date does not faithfully
represent their economic values or the acquirer’s economic circumstances resulting from
the business combination.
B104. The Board noted that the steps taken in this Statement toward consistent
application of its recognition principle continue the process of improving the relevance
and comparability of information provided about the assets acquired and liabilities
assumed in a business combination. As in Statement 141, the Board observed that this
Statement’s recognition principle will give rise to the recognition of assets and liabilities
by the acquirer that the acquiree may not have recognized in its financial statements
before the combination. For example, an acquirer will recognize unrecorded assets of an
acquiree for the future economic benefits embodied in internally generated intangible
assets that Statement 141 and this Statement require to be recognized separate from
goodwill. Additionally, in accordance with this Statement, the acquirer will recognize
assets of the acquiree that are used in research and development projects and that have no
alternative use. Although those assets met the definition of an asset, they previously did
not qualify for recognition in accordance with paragraph 5 of FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the
Purchase Method. Examples of unrecorded liabilities of an acquiree that an acquirer
would recognize include future sacrifices of economic benefits resulting from
contingencies of the acquiree that previously did not qualify for recognition in accordance
with the “probability threshold” criterion of Statement 5.
B105. The Board concluded that the consistent application of this Statement’s principle
for the recognition of assets acquired and liabilities assumed in a business combination
will improve the completeness, representational faithfulness, and relevance of the
information reported in an acquirer’s financial statements. However, for cost-benefit
reasons and to minimize disruptions to practice, the Board decided that this Statement
should provide particular accommodations and clarifications about the application of its
fair value measurement and recognition principles. More specifically, the Board decided
that this Statement should:
a.
b.
Require that particular assets and liabilities continue to be measured in accordance
with existing GAAP and that goodwill continue to be measured as a residual16
Clarify that separate recognition of assets and liabilities is not permitted for an
acquiree’s operating leases if the acquiree is the lessee (paragraph 47).
16
Assets and liabilities that are to be measured in accordance with existing GAAP rather than at their fair
values include (a) assets (disposal group) that qualify as assets held for sale, (b) deferred tax assets and
liabilities, and (c) employee benefit obligations. In accordance with this Statement, goodwill would be
measured as the excess of the fair value of the acquiree, as a whole, not its cost, over the net amount of the
recognized identifiable assets acquired and liabilities assumed.
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Guidance for recognizing the assets acquired and liabilities assumed
B106. The Board decided that to achieve a reasonably high degree of consistency in
practice and to resolve existing inconsistencies, this Statement should provide guidance
for applying its measurement and recognition principle. In this Statement, the Board
decided that guidance should emphasize two fundamental conditions; that is, to measure
and recognize an item as part of the acquirer’s accounting for the business combination,
the item acquired or assumed must be:
a.
b.
An asset or liability at the acquisition date
Part of the acquiree that the acquirer receives for the consideration transferred in
exchange for that business. That is, the items are not other assets acquired or
liabilities assumed as part of a substantively separate exchange transaction.
An item that is an asset or a liability at the acquisition date
B107. For purposes of determining whether an item is an asset or liability at the
acquisition date, the Board decided that this Statement should use the definitions in FASB
Concepts Statement No. 6, Elements of Financial Statements. Those definitions are:
Assets are probable18 future economic benefits obtained or controlled
by a particular entity as a result of past transactions or events.
Liabilities are probable21 future sacrifices of economic benefits
arising from present obligations22 of a particular entity to transfer assets
or provide services to other entities in the future as a result of past
transactions or events.
_________________________
18 and 21
Probable is used with its usual general meaning, rather than in a specific
accounting or technical sense (such as that in FASB Statement No. 5, Accounting for
Contingencies, par. 3), and refers to that which can reasonably be expected or believed
on the basis of available evidence or logic but is neither certain nor proved (Webster’s
New World Dictionary of the American Language, 2d college ed. [New York Simon
and Schuster 1982], p. 1132). Its inclusion in the definition is intended to acknowledge
that business and other economic activities occur in an environment characterized by
uncertainty in which few outcomes are certain (pars. 44–48).
22
Obligations in the definition is broader than legal obligations. It is used with its
usual general meaning to refer to duties imposed legally or socially; to that which one
is bound to do by contract, promise, moral responsibility, and so forth (Webster’s New
World Dictionary, p. 981). It includes equitable and constructive obligations as well as
legal obligations (pars. 37–40). [paragraphs 25 and 35]
B108. The Board observed that in accordance with Statement 141, and its predecessor
Opinion 16 and related interpretative guidance, particular items were being recognized in
practice as if they were assets acquired or liabilities assumed at the acquisition date even
though they did not meet the definition of an asset or a liability. That practice appears to
stem from whether an item is viewed as part of the cost of (or investment in) the acquiree.
For example, as discussed in paragraphs B94 and B95, in accordance with existing
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practices particular expenses for services received in connection with a business
combination were capitalized as part of the cost of the acquiree (and recognized as part of
goodwill) as if they were an asset at the acquisition date. As discussed in the following
paragraphs, the Board also observed that some future costs that an acquirer expected to
incur often were viewed as a cost of the acquiree and recognized as if they were a liability
at the acquisition date. The Board concluded that the representational faithfulness,
consistency, and understandability of financial reporting would be improved by
eliminating such practices.
B109. The Board specifically considered the guidance in EITF Issue No. 95-3,
“Recognition of Liabilities in Connection with a Purchase Business Combination.” In
Issue 95-3, the Task Force reached consensuses that the costs of an acquirer’s plan to (a)
exit an activity of an acquired company, (b) involuntarily terminate employees of an
acquired company, or (c) relocate employees of an acquired company should be
recognized as liabilities assumed in a purchase business combination and included in the
allocation of the acquisition cost if specified conditions were met. The Board concluded,
however, as it did in FASB Statement No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, that:
Only present obligations to others are liabilities under the definition.
An obligation becomes a present obligation when a transaction or event
occurs that leaves an entity little or no discretion to avoid the future
transfer or use of assets to settle the liability. An exit or disposal plan, by
itself, does not create a present obligation to others for costs expected to be
incurred under the plan; thus, an entity’s commitment to an exit or
disposal plan, by itself, is not the requisite past transaction or event for
recognition of a liability. [Paragraph 4, emphasis added.]
B110. Consistent with that conclusion, this Statement now specifies the accounting for
costs associated with restructuring or exit activities of a newly acquired business.
Paragraph 37 specifies that “the acquirer shall recognize, separately from goodwill, the
acquisition-date fair value of liabilities for restructuring or exit activities acquired in a
business combination only if they meet the recognition criteria in [Statement 146] as of
the acquisition date.” It also clarifies that:
Costs associated with restructuring or exit activities that do not meet
the recognition criteria in Statement 146 as of the acquisition date are not
liabilities at the acquisition date and, therefore, are recognized separately
from the business combination, generally as postcombination expenses of
the combined entity when incurred. For example, costs the acquirer expects
to incur in the future pursuant to its plan to exit an activity of an acquiree,
involuntarily terminate the employment of an acquiree’s employees, or
relocate employees of an acquiree are not assumed liabilities of the
acquiree and, therefore, are not accounted for as part of the business
combination.
Thus, this Statement nullifies the guidance in Issue 95-3.
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Determining that assets acquired and liabilities assumed are part of the exchange for the acquiree
B111. To recognize an asset or liability as part of the acquirer’s accounting for the
business combination, the asset or liability must be part of the exchange for the acquiree.
Paragraph 69 of this Statement states:
The acquirer shall assess whether any portion of the transaction price
(payments or other arrangements) and any assets acquired or liabilities
assumed or incurred are not part of the exchange for the acquiree. Only the
consideration transferred and the assets acquired or liabilities assumed or
incurred that are part of the exchange for the acquiree shall be included in
the business combination accounting. Any portion of the transaction price
or any assets acquired or liabilities assumed or incurred that are not part of
the exchange for the acquiree shall be accounted for separately from the
business combination.
B112. An objective of that assessment is to distinguish consideration that an acquirer
transfers for the acquiree from other increased (or reduced) payments made in connection
with the business combination that are for other assets or purposes. To assist in meeting
that objective, paragraph 70 of this Statement includes three specific examples of
payments or other arrangements that are not part of the exchange for the acquiree, and
Appendix A provides additional implementation guidance.
B113. The first example—the exclusion of payments that effectively settle preexisting
relationships between the acquirer and acquiree—is consistent with guidance in EITF
Issue No. 04-1, “Accounting for Preexisting Relationships between the Parties to a
Business Combination.” It is directed at ensuring that assets and liabilities related to
preexisting relationships between the parties that are not transferred to or assumed by the
acquirer are excluded from the accounting for the business combination. Assume, for
example, a potential acquiree had an asset (receivable) for an unresolved claim against the
potential acquirer and that acquirer and the acquiree’s owner agree to settle that claim as
part of an agreement to sell the acquiree to the acquirer. Consistent with Issue 04-1, the
Board concluded that if the acquirer makes a lump-sum payment to the seller-owner, part
of that payment is to settle the claim and is not part of the consideration transferred to
acquire the business. Thus, the portion of the payment that relates to the claim settlement
should be excluded from the accounting for the business combination and accounted for
separately. In effect, the acquiree relinquished its claim (receivable) against the acquirer
by transferring it (as a dividend) to the acquiree’s owner. Thus, at the acquisition date the
acquiree has no receivable (asset) to be acquired as part of the combination, and the
acquirer would account for its settlement payment separately. Board members
acknowledge that in practice the guidance in Issue 04-1 requires that amounts for all
preexisting relationships be excluded from the accounting for the business combination.
Although that guidance differs from the assessment and judgment approach of paragraph
69 of this Statement, the Board decided that the guidance in Issue 04-1 is reasonable.
Accordingly, the Board decided that this Statement should codify the guidance in Issue
04-1.
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B114. The second and third examples also are directed at ensuring that payments that are
not part of the consideration transferred for the acquiree are excluded from the business
combination accounting. The Board concluded that the payments for such transactions or
arrangements should be accounted for separately in accordance with applicable GAAP for
those transactions. Paragraph B99 also discusses the Board’s specific considerations
about potential abuses surrounding the third example—payments to reimburse the
acquiree or its former owners for paying the acquirer’s costs incurred in connection with
the business combination.
B115. The Board also decided to provide further application guidance to help address
concerns expressed about distinguishing between the elements of a business combination
and other concurrent transactions. It was suggested that parties directly involved in the
negotiations of an impending business combination could take on the characteristics of
related parties. As a result, they may be willing to enter into other agreements or include
conditions as part of the business combination agreement that were designed primarily to
achieve favorable postcombination reporting outcomes. Because of those concerns, the
Board decided to include factors that should be considered when assessing a particular
transaction or arrangement entered into by the parties to the combination.
B116. The Board believes that if, in connection with a business combination, a
transaction or arrangement is designed primarily for the economic benefit of the specific
acquirer or the combined entity (rather than the acquiree or its former owners), that
transaction or arrangement is not part of the exchange for the acquiree. The Board
concluded that that transaction or arrangement should be accounted for separately from
the business combination. The Board acknowledged, however, that judgment may be
required to determine whether a portion of the transaction price paid, or the assets
acquired and liabilities assumed, are not part of the exchange for the acquiree. The Board
decided to include in paragraph A88 of this Statement’s guidance three factors to be
considered in assessing a business combination transaction: (a) the reason for the
transaction or event, (b) who initiated the transaction or event, and (c) the timing of the
transaction or event. The Board believes that although those factors are neither mutually
exclusive nor individually conclusive, they can be helpful in considering whether a
transaction or event is arranged primarily for the economic benefit of the acquirer or
combined entity. Paragraph A88 expands on those factors, and paragraphs A89–A109
provide illustrative examples for assessing whether any portion of the consideration
transferred or the assets acquired or liabilities assumed or incurred are not part of the
exchange for the acquiree.
B117. The Board acknowledges that assessing the circumstances surrounding a business
combination imposes costs. The Board concluded, however, that those costs are
warranted. The Board believes the required assessment and related guidance will help
achieve a reasonably high degree of consistency in applying this Statement’s recognition
principle and help ensure that a business combination is faithfully represented.
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Guidance for particular assets acquired and liabilities assumed
B118. Paragraphs B119–B141 discuss the Board’s considerations and conclusions about
applying this Statement’s principle for measuring and recognizing particular assets
acquired and liabilities assumed. As previously noted, in accordance with that principle
the acquirer measures and recognizes the assets acquired and liabilities assumed at their
acquisition-date fair values. Paragraphs B143–B155 discuss the reasons for permitting
particular exceptions to that principle.
Valuation allowances
B119. The Board considered whether an exception to this Statement’s fair value
measurement principle is necessary for assets required to be recognized at fair value, such
as trade receivables and other short-term and long-term receivables acquired as part of a
business combination. Although several of the Board’s constituents suggested that an
exception be permitted for practical reasons the Board concluded that there is no
compelling reason for such an exception. Many of those constituents suggested retaining
the requirements of Statement 141, which states that receivables are measured at “present
values of amounts to be received determined at appropriate current interest rates, less
allowances for uncollectibility and collection costs, if necessary” (paragraph 37(b)). The
Board noted, however, that using an acquiree’s carrying basis and including collection
costs is inconsistent with this Statement’s fair value measurement requirement and the
principle that the acquirer’s initial measurement, recognition, and classification of the
assets acquired and liabilities assumed begins on the acquisition date—when the acquirer
obtains control of the acquiree. The Board concluded that because uncertainty about
collections and future cash flows is included in the fair value measure, the acquirer should
not recognize a separate valuation allowance for assets required to be measured at fair
value.
B120. The Board also observed that because uncertainties about future cash flows is
included in a fair value measure, this Statement’s fair value measurement approach differs
from the SEC registrants’ practice established in SEC Staff Accounting Bulletin
Topic 2.A.5, Adjustments to Allowances for Loan Losses in Connection With Business
Combinations, which states that generally the acquirer’s estimation of the uncollectible
portion of the acquiree’s loans should not change from the acquiree’s estimation prior to
the acquisition. The Board also observed that the fair value measurement approach is
consistent with relevant guidance in:
a.
b.
AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, which prohibits “carrying over” or creation of valuation
allowances in the initial accounting of all loans acquired in transfers that are within
the scope of this SOP, including purchase business combinations.
EITF Issue No. 98-1, “Valuation of Debt Assumed in a Purchase Business
Combination,” which applies to trade and other loan payables assumed in a business
combination.
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B121. The Board also understands that the fair value measurement approach has
implications for the capital requirements for financial institutions, in particular banks.
During the Board’s deliberations, constituents stated that the elimination of the separate
loan loss reserves of the acquiree upon initial recognition by the acquirer in a business
combination would affect the Tier II capital requirements for regulatory reporting
purposes. Constituents also told the Board, however, that this Statement’s fair value
measurement approach is supported by some banking regulatory agencies and some
financial institution analysts. The Board noted, however, that regulatory reporting
requirements are a separate matter beyond the scope of general-purpose financial
reporting. The Board concluded that requiring all acquirers to measure assets acquired
and liabilities assumed in the same way is consistent with the Board’s policy goal of
issuing accounting standards that result in neutral and representationally faithful financial
information.
Contingencies that meet the definitions of assets or liabilities
B122. Paragraph 35 of this Statement specifies that acquirer recognizes, separately from
goodwill, the acquisition-date fair value of assets and liabilities arising from contingencies
that were acquired or assumed as part of the business combination if the contingency
meets the definition of an asset or a liability in Concepts Statement 6 even if that
contingency does not meet the recognition criteria in Statement 5. The Board concluded
that to fairly represent the economic circumstances at the acquisition date, in principle, all
assets acquired and liabilities assumed should be measured and recognized at their
acquisition-date fair values, which includes assets and liabilities arising from
contingencies of the acquiree at the acquisition date. That conclusion also applies in those
circumstances in which the fair value of an acquiree’s contingent gain or loss is offset in
whole or in part by the fair value of an acquirer’s related liability or asset for a contingent
consideration arrangement.
B123. The Board also noted that, in principle, measuring contingencies at their fair value
is consistent with using a fair value measure for the initial recognition of many other
assets and liabilities that have inherent risks and uncertainties. Although there are various
degrees of risk and uncertainties inherent in major classes of assets and liabilities,
substantially all assets (perhaps other than cash) involve some uncertainty about their
future economic benefit. For example, the future economic benefit of a note receivable
includes an expectation of future payment but, to some degree, the future payment of any
or all contractual amounts due is an uncertain event. Fair value incorporates uncertainty
about the timing and amount of cash flows in the measurement of the asset or liability
rather than its recognition.
B124. The Board also decided that this Statement should address two significant
concerns about difficulties that are likely to be encountered in practice in measuring the
fair values of contingencies at the acquisition date. The first is that information needed to
measure the acquisition-date fair value of a contingency may not be available or of
sufficient quality at that date. The second is that eliminating the Statement 5 approach is
likely to require measuring at an earlier date contingencies that are significantly more
difficult to measure and that change is likely to require measurement guidance.
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B125. The Board decided to address the first concern by allowing acquirers to record
provisional fair value estimates at the acquisition date followed by a measurement period
during which the acquirer may adjust the provisional amounts recognized at the
acquisition date (paragraphs 62–68). The measurement period is intended to provide the
acquirer reasonable time to obtain the information necessary to identify and estimate
acquisition-date fair values of assets and liabilities on the basis of the circumstances that
existed at the acquisition date. The Board concluded that this Statement’s measurement
period is a reasonable way to accommodate concerns about the quality and availability of
information at the acquisition date.
B126. The Board decided that it is best to address the second concern—measuring fair
values of assets acquired and liabilities assumed—through the proposed Statement on fair
value measurement. That Statement comprehensively addresses and discusses the
fundamental issues surrounding fair value measurements and provides relevant guidance
for measuring the fair values of assets and liabilities. The Board also believes that
improving the understanding of what is meant by reliably measurable in relation to a fair
value measurement is important to the Board’s considerations in this Statement for
measuring the assets and liabilities for contingencies.
B127. The Board notes that a reliable measurement of the fair value of a contingency
does not mean that the acquirer must be able to determine, predict, or otherwise know the
ultimate settlement amount of that contingency at the acquisition date or within the
measurement period. Paragraph A28 of the proposed Statement on fair value measurement
also clarifies how fair value measures differ from practice in Statement 5:
For a liability measured at fair value, the guidance in FASB Statement
No. 5, Accounting for Contingencies, and FASB Interpretation No. 14,
Reasonable Estimation of the Amount of a Loss, does not apply. Both
Statement 5 and a fair value measurement consider uncertainty inherent in
future cash flows (amount and timing). However, Statement 5 considers
uncertainty in the context of recognition, establishing a probability
threshold for when to recognize a loss contingency. In contrast, a fair value
measurement considers uncertainty in the context of measurement,
incorporating uncertainty directly in the measurement.19
___________________
19
Paragraphs 55–61 of Concepts Statement 7 discuss the differences between recognition of
a loss contingency under Statement 5 and measurement of a liability at fair value (using
expected cash flows).
B128. Assumptions used in a fair value measurement are based on expectations at the
time the measurement is made, and those expectations reflect the information that is
available at the time of measurement. The fair value of the items measured will change
over time as factors used to estimate their fair value change. Changes in the fair value of
those items are a normal economic process to which any valuable resource is subject.
Such changes do not indicate that the expectations on which previous fair value
measurements were based were unreliable or incorrect. The fair value of those items at a
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single point in time is not a forecast of what the estimated fair value of those items may be
in the future.
B129. In its deliberations leading to this Statement, the Board considered but rejected two
alternatives: (a) retaining existing practice based on Statement 38 and (b) adopting a
similar approach based on Statement 5. To improve the accounting for acquisitions of
businesses by acquirers, the Board concluded that it could not continue to allow the
existing practice and related guidance that had permitted delayed measurement and
recognition of contingencies. The accounting guidance for contingencies of an acquiree
was specified in paragraphs 40 and 41 of Statement 141. Those requirements had been
carried forward by Statement 141 from Statement 38. Statement 141 defined a
preacquisition contingency as “a contingency of an entity that is acquired in a business
combination that is in existence before the consummation of the combination” (paragraph
F1). It added that a preacquisition contingency can be a contingent asset, a contingent
liability,17 or a contingent impairment of an asset.
B130. Statement 141 required that preacquisition contingencies (other than particular
income tax contingencies) be included in the purchase price allocation. However, it did
not require that accounting at the acquisition date. Rather, it permitted delayed recognition
during the Statement 141 allocation period18 based on amounts determined as follows:
(a)
(b)
If the fair value of the preacquisition contingency can be determined
during the allocation period, that preacquisition contingency shall be
included in the allocation of the purchase price based on that fair
value.
If the fair value of the preacquisition contingency cannot be
determined during the allocation period, that preacquisition
contingency shall be included in the allocation of the purchase price
based on an amount determined in accordance with the following
criteria:
(1) Information available prior to the end of the allocation period
indicates that it is probable that an asset existed, a liability had
been incurred, or an asset had been impaired at the
consummation of the business combination. It is implicit in this
condition that it must be probable that one or more future events
will occur confirming the existence of the asset, liability, or
impairment.
(2) The amount of the asset or liability can be reasonably estimated.
The criteria of this subparagraph shall be applied using the guidance
provided in FASB Statement No. 5, Accounting for Contingencies,
and related FASB Interpretation No. 14, Reasonable Estimation of
17
The terms contingent assets and contingent liabilities sometimes are used in practice to refer to all
contingencies, including items viewed as “possible assets” or “possible liabilities” that may not be assets or
liabilities at the acquisition date. Thus, this Statement does not use those terms to avoid confusion.
18
The allocation period in Statement 141 provided a period of time to identify and measure assets acquired
and liabilities assumed in a business combination, which usually was not to exceed one year.
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the Amount of a Loss, for application of the similar criteria of
paragraph 8 of Statement 5 (Statement 38, paragraph 5). [Paragraph
40; footnote references omitted.]
B131. The Board was told by members of its resource group and others that in practice
assets acquired and liabilities assumed for contingencies of an acquiree often were not
measured and recognized at their acquisition-date fair values. Instead, contingencies were
recognized after the acquisition date at an amount determined at that later date because
either (a) their amount was judged not reasonably estimable (in accordance with
subparagraph (b)(2) of paragraph 40 of Statement 141) or (b) the contingency was
determined not to meet the Statement 5 “probability” criterion for recognition. Although
that delayed recognition generally occurred within the Statement 141 allocation period,
the amount recognized seldom was the acquisition-date fair value. Rather, it often was the
settlement amount or a best estimate of the expected settlement amount based on
circumstances existing at that later date.
B132. The Board believes the objective of limiting the measurement period to a
reasonable period following the acquisition date is to measure the assets acquired and
liabilities assumed at their fair values as of the acquisition date. Therefore, it concluded
that the only information that should be considered in recording assets acquired and
liabilities assumed in a business combination is that information that pertains to their fair
values as of the acquisition date. For example, information discovered after a business
combination that suggests that an acquired asset requires an impairment (or other)
adjustment would not be an adjustment to the initial accounting for the business
combination if that information is about an event that occurred after the acquisition date;
instead, it would result in a charge to earnings.
B133. The Board also considered whether a strict Statement 5 approach might be feasible
for the initial measurement and recognition of all contingencies, which would mean
contingencies that did not meet the Statement 5 “probability” criterion would be measured
at zero (or a minimum amount that is probable). It was suggested that those initial
amounts that are recognized also should be “frozen” until the contingency is settled (or
sufficiently near settlement). Some constituents suggested that might be a practical way to
reduce the costs and measurement difficulties that could be involved in obtaining the
information and legal counsel needed to measure the fair value of numerous (in the
ordinary course of business) contingencies that the acquiree had already assessed and
judged not to qualify for recognition under Statement 5. They suggested that freezing the
initial amounts recognized also could (a) minimize the costs of ongoing reassessments and
(b) address concerns that reporting significant increases and decreases in fair value
estimates during the periods before settlement could lead to considerable volatility in
reported earnings and damage to the credibility of financial reporting.
B134. The Board noted that if a Statement 5 approach was to be applied as it is in
practice, gain contingencies likely would not be recognized, including those for which all
required information is available. That is, paragraph 17(a) of Statement 5 states that
“contingencies that might result in gains usually are not reflected in the accounts since to
do so might be to recognize revenue prior to its realization.” The Board concluded that
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would be a step backwards, since Statement 141 already required the recognition of all
gain contingencies that qualify as intangible assets at the acquisition date and for which
their fair value is determinable (paragraphs 39 and 40(a)). The Board also observed that
in accordance with Statement 5 contingent losses that arise outside a business combination
are not recognized unless there is a rather high likelihood of a future outflow of resources.
The Board also observed that since goodwill is calculated as a residual, omitting an asset
for an identifiable contingent gain also would result in overstating goodwill. Similarly,
omitting a liability for a contingent loss would result in understating goodwill, and, in
extreme cases, that omission could reduce a goodwill asset to zero or make it appear as if
that asset had “negative” value. The Board decided to reject that Statement 5 approach, as
well. However, the Board also noted that a project on business combinations is not the
place to address broadly what some believe are deficiencies in Statement 5.
Subsequent measurement of contingencies
B135. The Board noted that its decision to measure and recognize assets acquired and
liabilities assumed for contingencies of an acquiree at the acquisition date raises questions
about how those items should be measured after the business combination. That is,
without guidance from this Statement, questions would arise about whether those
contingencies should continue to be measured at fair value or in accordance with other
existing GAAP. Although this Statement is not directed at accounting for transactions and
events after a business combination, the Board decided that to avoid misleading reporting
consequences, this Statement must address that issue.
B136. The Board noted that if Statement 5 was applied in the postcombination period to a
recognized liability (asset) for a contingency of an acquiree that did not meet the
Statement 5 probability threshold at the acquisition date, in the absence of a change in
circumstances, that liability (asset) would be derecognized and a gain (loss) would be
reported in income of the postcombination period. The Board concluded that that would
lead to financial reporting that does not faithfully represent the economic circumstances
for that period. Thus, the Board decided that this Statement must address the subsequent
measurement and recognition of contingencies that would be subject to Statement 5.
B137. The Board also noted that concerns about the potential for misleading reporting
consequences do not exist for contingencies that are financial instruments. Contingencies
that are financial instruments generally would continue to be measured at fair value in
accordance with applicable GAAP because GAAP provides relevant guidance for how
subsequent changes in fair value of financial instruments are to be reported in a statement
of income and comprehensive income. The Board concluded that current GAAP provides
appropriate guidance for the subsequent measurement of those contingencies.
B138. The Board considered four alternatives for subsequent measurement of
nonfinancial contingencies of an acquiree:
Alternative 1—”Fresh-start” fair value approach
Alternative 2—Statement 5 “freeze” approach
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Alternative 3—Interest allocation approach—which is similar to the model in FASB
Statement No. 143, Accounting for Asset Retirement Obligations
Alternative 4—Deferred revenue approach—which would be applied only to those items
that are revenue-generating activities.
B139. Paragraphs B122–B134 discuss the reasons for the Board’s decision to require a
fair value measurement approach for the initial measurement and recognition of an
acquiree’s contingencies and rejection of a Statement 5 approach. For many of those
same reasons the Board concluded to require Alternative 1—a “fresh-start” fair value
approach for their subsequent measurement and recognition—and rejected Alternative 2.
Chief among those reasons are the Board’s conclusion that fair value is the most relevant
measurement attribute for contingencies and that the Statement 5 approach often fails to
measure and recognize an existing asset or liability.
B140. The Board also rejected Alternative 3, the interest allocation approach. In
accordance with that approach, the contingency would be remeasured using a convention
similar to Statement 143 whereby interest rates are held constant for initial cash flow
assumptions. It was noted that the reasons for selecting the interest allocation method in
Statement 143, including concerns over income statement volatility, for rather long-term
asset retirement obligations is not compelling for contingencies such as warranties and
pending litigation that generally have shorter lives.
B141. The Board also rejected Alternative 4, the deferred revenue approach. In
accordance with that approach, after the acquisition date, the recorded amount of the
acquisition-date fair value established for a deferred revenue liability (performance
obligation) would be amortized, similar to the approach for separately priced extended
warranties and product maintenance contracts acquired outside a business combination.
In addition, accruals would be added to the contingency for subsequent direct costs. The
Board acknowledges that the costs to apply that measurement approach are lower than
other measurement approaches. However, the Board concluded that the potential
reduction in costs does not justify (a) creating inconsistencies in the subsequent
accounting for particular classes of contingencies acquired or assumed in a business
combination and (b) the diminished relevance of the resulting information.
Recognition of research and development assets
B142. The Board concluded that further improvements could be made by eliminating the
requirement to measure and immediately write off in-process research and development
assets acquired in a business combination. Board members believe that requirement
results in information that is not representationally faithful. Accordingly, this Statement
supersedes Interpretation 4. Board members also concluded that is a meaningful step
toward fulfilling the Board’s objective of promoting international convergence of
accounting standards. Board members also considered whether further improvements
could be achieved by extending this Statement’s asset recognition to purchases of inprocess research and development assets that are acquired outside a business combination.
However, for the reasons discussed in paragraph B39, the Board decided not to extend the
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scope of this Statement to acquisitions of assets that are not businesses. Additionally, the
Board is considering in its short-term convergence project whether to address differences
between U.S. GAAP and IFRS relating to the recognition of in-process research and
development assets that are acquired outside of a business combination.
Exceptions to the fair value measurement principle
B143. Primarily because of cost-benefit or practicability concerns, the Board decided to
allow particular exceptions to the application of this Statement’s fair value measurement
principle. The bases for allowing each exception are described in more detail in
paragraphs B144–B155.
Assets held for sale
B144. The Board decided that long-lived assets (disposal group) acquired in a business
combination that qualify as held for sale in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, should be measured at
fair value less cost to sell in accordance with that Statement. The Board was concerned
that if this Statement required those assets to be measured at fair value, a loss would be
recognized immediately after the acquisition date, since Statement 144 would apply and
require recognition of the costs to sell in accordance with that Statement. The Board
concluded that assuming that there are no changes in events or other circumstances
following the acquisition date, that reported loss would not fairly represent the activities
of the acquirer during that period. Thus, the Board decided to require that long-lived
assets (disposal group) that qualify as held for sale at the acquisition date be measured and
recognized in accordance with the requirements of Statement 144.
Deferred taxes
B145. This Statement requires that deferred tax assets or liabilities be measured and
recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes, as
amended, rather than at their acquisition-date fair values. In accordance with
Statement 109, deferred tax assets or liabilities generally are measured and recognized at
undiscounted amounts. The Board decided not to require deferred tax assets or liabilities
acquired in a business combination to be measured at fair value because it observed that:
a.
b.
If those assets and liabilities were to be measured at their acquisition-date fair
values, without any change in the underlying economic circumstances, their
subsequent measurement in accordance with the provisions of Statement 109 would
result in postcombination gains or losses in the period immediately following the
acquisition. The Board concluded that would not faithfully represent the results of
the postcombination period and would be inconsistent with the notion that a business
combination that is a fair value exchange should not give rise to the recognition of
immediate postcombination gains or losses.
To measure those assets and liabilities at their acquisition-date fair values and
overcome the reporting problem noted in (a) would require a comprehensive
consideration of whether and how to modify the requirements of Statement 109 for
the subsequent measurement of deferred tax assets or liabilities acquired in a
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business combination. The Board concluded that due to the complexities of
Statement 109 and the added complexities that would be involved in tracking
deferred tax assets acquired and liabilities assumed in a business combination, the
benefits of applying this Statement’s fair value measurement principle are not
sufficient to warrant the costs or complexities that would cause.
B146. The Board decided to address three specific income tax accounting issues in
connection with a business combination. They are the acquirer’s accounting for (a) a
change in its valuation allowance for its deferred tax asset that results from a business
combination, (b) the reduction or elimination after the acquisition date of the valuation
allowance that is established at the date of the acquisition for its deductible temporary
differences or operating loss or tax credit carryforwards, and (c) tax benefits arising from
tax deductible goodwill in excess of goodwill for financial reporting. The Board
addressed these issues because retaining the existing requirements of Statement 109 are
incompatible with this Statement, would negate some benefits of applying the provisions
of this Statement, and the existing requirements of Statement 109 are different from the
requirements in the international accounting income tax standard (IAS 12).
B147. On the first issue, the Board agreed that a change in the acquirer’s valuation
allowance for its deferred tax asset that results from a change in the acquirer’s
circumstances upon a business combination should be accounted for as a separate event
and, thus, excluded from the business combination accounting. As a result, the acquirer
would recognize the change in its valuation allowance as income or expense in the period
of the business combination. The Board decided that it should consider this income tax
accounting matter primarily for purposes of determining whether it might achieve
convergence with international standards. Thus, the Board limited its consideration to the
existing alternatives prescribed by Statement 109 and IAS 12. Presently, these changes in
the acquirer’s valuation allowance are included as part of the business combination
accounting in accordance with Statement 109 but are accounted for separately in
accordance with IAS 12.
B148. Board members observed that neither the Statement 109 alternative nor the IAS 12
alternative is entirely consistent with the requirements in paragraph 69 of this Statement
because both alternatives remove the judgment that is required in assessing whether other
assets and liabilities are part of the business combination. Some Board members prefer to
exclude these changes in the acquirer’s valuation allowance from the business
combination accounting (the IAS 12 alternative) because the business combination model
focuses on measuring and recognizing the fair value of the acquiree. They believe that the
acquirer’s deferred tax asset is an attribute of the acquirer rather than the acquiree. Other
Board members prefer to include these changes in the acquirer’s valuation allowance in
the business combination accounting because they would emphasize consistency with the
Statement 109 model. They view the business combination as the triggering event for the
recognition of the change.
B149. Board members acknowledged that both alternatives are defensible on conceptual
grounds. They also observed that retaining either of the alternatives, which do not allow
for the judgment called for by this Statement, is acceptable for practical reasons. The
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Board concluded that on balance the benefits of converging to the IAS 12 alternative—
elimination of reconciling items and improvements in the comparability of information—
outweigh the costs related to a change in the accounting in accordance with Statement
109. Board members also agreed to amend Statement 109 to require, consistent with the
objective in paragraph 71 of this Statement, disclosure of the amount of the deferred tax
benefit (or expense) recognized in income in the period of the acquisition for the reduction
(or increase) of the acquirer’s valuation allowance for its deferred tax asset that results
from a business combination.
B150. On the second and third issues, the Board concluded that the fair value of other
long-lived assets acquired in a business combination should no longer be reduced for
changes after the acquisition date in the valuation allowance or in any excess amount of
tax-deductible goodwill over the goodwill for financial reporting purposes (excess tax
goodwill). This decision is consistent with the reasons for no longer reducing these assets
in circumstances in which the cost of the combination exceeds the assets acquired and
liabilities assumed. Additionally, from a conceptual standpoint, the excess tax goodwill
meets the definition of a temporary difference, and not recognizing the tax benefit of that
temporary difference at the date of the business combination is inappropriate and
inconsistent with Statement 109. Thus, this Statement amends Statement 109 accordingly.
Operating leases
B151. In accordance with FASB Statement No. 13, Accounting for Leases, assets and
liabilities are not separately recognized for rights and obligations of operating leases. The
Board considered whether to require, for example, the separate recognition of an asset
acquired for an acquiree’s rights to use property for the specified period and related
renewal options or other rights and a liability assumed for an acquiree’s obligations to
make required lease payments for an operating lease acquired in a business combination.
The Board concluded that because it is not prepared at this time to address how the asset
and the liability for an operating lease would be accounted for after the acquisition date,
consistency in lease accounting should take primacy over consistency in the application of
the fair value measurement requirement in this Statement. Therefore, consistent with
current practice in accordance with Statement 141, the asset and the liability arising from
an operating lease in which the acquiree is the lessee are recognized as a net amount.
B152. In addition, the Board decided to continue to require that acquirers recognize as
part of the combination an intangible asset if the terms of the operating lease are favorable
relative to market terms or a liability if the terms of the operating lease are unfavorable
relative to market terms. That practice is consistent with current practice in accordance
with Statement 141.
Employee benefit plans
B153. The Board concluded that if, at this time, it were to consider requiring that
employee benefit obligations assumed in a business combination be measured at their
acquisition-date fair values, the Board also would need to either (a) comprehensively
reconsider the relevant standards for those employee benefits, or (b) at minimum,
determine whether accommodations would be required, for their subsequent measurement
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following the acquisition date, or (c) both. At this time, the Board does not have an active
project to comprehensively reconsider the relevant standards for employee benefits. Thus,
due to the complexities in accounting for employee benefit obligations in accordance with
FASB Statements No. 87, Employers’ Accounting for Pensions, No. 106, Employers’
Accounting for Postretirement Benefits Other Than Pensions, and No. 112, Employers’
Accounting for Postemployment Benefits, the Board decided that at this time those benefits
should continue to be measured in accordance with their applicable standards.
Goodwill
B154. Consistent with Statement 141 and Opinion 16, this Statement requires that the
acquirer measure goodwill as a residual and recognize it as an asset. In Statement 141, the
Board concluded that direct measurement of goodwill is impracticable. The Board did not
reconsider that conclusion as part of the second phase of the business combinations
project. Paragraphs B101–B146 of Statement 141 provide the basis for the Board’s
decision that goodwill should be recognized as an asset but can be only measured as a
residual. Consistent with the fundamental principles underlying this Statement, the Board
decided, however, that all assets and liabilities should be measured at their full fair values
(or in limited cases their full amounts determined in accordance with other GAAP),
including those of an acquiree (subsidiary) that is not wholly owned.19 Thus, this
Statement eliminates the past practice of not recognizing the full amount of goodwill; that
is, omitting the portion related to the noncontrolling interests in such subsidiaries.
Because that is a change to present practice, the Board decided to provide guidance that
clarifies and illustrates how the goodwill residual is to be determined and allocated
between the controlling and noncontrolling interests for an acquiree that is not wholly
owned (paragraphs A62 and A63).
The Board considered three alternatives for purposes of allocating goodwill between the
controlling and noncontrolling interest in an acquisition of a less than wholly owned
acquiree. They are:
a.
b.
c.
Allocate a portion of goodwill to the controlling interest based on the difference
between the fair value of the equity interest acquired (which includes any previous
investment held in the acquiree) and the acquirer’s share of the fair value of the net
identifiable assets acquired and the remaining portion to the noncontrolling interests
Allocate goodwill to the controlling and noncontrolling interests based on their
relative ownership interests in the fair value of the acquiree
Allocate a portion of goodwill first to a reporting unit of the controlling interest that
is expected to benefit from synergies of the combination, and then allocate the
remainder to the controlling and noncontrolling interests based on their relative
ownership interests in the fair value of the acquiree.
B155. The Board decided that goodwill should be allocated based on the first of those
alternatives. Thus, as noted in paragraph A66, the amount of goodwill allocated to the
19
Paragraphs B168–B182 discuss the reasons for the Board’s decision to reduce the full amount of goodwill
in the event of a bargain purchase—an acquisition in which the fair value of the interest acquired in the
acquiree is greater than the consideration transferred for that interest.
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acquirer (controlling interest) is to be measured as “the difference between the
acquisition-date fair value of the acquirer’s equity interest in the acquiree and the
acquirer’s share in the acquisition-date fair value of the separately recognized assets
acquired and liabilities assumed” and the remainder is to be allocated to the
noncontrolling interests. The Board noted that each alternative has certain merits. It
concluded that on balance the first alternative best reflects the assumption that any control
premium that is paid by the acquirer for control rights that is included in the full amount
of goodwill should be allocated to the acquirer’s interests (and avoids allocating any of
that amount to the noncontrolling interest). The Board noted that the second alternative
would be simple to apply but would result in a portion of goodwill that is related to the
acquirer’s payment of a control premium being allocated to the noncontrolling interest.
The Board noted that the third alternative might be desirable in that it would allocate
goodwill to the reporting units based on expected benefits but concluded that might
introduce more difficulties and costs to apply in practice.
Recognizing Gains or Losses on Noncontrolling Equity Investments
B156. In accordance with paragraph 56 of this Statement, in a business combination
achieved in stages, an acquirer remeasures its noncontrolling equity investment at its
acquisition-date fair value and recognizes any gains or losses in income. Consistent with
its conclusion in paragraphs B30 and B31 of Proposed Statement, Consolidated Financial
Statements, Including Accounting and Reporting of Noncontrolling Interests in
Subsidiaries, that losing control of a business is a remeasurement event, the Board
concluded that gaining control of a business also is a remeasurement event. Specifically,
a change from holding a noncontrolling investment in an entity to obtaining control of that
entity is a significant change in the nature of and economic circumstances surrounding
that investment. That change warrants a change in the classification and measurement of
that investment. Board members observed that the acquirer no longer is the owner of a
noncontrolling investment asset in that entity when control of the underlying entity is
obtained. As in present practice, the acquirer ceases its investment accounting as an
owner of an investment asset and begins reporting the underlying assets, liabilities, and
results of operations of the entity as part of its consolidated results. In effect, the acquirer
exchanges its status as an owner of an investment asset in an entity for a controlling
financial interest in all of the underlying assets and liabilities of that entity (acquiree) and
the right to direct how the acquiree and its management use those assets in conducting its
operations.
B157. Paragraph 21(b) of this Statement also provides that, for purposes of applying the
acquisition method, the fair value of any noncontrolling equity investment is considered
part of the fair value of the consideration transferred. Board members noted that
measuring that investment asset at its acquisition-date fair value represents its economic
value at that date. They also noted that measuring that investment asset at its fair value at
the acquisition date—when that investment accounting ceases—is consistent with the
longstanding concept that when an asset is exchanged for another asset, the transaction is
accounted for based on the fair values of the assets involved (paragraphs B57 and B58).
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B158. In August 2003, the Board held a roundtable meeting with resource group
members and other constituents to discuss, among other things, the decision to require that
an acquirer remeasure any noncontrolling equity investment in an acquiree at its
acquisition-date fair value and recognize any gain or loss in income of the period. The
users of financial statements indicated they did not have significant concerns with the
change to present practice to remeasure any noncontrolling equity investment, as long as
the amount of the gain or loss is clearly disclosed in the financial statements or in the
notes. Paragraph 72(j) of this Statement requires that an acquirer in a business
combination achieved in stages disclose “the amount of any gain or loss recognized . . .
and the line item in the income statement in which that gain or loss is recognized.” Board
members rejected the view expressed by some constituents that the carrying basis of any
preacquisition investment should be retained in the initial accounting for the cost of the
business acquired. As noted in paragraphs B20–B22, the Board concluded that current
cost-accumulation practices have led to many of the inconsistencies and deficiencies in
accounting practices and financial reporting.
B159. Some constituents also expressed concern about allowing an opportunity for gain
recognition on a “purchase transaction.”
The Board noted that the required
remeasurement also could result in loss recognition. Moreover, the Board rejected the
characterization that the resulting recognition of a gain or loss is from a purchase. Rather,
under the mixed attribute accounting model that exists today, economic gains and losses
are recognized as they occur for particular, but not all, financial instruments. If a
noncontrolling equity interest in an entity is not required to be measured at its fair value,
the Board noted that the recognition of a gain or loss at the acquisition date is merely a
consequence of the mixed practice that permits the delayed recognition of the economic
gain or loss that is present in that financial instrument. However, if an investment asset is
being measured at fair value in accordance with GAAP, the gain or loss would be
recognized as it occurs in accordance with that accounting, and remeasurement would
result in no further gain or loss to be recognized in comprehensive income of the period.20
B160. This Statement affirms the Board’s conclusion in Statement 133 that fair value is
the most relevant measure for financial instruments. The Board acknowledges that current
accounting requirements for particular financial instruments are inconsistent with that
fundamental conclusion but concluded that addressing those inconsistencies is a matter
outside the scope of this project.21 The Board also noted its ongoing commitment to work
toward resolving the conceptual and practical issues related to determining the fair values
of financial instruments and portfolios of financial instruments. However, the Board also
concluded that there is no compelling need to resolve those inconsistencies before
proceeding with the conclusion reached in this Statement that upon a change in control, an
20
Paragraph 56 provides that “if, before the business combination, the acquirer recognized changes in the
value of its noncontrolling equity investment in other comprehensive income (for example, the investment
was classified as available for sale), the amount that was recognized in other comprehensive income shall be
reclassified and included in the calculation of any gain or loss as of the acquisition date.”
21
Currently, the Board’s fair value option project is considering whether to permit entities a one-time
election to report most financial instruments (or similar nonfinancial instruments) at fair value with the
changes in fair value included in earnings. Refinements of the project’s scope are expected as the Board
deliberates these issues.
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acquirer should remeasure its noncontrolling equity investment at its acquisition-date fair
value and recognize any gains or losses in income.
Measurement Period
B161. The Board decided to provide for a measurement period after the acquisition date
during which the acquirer adjusts any provisional amounts that were recognized at the
acquisition date to their subsequently determined acquisition-date fair values. The
measurement period provides the acquirer with reasonable time following the acquisition
date to obtain information necessary to measure the acquisition-date fair values of the
acquiree, acquirer’s interest in that acquiree, consideration transferred for the acquiree,
and assets acquired and liabilities assumed. The Board concluded that allowing
adjustments during the measurement period should address concerns about the quality and
availability of information at the acquisition date for measuring the acquisition-date fair
values of particular items, especially including contingencies of the acquiree and
contingent consideration arrangements of the acquirer, which often impact the valuation
of the acquiree as well.
B162. The Board decided that acquirers should provide users of their financial statements
with relevant information about the status of items that have been measured only
provisionally. Thus, paragraph 76(a) requires that the acquirer disclose “if the amounts
recognized in the financial statement for the business combination have been determined
only provisionally, (1) the reasons why the initial accounting for the business combination
is not complete, (2) the assets acquired or the liabilities assumed for which the
measurement period is still open, and (3) the nature and amount of any measurement
period adjustments recognized during the period.”
B163. The Board decided to place constraints on the period of time for which it is
deemed reasonable to be seeking necessary information. The Board concluded that that
period should end “as soon as the acquirer receives the necessary information about facts
and circumstances that existed as of the acquisition date or learns the information is not
obtainable. However, the measurement period shall not exceed one year from the
acquisition date” (paragraph 65).
B164. The Board acknowledged that some contingencies and similar matters may not
“mature” within a one-year limit. It observed, however, that the objective of the
measurement period is to provide time to obtain the information necessary to measure the
fair value of the item as of the acquisition date. The objective is not directed at
determining the ultimate settlement amount of a contingency or other item. As discussed
in paragraph B123, uncertainties about future cash flows are part of the measure of the fair
value of an asset or liability.
B165. The Board noted that the measurement period in this Statement differs in
important ways from the allocation period guidance of Statement 141 and its cost
allocation method. This Statement emphasizes the principle that assets acquired,
liabilities assumed, and the acquiree should be measured at their fair values on the
acquisition date. As discussed in paragraphs B130 and B131, the application of the
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Statement 141 allocation period and its postcombination adjustments delayed the
recognition of assets and liabilities and when those assets and liabilities were recognized,
they were not measured at their acquisition-date fair values. Thus, the Board decided to
abandon the Statement 141 term allocation period and its guidance.
B166. The Board also decided that to improve the quality of comparative information
reported in financial statements and converge with the requirements of IFRS 3, this
Statement should require that:
a.
b.
An acquirer recognize adjustments made during the measurement period to the
provisional values of the assets acquired and liabilities assumed as if the accounting
for the business combination had been completed at the acquisition date
Comparative information in previously issued financial statements be adjusted,
including any change in depreciation, amortization, or other income effect
recognized as a result of completing the initial accounting. (paragraph 67)
B167. The Board noted that Statement 141 was silent about whether adjustments during
the Statement 141 allocation period are to be reported retrospectively but noted that in
practice the effects of those adjustments typically were reported in the postcombination
period—not retrospectively. Board members acknowledged concerns that retrospective
adjustments and adjusting previously issued comparative information are more costly.
Some Board members indicated that for cost-benefit reasons they would prefer not to
require retrospective adjustments. Board members also noted, however, that applying
measurement period adjustments retrospectively would result in at least two significant
benefits: (a) improvements in comparative period information and (b) avoidance of
divergent accounting between U.S. entities and others and the reduction of reconciling
items and their attendant costs. The Board concluded that those overall benefits outweigh
the potential costs of retrospective application.
Business Combinations in Which the Consideration Transferred for the Acquirer’s Interest in
the Acquiree Is Less Than the Fair Value of That Interest (Bargain Purchases)
B168. Paragraphs 59–61 of this Statement provide the accounting requirements for
business combinations in which the fair value of the consideration transferred (paid) by
the acquirer is less than the fair value of that interest in the acquiree. This type of business
combination is referred to as a bargain purchase in this Statement. The Board believes
that bargain purchases are anomalous transactions—that is, business entities and their
owners generally do not knowingly and willingly sell assets or businesses at prices below
their fair values. However, bargain purchases have occurred and are likely to continue to
occur. They include a forced liquidation or distress sale (for example, death of founder or
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key manager) in which owners need to sell a business and are acting under compulsion to
sell at less than fair value.22
B169. The Board decided that because a bargain purchase is unlike a business
combination in which willing parties exchange assets (net assets) of equal values, the
presumption in paragraph 20 of this Statement would not apply to those transactions. That
is, the Board agreed that this Statement’s presumption that the amount paid by the
acquirer is the best evidence of the acquisition-date fair value of the acquirer’s interest and
its related measurement guidance are not appropriate for circumstances in which the seller
(transferor) of the business is known to be acting under compulsion. The Board
concluded, however, that the objectives and other fundamental principles underlying this
Statement are relevant and apply to a bargain purchase.
B170. The Board also observed that unlike a typical acquisition of an acquiree, an
economic gain is inherent in a bargain purchase. That is, at the acquisition date, the
acquirer is better off by the amount by which the fair value of the acquiree exceeds the fair
value of the consideration transferred (paid). The Board believes that, in concept, that
gain should be recognized by the acquirer at the acquisition date but (as discussed in
paragraphs B171–B182) decided to place limits on the recognition of gains on a bargain
purchase. Board members acknowledged that although the reasons for a forced
liquidation or distress sale often are apparent, sometimes clear evidence might not exist;
for example, if a seller uses a closed (private) process for the sale and to maintain its
negotiating position is unwilling to reveal the main reason for the sale. Board members
also agreed that because those transactions are expected to be rare, the appearance of a
bargain purchase without evidence of the underlying reasons would raise concerns in
practice about the existence of measurement errors.
B171. Constituents have expressed concerns about recognizing gains upon the acquisition
of a business, particularly when it is difficult to determine whether a particular acquisition
is in fact a bargain purchase. They also suggested that an initial determination of an
excess of the fair value of the acquirer’s interest in the acquiree over the fair value of the
consideration transferred (paid) by the acquirer for that interest might arise from other
factors, including:
a.
b.
Errors in measuring the fair values of the (1) acquirer’s interest in the business, (2)
assets acquired, or (3) liabilities assumed
Using measures under GAAP that are not fair value measurements.
22
Like a bargain purchase, a donation of a business is another example of a business combination in which
an acquirer obtains an acquiree that has a fair value that exceeds any consideration transferred by the
acquirer. However, in those cases the acquirer commonly is a charitable or other not-for-profit organization.
Accounting for business combinations among not-for-profit organizations is excluded from the scope of this
Statement.
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Distinguishing a bargain purchase from measurement errors
B172. Board members also acknowledged concerns raised by constituents that a
requirement to recognize gains on a bargain purchase might provide an opportunity for
inappropriate gain recognition from intentional errors resulting from:
a.
b.
c.
d.
Overstating the value attributed to its interest in the acquiree
Understating or failing to identify the value of items of consideration that it
transferred
Overstating values attributed to particular assets acquired
Understating or failing to identify and recognize particular liabilities assumed.
B173. Board members believe that problems surrounding intentional measurement errors
generally are best addressed by other means, such as strong internal control systems and
the use of independent valuation experts and external auditors, rather than by setting
standards that lack neutrality.23 However, Board members share concerns about the
potential for inappropriate gain recognition resulting from measurement bias or
undetected measurement errors. Thus, the Board decided, as specified in paragraph 60, to
require that:
If the fair value of the acquirer’s interest in the acquiree initially is
determined to exceed the fair value of the consideration transferred for that
interest, the acquirer shall assess whether it has correctly identified all
assets acquired and liabilities assumed and shall review the procedures
used to measure and remeasure, if necessary, all of the following:
a.
b.
c.
d.
The acquisition-date fair value of the acquiree
The acquisition-date fair value of the acquirer’s interest in the acquiree
The acquisition-date fair value of the consideration transferred
The acquisition-date values of the identifiable assets acquired and
liabilities assumed recognized in accordance with the requirements of
this Statement.
The objective of that review is to ensure that appropriate consideration has been given to
all available information in identifying the items to be measured and recognized and in
23
Paragraphs 98–110 of Concepts Statement 2 discuss the relationship of neutrality to intentional bias
introduced to attain a predetermined result or induce a particular mode of behavior. Paragraphs 77 and 78 of
Concepts Statement 2 discuss the effects of both intentional and unintentional biases in accounting
measures.
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determining their fair values. That includes determining the appropriate unit of account
and valuation premise for their measurement.24 The Board believes that such
remeasurement checks will mitigate if not eliminate undetected errors that might have
existed in the initial measurements.
B174. The Board acknowledged, however, that those remeasurement checks may be
insufficient for purposes of eliminating its concern about unintentional measurement bias
or addressing constituents’ concerns about abuse that stem from the opportunity for gain
recognition. The Board decided to address its concern by limiting the extent of gain that
can be recognized. Thus, paragraph 61 of this Statement provides that:
If, after performing any remeasurements required by paragraph 60, the
fair value of the acquirer’s interest in the acquiree still exceeds the fair
value of the consideration transferred for that interest, the acquirer shall
account for that excess by reducing the amount of goodwill that otherwise
would be recognized in accordance with paragraph 49. If the goodwill
related to that business combination is reduced to zero, any remaining
excess shall be recognized as a gain attributable to the acquirer on the
acquisition date.
In addition, paragraph 72(i) requires that an acquirer disclose:
. . . the amount of any gain recognized in accordance with paragraph
61, the line item in the income statement in which the gain is recognized,
and a description of the reasons why the acquirer was able to achieve a
gain.
B175. The primary objective of that limitation on gain recognition is to mitigate the
potential for inappropriate gain recognition through measurement errors, particularly those
that might result from unintended measurement bias. However, the disclosure
requirement is to provide information that enables users of an acquirer’s financial
statements to evaluate the nature and financial effect of business combinations that occur
during the period. Board members have been told by professional analysts and others that
separately disclosing information about revenues, expenses, gains, and losses resulting
from atypical events and circumstances, such as gains on a bargain purchase transaction,
is particularly important in analyzing an entity’s performance and developing trend
24
As discussed in Proposed Statement, Fair Value Measurements, the unit of account defines the boundaries
of what is being measured by reference to the level at which an asset or liability is aggregated (or
disaggregated), that is, whether individually (for example, a single loan) or as part of a larger group (for
example, a portfolio of loans). A valuation premise specifies the condition and location of many assets,
including whether assets are installed or integrated with other assets (that is, configured for use by an
entity). It provides additional information about the asset being measured and the assumptions that
marketplace participants would use in their estimates of fair value. A going-concern or in-use valuation
premise presumes that marketplace participants would continue to use (a) a business that is a going concern
or (b) an asset that is configured for use by an entity. In those situations, a going-concern or in-use
valuation premise is generally appropriate. Otherwise, an in-exchange valuation premise may be
appropriate. An in-exchange valuation premise presumes that an asset is not configured for use by an entity
and that marketplace participants would sell the asset.
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information for purposes of assessing an entity’s prospects for generating future earnings
and cash flows. Board members acknowledged, however, that the limitation and
disclosure requirements also may help mitigate constituents’ concerns about potential
abuse, although that is not their primary objective.
B176. Moreover, Board members believe that concerns about abuse resulting from the
opportunity for gain recognition may be overstated. First, they noted that financial
analysts and other users have often told the Board that they give little “weight” to onetime or unusual gains, such as those resulting from a bargain purchase transaction.
Second, they noted that managers of entities generally have no incentive to overstate
assets acquired or understate liabilities assumed in a business combination because that
generally would result in higher postcombination expenses—when the assets are used or
become impaired or liabilities are remeasured or settled.
B177. Some Board members expressed concern that placing a limit on gain recognition is
not consistent with this Statement’s fair value measurement principles and could lead to
misrepresentations for bargain purchases that are free of measurement errors. Those
Board members would prefer to allow for gain recognition without this Statement’s
limitation in those cases in which there is persuasive evidence (such as duress on a seller)
that the transaction is, in fact, a bargain purchase. They acknowledge, however, that to
apply this “persuasive evidence” distinction could lead to other difficulties in practice. On
balance, the Board concluded that this Statement’s limit on gain recognition is a practical
way to address the problems and concerns raised about measurement errors.
Distinguishing a bargain purchase from a “negative goodwill result”
B178. The Board also acknowledged that a so-called negative goodwill result remains a
remote possibility because, as discussed in paragraphs B143–B155, this Statement
continues to require that particular assets acquired and liabilities assumed be measured at
other than their acquisition-date fair value. The Board observed, however, that provisions
of this Statement address most deficiencies in past GAAP that previously led to negative
goodwill results—that is, a result that had the appearance but not the economic substance
of a bargain purchase. For example, as discussed in paragraphs B122–B134, prior to this
Statement, at the acquisition date a liability for a contingent loss of an acquiree may not
have been recognized at all or may have been recognized at a minimum amount rather
than at its fair value. The omission of such liabilities would result in an overstatement of
the identifiable net assets acquired and, thus, an equivalent understatement of the residual
calculation of goodwill. If the omitted liability exceeded the actual goodwill in the
acquiree, that would result in a calculated negative goodwill. Similarly, a liability for
contingent payment arrangements (for example, earnouts) often was not recognized at the
acquisition date, which, in some cases, could lead to understating the consideration paid
and creating the appearance of a bargain purchase. This Statement solves those problems
by requiring the measurement and recognition of substantially all liabilities at their fair
values on the acquisition date.
B179. Other changes made by this Statement also may reduce the instances of negative
goodwill. Among them is the Board’s decision, as discussed in paragraphs B146–B150,
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to account for a change in the acquirer’s valuation allowance for its deferred tax asset as a
separate event rather than as part of the business combination accounting. Previously, in
accordance with Statement 109 that change in the valuation allowance was included in the
business combination accounting and that inclusion had the effect of reducing the amount
of goodwill recognized. Another is the Board’s decision to eliminate the immediate writeoff to expense in-process research and development (IPR&D) assets acquired in a
business combination. Some constituents believe that, in the past, the opportunity to
immediately expense that asset led to overstatements of its measurement to achieve an
equivalent understatement of goodwill as a means to avoid future expenses for goodwill
impairments. Thus, Board members believe that this Statement’s improvements in GAAP
also help to mitigate the concerns raised about measurement errors that have, in the past,
led to negative goodwill results.
B180. Lastly, the Board also considered concerns raised by some constituents that a
buyer’s expectations of future losses and its need to incur future costs to make a business
viable might give rise to a negative goodwill result. That is, a buyer would only be
willing to pay a seller an amount that is, in that view, less than fair value of the acquiree
(or its identifiable net assets) because to make a fair return on the business the buyer
would need to make further investments in that business to bring its condition to fair
value. The Board disagreed with that view for the reasons noted in paragraphs B168–
B179, as well as those that follow.
B181. The Board noted that the objective of a fair value measurement is to estimate an
exchange price for the item being measured in its condition at the measurement date. The
Board observed that a possible cause of a negative goodwill result that might remain after
rechecking the procedures used in applying this Statement’s provisions is a failure to
correctly reflect the fair value of the acquiree’s identifiable assets or liabilities in their
current location and condition and their current level of performance. The Board also
concurred with the conclusion reached by the IASB in paragraph BC149 of IFRS 3, that
“although expectations of future losses and expenses have the effect of depressing the
price that an acquirer is prepared to pay for the acquiree, the net fair value of the
acquiree’s identifiable assets or liabilities will be similarly affected.” For example, if the
price of a business is depressed because its manufacturing facilities and equipment are
poorly configured and generating insufficient cash flows, the in-use fair value of those
assets would be similarly depressed. That is, their fair value would reflect expectations of
future losses and expenses based on their current in-use condition.
B182. Moreover, the Board noted that a fair value estimate is determined by reference to
willing marketplace participants representing unrelated buyers and sellers that are
knowledgeable and have a common level of understanding about factors relevant to the
business and the transaction, and that also are willing and able to transact in the same
market(s) and have the legal and financial ability to do so. In the absence of duress, the
Board is not aware of any compelling reason to believe a seller of a business would
willingly and knowingly sell a business for an amount less than its fair value. Thus, the
Board concluded that careful application of this Statement’s fair value measurement
requirements in practice will mitigate concerns that a negative goodwill might result and
might be misinterpreted as a bargain purchase transaction.
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Business Combinations in Which the Consideration Transferred for the Acquirer’s Interest in
the Acquiree Is More Than the Fair Value of That Interest (Overpayments)
B183. The Board considered whether this Statement should include provisions to account
for a business combination in which a buyer pays an amount that is in more than the fair
value of its interest in the acquiree. The Board acknowledged that that circumstance is
possible and, in concept, an overpayment should lead to recognition of an expense by the
acquirer. However, the Board believes that in practice that circumstance, if it occurs, will
not be detectable or known at the acquisition date. That is, the Board is not aware of
instances in which a buyer knowingly overpays a seller to acquire a business or is
otherwise compelled to make such an overpayment. Rather, the Board believes that an
acquirer’s overpayment, although rare, occurs unknowingly; generally as a result of
misinformation at the acquisition date. Thus, the Board concluded that in practice it is not
possible to identify and reliably measure an overpayment at the acquisition date. The
Board concluded that the accounting for overpayments is best addressed through
subsequent impairment testing when evidence of a potential overpayment first arises.
Disclosures
B184. This Statement carries forward those disclosure requirements from Statement 141
that remain relevant, eliminates those that do not, and modifies those that are affected by
changes in the measurement or recognition provisions of Statement 141(R). Paragraphs
B195–B213 of Statement 141 discussed the Board’s considerations and decisions that led
to the disclosures required by that Statement. (Because the Board is not redeliberating or
seeking comments on those conclusions, this Statement does not repeat those sections of
Statement 141.)
B185. Like the IASB, the Board decided that this Statement’s disclosure requirements
should include overall objectives for the disclosure of information that would be useful to
investors, creditors, and others in evaluating the financial effects of a business
combination. Those objectives are that the acquirer disclose information that enables
users of its financial statements to evaluate:
a.
b.
c.
The nature and financial effect of business combinations that occur (1) during the
reporting period and (2) after the balance sheet date but before the financial
statements are issued (paragraph 71)
The financial effects of adjustments to the amounts recognized in a business
combination that occurs in the current reporting period or in previous reporting
periods (paragraph 75)
Changes in the carrying amount of goodwill during the reporting period (paragraph
77).
In addition, the Board believes that it is not necessary (or possible) to identify in this
Statement all of the specific information that may be necessary to meet those objectives
for all business combinations. Rather, the Board concluded that this Statement should
specify particular disclosures that generally are required to meet those objectives and
specify that acquirers should disclose any additional information about the circumstances
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surrounding their particular business combination that they believe is necessary to meet
those objectives (paragraph 81).
B186. The Board also decided to organize within each of those objectives the specific
Statement 141 disclosure requirements that this Statement carries forward or modifies and
those developed during the Board’s deliberations leading to this Statement. Changes to
the Statement 141 requirements include the elimination of those disclosures that required
amounts or information that was based on applying the Statement 141 cost-allocation
(purchase price) method for assigning amounts to assets and liabilities that is replaced by
this Statement’s fair value measurement principle. Some of those disclosures are modified
to retain the information but conform the amounts to be disclosed with this Statement’s
fair value measurement principle. The following are among the disclosure requirements
that the Board decided to add, eliminate, or modify in developing this Statement,
including references to related discussions in other parts of this basis for conclusions.
a.
b.
c.
d.
e.
f.
Added for public business entities disclosure of the revenue and net income of the
acquiree, if practicable, for a minimum of the period from the acquisition date
through the end of the current year. This disclosure would be required for the
current year, the current interim period, and cumulative interim periods from the
acquisition date through the end of the current year (paragraphs B187–B191).
Eliminated the disclosure of the period for which the results of operations of the
acquiree are included in the income statement of the combined entity, which is
replaced by disclosure of the acquisition date. This Statement no longer permits the
alternative practice of reporting revenues and expenses of the acquiree as if the
acquisition occurred as of the beginning of the year (or a designated date) with a
reduction to eliminate the acquiree’s preacquisition period earnings (paragraphs B54
and B55).
Added a required reconciliation of beginning and ending balances of contingencies
for liabilities assumed and liabilities for contingent consideration arrangements and
disclosure of the maximum potential amount of future payments for contingent
consideration. The reconciliation would show changes in fair value estimates
recorded in income, payments, and other changes or settlements (paragraphs B74–
B86).
Added disclosure of the amount of acquisition-related costs, the amount expensed
and the income statement line item in which that expense is reported (paragraph
B93–B99).
Replaced the disclosure of extraordinary gains recognized for so-called “negative
goodwill” in accordance with paragraph 45 of Statement 141 with this Statement’s
required disclosure of the amount of any gain recognized in the period for a bargain
purchase, the line item in the income statement in which it is recognized, and a
description of the reasons why the acquirer was able to achieve a gain (paragraphs
B168–B182).
Eliminated the requirement to disclose the amount of in-process research and
development acquired and had been measured and immediately written off to
expense in accordance with Statement 141. This Statement no longer permits that
past practice (paragraph B142).
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Disclosure of Information about Postcombination Revenue and Net Income of Acquiree
B187. Paragraph 74(a) of this Statement requires that a public business enterprise
disclose, for each material business combination (or for individually immaterial business
combinations that are material collectively), the amounts of revenue and net income of the
acquiree since the acquisition date included in the consolidated income statement for the
period. At its August 2003 roundtable discussion meeting with users of financial
statements, the Board discussed the potential usefulness of information about
postcombination revenues and net income of an acquired business or businesses from
other (organic) revenues of the acquirer. The Board also asked whether that information
would be preferable to the existing pro forma supplemental disclosure that Statement 141
had carried forward from Opinion 16—that is, revenue and results of operations of the
combined entity for the current period as though the acquisition date for all business
combinations that occurred during the year had been as of the beginning of the annual
reporting period (paragraph 74(b)(1)).
B188. The Board also questioned whether those disclosures are directed at similar
objectives and, if so, whether one may be preferable. The Board observed that making
postcombination distinctions might be too costly or impossible if the operations of the
acquiree are integrated with those of the acquirer. Although users acknowledged that
point, they indicated that information about actual postcombination revenues and net
income is preferable to the pro forma disclosures and should be required whenever
possible. Some also said that distinguishing acquired revenues from organic revenues is
most important and suggested the acquirers be required to provide that information for a
12-month period following an acquisition rather than only through the end of the annual
period.
B189. The Board agreed with users that the information about postcombination revenues
and net income of the acquiree is useful. However, for practical reasons, the Board
concluded that this Statement should provide an exception to that requirement (paragraph
74) if distinguishing the postcombination results of the operations of the acquiree from
those of the combined entity is impracticable. The Board also decided that in those
circumstances the acquirer should disclose the fact and the reasons why it is impracticable
to provide the postcombination information. The Board also decided to limit the period
for that disclosure to the end of the current annual period. The Board believes that the
information needed to provide this disclosure during that period generally will be
available because often a short period of time is required to fully integrate an acquiree’s
operations with those of the acquirer. The Board also observed that the usefulness of the
separate information diminishes as the operations of the acquiree are integrated with the
combined entity.
B190. Some Board members suggested that this disclosure of postcombination revenues
and net income of an acquiree be expanded to all entities because the information would
be valuable to any investor, not merely investors in public business entities. It was noted
that that also would converge with the proposed requirements of the IASB. Other Board
members expressed concern about imposing the additional costs on nonpublic entities
because they believe the benefits to users of those entities would not be sufficient to
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warrant imposing those costs. They also observed that the IASB has not completed its
separate deliberations on its small- and medium-sized entities project and, thus, do not
have an established practice of differential disclosure for those circumstances in which it
is clear that the benefits would be sufficient for some entities but not so clear for all
entities. Because of those cost-benefit concerns, the Board decided not to expand this
disclosure requirement to all entities.
B191. Users expressed mixed views about the continued need for the pro forma
disclosure. Some suggested that it provides some useful information in predicting trends,
and others suggested it is of little or less value to them in predicting future growth.
However, users also said that the Board should retain the pro forma disclosures,
particularly for circumstances in which the postcombination disclosure is impracticable.
The Board concluded, consistent with the reasons noted in paragraph B199 of Statement
141, that the pro forma disclosure requirements should be retained. 25
Effective Date and Transition
B192. The Board decided that the provisions of this Statement should apply prospectively
and that its effectiveness should coincide with the adoption of the proposed Statement on
consolidated financial statements. Prospective application of this Statement is consistent
with Statement 141. The Board acknowledges that, like Statement 141, this Statement
could have been made effective upon its issuance, or shortly after. However, the Board’s
preference is that this Statement be adopted at the same time as the proposed Statement on
consolidated financial statements and that that proposed Statement become effective as of
the beginning of an annual period. The Board believes that particular provisions in that
proposed Statement, which address the subsequent accounting for an acquiree in
consolidated financial statements, are related to provisions in this Statement that address
the initial accounting for an acquiree at the acquisition date. The Board believes that
linking the timing of the changes in accounting required by these Statements will
minimize disruptions to practice. As a result, both preparers and users of financial
statements should benefit from such linkage.
B193. At the time the Exposure Drafts for this Statement and the proposed Statement on
consolidated financial statements were issued, the Board estimated that those Statements
would become effective no later than for annual periods beginning on or after December
15, 2006. The Board believes that a period of approximately three-six months following
issuance is desirable. That period should provide sufficient time for entities and their
25
Paragraph B199 of Statement 141 noted that during the deliberations leading to Statement 141:
Respondents also expressed mixed views about the proposal to eliminate the pro
forma sales and earnings disclosures required by Opinion 16. Many of the respondents
supported elimination of those disclosure requirements. Those respondents said that the
information provided has little value because it is based on hypothetical assumptions and
mechanical computations. Respondents that favored retaining those disclosures said that
the pro forma information is useful for measuring growth and in assessing whether the
synergies expected to result from the combination have been achieved. After considering
respondents’ views, the Board concluded that the pro forma disclosure requirements in
Opinion 16 should be retained in this Statement.
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auditors to analyze, interpret, and prepare for implementation of the provisions of these
Statements. It also allows time for coordinating the effective dates with the standards
being issued by the IASB and accommodates the IASB’s desire to allow sufficient time
for countries to enact enabling legislation. The Board also decided to encourage early
application of both Statements, as long as the provisions of both are applied at the same
time. The Board saw no reason to delay or preclude the application of this Statement’s
improvements for any significant length of time for entities that want to apply the
provisions of both Statements before their effective date.
Effective Date and Transition for Combinations Involving Only Mutual Entities
B194. Paragraph 60 of Statement 141 indicated that the provisions of that Statement are
not effective for combinations involving only mutual entities until the Board issues
interpretative guidance for the application of the purchase method to those transactions.
This Statement provides that interpretative guidance. Thus, in the absence of any special
effective date provisions provided by this Statement, the delayed application for
combinations between mutual entities would end upon the issuance of this Statement. The
Board observed that taken literally that could result in mutual entities making a two-step
transition—transitioning to Statement 141 when the guidance in this Statement is issued
and then transitioning to the provisions of this Statement when it becomes effective.
B195. The Board decided that it should take steps in this Statement to avoid the
complexities and difficulties that a two-step transition might impose on both issuers of
financial statements and the users of those financial statements. The Board concluded that
it would be best to effect the Statement 141 change that precludes the use of the pooling
method at the same time that this Statement’s changes to the procedures for applying the
acquisition method become effective. Therefore, the effective date for combinations
between mutual entities is the same as the effective date for all other entities applying this
Statement.
B196. The Board also decided that this Statement should carry forward the transition
provisions of Statement 141 that are relevant for entities adopting the change in
accounting from the pooling method to the purchase method. Therefore, the transition
provisions that applied to entities that adopted Statement 141 will now also apply to
combinations between mutual entities upon the effective date of this Statement. Those
provisions are provided in paragraphs C9–C24 of this Statement.
Benefits and Costs
B197. The mission of the FASB is to establish and improve standards of financial
accounting and reporting for the guidance and education of the public, including
preparers, auditors, and users of financial information. In fulfilling that mission, the
Board strives to determine that a proposed standard will fill a significant need and that the
costs imposed to apply that standard, as compared with other alternatives, are justified in
relation to the overall benefits of the resulting information. Although the costs to
implement a new standard may not be borne evenly, investors and creditors—both present
and potential—as well as others benefit from improvements to financial reporting. Those
129
improvements then facilitate the functioning of markets for capital and credit and the
efficient allocation of resources in the economy.
B198. The Board believes that the requirements of this Statement will result in improved
financial reporting in several ways. Foremost, by focusing on fundamental principles for
recognizing and measuring all business combinations, this Statement will assist the Board
in establishing principles-based standards that simplify GAAP whenever possible while
improving the comparability and understanding of the resulting information. This
Statement furthers that effort by requiring that all acquirers recognize the businesses they
acquire at fair value. It also requires, with limited exceptions, that the assets acquired and
liabilities assumed as part of the business combination be recognized and measured at
their fair values, regardless of the ownership percentage acquired or the means used to
acquire the business.
B199. The Board believes that this Statement improves the completeness, relevance, and
comparability of information provided to investors, creditors, and other users of financial
statements by requiring more assets and liabilities to be separately recognized and initially
measured at fair value. For example, in accordance with this Statement, (a) contingencies
that meet the definitions of assets or liabilities but not the previous criteria for recognition
would be separately recognized at fair value rather than subsumed in goodwill,
(b) research and development assets acquired in a business combination would be
measured and recognized at their fair value rather than expensed at the acquisition date as
previously required, and (c) assets and liabilities of acquired businesses that are not
wholly owned generally would be recognized at the full amount of their fair values rather
than measured in part at fair value, based on the percentage of ownership interest acquired
in the business combination, and in part based on another basis.
B200. The Board also believes this Statement benefits issuers of financial statements and
users of their financial statements by converging to a common set of high-quality financial
accounting standards on an international basis. That improves the comparability of
financial information around the world and simplifies and reduces the costs of accounting
for entities that issue financial statements in accordance with both U.S. GAAP and
international accounting standards.
B201. The Board believes that the guidance in this Statement is not overly complex.
Indeed, it eliminates guidance that many have found to be complex, costly, and arbitrary
and that has been the source of considerable uncertainties and costs in the marketplace.
Moreover, this Statement does not introduce a new method of accounting but rather
expands the use of the acquisition method of accounting that is familiar, has been widely
used, and for which there is a substantial base of experience.
B202. This Statement also improves the comparability and usefulness of information
provided by mutual entities by eliminating the permitted use of the pooling method by
those entities in their accounting for acquisitions of other mutual entities. Statement 141
had allowed a delayed effective date for applying its provisions to business combinations
between mutual entities. As discussed in Statement 141, the use of two methods that
produce such dramatically different financial statement outcomes makes it difficult or
130
impossible for users to compare the financial statements of entities that have accounted for
their business combinations by different methods.
B203. The Board sought to reduce the costs of applying this Statement. The Board
believes that this Statement does that by (a) requiring that particular assets and liabilities
(for example, those related to deferred taxes, pensions, and other postemployment
benefits) continue to be measured in accordance with existing accounting standards rather
than at fair value and (b) applying its provisions prospectively rather than retrospectively.
The Board acknowledges that those two steps may result in some sacrifice to the benefits
of improved financial reporting in accordance with this Statement. However, the Board
believes that the complexities and related costs that result from imposing the fair value
measurement requirement to all assets and liabilities, at this time, and requiring
retrospective application are not justified.
Alternative View
B204. One Board member, for the reasons discussed in paragraphs B205–B212, has
alternative views on the following proposals:
a.
b.
c.
The requirements (1) to measure and recognize the fair value of contingent
consideration obligations incurred in a business combination and contingencies
acquired or assumed in a business combination at the acquisition date and (2) to
subsequently remeasure to fair value contingent consideration liabilities and
contingencies
The disclosure requirements that permit remeasurement gains and losses to be
reported in notes to financial statements rather than requiring their separate display
on the face of the income statement
The required use of the acquisition method for particular combinations involving
mutual entities.
Required Use of Fair Value to Measure and Remeasure Particular Items
B205. This Statement proposes to replace the guidance contained in paragraph 37 of
Statement 141 relating to assigning acquisition date amounts to specific types of assets
acquired and liabilities assumed in a business combination. This Statement instead
proposes a general requirement (subject to a few limited exceptions) to measure acquired
assets and liabilities assumed at their fair values at the acquisition date. Among the items
that initially would be measured and recognized at fair value at the acquisition date are
(a) contingent consideration obligations and (b) assets and liabilities arising from
contingencies. As proposed in this Statement, contingencies and contingent consideration
liabilities that would be subject to Statement 5 if they were acquired, assumed, or incurred
in an event other than a business combination would continue to be measured at fair value
after the acquisition date with any changes in fair value recognized in income of the
period.
B206. Fair value is defined as the price at which an item could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation. In the
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absence of observable market transactions or market-based measures, fair value must be
estimated based on the “hypothetical” exchange price that would occur between
“hypothetical” marketplace participants using an expected present value technique as
discussed in FASB Concepts Statement No. 7, Using Cash Flow Information and Present
Value in Accounting Measurements. In the case of contingent consideration liabilities and
liabilities for contingencies, such measures of fair value are supposed to include the profit
element that a hypothetical third party would demand to assume the reporting entity’s
obligation. Because such liabilities are not normally settled, nor often even capable of
being settled by “lay-off” to a third party, accounting gains and losses automatically result
as the reporting entity actually settles the liability through its own performance. Examples
of such measures of fair value are contained in the Appendix C of Statement 143.
B207. The Board member questions both the relevance and the reliability of such fair
value measures and of the accounting gains and losses that would result from their use. In
his view, because such measures necessarily involve estimates that are not based on actual
or potential exchange transactions or on market inputs, they would be difficult to verify
and audit. Moreover, because they do not represent either what the reporting entity will
do or even what it may be able to do, the Board member views such measures as artificial
constructs that lack representational faithfulness with actual economic phenomena. As
such, they would seem to be of questionable relevance to users of financial statements in
assisting them in predicting the future cash flows of the reporting entity.
B208. He also observes that many of the eight entities that participated in the field visits
(paragraphs B12 and B17) expressed significant concerns related to measuring and
auditing the fair value of assets and liabilities for an acquiree’s contingencies and an
acquirer’s contingent consideration arrangements. Additionally, the proposal that
contingent consideration can be measured and remeasured with sufficient reliability seems
to contradict the Board’s decision in Statement 123(R) regarding the treatment of
performance conditions in measuring the fair value of share-based payments. Further, he
notes that the subject of the appropriate measurement attribute(s) in financial reporting
will be an important area of focus in the Board’s project to improve its conceptual
framework, and the Board’s proposals in this project seem to prejudge the outcome of
those discussions. In that regard, the Board has yet to agree on the appropriate
measurement of performance obligations relating to revenue transactions in its current
project on revenue recognition, or in his view, to fully address the measurement of fair
value of nonfinancial liabilities in its project on fair value measurement.
B209. Accordingly, the Board member believes that preacquisition contingencies should
continue to be recorded as they are under paragraphs 40 and 41 of Statement 141.
However, he prefers a modification to the accounting for contingent consideration in cases
in which a preparer concludes that it cannot determine the fair value with sufficient
reliability. In those circumstances, the Board member would prefer a treatment under
which any contingent consideration payable by the acquirer be charged as a
postcombination expense as such amounts become determinable over the current practice
of recording such amounts as additional purchase consideration and goodwill. In this
Board member’s view, contingent consideration arrangements generally represent a
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postacquisition profit-sharing arrangement with the prior owners of the acquiree rather
than conditional payments related to the value at the acquisition date of the acquiree.
Separate Display of Remeasurement Gains and Losses
B210. In addition to the remeasurement gains and losses noted above relating to an
acquiree’s contingencies and an acquirer’s contingent consideration arrangements, this
Statement also would result in a number of other potential remeasurement gains and losses
that would be reported in net income. These include gains and losses on nonmonetary
assets transferred by the acquirer as part of the consideration, gains and losses on
remeasuring any existing noncontrolling equity investment of the acquirer in the acquiree,
and in some cases, any “negative goodwill” measured in the business combination.
Additionally, in accordance with the Board’s tentative decisions for its proposed
Statement on consolidated financial statements, gains and losses would arise from
remeasuring at fair value any retained noncontrolling investment arising at the time of loss
of control of a subsidiary. Thus, when compared with current practice, these proposed
requirements would create various new types of gains and losses in the income statement
relating to remeasurements at fair value, thereby potentially further adding to the
challenges of effective communication in financial statements already posed by the mixed
attribute model. While the Board’s tentative decisions would require disclosure of these
gains and losses, it would not require any specific display or highlighting of them on the
face of the income statement.
B211. The Board member is concerned that the failure to require a separate display of
such gains and losses on the face of the income statement may complicate and hinder,
rather than help, financial analysis. In his view, professional users of financial statements
have repeatedly informed the Board that they attempt to separate such items from other
components of net income in performing their analyses and for valuation purposes.
Furthermore, examining potential display alternatives along these lines is an important
aspect of the Board’s current project on reporting on financial performance. Accordingly,
and in the meantime, in order to enhance the transparency and understandability of the
income statement, the Board member believes that it is important that any new standard
that introduces potentially significant new fair value measurements that affect net income
also require separate display of the resulting gains and losses on the face of the income
statement and not just in disclosures in the footnotes. This might be accomplished, for
example, by requiring that the aggregate gain or loss for the period resulting from such
remeasurements be displayed separately on the face of the income statement, with
disclosure in the footnotes of the components of that aggregate gain or loss.
Use of the Acquisition Method for Particular Combinations Involving Mutual Entities
B212. The Board member has significant concerns over the use of the acquisition method
for particular combinations involving mutual entities. In some of these transactions
(including one included in the Board’s field visits relating to this Statement), no
consideration is exchanged, the combining entities are of similar size, and the governing
board and management of the combined entity are drawn equally from each of the
combining entities. In such cases the Board member believes that properly identifying an
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acquirer is an essentially futile exercise that results in arbitrary revaluation of part of the
combined entity and in an accounting treatment that is not representationally faithful of
the underlying combination transaction. In his view, such combinations of mutual entities
do not represent the acquisition of one entity by another, but rather the creation of a new
entity. Accordingly, in such cases, the Board member believes that “fresh-start”
accounting for the entire combined entity would be preferable to what he views as the
essentially arbitrary, partial revaluation that would result from applying the provisions of
this proposed Statement. This Board member therefore disagrees with the Board’s
decision not to reconsider the alternative of the fresh-start method and this Statement’s
tentative affirmation of the conclusion reached in Statement 141 that precludes the use of
the fresh-start method in those circumstances (paragraphs B30 and B45–B47).
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Appendix C
CONTINUING AUTHORITATIVE GUIDANCE
CONTENTS
Paragraphs
Introduction.................................................................................................................... C1
Accounting for Asset Acquisitions—General Concepts......................................... C2–C8
Business Combinations Involving Only Mutual Entities That Were
Accounted for by the Pooling-of-Interests Method ............................................ C9–C12
Disposition of Assets after a Combination Accounted for Using the
Pooling Method........................................................................................... C11–C12
Transition Requirements for Mutual Entities That Previously
Recognized Goodwill, Negative Goodwill, or Unidentified Intangible
Assets ................................................................................................................ C13–C24
Transition for Entities That Have Not Adopted Statement 141............................. C16
Transition for Entities That Have Not Adopted Statement 147.................... C17–C18
Reclassified Goodwill—Transitional Impairment Testing
and Disclosure Requirements ..................................................................... C19–C24
Transactions between Entities under Common Control ..................................... C25–C31
Procedural Guidance..................................................................................... C27–C31
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Appendix C
CONTINUING AUTHORITATIVE GUIDANCE
Introduction
C1. This appendix provides continuing authoritative guidance for asset acquisitions,
business combinations involving only mutual entities, and entities under common control.
The guidance in this appendix has been quoted, paraphrased, or modified as necessary so
that it can be understood in the context of this Statement. The original source of the
guidance is noted parenthetically or otherwise. The Board may reconsider that guidance at
a later date in another project.
Accounting for Asset Acquisitions—General Concepts
C2. As noted in paragraph 5 of this Statement, a transaction or event is accounted for as
a business combination only if the assets acquired and liabilities assumed constitute a
business (an acquiree). If the assets acquired and liabilities assumed do not constitute a
business, the acquirer should account for the transaction as an asset acquisition, which is
described in paragraphs C3–C8 or in accordance with other applicable generally accepted
accounting principles.26
C3. (FAS 141, ¶4) Initial recognition. Assets are commonly acquired in exchange
transactions that trigger the initial recognition of the assets acquired and any liabilities
assumed. If the consideration given in exchange for the assets (or net assets) acquired is
in the form of assets surrendered (such as cash), the assets surrendered are derecognized at
the date of acquisition. If the consideration given is in the form of liabilities incurred or
equity interests issued, the liabilities incurred and equity interests issued are initially
recognized at the date of acquisition (Opinion 16, paragraph 67).
C4. (FAS 141, ¶5) Initial measurement. Like other exchange transactions, generally
asset acquisitions are measured on the basis of the fair values exchanged. In exchange
transactions, the fair values of the net assets acquired and the consideration paid are
assumed to be equal, in the absence of evidence to the contrary. Thus, the cost27 of an
asset acquisition to the acquiring entity is equal to the fair values exchanged, and no gain
or loss is recognized, except for the gain or loss that is recognized if the fair value of
noncash assets given as consideration differs from the assets’ carrying amounts on the
acquiring entity’s books. (Opinion 16, paragraph 67).
C5. (FAS 141, ¶6) Asset acquisitions in which the consideration given is cash are
measured by the amount of cash paid, which generally includes the transaction costs of the
26
Paragraph D29(b) of this Statement amends FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, to require that the primary beneficiary of a variable interest
entity that does not constitute a business initially measure and recognize the assets (except goodwill) and
liabilities of the variable interest entity in accordance with paragraphs 28–48 of this Statement.
27
Cost is a term that is often used to refer to the amount at which an entity initially recognizes an asset at the
date it is acquired, whatever the manner of acquisition.
136
asset acquisition. However, if the consideration given is not in the form of cash (that is, in
the form of noncash assets, liabilities incurred, or equity interests issued), measurement is
based on the fair value of the consideration given, which also generally includes the
transaction costs of the asset acquisition, or the fair value of the assets (or net assets)
acquired, whichever is more clearly evident and, thus, more reliably measurable (Opinion
16, paragraph 67).
C6. (FAS 141, ¶7, FAS 142, ¶9) Allocating cost. Acquiring assets in groups requires not
only ascertaining the cost of the asset (or net asset) group but also allocating that cost to
the individual assets (or individual assets and liabilities) that make up the group. The cost
of such a group is determined using the concepts described in paragraphs C4 and C5. The
cost of a group of assets acquired in an asset acquisition is allocated to the individual
assets acquired or liabilities assumed based on their relative fair values and does not give
rise to goodwill (Opinion 16, paragraph 68).
C7. Additionally, the accounting for an asset acquisition differs from the accounting for
business combinations in the following respects:
a.
b.
c.
Intangible assets acquired in an asset acquisition are recognized in accordance with
FASB Statement No. 142, Goodwill and Other Intangible Assets, not in accordance
with this Statement.
In-process research and development assets acquired in an asset acquisition are
accounted for in accordance with FASB Statement No. 2, Accounting for Research
and Development Costs, as amended by this Statement, not in accordance with
Statement 142.
Contingent consideration related to an asset acquisition and contingencies acquired
in an asset acquisition are accounted for in accordance with FASB Statement No. 5,
Accounting for Contingencies, not in accordance with this Statement.
C8. (FAS 141, ¶8) Accounting after acquisition. The nature of an asset or liability and
not the manner of its acquisition determines an acquirer’s subsequent accounting for the
asset or liability. The basis for measuring the asset acquired or liabilities assumed—
whether the cost, the fair value of an asset received or given up, the fair value of a liability
incurred, or the fair value of equity shares issued—has no effect on the subsequent
accounting for the asset or liability (Opinion 16, paragraph 69).
Business Combinations Involving Only Mutual Entities That Were Accounted for by
the Pooling-of-Interests Method
C9. FASB Statement No. 141, Business Combinations, prohibited the use of the poolingof-interests method (pooling method) for business combinations initiated after the
effective date of that Statement (June 30, 2001). Statement 141 superseded APB Opinion
No. 16, Business Combinations, and the AICPA Accounting Interpretations of that
Opinion that provided guidance on applying the pooling method. Statement 141 defined
the pooling method as:
137
A method of accounting for business combinations that was required to
be used in certain circumstances by APB Opinion No. 16, Business
Combinations. Under the pooling-of-interests method, the carrying amount
of assets and liabilities recognized in the statements of financial position of
each combining entity are carried forward to the statement of financial
position of the combined entity. No other assets or liabilities are
recognized as a result of the combination, and thus the excess of the
purchase price over the book value of the net assets acquired (the purchase
premium) is not recognized. The income statement of the combined entity
for the year of the combination is presented as if the entities had been
combined for the full year; all comparative financial statements are
presented as if the entities had previously been combined. [paragraph F1]
C10. The effective date of Statement 141 was delayed for combinations between mutual
entities. However, this Statement removes that delayed effective date. Thus, combinations
between mutual entities are prohibited from being accounted for by the pooling method.
That prohibition is to be applied prospectively as of the beginning of the annual period in
which this Statement is first applied but no later than annual periods beginning on or after
December 15, 2006. The following paragraphs carry forward, without reconsideration,
guidance in Statement 141 (some of which was carried forward from Opinion 16 and its
interpretations) that may be helpful in accounting for subsequent asset dispositions for
business combinations to which the pooling method was applied.
Disposition of Assets after a Combination Accounted for Using the Pooling Method
C11. (FAS 141, ¶D9) Following a business combination accounted for by the pooling
method, the combined entity might dispose of assets of the previously separate entities.
Unless those disposals are part of customary business activities of the combined entity,
any gain or loss recognized resulting from that disposition might be required to be
recognized as an extraordinary item. Recognition as an extraordinary item is warranted
because the pooling method of accounting would have been inappropriate if the combined
entity had made a commitment or had planned to dispose of a significant part of the assets
of one of the combining entities.
C12. (FAS 141, ¶D10) The combined entity should recognize the gain or loss resulting
from the disposal of a significant part of the assets or a separable segment of the
previously separate entities, less applicable income tax effect, as an extraordinary item if
(a) the gain or loss is material in relation to the net income of the combined entity and
(b) the disposition is within two years after the combination is consummated (Opinion 16,
paragraph 60).
Transition Requirements for Mutual Entities That Previously Recognized Goodwill,
Negative Goodwill, or Unidentified Intangible Assets
C13. Paragraphs 61 and 62 of Statement 141 provided transition provisions for business
combinations for which the acquisition date was before July 1, 2001, that were accounted
for using the purchase method requirements of Opinion 16. If a mutual entity had a
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business combination that was accounted for using the purchase method and did not adopt
Statement 141 when it became effective, that entity is required to apply those transition
provisions at the time this Statement is applied (for example, a business combination
between mutual entities that was accounted for using the purchase method requirements of
Opinion 16).
C14. FASB Statement No. 147, Acquisitions of Certain Financial Institutions, applied to
the acquisition of all or part of a financial institution, except for transactions between two
or more mutual entities. The term financial institution, as used in Statement 147 and this
Statement, includes all or part of a commercial bank, a savings and loan association, a
credit union, or other depository institution having assets and liabilities of the same types
as those institutions. Paragraphs 8–14 of Statement 147 provided transition provisions for
previously recognized unidentifiable intangible assets that arose from an acquisition of all
or part of a financial institution. An unidentifiable intangible asset was described in
FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions, as the amount by which the fair value of the liabilities assumed exceeds the
fair value of tangible and identified intangible assets acquired. If a financial institution
acquired a financial institution that resulted in an unidentifiable intangible asset and did
not adopt Statement 147 when it became effective, that entity is required to apply those
transition provisions at the time this Statement is applied (such as a transaction between
two or more mutual entities that resulted in an unidentifiable intangible asset).
C15. Paragraphs C16–C24 explains how the transition provisions of Statements 141 and
147 would be applied to mutual entities.
Transition for Entities That Have Not Adopted Statement 141
C16. The following transition provisions apply to business combinations involving only
mutual entities that have not adopted Statement 141. For those business combinations that
occurred prior to the adoption of this Statement and were accounted for using the purchase
method:
a.
b.
(FAS 141, ¶61(a)) The carrying amount of acquired intangible assets that do not
meet the criteria in paragraph 40 of this Statement for recognition apart from
goodwill (and any related deferred tax liabilities if the intangible asset amortization
is not deductible for tax purposes) should be reclassified as goodwill as of the date
FASB Statement No. 142, Goodwill and Other Intangible Assets, is initially applied
in its entirety. Paragraph D22(n) of this Statement amends Statement 142 to make it
effective for business combinations between two or more mutual entities. For those
business combinations, Statement 142 is effective in its entirety for annual periods
beginning on or after December 15, 2006, with early application encouraged.
(FAS 141, ¶61(b)) The carrying amount of any intangible assets that meets the
recognition criteria in paragraph 40 of this Statement that have been recognized and
included in the amount reported as goodwill (or as goodwill and intangible assets)
should be reclassified and accounted for as an asset apart from goodwill as of the
date Statement 142 is initially applied in its entirety. For example, when a business
combination was initially recorded, a portion of the cost of the acquiree was
139
c.
assigned to intangible assets that meet the recognition criteria in paragraph 40 of this
Statement. Those intangible assets have been included in the amount reported on the
statement of financial position as goodwill (or as goodwill and other intangible
assets). However, separate general ledger or other accounting records have been
maintained for those assets.
As of the earlier of the first day of the annual period beginning on or after December
15, 2006, or the date Statement 142 is initially applied in its entirety, the amount of
any unamortized deferred credit related to an excess over cost arising from (a) a
business combination accounted for prior to the adoption of this Statement or (b) an
investment accounted for by the equity method prior to the adoption of this
Statement should be written off and recognized in net income as the effect of a
change in accounting principle. The effect of the accounting change and related
income tax effects should be presented in the income statement between the captions
extraordinary items and net income.
Transition for Entities That Have Not Adopted Statement 147
C17. The following transition provisions apply to mutual entities excluded from the scope
of Statement 147 that acquired all or part of a financial institution before the adoption of
this Statement and recognized an unidentifiable intangible asset related to that acquisition
in accordance with paragraph 5 of Statement 72:
a.
b.
c.
(FAS 147, ¶9) If the transaction that gives rise to the unidentifiable intangible asset
is a business combination, the carrying amount of that asset should be reclassified to
goodwill28 (reclassified goodwill) as of the later of the date of acquisition or the date
Statement 142 is applied in its entirety (Statement 142 application date). The
reclassified goodwill should be accounted for and reported prospectively as goodwill
in accordance with Statement 142. In addition, the reclassified goodwill should be
tested for impairment in accordance with paragraph C19.
(FAS 147, ¶9) The carrying amounts of any recognized intangible assets that meet
the recognition criteria in paragraph 40 that are included in the amount reported as
an unidentifiable intangible asset and for which separate accounting records are
maintained (as discussed in paragraph C16(b)) should be reclassified and accounted
for as assets apart from the unidentifiable intangible asset and should not be
reclassified to goodwill.
(FAS 147, ¶8) If the transaction that gives rise to the unidentifiable intangible asset
is not a business combination, the carrying amount of that asset should continue to
be amortized as was previously set forth in paragraphs 5 and 6 of Statement 72, as
amended by Statement 142. (As discussed in paragraph 9 of Statement 142,
acquisitions of groups of assets that are not a business do not give rise to goodwill.)
Paragraphs 5 and 6 of Statement 72, as amended, stated:
That asset shall be amortized to expense over a period no greater than
the estimated remaining life of the long-term interest-bearing assets
28
If the amortization of the unidentifiable intangible asset is not deductible for tax purposes, any deferred tax
liabilities related to that asset also should be reclassified to goodwill.
140
acquired. Amortization shall be at a constant rate when applied to the
carrying amount of those interest-bearing assets that, based on their terms,
are expected to be outstanding at the beginning of each subsequent period.
The prepayment assumptions, if any, used to determine the fair value of the
long-term interest-bearing assets acquired also shall be used in determining
the amount of those assets expected to be outstanding. However, if the
assets acquired in such a combination do not include a significant amount
of long-term interest-bearing assets, the unidentifiable intangible asset shall
be amortized over a period not exceeding the estimated average remaining
life of the existing customer (deposit) base acquired. The periodic amounts
of amortization shall be determined as of the acquisition date and shall not
be subsequently adjusted except as provided by paragraph 6 of this
Statement. Notwithstanding the other provisions of this paragraph, the
period of amortization shall not exceed 40 years. [Footnote references
omitted.]
Paragraph 14 of Statement 142 specifies that an entity should evaluate
the remaining useful life of an intangible asset that is being amortized each
reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization. In no event, however,
shall the useful life of the unidentifiable intangible asset described in
paragraph 5 of this Statement be revised upward. [Footnote references
omitted.]
C18. Other than as set forth in paragraphs C16 and C17, the amount of the purchase price
assigned to the assets acquired and liabilities assumed in a business combination for which
the acquisition date was before this Statement is applied should not be changed.29
Reclassified Goodwill—Transitional Impairment Testing and Disclosure Requirements
C19. The following transitional impairment testing provisions apply to reclassified
goodwill that is recognized in accordance with paragraph C17(a). As described in
paragraphs C20–C22, reclassified goodwill should be tested for impairment as of the date
Statement 142 is adopted in its entirety.
C20. (FAS 147, ¶12) If an entity has no goodwill other than reclassified goodwill, the
transitional impairment testing provisions in paragraphs 54–58 of Statement 142 should be
completed for the reclassified goodwill by the end of the annual period in which the
transition provisions of this Statement are applied.
C21. (FAS 147, ¶13) If an entity has other goodwill in addition to reclassified goodwill,
and it has not completed the transitional impairment testing provisions in paragraphs 54–
58 of Statement 142 as of the first day of the annual period beginning on or after
29
This transition provision does not, however, affect the requirement to change the amounts assigned to the
assets acquired in a business combination for which the acquisition date was before this Statement is applied
due to (a) the resolution of a consideration contingency based on earnings (paragraph 28 of Statement 141)
or (b) changes to the purchase price allocation prior to the end of the allocation period (paragraph 40 of
Statement 141).
141
December 15, 2006, the reclassified goodwill should be combined with other goodwill in
applying those transition provisions.
C22. (FAS 147, ¶14) If an entity has other goodwill in addition to reclassified goodwill,
and it has completed the transitional impairment testing provisions in paragraphs 54–58 of
Statement 142 as of the first day of the annual period beginning on or after December 15,
2006, the following transition provisions should be applied for each reporting unit that
includes reclassified goodwill:
a.
b.
If the fair value of the reporting unit exceeds its carrying amount (including the
unidentifiable intangible asset) at the Statement 142 application date (that is, the first
step of the transitional goodwill impairment test indicated no impairment),
additional impairment testing related to the reclassified goodwill is not required.
If the first step of the transitional goodwill impairment test indicates a potential
impairment of goodwill at the Statement 142 application date, the amount of the
goodwill impairment loss (if any) should be remeasured based on the revised
carrying amount of goodwill. The fair value of the reporting unit and related assets
and liabilities used in calculating the implied fair value of goodwill should not be
remeasured for purposes of applying this transition provision. The revised carrying
amount of goodwill used in remeasuring the loss equals the amount of previously
recognized goodwill and the amount of any unidentifiable intangible asset
reclassified as goodwill in accordance with the transition provisions of this
Statement. Any adjustment to the impairment loss should be recognized as the
effect of a change in accounting principle in accordance with paragraph 56 of
Statement 142.
C23. (FAS 147, ¶16) In the period that the transition provisions are first applied, an entity
should disclose the following in the notes to the financial statements:
a.
b.
The carrying amount of previously recognized unidentifiable intangible assets
reclassified as goodwill
The amount of any adjustment to the previously recognized goodwill impairment
loss recognized pursuant to paragraph C22(b).
C24. (FAS 147, ¶17) For each period presented that precedes the Statement 142
application date, the amount of amortization expense related to reclassified goodwill
should be disclosed, either separately or as part of the transitional disclosure requirements
of Statement 142 (paragraph 61).
Transactions between Entities under Common Control
C25. (FAS 141, ¶D11) Consistent with the provisions of Statement 141 and Opinion 16,
paragraph 2(b) states that this Statement does not apply to combinations involving only
entities or businesses under common control. The following are examples of those types
of transactions:
a.
An entity charters a newly formed entity and then transfers some or all of its net
assets to that newly chartered entity.
142
b.
c.
d.
A parent company transfers the net assets of a wholly owned subsidiary into the
parent company and liquidates the subsidiary. That transaction is a change in legal
organization but not a change in the reporting entity.
A parent company transfers its interest in several partially owned subsidiaries to a
new wholly owned subsidiary. That also is a change in legal organization but not in
the reporting entity.
A parent company exchanges its ownership interests or the net assets of a wholly
owned subsidiary for additional shares issued by the parent’s partially owned
subsidiary, thereby increasing the parent’s percentage of ownership in the partially
owned subsidiary but leaving all of the existing minority interest outstanding.
C26. (FAS 141, ¶D12) When accounting for a transfer of assets or exchange of shares
between entities under common control, the entity that receives the net assets or the equity
interests should initially recognize the assets and liabilities transferred at their carrying
amounts in the accounts of the transferring entity at the date of transfer.
Procedural Guidance
C27. (FAS 141, ¶D14) Some transfers of net assets or exchanges of shares between
entities under common control result in a change in the reporting entity. In practice, the
method that many entities have used to account for those transactions is similar to the
pooling method. Certain provisions in Opinion 16 relating to application of the pooling
method provided a source of continuing guidance on the accounting for transactions
between entities under common control. Paragraphs C28–C31 provide procedural
guidance that should be considered when preparing financial statements and related
disclosures for the entity that receives the net assets.
C28. (FAS 141, ¶D15) In some instances, the entity that receives the net assets or equity
interests (the receiving entity) and the entity that transferred the net assets or equity
interests (the transferring entity) may account for similar assets and liabilities using
different accounting methods. In such circumstances, the carrying values of the assets and
liabilities transferred may be adjusted to the basis of accounting used by the receiving
entity if the change would be preferable. Any such change in accounting method should
be applied retrospectively, and financial statements presented for prior periods should be
adjusted, unless it is impracticable to do so. FASB Statement No. 154, Accounting
Changes and Error Corrections, provides guidance if retrospective application is
impracticable (Opinion 16, paragraph 52).
C29. (FAS 141, ¶D16) The financial statements of the receiving entity should report
results of operations for the period in which the transfer occurs as though the transfer of
net assets or exchange of equity interests had occurred at the beginning of the period.
Results of operations for that period will thus comprise those of the previously separate
entities combined from the beginning of the period to the date the transfer is completed
and those of the combined operations from that date to the end of the period. By
eliminating the effects of intercompany transactions in determining the results of
operations for the period before the combination, those results will be on substantially the
same basis as the results of operations for the period after the date of combination. The
143
effects of intercompany transactions on current assets, current liabilities, revenue, and cost
of sales for periods presented and on retained earnings at the beginning of the periods
presented should be eliminated to the extent possible. The nature of and effects on
earnings per share of nonrecurring intercompany transactions involving long-term assets
and liabilities need not be eliminated but should be disclosed (Opinion 16, paragraph 56).
C30. (FAS 141, ¶D17) Similarly, the receiving entity should present the statement of
financial position and other financial information as of the beginning of the period as
though the assets and liabilities had been transferred at that date. Financial statements and
financial information presented for prior years also should be restated to furnish
comparative information. All restated financial statements and financial summaries
should indicate clearly that financial data of previously separate entities are combined
(Opinion 16, paragraph 57).
C31. (FAS 141, ¶D18) Notes to financial statements of the receiving entity should
disclose the following for the period in which the transfer of assets and liabilities or
exchange of equity interests occurred:
a.
b.
The name and brief description of the entity included in the reporting entity as a
result of the net asset transfer or exchange of equity interests
The method of accounting for the transfer of net assets or exchange of equity
interests.
The receiving entity also should consider whether additional disclosures are required in
accordance with FASB Statement No. 57, Related Party Disclosures.
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Appendix D
AMENDMENTS TO EXISTING PRONOUNCEMENTS
D1. This Statement replaces FASB Statement No. 141, Business Combinations.
D2. This Statement supersedes the following pronouncements:
a.
b.
c.
d.
e.
FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions
FASB Statement No. 147, Acquisitions of Certain Financial Institutions
FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method
FASB Technical Bulletin No. 85-5, Issues Relating to Accounting for Business
Combinations.
D3. The following references are replaced by this Statement:
a.
b.
c.
All references to FASB Statement No. 141, Business Combinations, are replaced by
FASB Statement No. 141 (revised 200X), Business Combinations.
All references to Statement 141 are replaced by Statement 141(R).
All references to purchase method are replaced by acquisition method.
D4. APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, is amended as follows: [Added text is underlined and deleted text is
struck out.]
a.
Paragraph 9:
The contrary view is that convertible debt possesses characteristics of both debt
and equity and that separate accounting recognition should be given to the debt
characteristics and to the conversion option at time of issuance. This view is
based on the premise that there is an economic value inherent in the conversion
feature or call on the stock and that the nature and value of this feature should be
recognized for accounting purposes by the issuer. The conversion feature is not
significantly different in nature from the call represented by an option or warrant,
and sale of the call is a type of capital transaction. The fact that the conversion
feature coexists with certain debt characteristics in a hybrid security and cannot be
sold or transferred separately from these senior elements or from the debt
instrument itself does not constitute a logical or compelling reason why the values
of the two elements should not receive separate accounting recognition. Similar
separate accounting recognition for disparate features of single instruments is
reflected in, for example, the capitalization of long-term leases—involving the
145
separation of the principal and interest elements—and in the allocation of the
purchase cost in a bulk acquisition between goodwill and other assets.
D5. APB Opinion No. 18, The Equity Method of Accounting for Investments in Common
Stock, is amended as follows:
a.
Paragraph 19(m), as amended by FASB Statement No. 58, Capitalization of Interest
Cost in Financial Statements That Include Investments Accounted for by the Equity
Method, and FASB Statement No. 142, Goodwill and Other Intangible Assets:
An investment in common stock of an investee that was previously accounted for
on other than the equity method may become qualified for use of the equity
method by an increase in the level of ownership described in paragraph 17 (i.e.,
acquisition of additional voting stock by the investor, acquisition or retirement of
voting stock by the investee, or other transactions). When an investment qualifies
for use of the equity method, the investor should adopt the equity method of
accounting. The investment, results of operations (current and prior periods
presented), and retained earnings of the investor should be adjusted retroactively
as if the equity method had been in effect during all previous periods in which the
investment was heldin a manner consistent with the accounting for a step-by-step
acquisition of a subsidiary. 11a If that retroactive adjustment is made on or after the
date Statement 142 is initially applied in its entirety, the goodwill related to that
investment (including goodwill related to step purchases made prior to the initial
application of Statement 142) shall not be amortized in determining the amount of
the adjustment.
D6. APB Opinion No. 28, Interim Financial Reporting, is amended as follows:
a.
Footnote 3a to paragraph 21, added by Statement 141:
Disclosures required in interim financial information related to a business
combination are set forth in paragraphs 71–78 of FASB Statement No. 141
(revised 200X), Business Combinationsparagraph 58 of FASB Statement No. 141,
Business Combinations.
D7. APB Opinion No. 29, Accounting for Nonmonetary Transactions, is amended as
follows:
a.
Footnote 3a to paragraph 4(a), added by Statement 141:
Paragraph 6(e) of Statement 141(R) notesParagraph 10 of Statement 141 states
that an exchange of a business for a business is a business combination.
D8. APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, is amended as follows:
146
a.
Paragraph 20, as amended by FASB Statements No. 4, Reporting Gains and Losses
from Extinguishment of Debt, No. 101, Regulated Enterprises—Accounting for the
Discontinuation of Application of FASB Statement No. 71, No. 141, and No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections:
Extraordinary items are events and transactions that are distinguished by their
unusual nature and by the infrequency of their occurrence. Thus, both of the
following criteria should be met to classify an event or transaction as an
extraordinary item:
a. Unusual nature—the underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to, or only
incidentally related to, the ordinary and typical activities of the entity, taking
into account the environment in which the entity operates. (See discussion in
paragraph 21.)
b. Infrequency of occurrence—the underlying event or transaction should be of a
type that would not reasonably be expected to recur in the foreseeable future,
taking into account the environment in which the entity operates. (See
discussion in paragraph 22.)
However, the following items shall be recognized as an extraordinary items
regardless of whether those criteria are met:
(1)
(2)
(3)
[This subparagraph has been deleted.]
The net effect of discontinuing the application of FASB Statement No. 71,
Accounting for the Effects of Certain Types of Regulation, pursuant to
paragraph 6 of FASB Statement No. 101, Regulated Enterprises—
Accounting for the Discontinuation of Application of FASB Statement No.
71.
The remaining excess of fair value of acquired net assets over cost pursuant
to paragraphs 45 and 46 of FASB Statement No. 141, Business
Combinations.
D9. FASB Statement No. 2, Accounting for Research and Development Costs, is
amended as follows:
a.
Paragraph 12:
All Rresearch and development costs encompassed by this Statement shall be
charged to expense when incurred. However, the fair value of tangible and
intangible assets to be used in research and development acquired in a business
combination shall be recognized as assets if they meet the definition of an asset in
FASB Concepts Statement No. 6, Elements of Financial Statements. Research and
development costs incurred after the date of the business combination related to
those acquired assets shall be charged to expense when incurred. After the
business combination, the provisions of Statement 142, as amended, shall be
147
applied to intangible research and development assets acquired in a business
combination.
D10. FASB Statement No. 5, Accounting for Contingencies, is amended as follows:
a.
Paragraph 2:
Not all uncertainties inherent in the accounting process give rise to contingencies
as that term is used in this Statement. Estimates are required in financial
statements for many on-going and recurring activities of an enterprise. The mere
fact that an estimate is involved does not of itself constitute the type of
uncertainty referred to in the definition in paragraph 1. For example, the fact that
estimates are used to allocate the known cost of a depreciable asset over the
period of use by an enterprise does not make depreciation a contingency; the
eventual expiration of the utility of the asset is not uncertain. Thus, depreciation
of assets is not a contingency as defined in paragraph 1, nor are such matters as
recurring repairs, maintenance, and overhauls, which interrelate with depreciation.
Also, amounts owed for services received, such as advertising and utilities, are
not contingencies even though the accrued amounts may have been estimated;
there is nothing uncertain about the fact that those obligations have been incurred.
This Statement does not apply to the initial recognition, measurement, or
subsequent accounting for contingencies acquired or assumed in a business
combination that are accounted for in accordance with FASB Statement No. 141
(revised 200X), Business Combinations.
D11. FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, is amended as follows:
a.
Footnote 5 to paragraph 13, as amended by Statement 141:
Paragraphs 13, 15, and 19 indicate that the fair value of assets transferred or the
fair value of an equity interest granted shall be used in accounting for a settlement
of a payable in a troubled debt restructuring. That guidance is not intended to
preclude using the fair value of the payable settled if more clearly evident than the
fair value of the assets transferred or of the equity interest granted in a full
settlement of a payable (paragraphs 13 and 15). (See paragraph 20 of FASB
Statement No. 141 (revised 200X), Business Combinationsparagraph 6 of FASB
Statement No. 141, Business Combinations.) However, in a partial settlement of a
payable (paragraph 19), the fair value of the assets transferred or of the equity
interest granted shall be used in all cases to avoid the need to allocate the fair
value of the payable between the part settled and the part still outstanding.
b.
Footnote 6 to paragraph 13, as amended by Statement 141:
Some factors that may be relevant in estimating the fair value of various kinds of
assets are described in paragraph 34 of Statement 141(R), paragraphs 37 and 38 of
Statement 141, paragraphs 12–14 of APB Opinion No. 21, “Interest on
148
Receivables and Payables,” and paragraph 25 of APB Opinion No. 29,
“Accounting for Nonmonetary Transactions.”
c.
Footnote 16 to paragraph 28, as amended by Statement 141:
Paragraphs 28 and 33 indicate that the fair value of assets received shall be used
in accounting for satisfaction of a receivable in a troubled debt restructuring. That
guidance is not intended to preclude using the fair value of the receivable satisfied
if more clearly evident than the fair value of the assets received in full satisfaction
of a receivable (paragraph 28). (See paragraph 20 of Statement 141(R)paragraph 6
of Statement 141.) However, in a partial satisfaction of a receivable (paragraph
33), the fair value of the assets received shall be used in all cases to avoid the
need to allocate the fair value of the receivable between the part satisfied and the
part still outstanding.
D12. FASB Statement No. 52, Foreign Currency Translation, is amended as follows:
a.
Paragraph 101, as effectively amended by Statement 141:
The functional currency approach applies equally to translation of financial
statements of foreign investees whether accounted for by the equity method or
consolidated. It also applies to translation after a business combination.
Therefore, the foreign statements and the foreign currency transactions of an
investee that are accounted for by the equity method should be translated in
conformity with the requirements of this Statement in applying the equity method.
Likewise, after a business combination accounted for by the purchase method, the
amount assignedallocated at the acquisition date of acquisition to the assets
acquired and the liabilities assumed (including goodwill or [excess over cost,] as
thatose terms isare used in FASB Statement No. 141 (revised 200X), Business
Combinations, or the gain recognized pursuant to paragraph 61 of Statement
141(R) FASB Statement No. 141, Business Combinations) should be translated
in conformity with the requirements of this Statement. Accumulated translation
adjustments attributable to minority interests should be allocated to and reported
as part of the minority interest in the consolidated enterprise.
D13. FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, is
amended as follows:
a.
Paragraph 33:
A premium deficiency shall be recognized if the sum of expected claim costs and
claim adjustment expenses, expected dividends to policyholders, unamortized
acquisition costs, intangible assets recognized for acquired contracts, and
maintenance costs exceeds related unearned premiums.6
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D14. FASB Statement No. 68, Research and Development Arrangements, is amended as
follows:
a.
Paragraph 11 and its related footnote 3, as amended by Statement 142:
If the enterprise’s obligation is to perform research and development for others
and the enterprise subsequently decides to exercise an option to purchase the other
parties’ interests in the research and development arrangement or to obtain the
exclusive rights to the results of the research and development, the nature of those
results and their future use shall determine the accounting for the purchase
transaction or business combination.3
_________________________
3
Paragraph 5 of FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, states: “. . . the accounting for the cost of an
item to be used in research and development activities is the same under paragraphs 11 and 12 of
Statement 2 whether the item is purchased singly, or as part of a group of assets, or as part of an
entire enterprise in a business combination accounted for by the purchase method.” The
accounting for other recognized intangible assets acquired by the enterprise is specified in FASB
Statement No. 142, Goodwill and Other Intangible Assets.
D15. FASB Statement No. 87, Employers’ Accounting for Pensions, is amended as
follows:
a.
Paragraph 74, as amended by Statement 141:
When an employer is acquired in a business combination and that employerIf an
acquiree sponsors a single-employer defined benefit pension plan, the assignment
of the purchase price acquirerto individual assets acquired and liabilities assumed
shall includerecognize a liability for the projected benefit obligation in excess of
plan assets or an asset for plan assets in excess of the projected benefit obligation,
thereby eliminating any previously existing unrecognized net gain or loss,
unrecognized prior service cost, or unrecognized net obligation or net asset
existing at the date of initial application of this Statement. Subsequently, to the
extent that those amounts are considered in determining the amounts of
contributions, differences between the purchaser’s net pension cost and amounts
contributed will reduce the liability or asset recognized at the date of the
combination. If it is expected that the plan will be terminated or curtailed, the
effects of those actions shall not be considered in measuring the projected benefit
obligation. No future changes to the plan shall be anticipated.
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D16. FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions, is amended as follows:
a.
Paragraph 86:
When an employer is acquired in a business combination and that employer
sponsors a single-employer defined benefit postretirement plan, the
acquirerassignment of the purchase price to individual assets acquired and
liabilities assumed shall recognizeinclude a liability for the accumulated
postretirement benefit obligation in excess of the fair value of the plan assets or an
asset for the fair value of the plan assets in excess of the accumulated
postretirement benefit obligation. The accumulated postretirement benefit
obligation assumed shall be measured based on the benefits attributed by the
acquired entity to employee service prior to the date the business combination is
consummated, adjusted to reflect any changes in assumptions based on the
purchaser’s assessment of relevant future events (as discussed in paragraphs 23–
42).and (b) the terms of the substantive plan (as discussed in paragraphs 23-28 to
be provided by the purchaser to the extent they differ from the terms of the
acquired entity’s substantive plan.
b.
Paragraph 87:
If the postretirement benefit plan of the acquired entity is amended as a condition
of the business combination (for example, if the change is required by the seller as
part of the consummation of the acquisition), the effects of any improvements
attributed to services rendered by the participants of the acquired entity’s plan
prior to the date of the business combination shall be accounted for as part of the
accumulated postretirement benefit obligation of the acquired entity. Otherwise,
if improvements to the postretirement benefit plan of the acquired entity are not a
condition of the business combination, credit granted for prior service shall be
recognized as a plan amendment as discussed in paragraphs 50–55. If it is
expected that the plan will be terminated or curtailed, the effects of those actions
shall not be considered in measuring the accumulated postretirement benefit
obligation. Otherwise, nNo future changes to the plan shall be anticipated.
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D17. FASB Statement No. 109, Accounting for Income Taxes, is amended as follows:30
a.
Paragraph 11(h), as amended by Statement 141:
Business combinations. There may be differences between the assigned
recognized values of assets acquired and liabilities assumed in a business
combination and the tax bases of the assets and liabilities recognized in a business
combination. Those differences will result in taxable or deductible amounts when
the reported amounts of the assets and liabilities are recovered and settled,
respectively.
b.
Paragraph 16:
An enterprise shall recognize a deferred tax liability or asset for all temporary
differences6 and operating loss and tax credit carryforwards in accordance with
the provisions of paragraph 17. Deferred tax expense or benefit is the change
during the year in an enterprise’s deferred tax liabilities and assets.7 For deferred
tax liabilities and assets acquired in a purchase business combination during the
year, it is the change since the combination date. Total income tax expense or
benefit for the year is the sum of deferred tax expense or benefit and income taxes
currently payable or refundable.
c.
Paragraph 26:
The effect of a change in the beginning-of-the-year balance of a valuation
allowance that results from a change in circumstances that causes a change in
judgment about the realizability of the related deferred tax asset in future years
ordinarily shall be included in income from continuing operations. The only
exceptions are the initial recognition (that is, by elimination of the valuation
allowance) of certain tax benefits that are allocatedthat are recognized within one
year following the acquisition date as required by paragraph 30 and tax benefits of
items covered by paragraph 36 (items (c) and (e)–(g)). The effect of other
changes in the balance of a valuation allowance are allocated among continuing
operations and items other than continuing operations as required by paragraph
35.
30
The proposed amendments to Statement 109 in this paragraph anticipate the issuance of proposed FASB
Interpretation on accounting for uncertain tax positions, which is scheduled to be issued at about the same
time as this proposed Statement. That proposed Interpretation would apply to tax positions accounted for in
accordance with Statement 109, including tax positions that pertain to assets and liabilities acquired in a
business combination. The Board expects to issue a final Interpretation before this Statement becomes
effective.
152
d.
Paragraph 30, as amended by Statement 141:
A deferred tax liability or asset shall be recognized in accordance with the
requirements of this Statement for differences between the assignedrecognized
values of assets acquired and liabilities assumed in a business combination and
the tax bases of the assets and liabilities (except the portion of goodwill for which
amortization is not deductible for tax purposes, unallocated excess over cost (also
referred to as negative goodwill), leveraged leases, and acquired Opinion 23
differences8). recognized in a purchase business combination (rRefer to
paragraphs 259–272 for additional guidance). If a valuation allowance is
recognized for the deferred tax asset for an acquired entity’s deductible temporary
differences or operating loss or tax credit carryforwards at the acquisition date,
there is a rebuttable presumption8a that the tax benefits for those items that are
first recognized within one year following the acquisition date (that is, by
elimination of that valuation allowance) in financial statements after the
acquisition date shall be applied (a) first to reduce to zero any goodwill related to
the acquisition, (b) second to reduce to zero other noncurrent intangible assets
related to the acquisition, and (c) third and (b) second to reduce income tax
expense (refer to paragraph 16). The rebuttable presumption is overcome8b if the
recognition of the tax benefits results from a discrete event or circumstance that
occurred after the acquisition date and that was appropriately excluded from the
acquirer’s assessment in arriving at the valuation allowance at the date of
acquisition. If the rebuttable presumption is overcome, the tax benefits for those
items shall be reported as a reduction of income tax expense. Tax benefits that
are recognized after one year following the acquisition date (that is, by
elimination of that valuation allowance) also shall be reported as a reduction to
income tax expense (or credited directly to contributed capital as required by
paragraph 36).
_________________________
8a
That rebuttable presumption would not be applicable to the effect of a change in tax law or
regulation or to a change in tax status that results in a decrease in a valuation allowance. Refer to
paragraphs 27 and 28.
8b
The following is an example of a circumstance in which the rebuttable presumption is overcome:
Company A is acquired in a business combination. A natural disaster occurs after the acquisition
date that directly results in Company A obtaining a major new cleanup contract. Company A’s
normal business activities are construction and demolition; however, the company has not
provided any natural disaster cleanup services in the past and providing such services was not a
factor in determining the acquisition-date value of Company A. The increase in taxable earnings
from that contract clearly could not be foreseen and was not part of the acquirer’s assumptions in
establishing the valuation allowance at the acquisition date. Therefore, the resulting change in the
valuation allowance would decrease the income tax expense for the current period.
e.
Footnote 9a to paragraph 36(d), added by Statement 141:
FASB Statement No. 141, Business Combinations, prohibiteds the use of the
pooling-of-interests method for all business combinations initiated after June 30,
153
2001. FASB Statement No. 141 (revised 200X), Business Combinations, which
replaces Statement 141, continues to prohibit use of the pooling-of-interests
method.
f.
Paragraph 37(a):
Tax effects of deductible temporary differences and carryforwards that existed at
the date of a purchase business combination and for which a tax benefit is initially
recognized in subsequent yearsas a reduction of goodwill within one year
following the acquisition date (in accordance with the provisions of paragraph 30)
g.
Paragraph 45(f):
Tax expense that results from allocating certain tax benefits either directly to
contributed capital or to reduce goodwill (in accordance with paragraph 30)or
other noncurrent intangible assets of an acquired entity
h.
Paragraph 48:
An enterprise shall disclose (a) the amounts and expiration dates of operating loss
and tax credit carryforwards for tax purposes and (b) any portion of the valuation
allowance for deferred tax assets for which subsequently recognized tax benefits
will be allocated to reduce goodwill or other noncurrent intangible assets of an
acquired entity or credited directly to contributed capital (paragraphs 30 and 36).
An enterprise shall also disclose any acquisition-date income tax benefits or
expenses recognized from changes in the acquirer’s valuation allowance for its
previously existing deferred tax assets as a result of a business combination
(paragraph 266). Within one year after the acquisition date, if the rebuttable
presumption in paragraph 30 is overcome, an enterprise shall also disclose the
event or change in circumstances that caused a change in judgment about the
realizability of deferred tax assets.
i.
Paragraph 54:
For a purchase business combination consummated prior to the beginning of the
year for which this Statement is first applied, any balance remaining as of that
date for goodwill or negative goodwill shall not be adjusted to equal the amount it
would be if financial statements for the year of the combination and subsequent
years were restated. However, except for leveraged leases and except as provided
in paragraph 55, (a) remaining balances as of the date of initially applying this
Statement for assets and liabilities acquired in that combination shall be adjusted
from their net-of-tax amounts to their pretax amounts and (b) any differences
between those adjusted remaining balances and their tax bases are temporary
differences. A deferred tax liability or asset shall be recognized for those
temporary differences pursuant to the requirements of this Statement as of the
beginning of the year for which this Statement is first applied.
j.
Paragraph 259, as amended by Statement 141:
154
This Statement requires recognition of deferred tax liabilities and deferred tax
assets (and related valuation allowances, if necessary) for the deferred tax
consequences of differences between the assignedrecognized values of assets
acquired and liabilities assumed in a business combination and the tax bases of
the assets and liabilities recognized in a business combination. That requirement
includes the recognition of tax benefits arising from tax deductible goodwill in
excess of goodwill for financial reporting for both taxable and nontaxable
business combinations. A deferred tax liability or asset is not recognized for a
difference between the reported amount and the tax basis of goodwill or the
portion thereof for which amortization is not deductible for tax purposes
(paragraphs 262 and 263), unallocated “negative” goodwill, and leveraged leases
(paragraphs 256–258). Acquired Opinion 23 differences are accounted for in
accordance with the requirements of Opinion 23, as amended by this Statement
(paragraphs 31–34).
k.
Paragraph 260:
The following example illustrates recognition and measurement of a deferred tax
liability and asset in a nontaxable business combination. The assumptions are as
follows:
a. The enacted tax rate is 40 percent for all future years, and amortization of
goodwill is not deductible for tax purposes.
b. An wholly owned enterprise is acquired for $20,000, and the enterprise has no
leveraged leases.
c. The tax basis of the net assets acquired (other than goodwill) is $5,000, and
the assignedrecognized value (other than goodwill) is $12,000. Future
recovery of the assets and settlement of the liabilities at their assigned values
will result in $20,000 of taxable amounts and $13,000 of deductible amounts
that can be offset against each other. Therefore, no valuation allowance is
necessary.
The amounts recorded to account for the purchasebusiness combination
transaction are as follows:
AssignedRecognized value of the net assets
(other than goodwill) acquired
Deferred tax liability for $20,000 of taxable temporary differences
Deferred tax asset for $13,000 of deductible temporary differences
Goodwill
Purchase priceFair value of the acquireeacquired enterprise
l.
$12,000
(8,000)
5,200
10,800
$20,000
Paragraph 261:
In a taxable business combination, the assets acquired and liabilities assumed are
recognized for financial reporting purposes and the purchase price is also assigned
to thethose assets and liabilities recognized for tax purposes as well as for
155
financial reporting. However, the amounts assigned torecognized for particular
assets and liabilities may differ for financial reporting and tax purposes. A
deferred tax liability and asset are recognized for the deferred tax consequences of
those temporary differences in accordance with the recognition and measurement
requirements of this Statement. For example, a portion of the amount of goodwill
for financial reporting may be allocated to some other asset for tax purposes, and
amortization of that other asset may be deductible for tax purposes. If a valuation
allowance is recognized for that deferred tax asset at the acquisition date,
recognized benefits for those tax deductions after the acquisition date should be
applied in accordance with paragraph 30.(a) first to reduce to zero any goodwill
related to that acquisition, (b) second to reduce to zero other noncurrent intangible
assets related to that acquisition, and (c) third to reduce income tax expense.
m.
Paragraph 262:
Amortization of goodwill is deductible for tax purposes in some tax jurisdictions.
In those tax jurisdictions, the reported amount of goodwill and the tax basis of
goodwill are each separated into two components as of the combination
acquisition date for purposes of deferred tax calculations. The first component of
each equals the lesser of (a) goodwill for financial reporting or (b) tax-deductible
goodwill. The second component of each equals the remainder of each, that is,
(1) the remainder, if any, of goodwill for financial reporting or (2) the remainder,
if any, of tax-deductible goodwill. Any difference that arises between the book
and tax basis of that first component of goodwill in future years is a temporary
difference for which a deferred tax liability or asset is recognized based on the
requirements of this Statement. No deferred taxes are recognized for the second
component of goodwill. If that second component is an excess of tax-deductible
goodwill over the reported amount of goodwill, the tax benefit for that excess is a
temporary difference for which a deferred tax asset is recognized based on the
requirements of this Statement (refer to paragraph 263). However, if that second
component is an excess of goodwill for financial reporting over the tax-deductible
amount of goodwill, no deferred taxes are recognized either at the acquisition date
or in future years.recognized when realized on the tax return, and that tax benefit
is applied first to reduce to zero the goodwill related to that acquisition, second to
reduce to zero other noncurrent intangible assets related to that acquisition, and
third to reduce income tax expense.
n.
Paragraph 263, which provided an example illustrating accounting for the tax
consequences of goodwill when amortization of goodwill is deductible for tax
purposes, is replaced by the following:
The following example illustrates accounting for the tax consequences of
goodwill when tax-deductible goodwill exceeds the goodwill recorded for
financial reporting at the acquisition date. The assumptions are as follows:
156
a.
b.
At the acquisition date, the reported amount of goodwill for financial
reporting purposes is $600 before taking into consideration the tax benefit
associated with goodwill and the tax basis of goodwill is $900.
The tax rate is 40 percent for all years.
As of the acquisition date, the goodwill for financial reporting purposes is
adjusted for the tax benefit associated with goodwill by using the simultaneous
equations method as follows:
The PTD is the preliminary temporary difference (the excess of tax goodwill over
book goodwill, before taking into consideration the tax benefit associated with
goodwill), and the DTA is the resulting deferred tax asset.
(Tax Rate / (1-Tax Rate)) × PTD = DTA
In this example, the following variables are known:
Tax Rate = 40 percent
PTD = $300 ($900 − $600)
The unknown variable (DTA) equals $200, and the goodwill for financial
reporting purposes would be adjusted with the following entry:
DTA
200
Goodwill
200
Goodwill for financial reporting would be established at the acquisition date at
$400 ($600 less the $200 credit adjustment).
o.
Paragraph 264:
Accounting for a business combination and the changes in the acquirer’s
valuation allowance, if any, that results from the business combination shall
should reflect any provisions in the tax law that restrict the future use of either of
the combining enterprises’ deductible temporary differences or carryforwards to
reduce taxable income or taxes payable attributable to the other enterprise
subsequent to the business combination. For example, the tax law may limit the
use of the acquired enterprise’s deductible temporary differences and
carryforwards to subsequent taxable income of the acquired enterprise included in
a consolidated tax return for the combined enterprise. In that circumstance, or if
the acquired enterprise will file a separate tax return, the need for a valuation
allowance for some portion or all of the acquired enterprise’s deferred tax assets
for deductible temporary differences and carryforwards is assessed based on the
acquired enterprise’s separate past and expected future results of operations.
p.
Paragraph 265(e):
Based on assessments of all evidence available at the date of the business
combination in year 3 and at the end of year 3, management concludes that a
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valuation allowance is needed at both dates for the entire amount of the deferred
tax asset related to the acquired deductible temporary differences.
The acquired enterprise’s pretax financial income and taxable income for year 3
(after the business combination) and year 4 are as follows:
Pretax financial income
Reversals of acquired
deductible temporary
differences
Taxable income
Year 3
$ 15,000
Year 4
$10,000
(15,000)
$
—
(10,000)
$
—
At the end of year 4, the remaining balance of acquired deductible temporary
differences is $15,000 ($40,000 − $25,000). The deferred tax asset is $6,000
($15,000 at 40 percent). Based on an assessment of all available evidence at the
end of year 4, management concludes that no valuation allowance is needed for
that $6,000 deferred tax asset. Elimination of the $6,000 valuation allowance
results in a $6,000 deferred tax benefit that is reported as a reduction of deferred
income tax expense because the reversal of the valuation allowance occurred in
year 3, which was after the 1-year period (as described in paragraph 30)there is no
goodwill or other noncurrent intangible assets related to the acquisition. For the
same reason, tTax benefits realized in years 3 and 4 attributable to reversals of
acquired deductible temporary differences are reported as a zero current income
tax expense. The consolidated statement of earnings would include the following
amounts attributable to the acquired enterprise for year 3 (after the business
combination) and year 4:
Pretax financial income
Income tax expense (benefit):
Current
Deferred
Net income
q.
Year 3
$ 15,000
Year 4
$10,000
—
—
$ 15,000
—
(6,000)
$ 16,000
Paragraph 266:
The tax law in some tax jurisdictions may permit the future use of either of the
combining enterprises’ deductible temporary differences or carryforwards to
reduce taxable income or taxes payable attributable to the other enterprise
subsequent to the business combination. If the combined enterprise expects to file
a consolidated tax return, an acquirer may determine that as a result of the
business combination a different portion of its previously existing deferred tax
assets may become recognizable (that is, by reducing or increasing the acquirer’s
valuation allowance). For example, the acquirer may be able to utilize the benefit
of its tax operating loss carryforwards against the future taxable profit of the
acquiree. In such cases, the acquirer reduces its valuation allowance based on the
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weight of available evidence. However, that reduction does not enter into the
accounting for the business combination but is recognized as a tax benefit in
income (or credited directly to contributed capital (refer to paragraph 26)).a
deferred tax asset (net of a valuation allowance, if necessary) is recognized for
deductible temporary differences or carryforwards of either combining enterprise
based on an assessment of the combined enterprise’s past and expected future
results of operations as of the acquisition date. This either reduces goodwill or
noncurrent assets (except long-term investments in marketable securities) of the
acquired enterprise or creates or increases negative goodwill.
r.
Paragraphs 268 and 269, which provided guidance and a related example on the
recognition of carryforward tax benefits subsequent to a purchase method business
combination, are deleted.
s.
Footnote 18a to paragraph 270, added by Statement 141:
Statement 141 prohibiteds the use of the pooling-of-interests method for all
business combinations initiated after June 30, 2001. Statement 141(R) continues
to prohibit the use of the pooling-of-interests method.
D18. FASB Statement No. 112, Employer’s Accounting for Postemployment Benefits, is
amended as follows:
a.
Paragraph 5:
This Statement does not apply to:
a. Postemployment benefits provided through a pension or postretirement
benefit plan (FASB Statements No. 87, Employers’ Accounting for Pensions,
No. 88, Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’
Accounting for Postretirement Benefits Other Than Pensions, specify the
accounting for those costs.)
b. Individual deferred compensation arrangements that are addressed by APB
Opinion No. 12, Omnibus Opinion—1967, as amended by Statement 106
c. Special or contractual termination benefits covered by Statements 88 and 106
d. Stock compensation plans that are addressed by FASB Statement No. 123
(revised 2004), Share-Based Payment.
e. Postemployment benefits acquired in a business combination that are
addressed by FASB Statement No. 141 (revised 200X), Business
Combinations.
D19. FASB Statement No. 113, Accounting and Reporting for Reinsurance of ShortDuration and Long-Duration Contracts, is amended as follows:
a.
Paragraph 22:
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Amounts paid for retroactive reinsurance that meets the conditions for reinsurance
accounting shall be reported as reinsurance receivables to the extent those
amounts do not exceed the recorded liabilities relating to the underlying reinsured
contracts. If the recorded liabilities exceed the amounts paid, reinsurance
receivables shall be increased to reflect the difference and the resulting gain
deferred. The deferred gain shall be amortized over the estimated remaining
settlement period. If the amounts and timing of the reinsurance recoveries can
be reasonably estimated, the deferred gain shall be amortized using the effective
interest rate inherent in the amount paid to the reinsurer and the estimated timing
and amounts of recoveries from the reinsurer (the interest method). Otherwise,
the proportion of actual recoveries to total estimated recoveries (the recovery
method) shall determine the amount of amortization.5a
______________________________
5a
An entity that is accounting for guarantees of the adequacy of liabilities for losses and loss
adjustment expenses (reserve guarantees) provided by a selling enterprise in a business
combination should not apply paragraphs 22–24 of this Statement. Those guarantees are no
different from other guarantees of the existence of assets or the adequacy of liabilities often
provided by a seller in a business combination. Thus, the accounting for reserve guarantees
provided by a selling enterprise in a business combination would follow the provisions of FASB
Statement No. 141 (revised 200X), Business Combinations.
D20. FASB Statement No. 123 (revised 2004), Share-Based Payment, is amended as
follows:
a.
Paragraph 4:
This Statement applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for equity instruments held by an
employee share ownership plan)2 or by incurring liabilities to an employee or
other supplier (a) in amounts based, at least in part,3 on the price of the entity’s
shares or other equity instruments or (b) that require or may require settlement by
issuing the entity’s equity shares or other equity instruments. FASB Statement
No. 141 (revised 200X), Business Combinations, provides guidance for
determining whether equity instruments issued in a business combination are part
of the consideration transferred for control of the acquiree, and, therefore, in the
scope of Statement 141(R), or are in return for continued service to be recognized
in the postcombination period.
D21. FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, is amended as follows:
a.
Paragraph 11, as amended by Statement 123(R), Statement 141, and FASB
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity:
160
Notwithstanding the conditions of paragraphs 6–10, the reporting entity shall not
consider the following contracts to be derivative instruments for purposes of this
Statement:
a. Contracts issued or held by that reporting entity that are both (1) indexed to its
own stock and (2) classified in stockholders’ equity in its statement of
financial position
b. Contracts issued by the entity that are subject to FASB Statement No. 123
(revised 2004), Share-Based Payment. If any such contract ceases to be
subject to Statement 123(R) in accordance with paragraph A231 of that
Statement, the terms of that contract shall then be analyzed to determine
whether the contract is subject to this Statement.
c.
Contracts between an acquirer and a seller in a business combination to buy or
sell a business at a future date.Contracts issued by the entity as contingent
consideration from a business combination. The accounting for contingent
consideration issued in a business combination is addressed in FASB
Statement No. 141, Business Combinations. In applying this paragraph, the
issuer is considered to be the entity that is accounting for the combination
using the purchase method.
d.
Forward contracts that require settlement by the reporting entity’s delivery of
cash in exchange for the acquisition of a fixed number of its equity shares
(forward purchase contracts for the reporting entity’s shares that require
physical settlement) that are accounted for under paragraphs 21 and 22 of
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
D22. FASB Statement No. 142, Goodwill and Other Intangible Assets, is amended as
follows:
a.
Paragraph 1 and its related footnote 1:
This Statement addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. This Statement also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition.
FASB Statement No. 141 (revised 200X), Business
Combinations,FASB Statement No. 141, Business Combinations, addresses
financial accounting and reporting for goodwill and other intangible assets
acquired in a business combination at acquisition.1
____________________
1
Statement 141 was issued concurrently with this Statement and addresses financial accounting
and reporting for business combinations. It supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises.
161
b.
Paragraph 8, as amended by FASB Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections:
Except as described in Appendix D, this Statement does not change the
accounting prescribed in the following pronouncements:
a. FASB Statement No. 2, Accounting for Research and Development Costs
b. FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies
c. [This subparagraph has been deleted.]
d. FASB Statement No. 50, Financial Reporting in the Record and Music
Industry
e. FASB Statement No. 61, Accounting for Title Plant
f. FASB Statement No. 63, Financial Reporting by Broadcasters
g. FASB Statement No. 71, Accounting for the Effects of Certain Types of
Regulation (paragraphs 29 and 30)
h. FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions (paragraphs 4–7)
i. FASB Statement No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed
j. FASB Statement No. 109, Accounting for Income Taxes (a deferred tax asset)
k. FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (a servicing asset or
liability).
l. FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method
m. FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a
Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method.
c.
Paragraph 9 and its related footnotes 6, 7, and 8:
An intangible asset that is acquired either individually or with a group of other
assets (but not those acquired in a business combination) shall be initially
recognized and measured based on its fair value. General concepts related to the
initial measurement of assets acquired in exchange transactions, including
intangible assets, are provided in paragraphs 5–7 of Statement 141C2–C7 of
Statement 141(R).6 The cost of a group of assets acquired in a transaction other
than a business combination shall be allocated to the individual assets acquired
based on their relative fair values and shall not give rise to goodwill.7 Intangible
assets acquired in a business combination are initially recognized and measured in
accordance with Statement 141(R)Statement 141.8 Intangible assets acquired in a
business combination that are to be used in a particular research and development
project shall be recognized as intangible assets and accounted for in
162
accordance with this Statement.
However, research and development
expenditures related to those assets incurred internally after the date of acquisition
shall be accounted for in accordance with Statement 2, as amended.
___________________________________
6
Although those paragraphs refer to determining the cost of the assets acquired, both paragraph 20
of Statement 141(R)paragraph 6 of Statement 141 and paragraph 18 of APB Opinion No. 29,
Accounting for Nonmonetary Transactions, note that, in general, cost should be measured based
on the fair value of the consideration given or the fair value of the net assets acquired, whichever
is more reliably measurable.
7
Statement 141(R)Statement 141 requires intangible assets acquired in a business combination that
do not meet certain criteria to be included in the amount initially recognized as goodwill. Those
recognition criteria do not apply to intangible assets acquired in transactions other than business
combinations.
8
Statement 2 and Interpretation 4 require amounts assigned to acquired intangible assets that are to
be used in a particular research and development project and that have no alternative future use to
be charged to expense at the acquisition date. Statement 141 does not change that requirement,
nor does this Statement.
d.
Footnote 11 to paragraph 12:
However, both Statement 2 and Interpretation 4 requires amounts assigned to
acquired intangible assets acquired in an asset purchase that are to be used in a
particular research and development project and that have no alternative future
use to be charged to expense at the acquisition date.
e.
Paragraph 16:
If an intangible asset is determined to have an indefinite useful life, it shall not be
amortized until its useful life is determined to be no longer indefinite. An entity
shall evaluate the remaining useful life of an intangible asset that is not being
amortized each reporting period to determine whether events and circumstances
continue to support an indefinite useful life. If an intangible asset that is not being
amortized is subsequently determined to have a finite useful life, the asset shall be
tested for impairment in accordance with paragraph 17. That intangible asset
shall then be amortized prospectively over its estimated remaining useful life and
accounted for in the same manner as other intangible assets that are subject to
amortization. Intangible assets that are acquired in a business combination for use
in a particular research and development project and that have no alternative
future uses shall be considered indefinite-lived until the completion or
abandonment of the associated research and development efforts, at which point
the acquirer would make a separate determination of the useful life of that asset.
f.
Paragraph 21 and its related footnote 14:
The implied fair value of goodwill shall be determined in the same manner as the
amount of goodwill recognized in a business combination is determined. That is,
an entity shall assignallocate the fair value of a reporting unit to all of the assets
163
and liabilities of that unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the fair value of
the reporting unit was the price paid to acquire the reporting unit.14 The excess of
the fair value of a reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. That allocation process of
assignment shall be performed only for purposes of testing goodwill for
impairment; an entity shall not write up or write down a recognized asset or
liability, nor should it recognize a previously unrecognized intangible asset as a
result of that allocation process.
_____________________________________
14
The relevant guidance in paragraphs 28–48 of Statement 141(R)paragraphs 35–38 of Statement
141 shall be used in determining how to assignallocate the fair value of a reporting unit to the
assets and liabilities of that unit. Included in that allocation would be research and development
assets that meet the criteria in paragraph 32 of this Statement even if Statement 2 or Interpretation
4 would require those assets to be written off to earnings when acquired.However, no portion of
the fair value of the reporting unit shall be assigned to an asset or liability that would be
recognizable separate from goodwill had the business combination been accounted for in
accordance with Statement 141(R) if that asset or liability (a) relates to a business combination
that was completed before implementation of Statement 141(R) and (b) had not been recognized
separately from goodwill in accordance with provisions that existed before Statement 141(R). For
example, in performing the second step of a goodwill impairment test, an entity shall not assign
any fair value to an asset for a contingency if it had not been separately recognized, and arose
from a business combination completed before the implementation of Statement 141(R), even
though that asset would be recognized separate from goodwill in accordance with the recognition
requirements of Statement 141(R). Additionally, a portion of the fair value of the reporting unit
shall be assigned to an asset or liability that (1) relates to a business combination that was
completed before implementation of Statement 141(R) and (2) was recognized separately from
goodwill in accordance with provisions that existed before Statement 141(R).
g.
Footnote 18 to paragraph 30:
Statement 141(R)Emerging Issues Task Force Issue No. 98-3, “Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of
a Business,” includes guidance on determining whether an asset group constitutes
a business.
h.
Paragraph 33:
Some assets or liabilities may be employed in or relate to the operations of
multiple reporting units. The methodology used to determine the amount of those
assets or liabilities to assign to a reporting unit shall be reasonable and
supportable and shall be applied in a consistent manner. For example, assets and
liabilities not directly related to a specific reporting unit, but from which the
reporting unit benefits, could be assignedallocated according to the benefit
received by the different reporting units (or based on the relative fair values of the
different reporting units). In the case of pension items, for example, a pro rata
assignmentallocation based on payroll expense might be used. For use in making
those assignments, the basis for and method of determining the fair value of the
acquiree and other related factors (such as the underlying reasons for the
164
acquisition and management’s expectations related to dilution, synergies, and
other financial measurements) shall be documented at the acquisition date.
i.
Paragraph 34:
For the purpose of testing goodwill for impairment, all goodwill acquired in a
business combination (including the goodwill assigned to the noncontrolling
interests) shall be assigned to one or more reporting units as of the acquisition
date. Goodwill shall be assigned to reporting units of the acquiring entity that are
expected to benefit from the synergies of the combination even though other
assets or liabilities of the acquired entity may not be assigned to that reporting
unit. The total amount of acquired goodwill may be divided among a number of
reporting units. The methodology used to determine the amount of goodwill to
assign to a reporting unit shall be reasonable and supportable and shall be applied
in a consistent manner. For use in making those assignments, the basis for and
method of determining the fair value of an acquiree and other related factors (such
as the underlying reasons for the acquisition and management’s expectations
related to dilution, synergies, and other financial measurements) shall be
documented at the acquisition date. In addition, that methodology shall be
consistent with the objectives of the process of assigning goodwill to reporting
units described in paragraph 35.
j.
Paragraph 35, as amended by Statement 145:
In concept, the amount of goodwill assigned to a reporting unit would be
determined in a manner similar to how the amount of goodwill recognized in a
business combination is determined. An entity would determine the fair value of
the acquireeacquired business (or portion thereof) to be included in a reporting
unit—in essence a “purchase price” for that business. The entity would then
recognizeallocate that purchase price to the individual assets acquired and
liabilities assumed related to that acquired business (or portion thereof).21 Any
excess of the fair value of the acquiree over the fair value of its identifiable net
assetspurchase price is the amount of goodwill assigned to that reporting unit.
However, if goodwill is to be assigned to a reporting unit that has not been
assigned any of the assets acquired or liabilities assumed in that acquisition, the
amount of goodwill to be assigned to that unit might be determined by applying a
“with and without” computation. That is, the difference between the fair value of
that reporting unit before the acquisition and its fair value after the acquisition
represents the amount of goodwill to be assigned to that reporting unit.21a
___________________________________
21
Paragraphs 28–48 of Statement 141(R)Paragraphs 35–38 of Statement 141 provide guidance on
assigning the fair value of the acquireeallocating the purchase price to the assets acquired and
liabilities assumed in a business combination.
21a
Paragraph 58 of Statement 141(R) provides guidance for assigning goodwill to the acquirer and
noncontrolling interests in an acquisition in which the acquirer holds less than 100 percent of the
equity interests in the acquiree.
165
k.
Paragraph 38:
Goodwill arising from a business combination with a continuing noncontrolling
interest shall be tested for impairment using an approach consistent with the
approach used to measure the noncontrolling interest at the acquisition date. (A
noncontrolling interest is sometimes referred to as a minority interest.) For
example, if the goodwill assigned to a reporting unit wasis initially recognized
before the effective date of Statement 141(R) based only on the controlling
interest of the parent, the fair value of the reporting unit used in the impairment
test should be based on that controlling interest and should not reflect the portion
of fair value attributable to the noncontrolling interest. For that reporting unit
Similarly, the implied fair value of goodwill that is determined in the second step
of the impairment test and used to measure the impairment loss should reflect
only the parent company’s interest in that goodwill. If an entity has one or more
subsidiaries with an outstanding noncontrolling interest, goodwill impairment
losses shall be assigned to the controlling and noncontrolling interests on a pro
rata basis using the relative carrying values of goodwill. As described in
paragraph 58 of Statement 141(R), in a business combination in which the
acquirer holds less than 100 percent of the equity interests in the acquiree at the
acquisition date, the amount of goodwill determined in accordance with paragraph
49 of that Statement shall be assigned to the acquirer and noncontrolling interests.
Paragraphs A62 and A63 of Appendix A of that Statement describe how the
initial assignment shall be done. Goodwill impairment losses shall be assigned
first to the components of the reporting unit if the partially owned subsidiary is
part of a larger reporting unit, and then to the controlling and noncontrolling
interests of the partially owned subsidiary. For example, if a partially owned
subsidiary is part of a reporting unit, the portion of the impairment loss assigned
to that subsidiary would be determined by multiplying the goodwill impairment
loss by the proportion of the carrying value of the goodwill assigned related to
that partially owned subsidiary over the carrying value of the goodwill assigned to
the reporting unit as a whole. The amount of the impairment loss allocated to the
partially owned subsidiary would then be allocated to the controlling and
noncontrolling interests pro rata based on the relative carrying values of goodwill
allocated to those interests. If the partially owned subsidiary incurs a goodwill
impairment loss and is itself a reporting unit, then the impairment loss is only
allocated to the controlling and noncontrolling interests based on the relative
carrying values of goodwill allocated to them.
l.
Paragraph 44:
For intangible assets acquired either individually or withas part of a group of
assets (in either an asset acquisition or business combination), the following
information shall be disclosed in the notes to the financial statements in the period
of acquisition:
166
a. For intangible assets subject to amortization:
(1) The total amount assigned and the amount assigned to any major
intangible asset class
(2) The amount of any significant residual value, in total and by major
intangible asset class
(3) The weighted-average amortization period, in total and by major
intangible asset class
b. For intangible assets not subject to amortization, the total amount assigned
and the amount assigned to any major intangible asset class
c. The amount of research and development assets acquired in a transaction
other than a business combination and written off in the period and the line
item in the income statement in which the amounts written off are aggregated.
This information also shall be disclosed separately for each material business
combination or in the aggregate for individually immaterial business
combinations that are material collectively if the aggregate fair values of
intangible assets acquired, other than goodwill, are significant in relation to the
fair value of the acquiree.
m.
Paragraph 45:
The following information shall be disclosed in the financial statements or the
notes to the financial statements for each period for which a statement of financial
position is presented:
a. For intangible assets subject to amortization:
(1) The gross carrying amount and accumulated amortization, in total and
by major intangible asset class
(2) The aggregate amortization expense for the period
(3) The estimated aggregate amortization expense for each of the five
succeeding fiscal years
b. For intangible assets not subject to amortization, the total carrying amount and
the carrying amount for each major intangible asset class
c. The changes in the carrying amount of goodwill during the period
includingshowing separately:
(1) The aggregate amount of goodwill acquired
(2) The aggregate amount of impairment losses recognized
(3) The amount of goodwill included in the gain or loss on disposal of all or
a portion of a reporting unit.
(1) The gross amount and accumulated impairment losses at the beginning
of the period
(2) Additional goodwill recognized during the period, except goodwill
included in a disposal group that, on acquisition, meets the criteria to be
classified as held for sale in accordance with Statement 144
167
(3)
(4)
(5)
(6)
(7)
(8)
Adjustments resulting from the subsequent recognition of deferred tax
assets during the period in accordance with paragraph 30 of Statement
109
Goodwill included in a disposal group classified as held for sale in
accordance with Statement 144 and goodwill derecognized during the
period without having previously been included in a disposal group
classified as held for sale
Impairment losses recognized during the period in accordance with this
Statement
Net exchange differences arising during the period in accordance with
FASB Statement No. 52, Foreign Currency Translation
Any other changes in the carrying amounts during the period
The gross amount and accumulated impairment losses at the end of the
period.
Entities that report segment information in accordance with Statement 131 shall
provide the above information about goodwill in total and for each reportable
segment and shall disclose any significant changes in the allocation of goodwill
by reportable segment. If any portion of goodwill has not yet been allocated to a
reporting unit at the date the financial statements are issued, that unallocated
amount and the reasons for not allocating that amount shall be disclosed.
Illustration 1 in Appendix C provides an example of those disclosure
requirements.
n.
Paragraph 48 and its related footnote 24:
This Statement shall be effective as follows:
a. All of the provisions of this Statement shall be applied in fiscal years
beginning after December 15, 2001, to all goodwill and other intangible assets
recognized in an entity’s statement of financial position at the beginning of
that fiscal year, regardless of when those previously recognized assets were
initially recognized. Early application is permitted for entities with fiscal
years beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. In all cases, the provisions of this
Statement shall be initially applied at the beginning of a fiscal year.
Retroactive application is not permitted. (Refer to paragraphs 53–61 for
additional transition provisions.)
b. As described in paragraphs 50 and 51, certain provisions of this Statement
shall be applied to goodwill and other acquired intangible assets for which the
acquisition date is after June 30, 2001, even if an entity has not adopted this
Statement in its entirety.
c. The disclosures required by paragraph 45(c), as amended by
Statement 141(R), shall be provided beginning in annual periods beginning on
or after December 15, 2006.
168
dc. This Statement shall not be applied to previously recognized goodwill and
intangible assets acquired in a combination between two or more mutual
enterprises, acquired in a combination between not-for-profit organizations, or
arising from the acquisition of a for-profit business entity by a not-for-profit
organization until interpretive guidance related to the application of the
purchase method to those transactions is issued (refer to paragraph 52).24
e. For combinations involving only mutual entities, all of the provisions of this
Statement shall be applied as of the beginning of the first annual period
beginning on or after December 15, 2006, to goodwill and all other intangible
assets recognized in an entity’s statement of financial position at the
beginning of that annual period, regardless of when those previously
recognized assets were initially recognized. Early application is encouraged,
but only at the beginning of an annual period that begins after Statement
141(R) is issued. If applied earlier, the provisions of this Statement shall be
applied concurrent with the adoption of Statement 141(R) and FASB
Statement No. 1XX, Consolidated Financial Statements, Including
Accounting and Reporting of Noncontrolling Interests in Subsidiaries.
Retroactive application is not permitted.
______________________________________
24
The Board is considering issues related to application of the acquisition method to
combinations between not-for-profit organizations and the acquisition of a for-profit business
entity by a not-for-profit organization in a separate project. The Board plans to consider
issues related to the application of the purchase method to combinations between two or more
mutual enterprises, combinations between not-for-profit organizations, and the acquisition of
a for-profit business entity by a not-for-profit organization in a separate project.
o.
Paragraph 49, as amended by FASB Statement No. 147, Acquisitions of Certain
Financial Institutions:
Paragraph 61 of Statement 141 includeds the following transition provisions
related to goodwill and intangible assets acquired in business combinations for
which the acquisition date was before July 1, 2001, that were accounted for by the
purchase method.
a. The carrying amount of acquired intangible assets that diddo not meet the
criteria in paragraph 39 of Statement 141 for recognition apart from goodwill
(and any related deferred tax liabilities if the intangible asset amortization is
not deductible for tax purposes) shall be reclassified as goodwill as of the date
this Statement is initially applied in its entirety.
b. The carrying amount of (1) any recognized intangible assets that meetmet the
recognition criteria in paragraph 39 of Statement 141 or (2) any unidentifiable
intangible assets recognized in accordance with paragraph 5 of Statement 72
and required to be amortized in accordance with paragraph 8 of FASB
Statement No. 147, Acquisitions of Certain Financial Institutions, that have
been included in the amount reported as goodwill (or as goodwill and
intangible assets) shall be reclassified and accounted for as an assets apart
from goodwill as of the date this Statement is initially applied in its entirety.25
169
Paragraph C16 of Statement 141(R) requires similar transition provisions for
combinations between mutual entities for fiscal years beginning after
December 15, 2006.25a
_______________________________________
25
For example, when a business combination was initially recorded, a portion of the acquired
entity was assigned to intangible assets that meet the recognition criteria in paragraph 39 of
Statement 141. Those intangible assets have been included in the amount reported on the
statement of financial position as goodwill (or as goodwill and other intangible assets). However,
separate general ledger or other accounting records have been maintained for those assets.
25a
Combinations involving only mutual entities were included in the scope of Statement 141.
However, paragraph 60 of that Statement delayed the effective date for those combinations.
Combinations involving only mutual entities will no longer have a delayed effective date upon the
application of Statement 141(R).
p.
Paragraph 52:
Goodwill and intangible assets acquired in a combination between two or more
mutual enterprises, acquired in a combination between not-for-profit
organizations, or arising from the acquisition of a for-profit business entity by a
not-for-profit organization for which the acquisition date is after June 30, 2001,
shall continue to be accounted for in accordance with Opinion 17 until the
Board’s project on accounting for combinations between not-for-profit
organizations is completed (refer to footnote 24). In combinations involving only
mutual entities, goodwill acquired in a business combination following the
adoption of this Statement shall not be amortized. Additionally, for mutual
entities, intangible assets other than goodwill acquired in a business combination
or otherwise following the adoption of this Statement, shall be accounted for in
accordance with paragraphs 11–14 of this Statement.
q.
Paragraph 53:
To apply this Statement to intangible assets acquired in a transaction for which
the acquisition date is on or before June 30, 2001 (and following the adoption of
this Statement for combinations involving only mutual entities), the useful lives of
those previously recognized intangible assets shall be reassessed using the
guidance in paragraph 11 and the remaining amortization periods adjusted
accordingly.26 That reassessment shall be completed prior to the end of the first
interim period of the fiscal year in which this Statement is initially applied.
Previously recognized intangible assets deemed to have indefinite useful lives
shall be tested for impairment as of the beginning of the fiscal year in which this
Statement is initially applied (in accordance with paragraph 17). That transitional
intangible asset impairment test shall be completed in the first interim period in
which this Statement is initially applied, and any resulting impairment loss shall
be recognized as the effect of a change in accounting principle. The effect of the
accounting change and related income tax effects shall be presented in the income
statement between the captions extraordinary items and net income. The per-
170
share information presented in the income statement shall include the per-share
effect of the accounting change.
r.
The following paragraph is added after paragraph 61:
62. The transition requirements in paragraphs C17–C24 of Statement 141(R)
apply to entities that (a) have not adopted FASB Statement No. 147, Acquisitions
of Certain Financial Institutions, (b) previously had acquisitions of all or part of a
financial institution that were accounted for in accordance with the requirements
of Statement 72, and (c) have unidentifiable intangible assets related to those
acquisitions recorded in their financial statements at the date this Statement is
adopted in its entirety. (The application date of this Statement was fiscal years
beginning after December 15, 2001. However, this Statement was not applied to
previously recognized or current acquisitions of goodwill and intangible assets
that were acquired in a combination involving only mutual entities, as indicated in
paragraphs 48(c) and 52. The transition provisions in paragraphs C17–C24 of
Statement 141(R) apply to mutual entities that were excluded from the scope of
Statement 147.)
s.
Paragraph C2, illustrative Note C: Goodwill:
Note C: Goodwill
The changes in the carrying amount of goodwill for the year ended December 31,
20X3, are as follows:
($000s)
Balance as of
January 1, 20X3
Goodwill
Accumulated impairment
losses
Goodwill acquired during
year
Impairment losses
Goodwill written off
related to sale of business
unit
Balance as of
December 31, 20X3
Goodwill
Accumulated impairment
losses
Technology
Segment
$1,413
Communications
Segment
$1,104$904
Total
$2,517$2,317
(200)
—
1,413
(200)
904
189
—
115
(46)
304
(46)
(484)
—
(484)
1,118
1,219
2,337
—
$1,118
(246)
$973
(246)
$2,091
171
2,317
The Communications segment is tested for impairment in the third quarter, after
the annual forecasting process. Due to an increase in competition in the Texas
and Louisiana cable industry, operating profits and cash flows were lower than
expected in the fourth quarter of 20X2 and the first and second quarters of 20X3.
Based on that trend, the earnings forecast for the next five years was revised. In
September 20X3, a goodwill impairment loss of $46 was recognized in the
Communications reporting unit. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
t.
Paragraph F1 (the Glossary):
Goodwill
Future economic benefits arising from assets that are not individually identified
and separately recognized.The excess of the cost of an acquired entity over the
net of the amounts assigned to assets acquired and liabilities assumed. The
amount recognized as goodwill includes acquired intangible assets that do not
meet the criteria in FASB Statement No. 141, Business Combinations, for
recognition as an asset apart from goodwill.
D23. FASB Statement No. 144, Accounting for the Impairment or Disposal of LongLived Assets, is amended as follows:
a.
Paragraph 5, as amended by Statements 145 and 147:
This Statement does not apply to (a) goodwill, (b) intangible assets not being
amortized that are to be held and used, (c) servicing assets, (d) financial
instruments, including investments in equity securities accounted for under the
cost or equity method, (e) deferred policy acquisition costs and intangible assets
recognized for acquired insurance contracts under the requirements of FASB
Statement No. 141 (revised 200X), Business Combinations, (f) deferred tax assets,
and (g) unproved oil and gas properties that are being accounted for using the
successful-efforts method of accounting. This Statement also does not apply to
long-lived assets for which the accounting is prescribed by:
•
•
•
•
FASB Statement No. 50, Financial Reporting in the Record and Music
Industry
FASB Statement No. 63, Financial Reporting by Broadcasters
FASB Statement No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed
FASB Statement No. 90, Regulated Enterprises—Accounting for
Abandonments and Disallowances of Plant Costs.
172
b.
The table in paragraph D1, as amended by Statement 147:
Existing
Pronouncement
FASB Statement No. 141(R)147
Title
Business Combinations
Acquisition of Certain
Financial Institutions
• Depositor- and borrowerrelationship intangible
assets
• Credit cardholder
intangible assets
Apply
Requirement
in This
Statement
X
X
D24. FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, is amended as follows:
a.
Footnote 2 to paragraph 2:
FASB Statement No. 141 (revised 200X), Business Combinations, requires that
costs associated with an exit activity that involves a business newly acquired in a
business combination be recognized at fair value at the acquisition date if the
criteria for recognition in this Statement are met at that date.EITF Issue No. 95-3,
“Recognition of Liabilities in Connection with a Purchase Business
Combination,” provides guidance on the accounting for costs associated with an
exit activity that involves a company newly acquired in a business combination.
The Board is reconsidering that guidance in its project on business
combinations—purchase method procedures.
D25. FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, is amended as follows:
a.
Paragraph 16 and its related footnote 9:
This Statement does not affect the timing of recognition of financial instruments
issued as contingent consideration in a business combination. The recognition
and measurement of contingent consideration issued in a business combination is
addressed in paragraphs 25 and 26 of FASB Statement No. 141 (revised 200X),
Business CombinationsThe accounting for business combinations is addressed in
FASB Statement No. 141, Business Combinations.9 This Statement also does not
________________________________
9
The Board currently is addressing the accounting for contingent consideration issued in a
business combination in its project on purchase method procedures.
173
alter the measurement guidance for contingent consideration set forth in
paragraphs 25–36 of Statement 141. However, when recognized, a financial
instrument within the scope of this Statement that is issued as consideration
(whether contingent or noncontingent) in a business combination shall be
classified pursuant to the requirements of this Statement.
D26. FASB Statement No. 154, Accounting Changes and Error Corrections, is amended
as follows:
a.
Paragraph 24:
When there has been a change in the reporting entity, the financial statements of
the period of the change shall describe the nature of the change and the reason for
it. In addition, the effect of the change on income before extraordinary items, net
income (or other appropriate captions of changes in the applicable net assets or
performance indicator), other comprehensive income, and any related per-share
amounts shall be disclosed for all periods presented. Financial statements of
subsequent periods need not repeat the disclosures required by this paragraph. If a
change in reporting entity does not have a material effect in the period of change
but is reasonably certain to have a material effect in later periods, the nature of
and the reason for the change shall be disclosed whenever the financial statements
of the period of change are presented. (Paragraphs 71–82 of FASB Statement No.
141 (revised 200X), Business Combinations51–58 of FASB Statement No. 141,
Business Combinations, describe the manner of reporting and the disclosures
required for a business combination.)
D27. FASB Interpretation No. 21, Accounting for Leases in a Business Combination, is
amended as follows:
a.
Paragraph 15, as amended by Statement 141:
In a business combination, the acquiring enterprise shall retain the previous
classification in accordance with FASB Statement No. 13 for the leases of an
acquired enterprise unless the provisions of the lease are modified as indicated in
paragraph 13 above.2 (At the acquisition date, an acquirer may contemplate
renegotiating and modifying leases of the business acquired. Modifications made
after the acquisition date, including those that were planned at the time of the
business combination, are postcombination events that should be accounted for
separately by the acquirer in accordance with the provisions of Statement 13.) The
amounts assigned to individual assets acquired and liabilities assumed at the date
of the combination shall be determined in accordance with the general guides for
that type of asset or liability in paragraphs 28–48 of FASB Statement No. 141
(revised 200X), Business Combinationsparagraphs 36–39 of FASB Statement No.
141, Business Combinations. Subsequent to the recording of the amounts called
for by Statement 141(R)Statement 141, the leases shall thereafter be accounted for
174
in accordance with Statement No. 13.3 Paragraph 16 below explains the
application of this paragraph to a leveraged lease by an enterprise that acquires a
lessor.
b.
Paragraph 16, as amended by Statement 141:
In a business combination, the acquiring enterprise shall apply the following
procedures to the acquired enterprise’s investment as a lessor in a leveraged lease.
The acquiring enterprise shall retain the classification of a leveraged lease at the
date of the combination. The acquiring enterprise shall assign an amount to the
acquired net investment in the leveraged lease in accordance with the general
guides in paragraphs 28–48 of Statement 141(R)paragraphs 37 and 38 of
Statement 141, based on the remaining future cash flows and giving appropriate
recognition to the estimated future tax effects of those cash flows. Once
determined, that net investment shall be broken down into its component parts,
namely, net rentals receivable, estimated residual value, and unearned income
including discount to adjust other components to present value. The acquiring
enterprise thereafter shall account for that investment in a leveraged lease in
accordance with the provisions of FASB Statement No. 13. Appendix A illustrates
the application of this paragraph.
c.
Paragraph 17:
When an enterprise that has acquired another enterprise in a business combination
accounted for by the purchase method prior to the effective date of this
Interpretation applies the provisions of FASB Statement No. 13 retroactively,
leases acquired in the business combination shall be classified as they would have
been classified if the acquired enterprise had applied Statement No. 13
retroactively at the date of the business combination. The amounts retroactively
recorded for those leases shall be the amounts that would have been allocated
under APB Opinion No. 16 by the acquiring enterprise at the acquisitionpurchase
date if the leases had been classified in accordance with the provisions of
Statement No. 13 at that date. The following examples illustrate the application
of this paragraph: [The remainder of this paragraph is omitted.]
d.
Footnote 4 to paragraph 18, as amended by Statement 141:
See paragraph 59 of Statement 141 for the definition of “initiated.”
D28. FASB Interpretation No. 26, Accounting for Purchase of a Leased Asset by the
Lessee during the Term of the Lease, is amended as follows:
a.
Paragraph 5:
The termination of a capital lease that results from the purchase of a leased asset
by the lessee is not the type of transaction contemplated by paragraph 14(c) of
FASB Statement No. 13 but rather is an integral part of the purchase of the leased
asset. The purchase by the lessee of property under a capital lease shall be
175
accounted for like a renewal or extension of a capital lease that, in turn, is
classified as a capital lease,1 that is, any difference between the purchase price
and the carrying amount of the lease obligation shall be recorded as an adjustment
of the carrying amount of the asset. The provisions of this Interpretation do not
apply to leased assets acquired in a business combination.
D29. FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities, is amended as follows:
a.
Paragraph 4(h):
An entity that is deemed to be a business under the definition in FASB Statement
No. 141 (revised 200X), Business Combinations,Appendix C need not be
evaluated by a reporting enterprise to determine if the entity is a variable interest
entity under the requirements of this Interpretation unless one or more of the
following conditions exist (however, for entities that are excluded by this
provision of this Interpretation, other generally accepted accounting principles
should be applied):2
(1) The reporting enterprise, its related parties,3 or both participated significantly
in the design or redesign of the entity. However, this condition does not apply
if the entity is an operating joint venture under joint control of the reporting
enterprise and one or more independent parties or a franchisee.4
(2) The entity is designed so that substantially all of its activities either involve or
are conducted on behalf of the reporting enterprise and its related parties.
(3) The reporting enterprise and its related parties provide more than half of the
total of the equity, subordinated debt, and other forms of subordinated
financial support to the entity based on an analysis of the fair values of the
interests in the entity.
(4) The activities of the entity are primarily related to securitizations or other
forms of asset-backed financings or single-lessee leasing arrangements.
b.
Paragraphs 18–21 and footnote 16, which provide measurement guidance for the
initial consolidation of a variable interest entity, are replaced by the following:
18.
If the primary beneficiary of a variable interest entity and the variable
interest entity are under common control, the primary beneficiary shall initially
measure the assets, liabilities, and noncontrolling interests16 of the variable
interest entity at the amounts at which they are carried in the accounts of the
enterprise that controls the variable interest entity (or would be carried if the
enterprise issued financial statements prepared in conformity with generally
accepted accounting principles).
19.
Paragraphs 20 and 21 provide guidance if the primary beneficiary and
variable interest entity are not under common control.
176
20.
The initial consolidation of a variable interest entity that is a business16a is
a business combination and shall be accounted for in accordance with the
provisions of FASB Statement No. 141 (revised 200X), Business Combinations.
21.
If an entity becomes the primary beneficiary of a variable interest entity
that is not a business:
a. The primary beneficiary initially shall measure and recognize the assets
(except for goodwill) and liabilities of the variable interest entity in
accordance with paragraphs 28–48 of Statement 141(R). However, the
primary beneficiary shall initially measure assets and liabilities that it has
transferred to that variable interest entity at, after, or shortly before the date
that the entity became the primary beneficiary at the same amounts at which
the assets and liabilities would have been measured if they had not been
transferred. No gain or loss shall be recognized because of such transfers.
b. The difference between (1) the fair value of consideration paid, if any, and the
reported amount of previously held interests and (2) the net amount of the
variable interest entity’s recognized assets, liabilities, and noncontrolling
interests shall be recognized as a gain or loss. No goodwill shall be
recognized if the variable interest entity is not a business.
____________________
16
The term noncontrolling iterests is used in this Interpretation with the same meaning as in
Statement 1XX. That Statement defines a noncontrolling interest as “the portion of the equity
(residual interest) in a subsidiary attributable to the owners of the subsidiary other than the parent
and the parent’s affiliates.”
16a
c.
Statement 141(R) provides guidance on determining whether an entity is a business.
Paragraph 23:
The primary beneficiary of a variable interest entity that is a business shall
provide the disclosures required by Statement 141(R). The primary beneficiary
shall disclose the amount of gain or loss recognized on the initial consolidation of
a variable interest entity that is not a business. In addition to disclosures required
by other standards, the primary beneficiary of a variable interest entity shall
disclose the following (unless the primary beneficiary also holds a majority voting
interest):17
a. The nature, purpose, size, and activities of the variable interest entity
b. The carrying amount and classification of consolidated assets that are
collateral for the variable interest entity’s obligations
c. Lack of recourse if creditors (or beneficial interest holders) of a consolidated
variable interest entity have no recourse to the general credit of the primary
beneficiary.
d.
Appendix C, which provides a definition of a business, is deleted.
177
D30. FASB Technical Bulletin No. 84-1, Accounting for Stock Issued to Acquire the
Results of a Research and Development Arrangement, is amended as follows:
a.
Paragraph 6, as amended by Statement 141:
When an enterprise that is or was a party to a research and development
arrangement acquires the results of the research and development arrangement in
exchange for cash, common stock of the enterprise, or other consideration, the
transaction is a purchase of tangible or intangible assets resulting from the
activities of the research and development arrangement. Although such a
transaction is not a business combination, paragraphs C3–C8 of FASB Statement
No. 141 (revised 200X), Business Combinationsparagraphs 4–6 of FASB
Statement No. 141, Business Combinations, describes the general principles that
apply in recording the purchase of such an asset.
AMENDMENTS MADE BY STATEMENTS 141 AND 147 AND BY FASB
STAFF POSITION FAS 141-1 AND FAS 142-1 CARRIED FORWARD IN THIS
STATEMENT
D31. This Statement supersedes the following pronouncements:
a.
b.
c.
d.
e.
APB Opinion No. 16, Business Combinations
All of the AICPA Accounting Interpretations of Opinion 16
FASB Statement No. 10, Extension of “Grandfather” Provisions for Business
Combinations
FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises
FASB Statement No. 79, Elimination of Certain Disclosures for Business
Combinations by Nonpublic Enterprises.
D32. APB Opinion No. 28, Interim Financial Reporting, is amended as follows:
a.
Paragraph 21, as amended by Statement 144:
Extraordinary items should be disclosed separately and included in the
determination of net income for the interim period in which they occur. In
determining materiality, extraordinary items should be related to the estimated
income for the full fiscal year. Effects of disposals of a component of an entity
and unusual and infrequently occurring transactions and events that are material
with respect to the operating results of the interim period but that are not
designated as extraordinary items in the interim statements should be reported
separately. In addition, matters such as unusual seasonal results, and business
combinationsbusiness combinations treated for accounting purposes as poolings
of interests and acquisition of a significant business in a purchase should be
disclosed to provide information needed for a proper understanding of interim
financial reports. Extraordinary items, gains or losses from disposal of a
178
component of an entity, and unusual or infrequently occurring items should not be
pro-rated over the balance of the fiscal year.
D33. APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, is amended as follows:
a.
Paragraph 7:
This Opinion supersedes paragraphs 20 through 23, paragraph 29 insofar as it
refers to examples of financial statements, and Exhibits A through D of APB
Opinion No. 9. It also amends paragraph 13 and footnote 8 of APB Opinion No.
15, Earnings per Share, insofar as this Opinion prescribes the presentation and
computation of earnings per share of continuing and discontinued operations.
This Opinion does not modify or amend the conclusions of FASB Statement No.
109, Accounting for Income Taxes, paragraph 37, or of APB Opinion No. 16,
Business Combinations, paragraph 60, with respect to the classification of the
effects of certain events and transactions as extraordinary items. Prior APB
Opinions that refer to the superseded paragraphs noted above are modified to
insert a cross reference to this Opinion (footnote reference omitted).
D34. FASB Statement No. 45, Accounting for Franchise Fee Revenue, is amended as
follows:
a.
Paragraph 19:
A transaction in which a franchisor acquires the business of an operating
franchisee ordinarily shall be accounted for as a business combination in
accordance with FASB Statement No. 141 (revised 200X), Business
CombinationsAPB Opinion No. 16, Business Combinations, assuming no
relationship existed at the time of the franchise sale to preclude revenue
recognition (paragraphs 10 and 11). If the transaction is accounted for as a
pooling of interests, the financial statements of the two entities are retroactively
combined and the original franchise sales transaction as well as any product sales
shall be eliminated in the combined financial statements. If the transaction is
accounted for as a purchase, the financial statements of the two entities are not
retroactively combined and revenue shall not be adjusted. If such a transaction is,
in substance, a cancellation of an original franchise sale, the transaction shall be
accounted for in accordance with paragraph 18.
D35. FASB Statement No. 87, Employers’ Accounting for Pensions, is amended as
follows:
a.
The first sentence of Illustration 7—Accounting for a Business Combination—in
paragraph 261:
179
The following example illustrates how the liability (or asset) recognized by the
acquiring firm at the date of a business combination accounted for as a purchase
would be reduced in years subsequent to the date of the business combination.
D36. FASB Statement No. 95, Statement of Cash Flows, is amended as follows:
a.
Paragraph 134(g):
Company M purchased all of the capital stock of Company S for $950 in a
business combination. The acquisition was recorded under the purchase method
of accounting. The fair values of Company S’s assets and liabilities at the date of
acquisition are presented as follows: [The rest of the paragraph is omitted.]
D37. FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions, is amended as follows:
a.
Paragraph 86:
When an employer is acquired in a business combination that is accounted for by
the purchase method under Opinion 16 and that employer sponsors a singleemployer defined benefit postretirement plan, the assignment of the purchase
price to individual assets acquired and liabilities assumed shall include a liability
for the accumulated postretirement benefit obligation in excess of the fair value of
the plan assets or an asset for the fair value of the plan assets in excess of the
accumulated postretirement benefit obligation. The accumulated postretirement
benefit obligation assumed shall be measured based on the benefits attributed by
the acquired entity to employee service prior to the date the business combination
is consummated, adjusted to reflect (a) any changes in assumptions based on the
purchaser’s assessment of relevant future events (as discussed in paragraphs 23–
42) and (b) the terms of the substantive plan (as discussed in paragraphs 23–28) to
be provided by the purchaser to the extent they differ from the terms of the
acquired entity’s substantive plan.
b.
Paragraph 444:
On January 1, 1991, Company F acquires Company G and accounts for the
business combination as a purchase pursuant to APB Opinion No. 16, Business
Combinationsin a business combination. Company G has a postretirement health
care plan that Company F agrees to combine with its own plan. Company F
assumes the accumulated postretirement benefit obligation of Company G’s plan
as part of the acquisition agreement. However, at the date the business
combination is consummated, no liability is recognized for the postretirement
benefit obligation assumed.
180
D38. FASB Statement No. 109, Accounting for Income Taxes, is amended as follows:
a.
Paragraph 11(h):
Business combinations accounted for by the purchase method. There may be
differences between the assigned values and the tax bases of the assets and
liabilities recognized in a business combination accounted for as a purchase under
APB Opinion No. 16, Business Combinations. Those differences will result in
taxable or deductible amounts when the reported amounts of the assets and
liabilities are recovered and settled, respectively.
b.
Paragraph 13:
This Statement refers collectively to the types of differences illustrated by those
eight examples and to the ones described in paragraph 15 as temporary
differences. Temporary differences that will result in taxable amounts in future
years when the related asset or liability is recovered or settled are often referred to
in this Statement as taxable temporary differences (examples (a), (d), and (e) in
paragraph 11 are taxable temporary differences). Likewise, temporary differences
that will result in deductible amounts in future years are often referred to as
deductible temporary differences (examples (b), (c), (f), and (g) in paragraph 11
are deductible temporary differences). Business combinations accounted for by
the purchase method (example (h)) may give rise to both taxable and deductible
temporary differences.
D39. FASB Statement No. 128, Earnings per Share, is amended as follows:
a.
Paragraph 59:
When common shares are issued to acquire a business in a transaction accounted
for as a purchase business combination, the computations of earnings per share
shall recognize the existence of the new shares only from the acquisition date.
When a business combination is accounted for as a pooling of interests, EPS
computations shall be based on the aggregate of the weighted-average outstanding
shares of the constituent businesses, adjusted to equivalent shares of the surviving
business for all periods presented. In reorganizations, EPS computations shall be
based on analysis of the particular transaction and the provisions of this
Statement.
D40. FASB Statement No. 142, Goodwill and Other Intangible Assets, is amended as
follows:
a.
Paragraph 11(b):
The expected useful life of another asset or a group of assets to which the useful
life of the intangible asset may relate (such as mineral rights to depleting assets)
181
b.
Paragraph D11, which amended Interpretation 9, is deleted.
D41. FASB Statement No. 144, Accounting for the Impairment or Disposal of LongLived Assets, is amended as follows:
a.
Paragraph 5, as amended by Statement 145:
This Statement does not apply to (a) goodwill, (b) intangible assets not being
amortized that are to be held and used, (c) long term customer relationships of a
financial institution, such as core deposit intangibles, credit cardholder
intangibles, and servicing assets, (d) financial instruments, including investments
in equity securities accounted for under the cost or equity method, (e) deferred
policy acquisition costs, (f) deferred tax assets, and (g) unproved oil and gas
properties that are being accounted for using the successful-efforts method of
accounting. This Statement also does not apply to long-lived assets for which the
accounting is prescribed by:
•
•
•
•
b.
FASB Statement No. 50, Financial Reporting in the Record and Music
Industry
FASB Statement No. 63, Financial Reporting by Broadcasters
FASB Statement No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed
FASB Statement No. 90, Regulated Enterprises—Accounting for
Abandonments and Disallowances of Plant Costs.
Appendix D (Paragraph D1):
Existing
Pronouncement
FASB
Statement No. 72
Title
Accounting for Certain Acquisitions
of Banking or Thrift Institutions
Apply
Requirement
in This
Statement
Apply
Existing
Requirement
X
Existing
Requirement
Paragraph
Number
4
D42. FASB Interpretation No. 21, Accounting for Leases in a Business Combination, is
amended as follows:
a.
Paragraph 13:
If in connection with a business combination, whether accounted for by the
purchase method or by the pooling of interests method, the provisions of a lease
are modified in a way that would require the revised agreement to be considered a
new agreement under paragraph 9 of FASB Statement No. 13, the new lease shall
be classified by the combined enterprise according to the criteria set forth in
Statement No. 13, based on conditions as of the date of the modification of the
lease.
182
b.
Paragraph 14 and the heading preceding it:
Application of FASB Statement No. 13 in a Pooling of Interests
In a business combination that is accounted for by the pooling of interests method,
each lease shall retain its previous classification under FASB Statement No. 13
unless the provisions of the lease are modified as indicated in paragraph 13 above
and shall be accounted for by the combined enterprise in the same manner that it
would have been classified and accounted for by the combining enterprise.
c.
Paragraph 19 and the heading preceding it:
APPENDIX A: ILLUSTRATION OF THE ACCOUNTING FOR A
LEVERAGED LEASE IN A BUSINESSPURCHASE COMBINATION
This appendix illustrates one way that a lessor’s investment in a leveraged lease
might be valued by the acquiring enterprise in a business combination accounted
for by the purchase method and the subsequent accounting for the investment in
accordance with FASB Statement No. 13. The elements of accounting and
reporting illustrated for this example are as follows: [The rest of the paragraph is
omitted.]
183
Appendix E
IMPACT ON RELATED AUTHORITATIVE LITERATURE
E1. This appendix addresses the impact of this proposed Statement on authoritative accounting
literature included in categories (b), (c), and (d) in the GAAP hierarchy discussed in AICPA
Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. This appendix also addresses the relationship between
this proposed pronouncement and related SEC literature. Appendix D, Amendments to Existing
Pronouncements, addresses any authoritative literature in category (a) of the GAAP hierarchy that
will be amended or superseded by this proposed pronouncement.
EITF Issues
E2. The following table lists EITF Issues and Topics relating to business combinations and
indicates (a) the status of that literature after issuance of this proposed Statement and (b) the impact
of this proposed Statement on that literature (if any) or the reasons that the literature is beyond the
scope of this proposed Statement. (Note: The Status section of the EITF Abstracts will be updated
accordingly upon issuance of the final pronouncement.)
Nullified—
Incorporated
Nullified—
Unnecessary
Resolved
N/A
Status Legend
Guidance provided by the consensus is consistent with provisions in this Statement.
Guidance provided by consensus is changed or deemed unnecessary upon adoption of this
Statement.
Issue is addressed by this Statement (EITF consensus never reached).
Guidance is either outside the scope of this Statement or unaffected by this Statement.
184
EITF
Issue
No.
84-35
Title
Business
Combinations: Sale
of Duplicate
Facilities and
Accrual of
Liabilities
Status
Resolved
84-39
Transfers of
Monetary and
Nonmonetary
Assets among
Individuals and
Entities under
Common Control
Resolved
85-8
Amortization of
Thrift Intangibles
Nullified—
Unnecessary
85-21
Changes of
Ownership
Resulting in a New
Basis of
Accounting
N/A (Status
Update)
Description of Issue
This Issue discusses
whether the costs
associated with closing a
duplicate facility owned
by the acquiree after the
business combination
should result in an
adjustment of the
purchase price and what
types of liabilities should
be accrued in a business
combination. The Task
Force did not reach a
consensus on either of
those issues.
This Issue addresses
whether the corporation
should record the
transferred asset at fair
value or its historical cost
to the individual when an
asset is transferred from
an individual to a
corporation controlled by
that individual. The Task
Force did not reach a
consensus on this Issue.
Addition to Abstracts
Statement 141(R) was issued in XX
200X. Statement 141(R) resolves
this Issue because it provides
guidance on which liabilities,
including liabilities associated with
restructuring or exit activities,
should be included as part of the
business combination accounting.
This Issue addresses
whether unidentifiable
intangible assets acquired
(goodwill) should be
amortized in accordance
with Statement 72 or
Opinion 17. The Task
Force reached a
consensus that goodwill
should be amortized in
accordance with
paragraph 5 of Statement
72.
This Issue addresses (1)
what level of ownership
change in a company
results in a new basis of
accounting, (2) how the
new basis would be
reported, and (3) at what
amount the minority
Statement 141(R) was issued in XX
200X. Statement 141(R)
supersedes Statement 72 and,
therefore, nullifies this consensus.
185
Statement 141(R) was issued in XX
200X. Statement 141(R) carries
forward, without reconsideration,
the guidance in Appendix D of
Statement 141 for transfers of net
assets or exchanges of equity
interests between entities under
common control. That guidance
requires transfers of assets between
entities under common control to be
recorded at their carrying amounts.
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
comprehensively address new basis
issues. Thus, this Issue is outside
the scope of Statement 141(R).
85-41
Accounting for
Savings and Loan
Associations under
FSLIC
Management
Consignment
Program
N/A (Status
Update)
85-42
Amortization of
Goodwill Resulting
from Recording
Time Savings
Deposits at Fair
Values
Nullified—
Unnecessary
86-14
Purchased
Research and
Development
Projects in a
Business
Combination
Resolved
interest would be
reported. The Task Force
did not reach a consensus
on these issues.
This Issue addresses the
appropriate basis of
accounting for a newly
chartered institution on
the date of its creation
and on an ongoing basis.
The Task Force reached a
consensus that on the date
of creation, transactions
in the scope of this Issue
are not business
combinations but are
similar transactions that
warrant a revaluation of
assets and liabilities
consistent with a business
combination.
This Issue addresses the
appropriate period and
method for amortizing
unidentifiable intangible
assets recognized in
accordance with
Statement 72. The Task
Force reached a
consensus that
unidentifiable intangible
assets should be
amortized in accordance
with paragraph 5 of
Statement 72. (Statement
147 removed financial
institution acquisitions
from the scope of
Statement 72.)
This Issue addresses
whether in a business
combination, incomplete
research and development
projects of the acquired
company should be
allocated a portion of the
purchase price, and, if so,
whether that amount
should be capitalized or
written off. Although the
Task Force did not reach
a consensus on this Issue,
the Task Force Chairman
186
Statement 141(R), which
supersedes Statement 72, was
issued in XX 200X. Statement
141(R) does not affect this
consensus. However, the
measurement guidance in
paragraphs 37–39 of Statement 141
(which was carried forward from
paragraphs 87–89 of Opinion 16) is
replaced by Statement 141(R).
Statement 141(R) was issued in XX
200X. Statement 141(R)
supersedes Statement 72 and,
therefore, nullifies this consensus.
Statement 141(R) was issued in XX
200X. Statement 141(R) nullifies
Interpretation 4 and resolves this
Issue because it requires that inprocess research and development
(IPR&D) acquired in a business
combination be measured and
recognized in the consolidated
financial statements at fair value.
Future research and development
expenditures related to those
acquired assets that are incurred
after the date of acquisition will
continue to be subject to the
87-12
Foreign Debt-forEquity Swaps
N/A
(Status
Update)
87-21
Change of
Accounting Basis
in Master Limited
Partnership
Transactions
First Issue—
N/A
(Status
Update)
Second
Issue—
Nullified—
Incorporated
88-16
Basis in Leveraged
Buyout
Transactions
N/A
(Status
Update)
explained that the
accounting for research
and development projects
purchased in a business
combination is contained
in Interpretation 4.
This Issue addresses how
a U.S. company should
account for certain
foreign debt for equity
swaps. The Task Force
reached a consensus that
the excess of the proceeds
of the arrangement over
the cost of the debt
should first reduce longlived assets and then be
reported as negative
goodwill. The Task
Force concluded that
Statement 141 does not
affect this consensus.
The first issue addresses
when a new basis of
accounting should be
recorded for the assets
and liabilities of a master
limited partnership
(MLP). The Task Force
reached a consensus on
the first issue that a new
basis of accounting is not
appropriate in certain
circumstances.
The second issue
addresses how an MLP
should account for
transaction costs in a rollup. The Task Force
reached a consensus on
the second issue that the
MLP should expense
transaction costs in a rollup.
The Task Force
concluded that leveraged
buyout (LBO)
transactions within the
scope of this Issue are not
business combinations,
but are similar
187
guidance contained in Statement 2.
After the acquisition date, acquired
IPR&D assets should be classified
as indefinite-lived.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect the consensus in the Issue.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
comprehensively address new basis
issues.
Statement 141(R) requires that all
transaction costs in a business
combination be expensed, which is
consistent with the Task Force’s
consensus.
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
comprehensively address these
issues.
88-19
89-19
FSLIC-Assisted
Acquisitions of
Thrifts
Accounting for a
Change in
Goodwill
Amortization for
Business
Combinations
Initiated Prior to
the Effective Date
of FASB Statement
No. 72
Issue 1—N/A
(Status
Update)
transactions that should
analogize to Opinion 16.
Issue 1 addresses how an
acquirer should account
for a tax-sharing
arrangement with the
Federal Savings and Loan
Insurance Corporation
(FSLIC) in which the
FSLIC is entitled to share
in a specified percentage
of certain income tax
benefits that are realized
by the Thrift.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
address the accounting for income
taxes. Income taxes will continue to
be accounted for in accordance with
Statement 109. However, the Status
section of this Issue refers to
paragraph 30 of Statement 109,
which is amended by Statement
141(R).
Issue 2—
Nullified—
Unnecessary
Issue 2 addresses how an
acquirer should account
for assistance from the
FSLIC in the form of
yield maintenance. The
Task Force reached a
consensus that relies on
Statement 72.
Statement 141(R) supersedes
Statement 72 and also provides
guidance for accounting for assets
or liabilities, including regulatory
assistance, acquired as part of the
business combination.
Issue 3—
Nullified—
Unnecessary
Issue 3 addresses what
interest rate should be
used by the acquirer to
determine the fair value
of assets covered by yield
maintenance assistance
when allocating the
purchase price. The Task
Force reached a
consensus that there is a
rebuttable presumption
that the stated interest
rate in the agreement
should be considered a
market rate for purposes
of determining the fair
value of the assets
acquired.
Statement 141(R) nullifies the
consensus reached by the Task
Force because it requires assets
acquired and liabilities assumed to
be recognized at fair value, with
limited exceptions. Fair value first
relies on market interest rates rather
than stated rates.
Nullified—
Unnecessary
This Issue addresses
whether an enterprise can
adopt the provisions of
Statement 72 for goodwill
that arose in a business
combination that
occurred prior to the
effective date of
Statement 72.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) also
supersedes Statement 72 and,
therefore, nullifies this consensus.
188
90-5
Exchanges of
Ownership
Interests between
Entities under
Common Control
Issue 1—N/A
(Status
Update)
Issue 1 addresses
transfers of net assets
between entities under
common control.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Transactions between entities
under common control are outside
the scope of Statement 141(R).
Accordingly, the consensus reached
in this Issue continues to apply to
transactions completed after the
effective date of Statement 141(R).
90-12
Allocating Basis to
Individual Assets
and Liabilities for
Transactions within
the Scope of Issue
No. 88-16
Nullified—
Unnecessary
This Issue addresses how
NEWCO’s investment in
OLDCO should be
allocated to individual
assets and liabilities of
OLDCO in LBO
transactions within the
scope of Issue 88-16 in
which a portion of
NEWCO’s investment in
OLDCO is valued at
predecessor basis. The
consensus in Issue 90-12
is that NEWCO’s basis in
OLDCO should be
allocated to individual
assets and liabilities in a
manner similar to a step
acquisition (that is, the
partial purchase method).
Statement 141(R) was issued in XX
200X. Statement 141(R) changes
the accounting for step acquisitions
and eliminates the partial purchase
method. Statement 141(R) requires
that in a step acquisition, all assets
acquired and liabilities assumed
should be recorded at full fair value.
When there is a change in control,
there is no carryover of predecessor
basis (unless the consideration
exchanged includes assets,
liabilities, or both that do not leave
the controlled group after the
acquisition).
90-13
Accounting for
Simultaneous
Common Control
Mergers
Issue 1—N/A
(Status
Update)
The Task Force reached a
consensus on Issue 1 that
when the transfer of a
subsidiary to a target is
negotiated in conjunction
with a parent obtaining
control of the target, the
two steps (obtaining
control and the transfer)
cannot be separated and,
therefore, should be
viewed as one
transaction.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect this consensus.
Issue 2(a)—
Nullified—
Unnecessary
For Issue 2(a), the Task
Force reached a
consensus that the
transaction should be
accounted for by the
parent as a partial sale of
the subsidiary (to the
minority shareholders of
Statement 141(R) nullifies this
consensus because it requires the
assets acquired and liabilities
assumed to be recognized at fair
value, with limited exceptions.
However, if the consideration
exchanged in the form of assets,
liabilities, or a business does not
189
91-5
Nonmonetary
Exchange of CostMethod
Investments
the target) and a partial
acquisition of the target.
Accordingly, a gain or
loss would be recognized
by the parent on the
portion of the subsidiary
sold.
leave the consolidated group after
the acquisition, the acquirer
eliminates any gains or losses on
those transferred assets or liabilities
in the consolidated financial
statements.
Issue 2(b)—
Nullified—
Unnecessary
For Issue 2(b), the Task
Force reached a
consensus that in
determining the values
assigned to the target’s
and the subsidiary’s
assets and liabilities and
the minority interest for
purposes of the parent’s
consolidated financial
statements, the parent
should step up the
target’s assets and
liabilities to the extent
acquired by the parent
and should step up the
subsidiary’s assets and
liabilities to the extent the
subsidiary was sold.
Statement 141(R) nullifies this
consensus because it requires the
assets acquired and liabilities
assumed to be recognized at fair
value, with limited exceptions.
However, if the consideration
exchanged in the form of assets,
liabilities, or a business does not
leave the consolidated group after
the acquisition, the acquirer
eliminates any gains or losses on
those transferred assets or liabilities
in the consolidated financial
statements.
Issue 2(c)—
Nullified—
Unnecessary
For Issue 2(c), the Task
Force reached a
consensus that the
transaction should be
accounted for in the
target’s separate financial
statements as a reverse
acquisition of the target
by the subsidiary. In this
situation, the target’s
separate financial
statements would reflect
its assets and liabilities at
fair value to the extent
acquired. However, the
subsidiary’s assets and
liabilities should not be
revalued.
This Issue addresses how
an investor that carries its
investment at cost would
account for that
investment if the entity in
which the investment is
held is the acquirer or the
Statement 141(R) nullifies this
consensus because it requires the
assets acquired and liabilities
assumed to be recognized at fair
value, with limited exceptions, not
only fair value to the extent
acquired. However, if the
consideration exchanged in the
form of assets, liabilities, or a
business does not leave the
consolidated group after the
acquisition, the acquirer eliminates
any gains or losses on those
transferred assets or liabilities in the
consolidated financial statements.
N/A (Status
Update)
190
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect the consensus reached by the
Task Force. However, Statement
141(R) does provide new guidance
for identifying the acquirer in a
92-9
Accounting for the
Present Value of
Future Profits
Resulting from the
Acquisition of a
Life Insurance
Company
N/A (Status
Update)
93-7
Uncertainties
Related to Income
Taxes in a Purchase
Business
Combination
N/A (Status
Update)
acquiree in a business
combination. This Issue
refers to the guidance in
Opinion 16 for
identifying the acquiring
company.
This Issue addresses the
business combination and
subsequent accounting
for the present value of
future profits (PVP),
representing the present
value of estimated net
cash flows embedded in
the existing contracts
acquired. The PVP may
relate to traditional life
insurance contracts
covered by Statement 60
or other long-duration
contracts covered by
Statement 97.
business combination.
Statement 141(R) was issued in XX
200X. Statement 141(R) requires
that identifiable assets acquired and
liabilities assumed in a business
combination be measured at fair
value and recognized separately
from goodwill. Statement 141(R)
does not affect the Task Force
consensus on subsequent
accounting for the PVP. However,
Statement 141(R) amends
Statement 60, to require an
expanded presentation that splits the
fair value of acquired insurance
contracts into two components (1) a
liability measured in accordance
with the insurer’s accounting
policies for insurance contracts that
it issues and (2) an intangible asset,
representing the fair value of the
contractual rights and obligations
acquired, to the extent that the
liability does not reflect that fair
value.
Statement 141(R), which replaces
The issues are whether
Statement 141, was issued in XX
Statement 38 is
applicable to any income 200X. Statement 141(R) does not
tax uncertainties that arise affect the consensus reached by the
in a business combination Task Force that income tax
uncertainties should be accounted
and, if not, how income
for in accordance with Statement
tax uncertainties should
109, nor does Statement 141(R)
be accounted for in
change the guidance contained in
accordance with
Question 17 of the Special Report
Statement 109.
on Statement 109. However, this
Statement amends the guidance for
the subsequent recognition of
deferred tax benefits acquired in a
business combination in paragraph
30 of Statement 109.
(Note: The Exposure Draft of
FASB Interpretation No. XX,
Accounting for Uncertain Tax
Positions, addresses the impact of
that proposed Interpretation on
Issue 93-7 and Question 17 of the
Special Report on Statement 109.)
191
95-3
Recognition of
Liabilities in
Connection with a
Purchase Business
Combination
Nullified—
Unnecessary
This Issue addresses what
type of direct, integration,
or exit costs should be
accrued as liabilities in a
business combination.
The Task Force reached a
consensus that costs
expected to be incurred
by the acquiring entity
pursuant to its plan to
(1) exit an activity of an
acquired entity,
(2) involuntarily
terminate employees of
an acquired entity, or
(3) relocate employees of
an acquired entity should
be recognized as assumed
liabilities if certain
conditions are met.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) nullifies
this Issue because it provides
guidance on which liabilities,
including liabilities associated with
restructuring or exit activities,
should be included as part of the
business combination accounting.
95-8
Accounting for
Contingent
Consideration Paid
to the Shareholders
of an Acquired
Enterprise in a
Purchase Business
Combination
Nullified—
Incorporated
Statement 141(R) was issued in XX
200X. Statement 141(R)
incorporates this guidance and,
therefore, this Issue is nullified.
96-5
Recognition of
Liabilities for
Contractual
Termination
Benefits or
Changing Benefit
Plan Assumptions
in Anticipation of a
Business
Combination
N/A (Status
Update)
This Issue addresses the
criteria that should be
used to determine
whether contingent
consideration based on
earnings or other
performance measures
should be accounted for
as an adjustment of the
purchase price or as
compensation. The Task
Force reached a
consensus that the
determination is a matter
of judgment that depends
upon the relevant facts
and circumstances and
provided some indicators
for making the
determination.
This Issue addresses
whether a liability for
termination benefits and
curtailment losses under
employee benefit plans
that will be triggered by
the consummation of the
business combination
should be recognized
when it is probable that
the business combination
192
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect the consensus reached by the
Task Force.
will be consummated or
when the business
combination is
consummated. The Task
Force reached a
consensus that those
liabilities should be
recognized when the
business combination is
consummated.
96-7
Accounting for
Deferred Taxes on
In-Process
Research and
Development
Activities Acquired
in a Purchase
Business
Combination
Partially
Nullified—
Unnecessary
97-2
Application of
FASB Statement
No. 94 and APB
Opinion No. 16 to
Physician Practice
Management
Entities and Certain
Other Entities with
Contractual
Management
Arrangements
Issues 2 and
4—N/A
(Status
Update)
This Issue addresses
whether a deferred tax
liability should be
recognized at the
consummation date for
the initial difference
before the write-off of
IPR&D between the
amounts assigned for
financial reporting
purposes and its
underlying tax basis. The
Task Force reached a
consensus that the writeoff occurs prior to the
measurement of deferred
taxes in a business
combination.
Issue 2 addresses whether
there are circumstances in
which a transaction
between a physician
practice management
(PPM) and a physician
practice in which the
PPM executes a
management agreement
with the physician
practice should be
considered a business
combination. Issue 4
addresses the common
types of intangible assets
that should be considered
if the transaction is
accounted for as a
business combination.
The Task Force reached
the conclusion that Issue
2 is a business
combination. The Task
193
Statement 141(R) was issued in XX
200X. Statement 141(R) nullifies
this consensus as it relates to
IPR&D acquired in a business
combination. Statement 141(R)
nullifies Interpretation 4 and
requires that assets acquired in a
business combination to be used in
a particular research and
development activity, including
those that may have no alternative
future use, be recognized and
measured at the acquisition date at
fair value. However, this Issue will
continue to apply to IPR&D assets
acquired outside a business
combination.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
change the consensuses reached in
Issue 2; however, entities are
required to apply the requirements
of Statement 141(R) in accounting
for a business combination.
97-8
Accounting for
Contingent
Consideration
Issued in a
Purchase Business
Combination
Nullified—
Unnecessary
97-15
Accounting for
Contingency
Arrangements
Based on Security
Prices in a
Purchase Business
Combination
Issue 1—
Nullified—
Unnecessary
Issue 2—
Nullified—
Unnecessary
98-1
Valuation of Debt
Assumed in a
Purchase Business
Combination
Nullified—
Incorporated
Force did not address
Issue 4.
The consensus reached in
this Issue is that the
security or separate
financial instrument
should be recorded by the
issuer at fair value at the
date of acquisition if the
instrument is publicly
traded or indexed to a
security that is publicly
traded.
Issue 1 addresses how
contingent consideration
based on future security
prices should be recorded
when the arrangement
guarantees a future
security price that is
below the price of such
securities on the
acquisition date. The
Task Force reached a
consensus that those
arrangements should be
recorded at fair value.
Issue 2 addresses how
contingent consideration
based on a future security
price should be recorded
when the arrangement
does not result in a
guarantee of the
minimum value of the
total consideration. The
Task Force reached a
consensus that the cost of
the acquisition should be
recorded at an amount
equal to the maximum
number of shares that
could be issued
multiplied by the fair
value per share.
The Issue concerns
whether debt assumed in
a business combination
should be assigned an
amount equal to its fair
value or some other value
determined from the
present value of
194
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) nullifies
this consensus because it requires
that all contingent consideration in
a business combination be
measured and recognized at fair
value on the acquisition date.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) nullifies
this consensus because it requires
that all contingent consideration in
a business combination be
measured and recognized at fair
value on the acquisition date.
Statement 141(R) nullifies this
consensus because it requires that
all contingent consideration in a
business combination be measured
and recognized at fair value on the
acquisition date.
Statement 141(R) was issued in XX
200X. Statement 141(R) requires
that the amount assigned to debt
assumed in a business combination
be its fair value. Since Statement
141(R) incorporates this guidance,
this Issue has been nullified.
contractual cash flows.
The Task Force reached a
consensus that the
amount assigned to debt
assumed in a business
combination should be its
fair value.
This Issue provides a
definition and guidance
for determining whether a
group of net assets
acquired constitutes a
business.
98-3
Determining
Whether a
Nonmonetary
Transaction
Involves Receipt of
Productive Assets
or of a Business
Nullified—
Unnecessary
98-11
Accounting for
Acquired
Temporary
Differences in
Certain Purchase
Transactions That
Are Not Accounted
for as Business
Combinations
Accounting for an
Accelerated Share
Repurchase
Program
N/A
(Status
Update)
The Task Force’s
consensus is that
subsequent accounting
for an acquired valuation
allowance should be in
accordance with
paragraph 30 of
Statement 109.
Partially
Nullified—
Unnecessary
Determination of
the Measurement
Date for the Market
Price of Acquirer
Securities Issued in
a Purchase
Business
Combination
Nullified—
Unnecessary
This Issue addresses how
an entity should account
for an accelerated share
repurchase program, but
also addresses the impact
of an accelerated share
repurchase program on an
entity’s ability to account
for a business
combination as a pooling
of interests. The Status
section of the Issue refers
to Statement 141, which
prohibits the use of the
pooling-of-interests
method of accounting for
a business combination.
The Task Force reached a
consensus that the value
of the acquirer’s
marketable equity
securities issued to effect
a purchase business
combination should be
determined based on the
market price of the
securities over a
reasonable period of time
before and after the terms
99-7
99-12
195
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) nullifies
this consensus because it provides a
new definition and guidance for
determining whether an acquired
group of net assets constitutes a
business.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect the consensuses reached by
the Task Force. However,
Statement 141(R) amends the
guidance in paragraph 30 of
Statement 109.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) prohibits
the pooling-of-interests method of
accounting for business
combinations.
Statement 141(R) was issued in XX
200X. Statement 141(R) nullifies
this consensus because it requires
that all consideration transferred in
a business combination, including
equity securities issued as
consideration, be measured at their
fair value on the acquisition date.
99-15
Accounting for
Decreases in
Deferred Tax Asset
Valuation
Allowances
Established in a
Purchase Business
Combination As a
Result of a Change
in Tax Regulations
N/A
(Status
Update)
00-19
Accounting for
Derivative
Financial
Instruments
Indexed to, and
Potentially Settled
in, a Company’s
Own Stock
N/A
(Status
Update)
of the acquisition are
agreed to and announced.
The Issue relates to
whether the effect of a
change in tax law that
results in a decrease of a
valuation allowance that
initially was recorded in
the allocation of the
purchase price in a
purchase business
combination should be
included in income from
continuing operations
pursuant to paragraph 27
of Statement 109 or as an
adjustment to the
purchase price allocation
pursuant to paragraph 30.
The Task Force reached a
consensus that the effect
of a change in tax law
should be accounted for
in accordance with
paragraph 27.
This Issue applies to
security price guarantees
or other financial
instruments indexed to, or
otherwise based on, the
price of the company’s
stock that are issued in
connection with a
purchase business
combination and that are
accounted for as
contingent consideration
only if those instruments
meet the criteria in Issue
97-8 for recording as part
of the cost of the business
acquired in a purchase
business combination.
This Issue addresses how
freestanding contracts
that are indexed to, and
potentially settled in, a
company’s own stock
should be classified and
measured by the
company. The consensus
reached requires all
contracts to be initially
196
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
amend or change paragraph 27 of
Statement 109 (but does amend
paragraph 30). Therefore, Statement
141(R) does not affect the
consensus reached in this Issue.
Statement 141(R) was issued in XX
200X. Consistent with this
consensus, Statement 141(R)
requires that contingent
consideration issued in a business
combination be measured at fair
value and recognized at the
acquisition date. Statement 141(R)
does not affect classification
required by this Issue. Under
Statement 141(R), contingent
consideration is classified in the
consolidated financial statements as
a liability or equity based on other
relevant generally accepted
accounted principles.
measured at fair value
and subsequently
accounted for based on
their classification.
01-2
Interpretations of
APB Opinion No.
29
Paragraphs
4–9
Nullified—
Unnecessary
Paragraphs 4–9 address
business combination
issues that are addressed
in or changed as a result
of Statement 141(R).
Statement 141(R) was issued in XX
200X. Statement 141(R) nullifies
the discussion in paragraphs 4–9.
Issue 11—
N/A (Status
Update)
Issue 11 addresses
spinoffs or other
distributions of loans
receivable to shareholders
and refers to the
definition of a business in
Issue 98-3.
Issue 1 addresses whether
deferred revenue of an
acquired entity represents
a liability that should be
recorded in the purchase
accounting and
measurement of that
liability. The Task Force
reached a consensus that
a liability related to
deferred revenue should
only be recognized if it
represents a legal
obligation assumed by the
acquiring entity.
This Issue addresses how
to determine whether
separate entities are under
common control in the
context of Statement 141.
The Task Force did not
reach a consensus on this
Issue.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect the consensus reached in this
Issue. However, Statement 141(R)
nullifies Issue 98-3.
01-3
Accounting in a
Business
Combination for
Deferred Revenue
of an Acquiree
Issue 1—
Nullified—
Unnecessary
02-5
Definition of
“Common Control”
in Relation to
FASB Statement
No. 141
N/A (Status
Update)
02-7
Unit of Accounting
for Testing
Impairment of
Indefinite-Lived
Intangible Assets
N/A (Status
Update)
The Issue is what unit of
account should be used
for purposes of testing
indefinite-lived intangible
assets for impairment.
197
Statement 141(R) was issued in XX
200X. Statement 141(R) nullifies
the consensus reached in Issue 1
and requires that all assets acquired
and liabilities assumed in a business
combination be recognized at fair
value as of the acquisition date,
with limited exceptions.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Transfers of net assets or
exchanges of equity interests
between entities under common
control are excluded from the scope
of Statement 141(R). Statement
141(R) carries forward, without
reconsideration, the guidance in
Appendix D of Statement 141 for
transfers of net assets or exchanges
of equity interests between entities
under common control.
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the Task Force’s consensus
on this Issue. Statement 141(R)
requires the guidance contained in
this Issue be used to determine the
unit of accounting for acquired
intangible assets at the date of the
initial recognition.
02-11
Accounting for
Reverse Spinoffs
N/A (Status
Update)
This Issue addresses
when reverse spinoff
accounting is appropriate.
Footnote 1 to paragraph 4
refers to Issue 01-2 and to
the definition of a
business in Issue 98-3.
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the consensus reached in this
Issue. However, Statement 141(R)
nullifies Issue 98-3 and parts of
Issue 01-2.
02-13
Deferred Income
Tax Considerations
in Applying the
Goodwill
Impairment Test in
FASB Statement
No. 142
Issue 3—
N/A (Status
Update)
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) amends
paragraph 30 of Statement 109.
02-17
Recognition of
Customer
Relationship
Intangible Assets
Acquired in a
Business
Combination
Nullified—
Incorporated
This Issue addresses what
income tax bases should
be used to determine the
implied fair value of
goodwill assigned to a
reporting unit. The Task
Force noted that this
determination is made in
the same manner as is
used to determine the
amount of goodwill
recognized in a business
combination. This Issue
also refers to paragraph
30 of Statement 109.
This Issue addresses
customer relationship
intangible assets acquired
in a business
combination.
03-9
Determination of
the Useful Life of
Renewable
Intangible Assets
under FASB
Statement No. 142
N/A (Status
Update)
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
resolve this Issue.
04-1
Accounting for
Preexisting
Relationships
between the Parties
Nullified—
Incorporated
The Task Force did not
reach a consensus on the
application of the
Statement 142 provisions
for determining the useful
life of a renewable
intangible asset. The
Task Force generally
agreed that the Statement
142 provisions were
inconsistent with the
approach for determining
an intangible asset’s fair
value in accordance with
Statement 141.
This Issue addresses the
accounting for
preexisting relationships
between the acquirer and
198
Statement 141(R) was issued in XX
200X. Statement 141(R)
incorporates this guidance. Thus,
this Issue has been nullified.
Statement 141(R) was issued in XX
200X. Statement 141(R)
incorporates the guidance in this
Issue. Thus, this Issue has been
04-2
04-3
to a Business
Combination
Whether Mineral
Rights Are
Tangible or
Intangible Assets
Mining Assets:
Impairment and
Business
Combinations
N/A (Status
Update)
Issue 1(a)—
N/A (Status
Update)
Issue 1(b)—
N/A (Status
Update)
acquiree in a business
combination.
nullified.
The Task Force
reached a consensus
that mineral rights, as
defined by this Issue,
are tangible assets, and,
accordingly, an entity
should account for
mineral rights as
tangible assets. The
Task Force also
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the consensus reached in this
Issue.
concluded that an entity
should report the
aggregate carrying
amount of mineral rights
as a separate component
of property, plant, and
equipment either on the
face of the financial
statements or in the notes
to the financial
statements.
Issue 1(a) addresses
whether value beyond
proven and probable
reserves (VBPP) should
be considered when an
entity allocates the
purchase price of a
business combination to
mining assets. The Task
Force reached a
consensus on this Issue
that an entity should
include VBPP in the
value allocated to mining
assets in a purchase price
allocation to the extent
that a market participant
would include VBPP in
determining the fair value
of the asset.
Issue 1(b) addresses
whether the effects of
anticipated fluctuations in
the future market price of
minerals should be
considered when an entity
allocates the purchase
price of a business
199
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the consensus reached in this
Issue.
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the consensus reached in this
Issue.
D-33
Timing of
Recognition of Tax
Benefits for Prereorganization
Temporary
Differences and
Carryforwards
Partially
Nullified—
Unnecessary
D-54
Accounting by the
Purchaser for a
Seller’s Guarantee
of the Adequacy of
Liabilities for
Losses and Loss
Adjustment
Expenses of an
Insurance
Enterprise
Acquired in a
Purchase Business
Combination
Nullified—
Incorporated
D-87
Determination of
the Measurement
Date for
Consideration
Given by the
Nullified—
Incorporated
combination to mining
assets. The Task Force
reached a consensus on
this Issue that an entity
should include the effects
of anticipated fluctuations
in the future market price
of minerals in
determining the fair value
of mining assets in a
purchase price allocation
in a manner that is
consistent with the
expectations of
marketplace participants.
This announcement
relates to the approach
that should be used to
determine whether
recognized tax benefits
are attributable to pre- or
post-reorganization
carryforwards.
This announcement
addresses the accounting
by a purchaser for reserve
guarantees relating to the
adequacy of liabilities
existing at the acquisition
date of a business
combination for shortduration insurance
contracts on an insurance
enterprise. The FASB
staff concluded that a
purchaser, when
accounting for such
reserve guarantees,
should not apply
paragraphs 22–24 of
Statement 113, which
address retroactive
reinsurance
arrangements. Rather,
they should be accounted
for consistent with other
guarantees in a business
combination.
In this announcement, the
FASB staff concluded
that securities other than
those issued by the
acquirer that are issued as
200
Statement 141(R) was issued in XX
200X. Statement 141(R) amends
paragraph 30 of Statement 109 and
amends the illustration of that
paragraph in paragraph 268 of
Statement 109.
Statement 141(R), which replaces
Statement 141, was issued in XX
200X. Statement 141(R) does not
affect the conclusion reached in this
announcement, but the guidance in
this Issue is incorporated in
Statement 141(R).
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the FASB staff’s response in
this announcement. Statement
141(R) requires that the fair value
D-100
Acquirer in a
Business
Combination When
That Consideration
Is Securities Other
Than Those Issued
by the Acquirer
Clarification of
Paragraph 61(b) of
FASB Statement
No. 141 and
Paragraph 49(b) of
FASB Statement
No. 142
N/A (Status
Update)
D-101
Clarification of
Reporting Unit
Guidance in
Paragraph 30 of
FASB Statement
No. 142
N/A (Status
Update)
D-108
Use of the Residual
Method to Value
Acquired Assets
Other Than
Goodwill
N/A (Status
Update)
consideration in a
business combination
should be measured on
the date the business
combination is
consummated.
of all consideration issued in a
business combination be measured
on the acquisition date.
This announcement
clarifies the guidance in
paragraph 61(b) of
Statement 141 (and
paragraph 49(b) of
Statement 142) related to
a transition provision that
requires intangible assets
that were included in
goodwill to be
reclassified when
Statement 142 was
adopted.
This announcement
addresses what is meant
by discrete financial
information in paragraph
30 of Statement 142. This
Issue refers to the
definition of a business in
Issue 98-3 for
determining whether a
component constitutes a
business.
This announcement
addresses the use of the
residual value method to
determine the fair value
of intangible assets other
than goodwill that are
recognized in accordance
with Statement 141.
Statement 141(R), which replaces
Statements 72, 141, and 147, was
issued in XX 200X. Statement
141(R) carries forward the
transition provision in paragraph
61(b) of Statement 141 and,
therefore, does not affect the FASB
staff’s announcement.
Statement 141(R) was issued in XX
200X. Statement 141(R) does not
affect the guidance in this
announcement. However, Statement
141(R) nullifies Issue 98-3 and
provides a new definition and
guidance for determining whether a
group of net assets acquired
constitutes a business.
Statement 141(R), which replaces
Statement 141, was issued XX
200X. Statement 141(R) carries
forward Statement 141 criteria for
recognizing intangible assets
acquired in a business combination.
E3. The following are EITF Issues and Topics that either were resolved, nullified, or superseded by
Statement 141 but were not deleted because that Statement had a delayed effective date for
combinations involving only mutual entities. This proposed Statement removes that delayed
effective date and thus eliminates the following:
•
•
•
•
EITF 84-22: “Prior Years’ Earnings per Share following a Savings and Loan Association
Conversion and Pooling” [Resolved]
EITF 85-14: “Securities That Can Be Acquired for Cash in a Pooling of Interests” [Nullified]
EITF 86-10: “Pooling with 10 Percent Cash Payout Determined by Lottery” [Nullified]
EITF 86-31: “Reporting the Tax Implications of a Pooling of a Bank and a Savings and Loan
Association” [Nullified]
201
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
EITF 87-15: “Effect of a Standstill Agreement on Pooling-of-Interests Accounting” [Nullified]
EITF 87-16: “Whether the 90 Percent Test for a Pooling of Interests Is Applied Separately to
Each Company or on a Combined Basis” [Nullified]
EITF 87-27: “Poolings of Companies That Do Not Have a Controlling Class of Common Stock”
[Nullified]
EITF 88-26: “Controlling Preferred Stock in a Pooling of Interests” [Nullified]
EITF 88-27: “Effect of Unallocated Shares in an Employee Stock Ownership Plan on
Accounting for Business Combinations” [Nullified]
EITF 90-10: “Accounting for a Business Combination Involving a Majority-Owned Investee of a
Venture Capital Company” [Resolved]
EITF 93-2: “Effect of Acquisition of Employer Shares for/by an Employee Benefit Trust on
Accounting for Business Combinations” [Resolved]
EITF 95-12: “Pooling of Interests with a Common Interest in a Joint Venture” [Nullified]
EITF 96-8: “Accounting for a Business Combination When the Issuing Company Has Targeted
Stock” [Nullified]
EITF 96-23: “The Effects of Financial Instruments Indexed to, and Settled in, a Company’s Own
Stock on Pooling-of-Interests Accounting for a Subsequent Business Combination” [Resolved]
EITF 97-9: “Effect on Pooling-of-Interests Accounting of Certain Contingently Exercisable
Options or Other Equity Instruments” [Nullified]
EITF 99-6: “Impact of Acceleration Provisions in Grants Made between Initiation and
Consummation of a Pooling-of-Interest Business Combination” [Nullified]
EITF 99-18: “Effect on Pooling-of-Interests Accounting of Contracts Indexed to a Company’s
Own Stock” [Resolved]
EITF D-19: “Impact on Pooling-of-Interests Accounting of Treasury Shares Acquired to Satisfy
Conversions in a Leveraged Preferred Stock ESOP” [Nullified]
EITF D-40: “Planned Sale of Securities following a Business Combination Expected to Be
Accounted for as a Pooling of Interests” [Superseded]
EITF D-59: “Payment of a Termination Fee in Connection with a Subsequent Business
Combination That Is Accounted for Using the Pooling-of-Interests Method” [Nullified].
FASB Staff Positions (FSPs), Staff Q&As, and Statement 133 Implementation Issues
E4. The following table lists FSPs, Staff Q&As, and Statement 133 Implementation Issues relating
to business combinations and indicates (a) the status of that literature upon issuance of this proposed
Statement and (b) the impact of this proposed Statement on that literature (if any) or the reasons that
the literature is beyond the scope of this proposed Statement.
Superseded—
Incorporated
Nullified—
Unnecessary
Modified
N/A
Status Legend
Guidance provided by the FSP/Q&A/Issue is consistent with provisions in this Statement.
Guidance provided by FSP/Q&A/Issue is deemed unnecessary upon adoption of this
Statement.
Guidance provided by FSP/Q&A/Issue is modified by this Statement.
Guidance is either outside the scope of this Statement or unaffected by this Statement.
202
FSP/
Q&A/
Issue
No.
Title
A Guide to
Implementation of
Statement 109 on
109
Question Accounting for
Income Taxes:
13
Questions and
Answers
A Guide to
Implementation of
Statement 109 on
109
Question Accounting for
Income Taxes:
14
Questions and
Answers
A Guide to
Implementation of
109
Statement 109 on
Question Accounting for
15
Income Taxes:
Questions and
Answers
A Guide to
Implementation of
Statement 109 on
109
Question Accounting for
Income Taxes:
16
Questions and
Answers
A Guide to
Implementation of
Statement 109 on
109
Question Accounting for
Income Taxes:
17
Questions and
Answers
Effect of
Statement on
FSP/Q&A/
Issue No.
Comments
Nullified—
Unnecessary
This question addresses the subsequent accounting for acquired
tax benefits (through the reversal of a previously established
valuation allowance) in paragraph 30 of Statement 109. This
Statement amends paragraph 30 of Statement 109. Therefore,
this guidance is no longer necessary.
Modified
This question addresses the accounting, after the acquisition
date, for changes in the acquiring enterprise’s valuation
allowance for deferred tax assets. This Statement amends the
requirements for the accounting for changes in the acquirer’s
enterprise’s valuation allowance that result from the business
combination, which is referred to in the second sentence of the
question. However, this Statement would not change the
answer to this question.
Nullified—
Unnecessary
This question addresses the accounting for a deferred tax
liability or asset in a business combination that results in
allocated negative goodwill. This Statement eliminates the
allocation of negative goodwill to other assets acquired.
Therefore, this guidance is no longer necessary.
N/A
This question addresses the recognition of a temporary
difference related to intangible assets. This Statement has no
affect on the accounting for deductible temporary differences
related to those assets.
Modified
This question addresses the appropriate tax basis for the
acquired assets and liabilities assumed in a business
combination. It also addresses the accounting in periods after
the business combination. This Statement amends paragraph
30 of Statement 109. The changes to that paragraph are
consistent with the answer to the question of the appropriate
tax basis. However, this Statement eliminates the reduction of
other noncurrent intangible assets related to an acquisition for
changes that occur after the acquisition date. Therefore, that
part of the answer is no longer applicable.
(Note: The Exposure Draft of FASB Interpretation No. XX,
Accounting for Uncertain Tax Positions, addresses the impact
of that proposed Interpretation on Question 17 of the Special
Report on Statement 109.)
203
FSP/
Q&A/
Issue
No.
Title
A Guide to
Implementation of
Statement 109 on
109
Question Accounting for
17A–C Income Taxes:
Questions and
Answers
A Guide to
Implementation of
Statement 115 on
Accounting for
115
Certain
Question
Investments in
24
Debt and Equity
Securities:
Questions and
Answers
Interaction of
FAS
FASB Statements
141-1
No. 141 and No.
and
142 and EITF
142-1
Issue No. 04-2
Hedging—
General:
Continuing the
E15
Shortcut Method
after Purchase
Business
Combination
Effect of
Statement on
FSP/Q&A/
Issue No.
Comments
N/A
These questions address the transition requirements for
Statement 109 without restating the financial statements for a
business combination that occurred prior to the adoption of
Statement 109. This Statement has no affect on these Statement
109 transition issues.
N/A
Footnote 11 of this question refers to the definition of a
business combination in paragraph 9 of Statement 141. This
Statement provides a new definition of a business combination.
Superseded—
Incorporated
Appendix A of this Statement incorporates the guidance in FSP
141-1. Also, the amendment that removes the parenthetical that
reads “such as mineral rights to depleting assets” from
paragraph 11 of Statement 142 is carried forward in Appendix
D of this Statement.
Modified
This Statement uses the term acquisition method, rather than
the term purchase method used in Statement 141, to describe
the method of accounting for a business combination. This
Statement has no effect on the Issue’s response that there is no
“continuation” of the short-cut method of accounting that had
been applied by the acquired entity.
AICPA Literature
E5. The following table lists guidance issued by the AICPA or its staff that may be affected by the
tentative decisions made by the Board in this proposed Statement. This information is presented for
informational purposes only. Decisions about whether to amend AICPA guidance are made by the
FASB in conjunction with the AICPA prior to issuing the final pronouncement. (Note: The AICPA
will physically make the changes until we have an FASB codification.)
AICPA
Literature
Title
SOP 78-9
Accounting for
Investments in Real
Estate Ventures
SOP 90-7
Financial Reporting
Analysis
This SOP addresses the accounting for differences that arise between the
carrying amount of an investment in a real estate venture and the investor’s
equity in the underlying net assets recorded by the venture. Paragraph 27 of
this SOP requires that those differences be accounted for in accordance
with the provisions of Statement 141. This Statement replaces Statement
141.
The first bullet of paragraph 38 states, “The reorganization value of the
204
by Entities in
Reorganization
Under the
Bankruptcy Code
SOP 96-1
Environmental
Remediation
Liabilities
SOP 01-6
Accounting by
Certain Entities
(Including Entities
With Trade
Receivables) That
Lend to or Finance
the Activities of
Others
SOP 03-3
Accounting for
Certain Loans or
Debt Securities
Acquired in a
Transfer
Practice
Bulletin 6
Amortization of
Discounts on Certain
Acquired Loans
AICPA
Audit and
Accounting
Guide
Agricultural
Producers
and Agricultural
Cooperatives
entity should be allocated to the entity’s assets in conformity with the
procedures specified by FASB Statement No. 141, Business
Combinations.” This Statement replaces Statement 141 and provides
guidance for measuring and recognizing the individual assets acquired and
liabilities assumed in a business combination.
The third bullet of paragraph 38 states that “deferred taxes should be
reported in conformity with generally accepted accounting principles.
Benefits realized from preconfirmation net operating loss carryforwards
should first reduce reorganization value in excess of amounts allocable to
identifiable assets and other intangibles until exhausted and thereafter be
reported as a direct addition to paid-in capital.” This Statement amends
paragraph 30 of Statement 109 to require that tax benefits that are
recognized after one year following the acquisition date (that is, by
elimination of that valuation allowance) be reported as a reduction to
income tax expense (not goodwill).
Paragraph 147 requires that in conjunction with the initial recording of a
business combination or the final estimate of a preacquisition contingency
at the end of the allocation period following the guidance in Statement 141,
the environmental remediation liability is considered in the determination
and allocation of the purchase price. By analogy to the accounting for a
purchase business combination, the recording of an environmental
remediation liability in conjunction with the acquisition of property would
affect the amount recorded as an asset. This Statement replaces Statement
141 and provides guidance for determining which liabilities should be
included in the business combination accounting.
Paragraph 15(c) provides regulatory capital disclosures applicable to
business combinations involving financial institutions accounted for as a
pooling of interests. Footnote 34 to paragraph 15(c) states that all business
combinations initiated after June 30, 2001, must be accounted for using the
purchase method in accordance with the provisions of Statement 141. This
Statement replaces Statement 141.
This SOP prohibits “carrying over” or creation of valuation allowances in
the initial accounting of all loans acquired in transfers that are within the
scope of this SOP, including purchase business combinations. This
Statement requires that acquired receivables (including loans) be measured
at fair value at the date of acquisition and, therefore, that a separate
allowance for uncollectible amounts not be established upon initial
recognition of those receivables. (Footnote 7 in this SOP should be
amended to refer to Statement 141(R) instead of Statement 141.)
This SOP provides guidance for accounting for loan loss reserves acquired
in a business combination. This Statement requires that acquired loans be
measured at fair value at the date of acquisition. Therefore, a separate
allowance for uncollectible amounts should not be established upon initial
recognition of those loans.
The beginning of Chapter 10 has a footnote that explains the delayed
effective date of Statement 141 for mutual enterprises. This Statement
removes that delayed effective date. Also, this Guide refers to Statement
141, which is replaced by this Statement.
205
Depository and
Lending Institutions:
AICPA
Banks and Savings
Audit and
Institutions, Credit
Accounting
Unions, Finance
Guide
Companies and
Mortgage Companies
This Guide refers to Statements 72, 141, and 147 and Interpretation 9. This
Statement replaces Statement 141 and supersedes Statements 72 and 147
and Interpretation 9.
Auditing Derivative
AICPA
Instruments, Hedging
Audit and
Activities,
Accounting
and Investments in
Guide
Securities
Exhibit 3-1 provides a list of derivative contracts excluded from Statement
133 and this Guide. This Statement amends Statement 133 to exclude from
its scope contracts between an acquirer and a seller in a business
combination to buy or sell a business at a future date. This Statement also
removes the Statement 133 scope exception for contracts issued by the
entity as contingent consideration from a business combination.
AICPA
Audit and
Accounting
Guide
AICPA
Audit and
Accounting
Guide
AICPA
Audit and
Accounting
Guide
AICPA
Audit and
Accounting
Guide
AICPA
Audit and
Accounting
Guide
AICPA
Audit and
Accounting
Guide
AICPA
Audit and
Accounting
Guide
AICPA
Practice
Aid
Federal Government
Contractors
This Guide refers to Statement 141, which is replaced by this Statement.
Health Care
Organizations
This Guide refers to Statements 72, 141, and 147 and Interpretations 4 and
9. This Statement replaces Statement 141 and supersedes Statements 72
and 147 and Interpretations 4 and 9.
Investment
Companies
This Guide refers to Statement 141, which is replaced by this Statement.
Life and Health
Insurance Entities
This Guide refers to Statements 72, 141, and 147 and Interpretation 9. This
Statement replaces Statement 141 and supersedes Statements 72 and 147
and Interpretation 9.
Not-for-Profit
Organizations
This Guide refers to Statements 72, 141, and 147 and Interpretations 4 and
9. This Statement replaces Statement 141 and supersedes Statements 72
and 147 and Interpretations 4 and 9.
Entities With Oil and
Gas Producing
Activities
This Guide uses the Statement 141 definition of goodwill in the glossary.
This Statement amends that definition. Also, this Guide refers to Statement
141 and FSPs 141-1 and 142-1. This Statement replaces Statement 141
and incorporates FSPs 141-1 and 142-1.
Property and
Liability Insurance
Companies
This Guide refers to Statement 141 and Technical Bulletin 85-5. This
Statement replaces Statement 141 and supersedes Technical Bulletin 85-5.
Assets Acquired in a
Business
Combination to Be
Used in Research and
Development
Activities: A Focus
on Software,
Electronic Devices
and Pharmaceutical
Industries
This Practice Aid provides guidance for measuring the fair value of
research and development assets acquired in a business combination in
accordance with Statement 141. This Statement replaces Statement 141 and
supersedes Interpretation 4 and requires that in-process research and
development be recognized as an asset at the acquisition date. This Practice
Aid provides other guidance that may be in conflict with this Statement.
206
SEC or SEC Staff Literature
E6. The following table lists guidance issued by the SEC or its staff that the FASB staff believes
may be affected by the tentative decisions made by the Board in this proposed Statement. This
information is presented for informational purposes only. Decisions about whether to amend SEC or
SEC staff guidance are made by the SEC and its staff.
SEC or
SEC Staff
Literature
Title
SAB Topic
2.A.5
Adjustments to
Allowances for Loan
Losses in Connection
with Business
Combinations
SAB Topic
2.A.7
Loss Contingencies
Assumed in a
Business
Combination
SAB Topic
2.A.8
Business
Combinations Prior
to an Initial Public
Offering
SAB Topic
2.A.9
Liabilities Assumed
in a Purchase
Business
Combination
SAB Topic
2.D
Financial Statements
of Oil and Gas
Exchange Offers—
Question 1
Analysis
This Topic states that generally the acquirer’s estimation of the
uncollectible portion of the acquiree’s loans should not change from the
acquiree’s estimation before the acquisition.
This Statement requires that acquired receivables (including loans) be
measured at fair value as of the acquisition date. Therefore, a separate
allowance for uncollectible amounts would not be established upon initial
recognition of those receivables.
This Topic states that in accordance with Statement 141, the acquirer
should allocate the cost of an acquired company to the assets acquired and
liabilities assumed based on their fair values at the acquisition date. With
respect to contingencies for which a fair value is not determinable at the
acquisition date, the guidance in Statement 5 should be applied.
This Statement requires that contingencies that meet the definition of a
liability assumed in a business combination be initially measured and
recognized at fair value. This Statement eliminates the alternative
described in paragraph 40(b) of Statement 141, which allows for
recognition under an approach consistent with Statement 5.
This Topic states that the combination of two or more businesses should be
accounted for in accordance with Statement 141. This Statement replaces
Statement 141.
This Topic states that the correction of a seller’s erroneous application of
GAAP should not occur through the purchase price allocation. Rather, the
acquiree’s financial statements should be restated to reflect an appropriate
amount, with the resultant adjustment being applied to the historical
income statement of the acquiree. This Statement does not address the
seller’s accounting for assets and liabilities sold in a business combination.
However, this Topic does contain a reference to Statement 141, and this
Statement replaces Statement 141.
Question 1 addresses basis questions in oil and gas exchange offers. This
Statement does not affect the SEC staff’s interpretative response.
However, this Topic refers to the guidance provided in Statement 141 for
business combinations and in paragraphs D11–D13 for entities under
common control. This Statement replaces the guidance in Statement 141
for business combinations. This Statement also carries forward without
reconsideration the guidance in paragraphs D11–D13 of Statement 141 for
entities under common control.
207
SEC or
SEC Staff
Literature
EITF Topic
No. D-84
Title
Analysis
Accounting for
Subsequent
Investments in an
Investee After
Suspension of Equity
Method Loss
Recognition When an
Investor Increases Its
Ownership Interest
from Significant
Influence to Control
through a Market
Purchase of Voting
Securities
This announcement addresses the accounting for a step acquisition in
which an investor had an investment that was accounted for under the
equity method, for which the attribution of equity method losses was
suspended, and then acquires an additional interest that gives that investor
control of the investee. The SEC staff stated that those types of
transactions should follow step accounting guidance. This Statement
provides new guidance for step acquisitions, which differs from the step
acquisition guidance that existed when this announcement became
effective.
208
Appendix F
DIFFERENCES BETWEEN THE IASB’S AND THE FASB’S EXPOSURE
DRAFTS
Introduction
F1. This Exposure Draft is the result of the IASB’s and the FASB’s projects to improve
accounting and reporting for business combinations. The first phase of those projects led
to IFRS 3 Business Combinations and FASB Statement No. 141, Business Combinations.
In 2002, the IASB and the FASB agreed to reconsider jointly their guidance for applying
the purchase method (now called the acquisition method) of accounting for business
combinations. The objective of the joint effort is to develop a common and
comprehensive standard for the accounting for business combinations that could be used
for both domestic and international financial reporting. Although the Boards reached the
same conclusions on the fundamental issues addressed in this Exposure Draft, they
reached different conclusions on a few limited matters.
F2. On those matters on which the Boards reached different conclusions, each Board
has set out its own guidance in its version of the Exposure Draft. This appendix identifies
and compares those paragraphs in which the IASB and the FASB have proposed
substantively different guidance. This appendix does not identify nonsubstantive
differences. For example, this appendix does not identify differences in terminology, such
as profit or loss (IASB) and income (FASB). Nor does it identify differences in
references to IASB or FASB guidance. For example, the IASB’s version of this Exposure
Draft refers to IAS 19, Employee Benefits, whereas the FASB’s version refers to FASB
Statement No. 87, Employers’ Accounting for Pensions.
F3. Most of the differences identified in this appendix arise because of the Boards’
decisions to produce guidance for accounting for business combinations that is consistent
with other existing IFRSs or FASB standards. Even though those differences are
candidates for future convergence projects, the Boards do not plan to eliminate them
before a final Statement on business combinations is issued.
209
Paragraph Reference
IASB’s Guidance
FASB’s Guidance
Paragraph 2(c)—Scope
exception for not-forprofit organizations
Paragraph 2(c) is not used because the IASB does not provide
guidance for not-for-profit organizations. Therefore, this
scope exception is not necessary for the IASB.
Paragraph 2(c) specifies that this Statement does not apply to
combinations between not-for-profit organizations or the
acquisition of a for-profit business by a not-for-profit
organization. The FASB plans to issue a separate Exposure
Draft that addresses business combinations between not-forprofit organizations.
Paragraph 11—
Identification of the
primary beneficiary as
the acquirer
N/A—The IASB does not have guidance for primary
beneficiaries because it does not have consolidation guidance
equivalent to FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities.
The last two sentences of paragraph 11 state that for purposes
of this Statement, the primary beneficiary of a variable
interest entity is always the acquirer. The determination of
what party, if any, is the primary beneficiary of a variable
interest entity is made solely in accordance with
Interpretation 46(R), not based on the guidance in paragraphs
12–16.
Paragraphs 35, 36, and
87—Contingencies
Contingencies
Contingencies that meet the definition of assets or
liabilities
Paragraph 35 requires the acquirer to recognize, separately
from goodwill, the acquisition-date fair value of an
identifiable asset or liability even if the amount of the future
economic benefits embodied in the asset or required to settle
the liability is contingent (or conditional) on the occurrence
or non-occurrence of one or more uncertain future events not
wholly within the control of the entity. Although the IASB
and the FASB use different words to describe the accounting
for contingencies acquired in a business combination, the
guidance is expected to result in the identification and
Paragraph 35 requires the acquirer to recognize separately
from goodwill the acquisition-date fair value of assets and
liabilities arising from contingencies that were acquired or
assumed as part of the business combination. Therefore, the
acquirer recognizes as of the acquisition date an asset or a
liability for a contingency even if that contingency does not
meet the recognition criteria in FASB Statement No. 5,
Accounting for Contingencies. Although the IASB and the
FASB use different words in these paragraphs, the guidance
is expected to result in the identification and recognition of
the same assets and liabilities and at the same amounts.
210
Paragraph Reference
IASB’s Guidance
FASB’s Guidance
recognition of the same assets and liabilities at the same
amounts.
Paragraph 74—
Disclosures of the effects
of a business
combination
After initial recognition, paragraph 36 requires the acquirer to
account for such assets in accordance with IAS 38 Intangible
Assets or IAS 39 Financial Instruments: Recognition and
Measurement, as appropriate, and such liabilities in
accordance with [draft] IAS 37 or other IFRSs, as
appropriate.
After initial recognition, paragraph 36 requires contingencies
to be accounted for in accordance with applicable generally
accepted accounting principles, except for contingencies that
would be accounted for in accordance with Statement 5 if
they were acquired or incurred in an event other than a
business combination. Those contingencies should continue
to be measured at fair value with changes in fair value
recognized in income in each reporting period.
Paragraph 87 provides transition from the existing IFRS 3
requirement for previously recognized contingent liabilities.
The disclosures required by paragraph 74 apply to all
acquirers.
N/A—FASB did not have similar guidance in Statement 141.
Paragraph 74(b)(1) requires disclosure of the revenue and
profit or loss of the combined entity for the current period as
though the acquisition date for all business combinations that
occurred during the year had been as of the beginning of the
annual reporting period. Paragraph 74(b)(2) is not used
because the IASB does not require this disclosure for the
comparable prior period.
211
The disclosures required by paragraph 74 apply only to
acquirers that are public business enterprises, as described in
paragraph 9 of FASB Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information.
Paragraph 74(b) requires disclosure of the following
supplemental pro forma information:
(1) The results of operations* of the combined entity for the
current period as though the acquisition date for all
business combinations that occurred during the year had
been as of the beginning of the annual reporting period.
(2) If comparative financial statements are presented, the
results of operations of the combined entity for the
comparable prior period as though the acquisition date for
Paragraph Reference
IASB’s Guidance
FASB’s Guidance
all business combinations that occurred during the current
year had occurred as of the beginning of the comparable
prior fiscal year.
____________________
*For this disclosure, results of operations means revenue, income
before extraordinary items and the cumulative effect of accounting
changes, net income, and earnings per share. In determining the
pro forma amounts, income taxes, interest expense, preferred share
dividends, and depreciation and amortization of assets shall be
adjusted to the accounting base recognized for each in recording the
combination. Pro forma information related to results of operations
of periods prior to the combination shall be limited to the results of
operations for the immediately preceding period. Disclosure also
shall be made of the nature and amount of any material,
nonrecurring items included in the reported pro forma results of
operations.
Paragraph 76(d)—
Disclosures of the
financial effects of
adjustments to the
amounts recognized in a
business combination
Paragraph 76(d) requires the acquirer to disclose the amount
and an explanation of any gain or loss recognized in the
current period that (1) relates to the identifiable assets
acquired or liabilities assumed in a business combination that
was effected in the current or the previous annual period and
(2) is of such a size, nature, or incidence that disclosure is
relevant to understanding the combined entity’s financial
statements.
N/A—FASB does not require this disclosure.
Paragraph 78(b)—
Goodwill by reportable
segment
The disclosure in paragraph 78(b) is not required by the
IASB. Paragraph 134 of IAS 36 Impairment of Assets
requires an entity to disclose the aggregate carrying amount
of goodwill allocated to each cash-generating unit (group of
units) for which the carrying amount of goodwill allocated to
that unit (group of units) is significant in comparison with the
Paragraph 78(b) requires that the acquirer disclose for each
material business combination that occurs during the period
or in the aggregate for individually immaterial business
combinations that are material collectively and that occur
during the period, the amount of goodwill by reportable
segment, if the combined entity is required to disclose
212
Paragraph Reference
IASB’s Guidance
FASB’s Guidance
entity’s total carrying amount of goodwill. This information
is not required to be disclosed for each material business
combination that occurs during the period or in the aggregate
for individually immaterial business combinations that are
material collectively and occur during the period.
segment information in accordance with Statement 131,
unless such disclosure is impracticable. Similar to IAS 36,
paragraph 45 of FASB Statement No. 142, Goodwill and
Other Intangible Assets, requires disclosure of this
information in aggregate by each reportable segment, not for
each material business combination that occurs during the
period or in the aggregate for individually immaterial
business combinations that are material collectively and that
occur during the period.
Paragraph 80 requires an acquirer to provide a goodwill
reconciliation in accordance with the requirements of
Statement 142. Statement 142 requires a goodwill
reconciliation; however, the requirement is less detailed than
that required by the IASB. This Exposure Draft would amend
the requirement in Statement 142 to converge the level of
detail in the reconciliation to that required by the IASB.
Paragraph 80—
Goodwill reconciliation
Paragraph 80 requires an acquirer to provide a goodwill
reconciliation and provides a detailed list of items that should
be shown separately.
Paragraph A49(d)—
Customer contract
intangible assets
IFRS 4 Insurance Contracts permits, but does not require, an
expanded presentation that splits the fair value of acquired
insurance contracts into two components: (a) a liability
measured in accordance with the insurer’s accounting
policies for insurance contracts that it issues and (b) an
intangible asset, representing the fair value of the contractual
rights and obligations acquired, to the extent that the liability
does not reflect that fair value.
Paragraph D13 amends FASB Statement No. 60, Accounting
and Reporting by Insurance Enterprises, to require the
expanded presentation permitted by IFRS 4.
Footnote to paragraph
A52(i)—Contract-based
intangible assets
N/A
The footnote to paragraph A52(i) codifies FASB Staff
Positions FAS 141-1 and 142-1, “Interaction of FASB
Statements No. 141 and No. 142 and EITF Issue No. 04-2.”
213
Paragraph Reference
Paragraph A102—
A109—Replacement
share-based payment
awards
IASB’s Guidance
FASB’s Guidance
Both the IASB and the FASB require that if the acquirer is
obligated to replace the acquiree’s awards, all or a portion of
the acquirer’s replacement awards are included in the
measurement of the consideration transferred by the acquirer.
However, the amount included in the measurement of the
consideration transferred by the acquirer is calculated
consistently with the requirements of IFRS 2 Share-based
Payment.
The footnote to paragraph A56(i) incorporates the guidance
in FSP 141-1. Also, the amendment that removes the
parenthetical that reads “such as mineral rights to depleting
assets” from paragraph 11 of Statement 142 is carried
forward in Appendix D of this Exposure Draft.
Both the IASB and the FASB require that if the acquirer is
obligated to replace the acquiree’s awards, all or a portion of
the acquirer’s replacement awards are included in the
measurement of the consideration transferred by the acquirer.
However, the amount included in the measurement of the
consideration transferred by the acquirer is calculated
consistently with the requirements of FASB Statement No.
123 (revised 2004), Share-Based Payment.
The portion attributable to past services, which is included in
the measurement of the consideration transferred, is equal to
the remaining fair-value-based measure of the replacement
award (or settlement) multiplied by the ratio of the portion of
the vesting period completed to the total vesting period. (The
amount, if any, to be recognized in postcombination profit or
loss is the remaining fair-value-based measure of the
replacement award (or settlement) multiplied by the ratio of
the future vesting period to the total vesting period.) The
vesting period is the period during which all the specified
vesting conditions are to be satisfied. Vesting conditions are
defined in IFRS 2. Paragraphs A104–A109 illustrate the
IASB’s requirements.
214
The portion attributable to past services, which is included in
the measurement of the consideration transferred, is equal to
the remaining fair-value-based measure of the replacement
award (or settlement) multiplied by the ratio of the past
service period to the total service period (that is, the period
that begins with the service inception date for the award of
the acquiree and ends with the service completion date for the
replacement award). The past service period ends and the
future service period begins on the acquisition date. (The
amount, if any, which represents compensation expense to be
recognized in postcombination consolidated net income is the
remaining fair-value-based measure of the replacement award
(or settlement) multiplied by the ratio of the future service
period to the total service period.) The requisite service
period of awards issued by the acquirer shall reflect any
Paragraph Reference
IASB’s Guidance
FASB’s Guidance
explicit, implicit, and derived service periods (consistent with
the requirements of Statement 123(R)). Paragraphs A104–
A109 illustrate the FASB’s requirements.
Appendix B provides the background for the FASB’s project
and the FASB’s basis for its conclusions, which is the same
or similar to the IASB’s in many respects, but not all.
Basis for Conclusions /
Appendix B—
Background information
and basis for conclusions
The Basis for Conclusions provides the background for the
IASB’s project and the IASB’s basis for its conclusions,
which is the same as or similar to the FASB’s in many
respects, but not all.
Appendix C—
Continuing authoritative
guidance
Appendix C contains guidance and transition provisions that
have been carried forward or adapted from IASB sources.
The Boards did not deliberate jointly or reach convergence
on the continuing authoritative guidance. Therefore, the
IASB’s Appendix C differs from the FASB’s Appendix C.
Appendix C contains guidance and transition provisions that
have been carried forward or adapted from FASB sources.
The Boards did not deliberate jointly or reach convergence
on the continuing authoritative guidance. Therefore, the
FASB’s Appendix C differs from the IASB’s Appendix C.
Appendix D—
Amendments
Appendix D contains the amendments to IFRSs that would
result from this proposed IFRS.
Appendix D contains the amendments to FASB standards
that would result from this proposed Statement.
Appendix E—Fair value
measurement / related
literature analysis
The IASB’s Appendix E provides guidance for measuring
fair value. The FASB did not provide fair value measurement
guidance in this appendix because the FASB’s Exposure
Draft refers to the FASB Exposure Draft, Fair Value
Measurements, which was published on June 23, 2004. That
Exposure Draft provides the guidance that the IASB provides
in Appendix E.
The FASB’s Appendix E addresses the impact of this
Exposure Draft on authoritative accounting literature
included in categories (b), (c), and (d) in the GAAP hierarchy
and the relationship between this Exposure Draft and related
SEC literature. The IASB provides all authoritative guidance
for entities under its jurisdiction and, therefore, does not need
an equivalent appendix.
215