April 15, 2008
NDS 2008-17
Revised for FASB Codification
July 1, 2009
New Developments Summary
Business combinations
FASB Statement 141 (revised 2007) (ASC 805)
Summary
On December 4, 2007, the FASB issued Statement 141 (revised 2007), Business Combinations (FASB
Accounting Standards CodificationTM (ASC or Codification) 805, Business Combinations), which will
change how a reporting enterprise accounts for the acquisition of a business in fiscal years beginning after
December 15, 2008.
When effective, Statement 141R (ASC 805) will replace existing Statement 141 (not included in
Codification) in its entirety, and will carry forward the existing requirements to account for all business
combinations using the acquisition method (formerly called the purchase method).
Under ASC 805, business combination accounting will apply to a wider range of transactions and events,
including acquisitions of some development stage companies, combinations of mutual entities,
acquisitions without the exchange of consideration, and the initial consolidation of a variable interest
entity that is a business.
ASC 805 will eliminate the current cost-based purchase method under Statement 141, which recognizes
the acquired business as the sum of (a) separately valued individual purchase layers (as in a step
acquisition) and (b) the carryover of the acquiree’s basis for any remaining noncontrolling ownership
interest in the acquiree. In general, ASC 805 will require acquisition-date fair value measurement of
identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree. Under ASC
805, the value of the business acquired usually will be measured as the sum of the acquisition-date values
(measured at fair value, with a few exceptions) of the following:
•
Consideration transferred for the acquiree
•
Equity interests in the acquiree held by the acquirer immediately before the acquisition date (for an
acquisition achieved in stages, also known as a step acquisition)
•
Noncontrolling interests in the acquiree held by third parties (in a partially owned subsidiary)
The new measurement requirements will result in the recognition of the full amount of acquisition-date
goodwill including amounts attributable to noncontrolling interests. The acquirer will recognize in income
any gain or loss due to remeasurement to acquisition-date fair value of consideration transferred or of
previously acquired equity interests in the acquiree. Neither the direct acquisition-related costs incurred to
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effect a business combination nor any costs the acquirer expects but is not obligated to incur under a plan
to restructure an acquired business will be included as part of the business combination accounting.
ASC 805 applies prospectively to business combinations with an acquisition date on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008.
The acquisition method under ASC 805 will not apply to subsequent acquisitions of some or all of the
noncontrolling interest in a subsidiary after the date of the business combination. FASB Statement 160,
Noncontrolling Interests in Consolidated Financial Statements: an amendment of ARB No. 51 (ASC 81010, Consolidation), issued concurrently with Statement 141R (ASC 805), provides new guidance on the
accounting for changes in the acquirer’s ownership interests in a consolidated subsidiary and the
presentation of noncontrolling equity interests in consolidated financial statements. ASC 810-10 is
effective for fiscal years beginning on or after December 15, 2008 (see NDS 2008-18, “Noncontrolling
interests in consolidated financial statements: FASB Statement 160”).
This bulletin highlights the provisions in ASC 805 that will change business combination accounting. It is
not a substitute for reading and applying the specific guidance in ASC 805 and other applicable
accounting literature.
Contents
A. Background ............................................................................................................................................ 3
B. Overview ................................................................................................................................................ 4
C. Scope ...................................................................................................................................................... 6
Definition of a business combination ..................................................................................................... 6
Definition of a business .......................................................................................................................... 7
Scope exclusions .................................................................................................................................... 7
D. Acquisition method ................................................................................................................................ 8
Identification of the acquirer .................................................................................................................. 8
Reverse acquisition........................................................................................................................... 8
Acquisition date ...................................................................................................................................... 9
Measurement period ............................................................................................................................... 9
What is part of the business combination transaction?......................................................................... 10
Acquisition-related (transaction) costs ........................................................................................... 10
Compensation to employees or former owners of the acquiree ..................................................... 10
Effective settlement of a preexisting relationship .......................................................................... 11
Identifiable assets acquired, liabilities assumed, and noncontrolling interests: general principles ...... 11
Recognition principle ..................................................................................................................... 11
Classification principle ................................................................................................................... 11
Measurement principle ................................................................................................................... 12
Identifiable assets acquired and liabilities assumed: specific guidance ............................................... 12
Assets and liabilities arising from contingencies ........................................................................... 12
Assets held for sale ......................................................................................................................... 15
Assets with uncertain cash flows (valuation allowances) .............................................................. 15
Employee benefits .......................................................................................................................... 15
Income taxes ................................................................................................................................... 16
Indemnification assets .................................................................................................................... 17
Insurance and reinsurance contracts ............................................................................................... 18
Leases ............................................................................................................................................. 19
Reacquired rights ............................................................................................................................ 20
Research and development ............................................................................................................. 20
Restructuring costs ......................................................................................................................... 21
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Acquisition-date value of the acquiree ................................................................................................. 22
Business combination achieved in stages (step acquisition) .......................................................... 22
Noncontrollng interests in a partially owned acquiree ................................................................... 22
Goodwill or gain on a bargain purchase ............................................................................................... 22
Goodwill impairment testing .......................................................................................................... 24
Consideration transferred for the acquiree ........................................................................................... 24
Acquisition-date measurement gains and losses ............................................................................ 24
Equity securities issued .................................................................................................................. 25
Contingent consideration ................................................................................................................ 25
Replacement share-based payment awards .................................................................................... 26
Mutual entities ...................................................................................................................................... 28
Fair value measurement.................................................................................................................. 28
Full adoption of ASC 350 for goodwill and intangible assets ........................................................ 28
Transition........................................................................................................................................ 29
E. Disclosures ........................................................................................................................................... 29
Disclosure objectives ............................................................................................................................ 29
Amended disclosure requirements in other pronouncements ............................................................... 29
SAB 74 (Topic 11:M) disclosures for SEC registrants ........................................................................ 29
F. Effective date and transition ................................................................................................................. 30
Transition for amendments to ASC 740 ............................................................................................... 30
G. International convergence .................................................................................................................... 30
Appendix A ................................................................................................................................................. 32
Amendments of other accounting standards [appendix E of Statement 141R] .................................... 32
Amendments to level (a) GAAP discussed in this New Developments Summary .............................. 32
Other level (a) GAAP pronouncements amended in appendix E of Statement 141R .......................... 34
FASB Statements, Interpretations, Technical Bulletin, and Staff Position nullified............................ 35
Appendix B: Disclosure supplement........................................................................................................... 37
A. Background
On December 4, 2007, the FASB issued Statement 141 (revised 2007), Business Combinations (FASB
Accounting Standards CodificationTM (ASC or Codification) 805, Business Combinations), which will
change how a reporting enterprise accounts for the acquisition of a business in fiscal years beginning after
December 15, 2008.
In 2001, the FASB issued Statement 141, Business Combinations (not included in Codification), to
require that all business combinations be accounted for using the purchase method and to provide new
guidance on the recognition of intangible assets separately from goodwill. Statement 141 carried over the
purchase method measurement and recognition provisions from Accounting Principles Board (APB)
Opinion 16, Business Combinations (not included in Codification), without reconsideration. After issuing
Statement 141, the FASB addressed purchase method procedures as part of a joint project with the IASB
to develop a converged standard for business combinations accounting. The Boards reached the same
conclusions on most, but not all, of the issues addressed in the project. As a result of this project, the
FASB issued
•
Statement 141R (ASC 805)
•
Statement 160, Noncontrolling Interests in Consolidated Financial Statements: an amendment of
ARB No. 51 (ASC 810-10, Consolidation) (see NDS 2008-18)
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In January 2008, the IASB issued the following corresponding international standards:
•
International Financial Reporting Standard 3 Business Combinations (revised 2008) (IFRS 3)
•
International Accounting Standard 27 Consolidated and Separate Financial Statements (revised
2008) (IAS 27)
This bulletin highlights the provisions in ASC 805 that will change business combinations
accounting. It is not a substitute for reading and applying the specific guidance in ASC
805 and other applicable accounting literature.
B. Overview
When effective, Statement 141R (ASC 805) will replace existing Statement 141 in its entirety. ASC 805
carries forward the existing requirements:
•
To account for all business combinations using the acquisition method (formerly called the purchase
method)
•
To identify the acquirer for every business combination
•
To recognize intangible assets acquired separately from goodwill based on contractual and
separability criteria. The FASB reaffirmed that an assembled workforce acquired in a business
combination is subsumed into goodwill.
ASC 805 expands the scope of business combination accounting to include more transactions and events,
and provides new measurement, recognition, and disclosure requirements.
ASC 805 will supersede the cost accumulation and allocation approach to business combinations
accounting under Statement 141 and step acquisition accounting, which results in recognizing the
acquired business (acquiree) as the sum of (a) separately valued individual purchase layers, one for each
separate equity acquisition and (b) the carryover of the acquiree’s basis for any remaining noncontrolling
ownership interests in a partially owned subsidiary. Instead, ASC 805 will require
1. Recognition of the full acquisition-date value of identifiable assets acquired, liabilities assumed, and
noncontrolling interests in the acquiree, all measured at fair value with a few exceptions
2. Measurement of the total value of the acquiree as the sum of the acquisition-date values (generally
fair values) of
a. The consideration transferred for the acquiree
b. Any equity interests in the acquiree held by the acquirer immediately before the acquisition-date
if the acquisition was achieved in stages (a step acquisition)
c. The noncontrolling interests in the acquiree
3. Recognition of goodwill (or a gain on a bargain purchase) measured as the difference between the
total value of the acquiree (item 2 above) and the acquisition-date value of the identifiable assets
acquired and liabilities assumed (item 1 above). The result of these new measurement requirements
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will be the recognition of acquisition-date goodwill amounts attributable to noncontrolling interests in
addition to the amounts attributable to the acquirer’s controlling interest.
Significant amendments to other accounting standards
Readers should be aware that appendices E and F of Statement 141R (appendices are not
included in the Codification) contain significant amendments to other accounting
standards and authoritative literature, some of which are not fully described in the
standard section of Statement 141R. In addition, although Statement 141R (ASC 805) will
not retrospectively change the accounting for previous business combinations, it will
prospectively affect the accounting for some items recognized in previous business
combinations. Therefore, some of those amendments will affect companies, regardless of
whether they have a business combination transaction accounted for under ASC 805. For
example, companies should consider the following:
• Both Statement 141R (ASC 805) and Statement 160 (ASC 810-10) amend ASC 350,
Intangibles – Goodwill and Other (FASB Statement 142, Goodwill and Other
Intangible Assets), to change the impairment test for goodwill, including goodwill
recognized before the effective date of the new statements (see “Goodwill impairment
testing”).
•
•
Statement 141R (ASC 805) also amends ASC 350
−
To require additional disclosures about changes in the carrying amount of
goodwill during a period
−
To limit the amortization period for a reacquired right that the acquirer previously
granted to the acquiree (see “Reacquired rights”)
−
To incorporate consideration of market participant assumptions for an asset’s
highest and best use when measuring assets at fair value (consistent with ASC
820, Fair Value Measurements (FASB Statement 157, Fair Value
Measurements)) for all acquired intangible assets, including those acquired
outside of a business combination (see “Measurement principle” for a discussion
of ASC 820 examples on the highest and best use in fair value measurements)
Statement 141R (ASC 805) amends the requirements in ASC 805-740, “Income
Taxes” (FASB Statement 109, Accounting for Income Taxes), and in the uncertain tax
position guidance of ASC 740, Income Taxes (FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes), for recognizing changes in a valuation allowance
for an acquired entity’s deferred tax asset or changes in an acquired tax position,
when those changes occur after the effective date of ASC 805 (see “Income taxes”).
In an SEC registrant’s disclosure of the impact that the adoption of Statement 141R (ASC
805) and Statement 160 (ASC 810-10) will have on its financial statements, the registrant
should include consideration of the potential impact of Statement 141R (ASC 805) (and
Statement 160 (ASC 810-10)) amendments to other accounting standards.
Appendix A to this bulletin identifies some of the significant amendments to FASB
Statements and Interpretations contained in Statement 141R (ASC 805).
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C. Scope
Definition of a business combination
ASC Glossary redefines a business combination as “a transaction or other event in which an acquiring
entity obtains control of one or more businesses.” The definition explicitly includes a merger of equals.
Throughout ASC 805, the term control has the meaning of controlling financial interest, as that term is
used in ASC 810-10-15-8 (Accounting Research Bulletin (ARB) 51, Consolidated Financial Statements).
(The FASB defined the term control in ASC Glossary by reference to controlling financial interest in
ASC 810-10-15-8 to maintain consistency between the business combinations and consolidation
guidance. However, ASC 810-10-15-8 provides guidance on the application of the controlling financial
concept but does not specifically define the term.) Other events that qualify as business combinations
under ASC 805, but not under Statement 141, include when an entity
•
Obtains control of a business without exchange of consideration or other direct involvement by the
acquirer. For example, the holder of a majority of voting equity might obtain control when
participating rights held by minority interests expire.
•
Obtains control of a business by contract alone, without holding any ownership interest in that
business or holding only a minority ownership interest
•
Becomes the primary beneficiary of a variable interest entity that is a business, in accordance with
ASC 810-10 “Variable Interest Entities” subsections (FASB Interpretation 46 (revised December
2003), Consolidation of Variable Interest Entities (Interpretation 46R))
Initial measurement of variable interest entities
ASC 810-10-30-1 currently requires that the primary beneficiary of a variable interest
entity initially measure at fair value the newly consolidated entity’s assets, liabilities, and
noncontrolling interests, except for entities under common control or for assets and
liabilities transferred by the primary beneficiary to the entity shortly before consolidation.
Under ASC 810-10, “Variable Interest Entitites” as amended by ASC 805, the initial
consolidation of a variable interest entity that is a business will be accounted for as a
business combination in accordance with ASC 805.
For a variable interest entity that is not a business, the acquisition date measurement and
recognition provisions of ASC 805, including the exceptions to fair value measurement at
the acquisition-date, will apply to the initial consolidation of any variable interest entity
that is not under common control with its primary beneficiary. However, the primary
beneficiary of a variable interest entity that is not a business:
• Would measure assets and liabilities transferred to the entity shortly before
consolidation as if they had not been transferred and would not recognize a gain or
loss on the transfer
•
Would recognize a loss instead of goodwill
•
Would not separately remeasure and recognize a gain or loss on the primary
beneficiary’s equity interests in the variable interest entity acquired before becoming
the primary beneficiary. Instead, any such amounts would be included in the total
gain or loss recognized on initial consolidation.
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Definition of a business
ASC Glossary also redefines a business as “an integrated set of assets and activities capable of being
conducted and managed for the purpose of providing a return in the form or dividends, lower costs,
increased share prices, or other economic benefits to investors, owners, or participants.” The new
definition effectively extends business combinations accounting to include
•
Combinations of two or more mutual entities, such as mutual insurance companies, credit unions, and
farm and electric cooperatives. Before the effective date of ASC 805, such combinations are
accounted for under APB Opinion 16 or FASB Statement 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions (not included in Codification)
•
Acquisitions of certain development-stage companies or other entities that meet the new broader
definition of a business in ASC Glossary but that would be accounted for as asset acquisitions in
transactions that occur before the effective date of ASC 805
ASC 805-10-55-4 through 55-9 includes the following guidance on applying the new definition of a
business:
•
A business consists of inputs and processes that have the ability to produce outputs. Thus, a
development-stage company that has not yet begun producing outputs may be a business.
•
Accounting, billing, payroll, and other administrative systems are generally not considered to be
processes used to create outputs.
•
The determination of whether an integrated set of assets and activities is a business should be based
on whether that set could be conducted and managed as a business by a market participant (as defined
in ASC Glossary). However, a business need not include all of the inputs and processes used by the
seller to produce outputs if market participants are capable of acquiring the business and continuing to
produce outputs by integrating the acquired set with their own inputs and processes.
•
The existence of goodwill in a particular set of assets and activities creates a presumption that the set
is a business, absent contrary evidence.
The new definition of a business and related guidance in ASC Glossary and ASC 805-10-55-4 through
55-9 replaces the definitions in EITF Issue 98-3, “Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business,” (not included in Codification) and in
Interpretation 46R (definition not in Codification). ASC 805 does not carry forward from those
definitions (a) the requirement that a business must have outputs to continue normal operations and
sustain a revenue stream and (b) the presumption that a development stage company is not a business.
Scope exclusions
ASC 805, like Statement 141, does not apply to
•
The formation of a joint venture
•
A combination between entities under common control. ASC 805-50, “Transactions between Entities
under Common Control” subsections, carries forward the guidance from Statement 141 on accounting
for transactions between entities under common control. ASC 805-50, “Transactions between Entities
under Common Control” clarifies that an entity that receives the net assets or equity interests of an
entity under common control should adjust comparative information for prior years presented in the
financial statements only for periods during which the entities were under common control.
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A combination between two or more not-for-profit organizations or the acquisition of a for-profit
business by a not-for-profit organization
•
The acquisition of a group of assets that is not a business
•
The acquisition of all or part of the remaining noncontrolling interest in a consolidated subsidiary
after the date of the business combination (see “Noncontrolling interests in a partially owned
subsidiary”)
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Not-for-profit organizations: mergers and acquisitions
The FASB has begun redeliberations on proposed new standards for not-for-profit
organizations on accounting for (a) mergers and acquisitions, (b) noncontrolling interests
in consolidated entities, and (c) goodwill and other intangible assets acquired in a merger
or acquisition. Until these new standards are finalized and effective, not-for-profit
organizations should continue to apply the guidance in APB Opinion 16 and in other
authoritative literature, as it was before the amendments and nullifications in Statement
141 and Statement 141R (ASC 805).
The acquisition method procedures in ASC 805 do not apply to the parent’s acquisition of some or all of
the noncontrolling interest in a subsidiary after the date of the business combination. ASC 810-10, which
has the same effective date as ASC 805, addresses how to account for subsequent changes in the
acquirer’s ownership interests in a consolidated subsidiary (see NDS 2008-18).
D. Acquisition method
Identification of the acquirer
ASC 805-10-25-4 continues the existing requirement to identify one of the combining entities in each
business combination as the acquirer. ASC 805-10-25-5 indicates that the acquirer should be determined
in accordance with the guidance in ASC 810-10. Accordingly, the acquirer is the entity that obtains
control (a controlling financial interest) of the other entity or entities in a business combination, usually
through direct or indirect ownership of a majority voting interest. However, the primary beneficiary of a
variable interest entity, determined in accordance with ASC 810-10, “Variable Interest Entities,” is the
acquirer of that entity.
ASC 805-10-55-11 through 55-15 provides additional factors to consider (similar to those in Statement
141) if the guidance in ASC 810-10 does not clearly indicate which entity is the acquirer. However, those
additional factors do not apply to the determination of the acquirer for initial consolidation of a variable
interest entity.
Reverse acquisition
If a business combination is effected primarily by the exchange of equity interests, the entity that issues
its equity interests is usually the acquirer. However, in a reverse acquisition, the entity that issues
securities to effect a combination (the legal acquirer) is determined to be the acquiree for accounting
purposes, and the entity whose equity interests are acquired (the legal acquiree) is the acquirer for
accounting purposes. ASC 805-40, “Reverse Acquisitions,” provides an example on how to account for a
reverse acquisition.
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Reverse acquisition or recapitalization: SEC staff views
The following guidance is from “Frequently Requested Accounting and Financial
Reporting Interpretations and Guidance” (March 31, 2001), prepared by accounting staff
members in the SEC Division of Corporation Finance:
The merger of a private operating company into a non-operating public
shell corporation with nominal net assets typically results in the owners
and management of the private company having actual or effective
operating control of the combined company after the transaction, with
shareholders of the former public shell continuing only as passive
investors. These transactions are considered by the staff to be capital
transactions in substance, rather than business combinations. That is, the
transaction is equivalent to the issuance of stock by the private company
for the net monetary assets of the shell corporation, accompanied by a
recapitalization. The accounting is identical to that resulting from a
reverse acquisition, except that no goodwill or other intangible should be
recorded.
Acquisition date
ASC 805-10-25-6 requires using the acquisition date—the date the acquirer obtains control of the
acquired business—to measure and recognize a business combination, eliminating the acquirer’s option
under Statement 141 to designate, for convenience, an effective date at the end of an accounting period
between the dates the business combination is initiated and consummated.
Consolidation in the year of the business combination
Under ASC 805-10-45-4, the acquirer’s financial statements for the period in which a
business combination occurs will include only the cash inflows and outflows, revenues
and expenses, and other effects of the acquiree’s operations after the acquisition date.
In contrast, regardless of whether the acquirer designates a convenient effective date
under Statement 141, ARB 51, paragraph 11 (not included in Codification), currently
permits a subsidiary that was purchased during the year to be included in the consolidated
financial statements as of the beginning of the year, with an adjustment in the
consolidated income statement to remove preacquisition earnings. When effective, ASC
810-10-45-4 (Statement 160) will amend paragraph 11 in ARB 51 so it is consistent with
the acquisition-date recognition requirements of ASC 805.
Measurement period
ASC 805 provides for a measurement period after the acquisition date. Under ASC 805-10-25-13 through
25-19, the acquirer retrospectively adjusts the business combination accounting for information obtained
during the measurement period about facts and circumstances that existed as of the acquisition date.
Because the accounting is adjusted as though the information were available at the acquisition date,
comparative information for prior periods presented must be revised as necessary. The measurement
period ends as of the earlier of (a) one year from the acquisition date or (b) the date when the acquirer
receives the information necessary to complete the business combination accounting. The business
combination accounting is not revised in the following situations:
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•
At any time for information obtained after the acquisition date that is not about facts and
circumstances that existed as of the acquisition date
•
After the measurement period ends, except for error corrections in accordance with ASC 250,
Accounting Changes and Error Corrections (FASB Statement 154, Accounting Changes and Error
Corrections)
For business combinations occurring before ASC 805 is effective, Statement 141 provides for an
allocation period that is similar to the measurement period in ASC 805. However, Statement 141 is silent
about whether allocation period adjustments should be recorded retrospectively.
What is part of the business combination transaction?
ASC 805-10-25-20 through 25-23 requires the acquirer to identify any amounts that are not part of what
the acquirer and the acquiree exchanged in the business combination. The accounting for a business
combination includes only the consideration transferred for the acquiree, and the assets acquired and the
liabilities assumed or incurred by the acquirer in exchange. A transaction is likely to be separate from the
business combination if it is entered into by, on behalf of, or primarily for the benefit of either the
acquirer or the combined entity rather than primarily for the benefit of the acquiree or its former owners.
Acquisition-related (transaction) costs
Costs that the acquirer incurs to effect a business combination are not part of the consideration transferred
in exchange for the acquiree under ASC 805-10-25-23. Therefore, ASC 805-10-25-23 requires that such
costs be accounted for separately from the business combination transaction. They are to be charged to
expense when incurred, except for debt or equity issuance costs, which are accounted for in accordance
with other generally accepted accounting principles.
The acquirer’s reimbursement of amounts paid by the acquiree or its former owners for acquisitionrelated costs of the acquirer should also be accounted for separately from the business combination. Such
costs are incurred primarily for the benefit of the acquirer rather than the acquiree or its former owners,
and therefore are not part of the business combination transaction.
Acquisition-related costs
The ASC 805 requirement to exclude all acquisition-related costs from the measurement
of a business combination transaction is a significant change from the long-standing
requirement in both APB Opinion 16 and Statement 141. Under these standards, the
acquirer would recognize the direct costs of the combination as part of the cost of the
acquired entity.
Compensation to employees or former owners of the acquiree
Compensation paid to the employees or former owners of the acquiree for future services is not accounted
for as part of the business combination transaction. ASC 805-10-55-24 through 55-25 provides guidance
on
•
Determining whether contingent payments to employees or former shareholders of the acquiree
represent contingent consideration transferred for the acquiree or compensation paid for future
services (see “Contingent consideration”)
•
Calculating the compensation portion, if any, of a share-based payment award that the acquirer is
obligated to issue to replace the acquiree’s awards (see “Replacement share-based payment awards”)
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Effective settlement of a preexisting relationship
ASC 805-10-55-20 through 55-23 incorporates the guidance in EITF Issue 04-1, “Accounting for
Preexisting Relationships between the Parties to a Business Combination” (not included in Codification).
Accordingly, the effective settlement of a preexisting relationship between the acquirer and the acquiree
as a result of a business combination is accounted for separately from the business combination.
However, consistent with EITF Issue 04-1, the business combination transaction under ASC 805 includes
recognition of a reacquired right, such as a franchise right, that the acquirer had previously granted to the
acquiree to use the acquirer’s assets (see “Reacquired rights”).
Identifiable assets acquired, liabilities assumed, and noncontrolling interests: general
principles
Under ASC 805, identifiable assets acquired and liabilities assumed must be accounted for in accordance
with general principles for recognition, classification, and measurement unless ASC 805 provides an
exception in the guidance for a specific item.
Recognition principle
Recognition conditions
Under ASC 805-20-25-1 through 25-3, the acquirer recognizes the assets acquired and liabilities assumed
in a business combination if, as of the acquisition date, both of the following conditions are met:
•
The item is part of the business combination transaction (see “What is part of the business
combination transaction?”).
•
The item meets the definition of an asset or liability in FASB Concepts Statement 6, Elements of
Financial Statements, which defines assets and liabilities as follows:
Assets are probable future economic benefits obtained or controlled by a particular entity
as a result of past transactions or events [paragraph 24, footnote references omitted].
Liabilities are probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in
the future as a result of past transactions or events [paragraph 35, footnote references
omitted].
In those definitions, probable is intended to acknowledge that few outcomes of economic activity are
certain, not to prescribe a recognition threshold as in ASC 450, Contingencies (FASB Statement 5,
Accounting for Contingencies).
Classification principle
Under ASC 805-20-25-6 through 25-8, identifiable assets acquired and liabilities assumed are classified
based on the conditions, policies, contract terms, and other relevant factors that exist as of the acquisitiondate. For example, the acquirer must consider acquisition-date factors to determine the following:
•
Classification of investments in accordance with ASC 320, Investments – Debt and Equity Securities,
10-25-1 through 25-20 (FASB Statement 115, Accounting for Certain Investments in Debt and Equity
Securities)
•
Designation of hedging relationships in accordance with ASC 815, Derivatives and Hedging, 20,
“Hedging – General” (FASB Statement 133, Accounting for Derivative Instruments and Hedging
Activities)
•
Assessment of hybrid instruments in accordance with ASC 815-15, “Embedded Derivatives”
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ASC 805-20-25-8 provides exceptions to the classification principle for classifying (a) an acquired lease
as operating or capital (see “Leases”) and (b) a contract written by an entity within the scope of ASC 944,
Financial Services – Insurance (FASB Statement 60, Accounting and Reporting by Insurance
Enterprises), as an insurance or reinsurance contract or as a deposit contract (see “Insurance and
reinsurance contracts”).
Measurement principle
ASC 805-20-30-1 requires the acquirer to measure the identifiable assets acquired, liabilities assumed,
and noncontrolling interests in the acquiree at their acquisition-date fair values.
Highest and best use
Fair value measurements in accordance with ASC 820 require the use of market participant assumptions
about an acquired asset’s highest and best use, regardless of the acquirer’s intended use of that asset. ASC
805-20-30-6 clarifies that market participant assumptions about an acquired asset’s highest and best use
are the basis of fair value measurements for both initially recognizing and subsequently testing the asset
for impairment.
Examples: highest and best use in fair value measurements
ASC 820-10-55-25 through 55-32 illustrate the application of the highest-and-best-use
valuation concept in business combinations.
ASC 820-10-55-26 through 55-29 illustrate circumstances in which individual assets
provide maximum value as part of a group. In those circumstances, market participant
assumptions about the highest and best use of the asset group as a whole would determine
the fair value of an individual asset that is part of the group.
ASC 820-10-55-32 illustrates the acquisition of an in-process research and development
project that the acquirer does not intend to complete. The acquirer’s plan to lock up the
project for competitive reasons is expected to provide defensive value, for example, by
protecting the value of the acquirer’s existing products. However, the fair value of the
acquired project should be based on its highest and best use for market participants, not
on the acquiring entity’s intended use. Therefore, how an acquirer measures, recognizes,
and subsequently accounts for an acquired asset that it intends to lock up or abandon will
require careful consideration of all relevant facts and circumstances.
Identifiable assets acquired and liabilities assumed: specific guidance
Assets and liabilities arising from contingencies
ASC Glossary defines a contingency as “an existing condition, situation, or set of circumstances
involving uncertainty as to possible gain or loss to an entity that will ultimately be resolved when one or
more future events occurs or fails to occur.” Under ASC 450, contingencies would be recognized as
follows:
•
Contingencies that might result in gains usually are not recognized as assets, since doing so might
result in recognizing revenue before realization
•
A loss contingency liability is recognized when the amount of loss can be reasonably estimated and it
is probable that
−
An asset has been impaired or a liability has been incurred
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Future events will occur confirming the loss
However, the recognition and measurement guidance in ASC 450 does not apply to the acquisition-date
accounting for contingencies in a business combination. Instead, ASC 805 provides new measurement
and recognition guidance for assets and liabilities arising from contingencies, a new term that is more
descriptive of the new accounting requirements for business combinations.
Recognition
ASC 805-20-25-19 requires a new approach for recognizing an asset or liability arising from a
contingency and establishes different recognition thresholds for contractual and noncontractual
contingencies, as follows:
•
Contractual contingencies: Assets and liabilities that arise from acquired contingencies related to
contracts are recognized at fair value on the acquisition date.
•
Noncontractual contingencies: For all other (noncontractual) contingencies, the acquirer recognizes
the asset or liability only if it is more likely than not that the contingency gives rise to an asset or
liability, as defined in Concepts Statement 6, as of the acquisition date. For example, a liability
arising from a noncontractual contingency would be recognized as part of the business combination
if, as of the acquisition date, it is more likely than not that the entity has incurred a present obligation
to pay if a specified contingent event occurs. The probability that the entity will incur a gain or loss if
the contingent event occurs would be reflected in the measurement of the fair value of the asset or
liability to be recognized.
In contrast, before ASC 805 is effective, Statement 141 requires that the purchase price of the acquired
entity include the fair value of a preacquisition contingency if the fair value can be determined during the
allocation period, which is similar to the measurement period under ASC 805. If the fair value cannot be
determined during the allocation period, then a contingent asset or liability would be recognized based on
the guidance in ASC 450. The Statement 141R basis for conclusions indicates that, under Statement 141,
acquirers in business combinations have seldom recognized the acquisition-date fair value of assets or
liabilities arising from preacquisition contingencies. Instead, the amount recognized has often been the
best estimate of the expected settlement amount, which could be zero if the ASC 450 probability
recognition threshold has not been met.
Measurement
Assets and liabilities arising from either contractual or noncontractual contingencies that are recognized
as of the acquisition date are measured at acquisition-date fair value.
Example: recognition of a liability arising from a noncontractual contingency
ASC 805-20-55-58 through 55-60 provide the following example of a noncontractual
contingency assessment.
Company AC acquires company TC. As of the acquisition date, TC is subject to a lawsuit,
in its discovery stage, alleging that TC violated employment discrimination laws. TC
management asserts that its policies and procedures complied with all applicable laws and
regulations.
Under ASC 805, AC would recognize a liability measured at its acquisition-date fair
value if AC concludes that it is more likely than not that TC violated the employment
discrimination law. That conclusion would be based on consideration of all relevant facts
and circumstances that were known as of the acquisition date, such as the following:
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Results of discovery to date
•
Advice from AC’s lawyers about whether TC would be found liable based on facts
known as of the acquisition date
•
Other relevant information gathered during due diligence or other procedures
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Neither the past practice of settling similar lawsuits, nor the consideration of an out-ofcourt settlement, would provide by itself a conclusive basis for recognizing a liability.
Settlement information would be considered along with other information to determine
whether it is more likely than not that TC violated the law and is likely to be found liable
under the lawsuit.
If a liability is recognized, the possibility of an out-of-court settlement would be reflected
in the fair value measurement of the liability.
Subsequent accounting
Under ASC 805, the recognition and measurement of assets and liabilities arising from contingencies
recognized as part of the entity’s business combinations should be retrospectively adjusted as of the
acquisition date if the conditions for a measurement-period adjustment are met (see “Measurement
period”).
Assets and liabilities arising from contingencies that were recognized at fair value as of the acquisition
date in accordance with ASC 805-20-25-19, but would have been accounted for under ASC 450 outside a
business combination, will not be adjusted (except for certain measurement-period adjustments) until new
information about the possible outcome of the contingency is obtained. When new information about the
outcome of the contingency is obtained, the acquirer would measure
•
•
A liability at the higher of
−
Its acquisition-date fair value
−
The amount that would be recognized by applying ASC 450
An asset at the lower of
−
Its acquisition-date fair value
−
The best estimate of its future settlement amount
Acquired noncontractual contingencies that do not meet the more-likely-that-not recognition threshold as
of the acquisition date are subsequently accounted for in accordance with other generally accepted
accounting principles, as appropriate. The provisions of ASC 805 will not apply to the recognition or
measurement of those contingent assets or liabilities after the acquisition date.
Derecognition
Assets and liabilities arising from contingencies that are recognized as of the acquisition date are
derecognized only when the contingency is resolved, for example, when the acquirer
•
Collects, sells, or loses the right to the asset
•
Settles the liability or is no longer obligated to settle the liability
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The effect of new information about the outcome of a contingency
An asset or liability arising from a contingency that is recognized on the acquisition date
under ASC 805 will not be adjusted in subsequent periods until new information about the
possible outcome of the contingency is obtained. That requirement might reduce the risk
of recognizing a loss immediately after the acquisition-date solely because the
acquisition-date fair value is less than the amount that would have been recognized under
ASC 450. However, judgment may be required to determine whether new information
about a contingency is of such a nature or significance that it would trigger a
remeasurement adjustment. Further, it may be difficult to determine whether the new
information received during the measurement period should result in a measurementperiod adjustment as of the acquisition date or in a subsequent-period adjustment.
Under ASC 805, the carrying amount of a liability arising from a contingency will not be
reduced below the amount recognized as of the acquisition date until derecognition,
regardless of whether new information indicates that both the fair value and the ASC 450
measurement of the liability would be significantly less than its carrying amount. The
carrying amount of an asset arising from a contingency may not be increased over the
amount recognized as of the acquisition date.
Assets held for sale
Measurement
ASC 805-20-30-22 provides an exception to its general acquisition-date fair value measurement principle
for acquired long-lived assets classified as held-for-sale at the acquisition date, in accordance with ASC
360-10, Property, Plant, and Equipment, “Impairment or Disposal of Long-Lived Assets” subsections
(FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets). Therefore, such
assets are measured at fair value, less cost to sell.
Assets with uncertain cash flows (valuation allowances)
Measurement
Under ASC 805-20-30-4, no separate valuation allowance is recognized as of the acquisition date for
acquired assets measured at acquisition-date fair value because the uncertainty of future cash flows is
reflected in the fair value measurement. However, assets that are not measured at fair value, such as
deferred tax assets and some indemnification assets, may be subject to valuation allowances (see
“Indemnification assets” and “Income taxes”).
Disclosures
To help financial statement users assess considerations of credit quality included in the fair value
measures of acquired receivables, ASC 805-20-50-1 requires disclosures about acquired receivables that
are not subject to ASC 310, Receivables, 30, “Loans and Debt Securities Acquired with Deteriorated
Credit Quality (AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer).
Employee benefits
ASC 805-20-25-22 refers to guidance in other accounting standards for the acquisition-date measurement
and recognition of assets and liabilities related to the acquiree’s employee benefit arrangements for
deferred compensation, compensated absences, termination, pension, postretirement, and postemployment
benefits. Statement 141R (ASC 805) amends the provisions on business combinations accounting in ASC
805-20-25-23 (FASB Statement 87, Employers’ Accounting for Pensions), and in ASC 805-20-25-25
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(FASB Statement 106, Employers’ Accounting for Postretirement Benefits), to provide the following
guidance:
•
For an acquiree-sponsored, single-employer defined benefit pension or postretirement plan, the
acquirer recognizes an asset or liability for the funded status of the plan as part of the business
combination. The measurement of the asset or liability recognized excludes the effects of expected
plan amendments, terminations, or curtailments that the acquirer has no obligation to make as of the
acquisition date. However, the projected benefit (or postretirement benefit) obligation assumed should
reflect any changes in assumptions necessary to reflect the acquirer’s assessment of other relevant
future events.
•
If an acquiree participates in a multiemployer plan and it is probable as of the acquisition date that the
acquirer will withdraw from that plan, the acquirer would recognize a withdrawal liability in
accordance with ASC 450 as part of the business combination.
Income taxes
Under ASC 805-740-25-2, deferred taxes and uncertain tax positions in a business combination are
accounted for in accordance with ASC 740, as amended by ASC 805. Also, Statement 141R (ASC 805)
will nullify EITF Issue, 93-7, “Uncertainties Related to Income Taxes in a Purchase Business
Combination” (not included in Codification).
Acquisition-date change in acquirer’s valuation allowance
Under ASC 740, as amended by Statement 141R (ASC 805), a change in the acquirer’s valuation
allowance on its previously existing deferred tax asset as a result of a business combination will not be
accounted for as part of the business combination and therefore, will not be accounted for as an
adjustment to goodwill. Business combination accounting under ASC 805 will exclude the effects of an
acquisition-date reduction of the valuation allowance on the acquirer’s previously recognized deferred tax
asset for net operating loss carryforwards, even if the allowance was reduced because the related tax
benefits may be used against future taxable profits of the acquiree. In contrast, before the effective date of
ASC 805, such changes in a valuation allowance would be accounted for as part of the business
combination.
Deferred tax asset for excess of tax-deductible over accounting goodwill
Under ASC 805-740-25-8 and 25-9, as amended by Statement 141R (ASC 805), the tax benefit for any
excess of tax-deductible goodwill over the amount of goodwill for financial reporting will be a temporary
difference at the acquisition date. A deferred tax asset would be recognized as an adjustment to goodwill
reported in the financial statements. In contrast, before the effective date of ASC 805, such tax benefits
would be recognized as reductions of goodwill when realized on the tax return.
As illustrated in ASC 805-740-55-9 through 55-13 (the Statement 141R amendments to Statement 109),
the acquisition-date deferred tax asset on the excess of tax-deductible goodwill over book goodwill and
the goodwill recognized for financial reporting are calculated as follows:
•
Preliminary temporary difference = tax-deductible goodwill – book goodwill (before adjustment for
the deferred tax asset associated with goodwill)
•
Deferred tax asset = (tax rate ÷ (1 – tax rate)) × preliminary temporary difference
•
Goodwill recognized for financial reporting = book goodwill (before adjustment for the associated
deferred tax asset) – the associated deferred tax asset
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Subsequent change in the acquired entity’s valuation allowance or tax position
ASC 805-740-45-2 amends the guidance in Statement 109 and in Interpretation 48 (ASC 740) on
accounting for changes in (a) the valuation allowance on an acquired entity’s deferred tax asset or (b) an
acquired tax position. The amendments change the guidance in ASC 740 to be consistent with the ASC
805 conditions for a measurement period adjustment and measurement of identifiable assets acquired.
Accordingly, a change in a valuation allowance for an acquired entity’s deferred tax asset (or a change in
an acquired tax position) will be recognized as follows:
•
A change in the acquiree’s valuation allowance (or in an acquired tax position) will be recognized
through a corresponding change in goodwill if the change occurs (a) during the measurement period
and (b) as a result of new information about facts and circumstances that existed as of the acquisition
date. If goodwill is reduced to zero, any additional decrease in the valuation allowance (or in an
acquired tax position) would be recognized as a gain on a bargain purchase. The fair values of
acquired noncurrent intangible assets would not be reduced prior to recognizing a gain.
•
All other changes would be adjustments to income tax expense or contributed capital, as appropriate,
and would not be recognized as adjustments to the acquisition-date accounting for the business
combination.
Income tax effects of replacement share-based payment awards
ASC 805-740-25-10 through 25-11 provides guidance on accounting for the income tax effects of the
acquirer’s replacement award of an acquiree’s share-based payment award (replacement award) that is
classified as equity and issued in a nontaxable business combination (see “Replacement share-based
payment awards”).
Transition
The amendments to ASC 740 will be applied prospectively to business combinations with acquisition
dates before the effective date of ASC 805. Therefore, ASC 805 will not change the accounting for (a)
previously recognized business combinations or (b) previously recognized changes in valuation
allowances on an acquired deferred tax asset (or changes in an acquired tax position).
Deferred tax assets and tax positions acquired before Statement 141R (ASC 805)
Until the effective date of ASC 805 all subsequent period changes to a valuation
allowance on an acquired entity’s deferred tax asset would first reduce related goodwill to
zero, then reduce to zero any other noncurrent intangible assets related to the acquisition,
and finally reduce income tax expense.
The ASC 805 amendments to ASC 740 will require that all changes in a valuation
allowance for an acquired deferred tax asset or in an acquired tax position that occur after
the effective date of ASC 805 will be recognized in accordance with the amended
guidance. Therefore, except for certain measurement period adjustments, all such changes
that occur after the effective date of ASC 805 will be recognized as adjustments to
income tax expense or contributed capital, as appropriate, even if the deferred tax asset or
tax position was initially acquired prior to the effective date of ASC 805.
Indemnification assets
Indemnification assets arise from the seller’s complete or partial indemnification of the acquirer for the
outcome of a particular uncertainty, such as an uncertain tax position. ASC 805 provides the following
guidance on accounting for indemnification assets acquired in a business combination.
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Recognition and measurement
Under ASC 805-20-25-27 through 25-28, the acquirer recognizes an indemnification asset at the same
time that it recognizes the indemnified item. Therefore, an indemnification asset would be recognized as
of the acquisition date only if the indemnified item is recognized as of the acquisition date. For example,
if a noncontractual loss contingency does not give rise to a liability that meets the more-likely-than-not
recognition threshold on the acquisition date, the acquirer would not recognize an asset on the acquisition
date for the seller’s indemnification of that loss contingency.
An indemnification asset recognized under ASC 805-20-25-27 through 25-28 is measured on the same
basis as the indemnified item according to the contractual terms of the agreement using assumptions
consistent with those used to measure the indemnified item. Therefore, the indemnification asset may not
be measured at its acquisition-date fair value. The amount recognized for an indemnification asset is
subject to management’s assessment of collectibility. A valuation allowance may be recognized at the
acquisition date for an indemnification asset that is not measured at fair value, but no valuation allowance
would be recognized for indemnification assets that are measured at fair value.
Subsequent accounting
An acquired indemnification asset recognized as of the acquisition date under ASC 805-20-30-18 through
30-19 is subsequently remeasured each reporting date on the same basis as the indemnified asset or
liability, subject to any contractual limitations on its amount. Amounts that are subsequently measured on
a basis other than fair value are also subject to management’s assessment of collectibility.
Derecognition
An indemnification asset is derecognized only when the acquirer collects it, sells it, or loses the right to it.
Example: indemnification of an uncertain tax position
The seller agrees to fully indemnify the acquirer for an uncertain tax position for which
the acquirer recognizes an acquisition-date liability in accordance with the uncertain tax
position guidance of ASC 740, as amended by Statement 141R (ASC 805). As of the
acquisition date, the acquirer would recognize an indemnification asset for the same
amount as the related liability, based on the acquirer’s assessment that the asset is fully
collectible.
If the buyer agrees to indemnify only a portion of the liability, the asset is measured on
the same basis used to measure the indemnified liability, but the indemnification asset is
limited to the amount indemnified.
Insurance and reinsurance contracts
Statement 141R (ASC 805) amends Statement 60 (ASC 944-805-25-1 through 25-5 and 30-1 through 302) to provide the following guidance on an insurer’s accounting for insurance and reinsurance contracts
acquired in a business combination. The acquirer considers the acquired contracts to be new contracts for
accounting and measurement purposes, but not for classification purposes.
Measurement
The acquirer measures the assets and liabilities related to the acquired insurance and reinsurance contracts
at their acquisition-date fair values.
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Recognition
The acquirer separately recognizes the following components of the fair value measurement of an
insurance or reinsurance contract:
•
Assets and liabilities arising from the contract measured in accordance with the accounting policies
used by the acquirer for contracts it issues or holds. Those asset and liabilities do not include the
acquiree’s deferred acquisition costs or unearned premiums.
•
An intangible asset (or liability) measured as the difference between (a) the fair value of the
contractual insurance or reinsurance rights acquired and obligations assumed and (b) the amount
recognized for the assets and liabilities arising from the contract that are measured in accordance with
the acquirer’s accounting policies
Classification
The acquirer will carry forward the acquiree’s classification of an acquired contract as an insurance (or
reinsurance) contract or deposit contract. Reassessment of that classification is required as of the
acquisition date only if the contract is modified at the acquisition date in a manner that would change the
classification.
Subsequent accounting
After the acquisition date, the intangible asset is measured on a basis consistent with the related insurance
or reinsurance liability.
Leases
ASC 805 provides guidance on accounting for an acquiree’s leases that is consistent with the existing
accounting requirements for leases.
Recognition of operating leases
Regardless of whether the acquiree is the lessee or lessor in an operating lease, the acquirer recognizes
either (a) an intangible asset if the terms of an acquiree’s operating lease are favorable to market terms at
the acquisition date or (b) a liability if the terms of the operating lease are unfavorable to market terms.
The acquirer would also recognize an identifiable intangible asset for an operating lease at market terms if
the lease has value for market participants.
For an operating lease in which the acquiree is the lessee, the acquirer would not recognize any assets or
liabilities other than those described in the preceding paragraph.
For operating leases in which the acquiree is the lessor, the acquisition-date fair value of an intangible
asset or liability recognized for the operating lease is not part of the acquisition-date fair value of the asset
subject to the lease. The acquirer measures and recognizes the asset subject to the lease separately from
any intangible asset or liability arising from the lease contract.
Recognition of capital leases in which the acquiree is the lessee
For capital leases in which the acquiree is the lessee, the acquirer would separately recognize the leased
asset and the related financial obligation at their fair values.
Measurement
ASC 805’s general fair value measurement principle applies to lease contracts.
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Classification
ASC 805-20-25-8 provides an exception to its general acquisition-date classification principle for
acquired leases. Therefore, in accordance with ASC 840, Leases (FASB Interpretation 21, Accounting for
Leases in a Business Combination), the acquiree’s classification of a lease as operating or capital in
accordance with the criteria of ASC 840-10-25-1 (FASB Statement 13, Accounting for Leases), would not
change as a result of a business combination, unless the provisions of the lease are modified. Statement
141R (ASC 805) amends Interpretation 21 (ASC 840-10-35-5) to clarify that lease modifications planned
at the acquisition date, but made after the acquisition date, are accounted for as postcombination events.
Reacquired rights
The acquirer in a business combination may reacquire a right that was previously granted to the acquiree
to use the acquirer’s recognized or unrecognized asset.
Recognition
ASC 805-20-25-14 through 25-15 incorporates the existing provision in EITF Issue 04-1 that requires the
acquirer to recognize the reacquired right as an identifiable intangible asset.
Measurement
ASC 805-20-30-20 establishes the requirement to measure the acquisition-date value of the reacquired
right based on the remaining contractual term of the related contract without consideration of potential
contract renewals. In addition, as currently required under EITF Issue 04-1 (ASC 805-20-25-15), if the
contract is favorable or unfavorable compared to similar current market transactions, the acquirer
recognizes a gain or loss on the effective settlement of a preexisting relationship (see “Effective
settlement of a preexisting relationship”).
Subsequent accounting
ASC 805-20-35-2 requires that the reacquired right be amortized over the remaining contractual period of
the contract granting the right, without consideration of potential renewals. If the acquirer reissues the
reacquired right to a third party, the carrying amount of the reacquired right is included in the
determination of any gain or loss on reissuance.
Research and development
Recognition and measurement
ASC 805 does not provide an exception to its general recognition and measurement principle for research
and development assets. Therefore, in a business combination under ASC 805, tangible and intangible
assets used in research and development are recognized at their acquisition-date fair values and are not
immediately charged to expense, regardless of whether they have any alternative future use in another
research and development project or otherwise (see “Measurement principle” for a discussion of the use
of market-participant assumptions for highest and best use in measuring the fair value of an acquired inprocess research and development project). Accordingly, ASC 805 nullifies FASB Interpretation 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method
(not included in Codification), and amends the following statements:
•
FASB Statement 2, Accounting for Research and Development Costs (ASC 730, Research and
Development, 10)
•
FASB Statement 68, Research and Development Arrangements (ASC 730-20, “Research and
Development Arrangements”)
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FASB Statement 86, Accounting for the Costs of Computer Software to Be Sold. Leased, or
Otherwise Marketed (ASC 985, Software, 20, “Costs of Software to Be Sold, Leased, or Marketed”)
Until the effective date of ASC 805, costs assigned in a business combination to acquired research and
development assets that have no alternative future use are immediately charged to expense.
Subsequent accounting
ASC 730-10-15-4f, as amended by Statement 141R (ASC 805), requires tangible assets recognized in a
business combination that are used in a research and development activity to be accounted for after the
acquisition date in accordance with their nature. The amount recognized as part of the business
combination would not be charged to expense immediately after the acquisition date solely because the
asset has no alternative future use in another research and development activity or otherwise.
Statement 141R (ASC 805) amends Statement 142 (ASC 350-30-35-17A) to require that an intangible
asset used in research and development activities that is recognized in a business combination be
accounted for as an indefinite-lived asset until the associated research and development efforts are
completed or abandoned. The acquirer would determine the useful life of the intangible asset on
completion or abandonment of the associated research and development efforts.
In-process research and development
For ASC 805, the FASB concluded that in-process research and development acquired in
a business combination generally will satisfy the definition of an asset, because the
exchange at the acquisition date provides evidence that future economic benefits are
expected to result from the research and development. The requirement to measure the
fair value of in-process research and development acquired in a business combination
already exists under Statement 141, but Statement 141 requires that value to be charged
immediately to expense rather than recognized as an asset.
The requirement under ASC 730-30-35-17A to recognize in-process research and
development projects acquired in a business combination as assets does not apply to
additional costs incurred after the business acquisition date. In accordance with ASC 73010, costs incurred and assets acquired after the date of the business combination are
expensed as incurred, if used in research and development activities with no alternative
future use.
Restructuring costs
Recognition
Under ASC 805-20-25-2, costs that an acquirer expects, but is not obligated, to incur in the future either
to exit an acquired activity or to terminate or relocate the acquiree’s employees are not accounted for as
part of the business combination. Statement 141R (ASC 805) amends the scope of FASB Statement 146,
Accounting for Costs Associated with Exit or Disposal Activities (ASC 420, Exit or Disposal Cost
Obligations), to include exit activities associated with an entity newly acquired in a business combination
and also nullifies EITF Issue 95-3, “Recognition of Liabilities in Connection with a Purchase Business
Combination” (not included in Codification). Under ASC 805-20-25-2, an exit or disposal plan by itself
does not create a present obligation to incur costs under the plan. Therefore, the expectation of incurring
such costs would not meet the definition of a liability as of the acquisition date. Any liability for costs
associated with that exit or disposal plan would be recognized in subsequent periods when the recognition
requirements of ASC 420 have been met.
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Acquisition-date value of the acquiree
Under ASC 805, the acquirer must measure the total acquisition-date value of the acquiree to determine
the amount of goodwill or gain on a bargain purchase to recognize as part of the business combination.
The total acquisition-date value of the acquiree equals the sum of the following:
•
The acquisition-date value of consideration transferred by the acquirer, which is generally the
acquisition-date fair value of the consideration (see “Consideration transferred for the acquiree”)
−
However, in a combination effected solely by an exchange of equity interests, the acquisition-date
fair value of the acquiree’s equity interests should be used to measure the fair value of the
consideration transferred if the acquiree’s equity interests are more reliably measurable than the
equity interests issued by the acquirer.
•
The acquisition-date fair value of any equity interests in the acquiree held by the acquirer
immediately before the acquisition
•
The acquisition-date fair value of any remaining noncontrolling interests (see “Noncontrolling
interests in a partially-owned acquiree”)
Business combination achieved in stages (step acquisition)
An acquirer may obtain control of an acquiree in which the acquirer had an equity interest before the
acquisition date. ASC 805-10-25-10 requires that any equity interest in the acquiree held by the acquirer
immediately before the acquisition date be adjusted to acquisition-date fair value. Any resulting gain or
loss will be recognized in earnings. The calculation of the acquisition-date gain or loss will include
reclassification of any related amounts previously recognized in accumulated other comprehensive
income by the acquirer.
Noncontrollng interests in a partially owned acquiree
Under ASC 805-20-30-1, noncontrolling interests in an acquiree are measured at acquisition-date fair
value, which includes goodwill attributable to the noncontrolling interests. The per-share fair value of the
noncontrolling interests in an acquiree might differ from the per-share fair value of the acquirer’s
controlling interest because of the existence of a control premium or minority interest discount.
The acquisition method of accounting for a business combination under ASC 805 does not apply to the
parent’s acquisition of some or all of the noncontrolling interests in a subsidiary after the business
combination date. Statement 160 (ASC 810-10), issued concurrently with Statement 141R (ASC 805),
provides new guidance on accounting for changes in the controlling interest in a subsidiary and on
presenting noncontrolling interests in consolidated financial statements (see NDS 2008-18).
In contrast, until the effective date of ASC 805 and ASC 810-10, the acquisition of additional equity
interests in a consolidated subsidiary must be accounted for by the purchase method in accordance with
Statement 141.
Goodwill or gain on a bargain purchase
Under ASC 805-30-30-1, the acquirer measures and recognizes either goodwill or a gain on a bargain
purchase as a residual amount, which is the difference between the following:
•
The total acquisition-date value of the acquiree (see “Acquisition date value of the acquiree”)
•
The net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed in
the combination, measured and recognized according to the provisions of ASC 805
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Bargain purchase
ASC 805-30-30-4 defines a bargain purchase as a business combination in which (a) the net of the
acquisition-date amounts of the identifiable assets acquired and liabilities assumed in the combination,
measured and recognized according to the provisions of ASC 805-30-30-1, exceeds (b) the total
acquisition-date value of the acquiree. A bargain purchase gain, therefore, could be in part the result of
ASC 805’s exceptions to its acquisition-date fair value measurement principle. ASC 805-30-25-4 requires
the acquirer to reassess whether it has identified all assets acquired and liabilities assumed and its
measurement procedures before recognizing a gain on a bargain purchase. A bargain purchase gain is
attributed to the acquirer.
Measuring goodwill or a bargain purchase gain
The value of identifiable assets acquired is not reduced before gain recognition
ASC 805 eliminates the requirement under Statement 141 to reduce the acquisition-date
amounts assigned to certain identifiable assets before recognizing any gain from negative
goodwill. Under ASC 805-30-30-1, the recognized acquisition-date value of the identifiable
assets acquired is not affected by the existence of goodwill or a bargain purchase gain.
For example, assume that 100 percent of a business is purchased in a single transaction for
cash. If the acquired identifiable net assets are valued at $100 as of the acquisition date, the
acquirer would recognize those net identifiable assets at $100, regardless of whether the
value of consideration transferred for the acquiree is $115 (resulting in goodwill of $15) or
$90 (resulting in a bargain purchase gain of $10).
Goodwill and a bargain purchase gain are not both recognized in the same transaction
The following is based on the example in ASC 805-30-55-15.
Assume the following:
• The acquirer purchases 80 percent of the acquiree’s equity interests in exchange for
$150 cash.
•
The acquisition-date value of the identifiable assets acquired is $250, of the liabilities
assumed is $50, and of the 20 percent noncontrolling interest is $42.
The calculation of the gain on this purchase is as follows:
Acquisition-date value recognized for identifiable net assets acquired
Less consideration transferred
Less acquisition-date fair value of 20 percent noncontrolling interest in the
acquiree
Gain on bargain purchase of 80 percent
$200
150
42
$ 8
The $8 gain recognized is attributed to the acquirer’s controlling interest.
Note that the $42 fair value of the noncontrolling interest is greater than 20 percent of the
$200 amount recognized for the identifiable net asset acquired. The $2 excess technically
represents goodwill inherent in the fair value of the noncontrolling interest. However, in
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accounting for the acquisition, the acquirer recognizes a gain on a bargain purchase of $8. It
would not be correct to recognize a gain of $10 (attributable to the acquirer’s 80 percent
acquired interest) and goodwill of $2 (attributable to the 20 percent noncontrolling interest).
The measurement and recognition of goodwill or a bargain purchase gain under ASC 805 is significantly
different than measurement and recognition under Statement 141. In a business combination under
Statement 141, goodwill is separately measured and recognized for each acquisition of the acquiree’s
equity interests and those purchase layers are not adjusted to fair value on the date of the business
combination. Goodwill attributable to the noncontrolling interests in the acquiree is not recognized. Under
Statement 141, if the value of the identifiable net assets acquired exceeds the cost of a business
combination, the recognized value of certain long-lived assets is reduced to zero. Any remaining excess is
recognized as an extraordinary gain.
Goodwill impairment testing
For a goodwill impairment test under ASC 350, as amended by Statements 141R (ASC 805) and 160
(ASC 810-10), the value of the reporting unit and the amount of implied goodwill calculated in the second
step of the test will be determined in accordance with the measurement and recognition guidance on
accounting for business combinations under ASC 805. The amendments to ASC 350 will apply to
goodwill tested for impairment after ASC 805 and ASC 810-10 become effective, including goodwill
recognized before the effective date of ASC 805 and ASC 810-10.
Neither ASC 805 nor ASC 810-10 provides for a transitional impairment test as of their effective date
except for goodwill recognized in combinations of two or more mutual entities before the effective date of
ASC 805 (see “Mutual entities, transition”).
Consideration transferred for the acquiree
Consideration transferred includes assets transferred, liabilities incurred by the acquirer to former owners
of the acquiree, and equity interests issued by the acquirer in consideration for its interest in the acquiree.
Under ASC 805, consideration transferred by the acquirer for the business does not include acquisitionrelated costs or other amounts transferred in transactions that are not part of the business combination (see
“What is part of the business combination transaction?”).
ASC 805-30-30-7 through 30-13 requires measuring the consideration transferred at its acquisition-date
fair value, with the following exceptions:
•
Replacement share-based payment awards are measured in accordance with ASC 718, Compensation
– Stock Compensation (FASB Statement 123 (revised 2004), Share-Based Payment (Statement
123R)) (see “Replacement share-based payment awards”).
•
Transfers of assets or liabilities that remain within the combined entity after the acquisition are
measured at their carrying amounts immediately before the acquisition date
Acquisition-date measurement gains and losses
The acquirer recognizes a gain or loss for any differences between the acquisition-date values (generally
fair values, as noted in the preceding paragraph) and the acquisition-date carrying amounts of the assets
and liabilities of the acquirer that are included in consideration transferred for the acquiree. However, no
gain or loss would be recognized on any transferred assets or liabilities that are not remeasured on the
acquisition date because they remain within the combined entity.
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Equity securities issued
Equity securities issued to effect a business combination under ASC 805 are measured at fair value at the
acquisition-date. In contrast, measurement under Statement 141 requires consideration of the market price
for the securities for a reasonable period before and after the date when the acquisition terms are agreed
on and announced.
Contingent consideration
Under ASC 805-30-25-5 through 25-7, the acquisition-date value of the consideration transferred for the
acquiree includes the acquisition-date fair value of any contingent consideration, which is either the right
to a return of previously transferred consideration if certain conditions are met or an obligation to transfer
additional consideration if certain conditions are met.
ASC 805-10-55-25 provides a list of indicators for determining whether contingent payments to
employees or former shareholders of the acquiree are (a) contingent consideration exchanged for the
acquiree or (b) transactions separate from the business combination. This guidance supersedes similar
guidance in EITF Issue 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination,” (not included in Codification) which ASC 805
nullifies.
Classification
The amount recognized for a contingent right to a return of previously transferred consideration is
classified as an asset. The amount recognized for a contingent obligation to pay additional consideration
is classified as either a liability or equity in accordance with applicable generally accepted accounting
principles, including ASC 480, Distinguishing Liabilities from Equity (FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity), and ASC 815,
Derivatives and Hedging, 40, “Contracts in Entity’s Own Equity” (EITF Issue 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”).
Subsequent accounting
Under ASC 805-30-35-1, consideration transferred that is accounted for as part of the business
combination transaction is adjusted for changes in the fair value of contingent consideration during the
measurement period, only if those changes result from new information about facts and circumstances
that existed as of the acquisition date. Measurement-period adjustments of the consideration transferred
will not include changes resulting from subsequent events, such as meeting an earnings target. Other
changes in the fair value of contingent consideration will be accounted for as follows:
•
Contingent consideration classified as an asset or a liability will be adjusted to fair value at each
reporting date through earnings (or other comprehensive income for certain hedging instruments
under ASC 815-20, “Hedging – General”) until the contingency is resolved.
•
Contingent consideration classified as equity will not be remeasured. The settlement of contingent
consideration classified as equity will be accounted for within equity.
Possible effects of ASC 805 contingent consideration accounting
Under ASC 805, the effect of the resolution of a contingency may be counter-intuitive.
For example, assume that the amount of consideration to be paid for an acquired business
will be based on whether the postcombination earnings of the combined entity meet
specified earnings targets. As part of a business combination, the acquirer recognizes a
liability for contingent consideration. The acquirer would recognize
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A postcombination gain if the combined entity does not meet any of the earnings
targets
•
A postcombination loss if the final consideration paid is in excess of the contingent
consideration liability recognized due to earnings in excess of expected amounts
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In contrast, under Statement 141, contingent consideration usually is not recorded until the contingency is
resolved and the consideration is issued or becomes issuable. Generally, under Statement 141, the
recorded cost of the acquired entity is affected by consideration recognized on the resolution of a
contingency based on earnings, but not by consideration recognized on the resolution of a contingency
based on security prices.
Replacement share-based payment awards
ASC 805-30-30-9 through 30-13 provides guidance on the accounting for share-based payment awards
issued by acquirers to replace share-based payment awards of the acquired company. The guidance is
similar to the current accounting for such replacement awards, but is more detailed than the accounting
literature entities are currently applying by analogy (see NDS 2008-7, “Share-based payment”).
Allocation between consideration transferred and postcombination compensation cost
The primary accounting issue for replacement awards in business combinations is the allocation of the
acquisition-date value of the replacement awards between (a) consideration transferred for the acquired
business and (b) compensation cost to be recognized in the acquirer’s postcombination financial
statements as the services are performed, or immediately if the replacement awards are fully vested on
issuance (postcombination compensation cost).
Exchanges of the acquirer’s replacement awards for the acquiree’s share-based payment awards are
accounted for as modifications using the fair-value-based measurement method of ASC 718. If the
acquirer is obligated to replace the acquiree’s awards, either all or a portion of the acquisition-date value
of the replacement awards is consideration transferred. The acquirer is obligated to replace the acquiree’s
awards if the acquiree or its employees can enforce replacement, for example, because replacement is
required under the terms of either the acquisition agreement or the awards or under applicable laws or
regulations. In contrast, the acquirer is not obligated to replace the awards if, for example, the terms of the
acquiree’s awards provide that the awards expire on the occurrence of a business combination. If the
acquirer either replaces awards that it is not obligated to replace or otherwise grants share-based awards to
employees of the acquiree that are not replacement awards, the entire acquisition-date value of the awards
is accounted for as share-based compensation in the postcombination financial statements, and no amount
is allocated to consideration transferred.
To allocate between consideration transferred and postcombination compensation cost, the acquisitiondate value of both equity- and liability-classified replacement awards that the acquirer is obligated to
issue, the acquirer must
1. Measure both the replacement awards and the acquiree awards as of the acquisition date using the
fair-value-based measurement method of ASC 718 (or, for nonpublic entities, the calculated value
method or, for awards classified as liabilities, the intrinsic value method, as applicable to either the
replacement awards or the acquiree awards).
The acquisition-date value of replacement awards that require postcombination service (unvested
replacement awards) should reflect only the number of replacement awards expected to vest.
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2. Allocate to consideration transferred the portion of the replacement award attributable to
precombination service, which is determined as follows:
−
The acquisition-date value of the acquiree awards expected to vest is multiplied by the ratio of (a)
the requisite service completed before the acquisition date to (b) the greater of (i) the total service
period or (ii) the original requisite service period of the acquiree award. The total service period
is the sum of (a) the requisite service completed before the acquisition date and (b) the
postcombination requisite service period, if any, for the replacement awards. The requisite service
period consists of applicable explicit, implicit, and derived service periods, as provided under
ASC 718-10-35-5.
3. Allocate to postcombination compensation cost any excess of the total acquisition-date value of the
replacement awards expected to vest over the amount attributable to precombination service
computed in step 2.
Because the exchange of acquirer share-based payment awards for acquiree awards is accounted for as a
modification under ASC 718-20-35-3, any excess of the acquisition-date value of the replacement awards
over the acquisition-date value of the acquiree awards must be recognized as postcombination
compensation cost. The calculation in step 3 automatically includes the excess acquisition-date value of
replacement awards in postcombination compensation cost because the amount attributable to
precombination service in step 2, and then subtracted from the acquisition-date value of replacement
awards in step 3 (to determine postcombination compensation cost), is based on the acquisition-date value
of the acquiree award.
The following example illustrates the allocation of the acquisition-date value of replacement awards
between consideration transferred and postcombination compensation cost.
Example: allocation of replacement award
An acquiring company issued 100 replacement awards having an acquisition-date value
of $1,200 (measured in accordance with ASC 718) and a two-year vesting period to
replace 100 awards held by the acquiree’s employees. The acquiree’s awards had a fouryear requisite service period and an acquisition-date value of $1,000 (measured in
accordance with ASC 718). The employees had rendered one year of service as of the
acquisition date.
The acquisition-date value of the replacement awards attributable to precombination
service and accounted for as consideration transferred was $250, computed as follows:
$1,000 x (1 year of precombination service / 4-year original requisite service period)
The four-year original requisite service period is used in the calculation because it is
greater than the total service period of one year of precombination requisite service plus
two years of postcombination requisite service.
The postcombination compensation cost would be $950 computed as follows:
$1,200 - $250
The $200 excess compensation included in the replacement awards ($1,200 – $1,000) is
included in postcombination compensation cost because (a) the calculation of acquisitiondate value attributable to precombination service is based on the acquisition-date value of
the acquiree’s award and (b) postcombination compensation cost is the acquisition-date
value of the replacement awards minus the amount allocated to precombination service.
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The allocation of the $1,200 between consideration transferred and postcombination
compensation cost would be the same if the replacement awards required no
postcombination service. However, in that situation, the acquirer would recognize the
$950 postcombination compensation cost immediately following the acquisition.
Postcombination compensation cost is recognized in the acquirer’s financial statements as required under
ASC 718-10-25-2 through 25-4. Changes and events affecting the value of replacement awards after the
acquisition date do not affect the consideration transferred for the acquired business. Such changes and
events, including those listed below, are accounted for in the acquirer’s postcombination financial
statements:
•
A change in the number of replacement awards expected to vest
•
Changes in the fair value of liability-classified replacement awards
•
Modifications of the replacement awards
•
Changes in the expected or ultimate outcome of performance conditions in replacement awards
Income tax effects of replacement awards
ASC 805-740-25-10 addresses the accounting for the tax effects of equity-classified share-based payment
awards issued as replacement awards in exchange for outstanding awards of the acquiree in a nontaxable
business combination. If the replacement awards are nonqualified―that is, they will result in
postcombination tax deductions under current tax law―the acquirer would recognize a deferred tax asset
for the deductible temporary difference of the portion of the replacement awards’ fair value that relates to
precombination service.
After the acquisition, the tax effects of nonqualified replacement awards are accounted for as required
under ASC 805-740-25-11 and do not affect the consideration transferred for the acquired business.
Similarly, the postcombination tax effects of qualified replacement awards, such as disqualifying
dispositions of shares, are accounted for as provided by ASC 805-740-25-11.
Mutual entities
Fair value measurement
In a combination of two mutual entities under ASC 805, the fair value of the acquiree and the fair value of
the member interests exchanged as consideration are presumed to be equal in the absence of contrary
evidence. For the fair value measurement of a mutual entity under ASC 820, market participant
assumptions should include assumptions about future member benefits. For example, cash flows used as
valuation inputs may reflect member benefits, such as reduced fees for goods and services.
ASC 805-30-55-3 emphasizes that, as in any business combination, the acquirer in a combination of
mutual entities should not recognize the transaction as a direct addition to retained earnings.
Full adoption of ASC 350 for goodwill and intangible assets
Until ASC 805 is effective, mutual entities must apply ASC 350 to account for intangible assets acquired
outside of a business combination, but not for goodwill and other intangible assets acquired in a
combination of two or more mutual entities. ASC 805-10-65-1 will require mutual entities to apply ASC
350, as amended by ASC 805, in its entirety. In addition, ASC 360-10, “Impairment or Disposal of LongLived Assets,” will apply to long-term customer-relationship intangible assets, except for servicing assets,
recognized in the acquisition of a financial institution by a mutual entity.
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Transition
Until ASC 805 becomes effective, combinations between mutual entities are accounted for in accordance
with APB Opinion 16 or Statement 72. For mutual entities with goodwill or intangible assets acquired in
combinations accounted for using the purchase method under APB Opinion 16 or Statement 72, ASC
805-10-65-1 provides transition guidance, similar to that in Statement 141 and FASB Statement 147,
Acquisitions of Certain Financial Institutions (not included in Codification). Mutual entities with
previously recognized goodwill must perform a transitional goodwill impairment test as of the beginning
of the first annual reporting period beginning on or after December 15, 2008.
E. Disclosures
Disclosure objectives
ASC 805-10-50-1 establishes two broad disclosure objectives. The objectives require disclosure of
information that enables financial statements users to evaluate
•
The nature and financial effects of a business combination that occurs either (a) during the current
reporting period or (b) after the reporting date but before the financial statements are issued
•
The financial effects of adjustments recognized in the current reporting period that relate to business
combinations that occurred in the current or previous reporting periods
ASC 805-10-50 provides an extensive list of specific disclosures requirements for each objective (see
“Appendix B Disclosure supplement”). However, the reporting enterprise is also required to disclose any
additional information that may be necessary to meet those objectives. Many of the disclosure
requirements in ASC 805-10-50 are either new or significant modifications of disclosure requirements in
Statement 141.
Amended disclosure requirements in other pronouncements
ASC 805 also amends the disclosure requirements under ASC 944, ASC 740, and ASC 350, as follows:
•
ASC 944-805-50-1, as amended, will extend the ASC 350-30-50-1 through 50-3 disclosure
requirements to intangible assets arising from insurance and reinsurance contracts acquired in a
business combination.
•
ASC 740-10-50-9, as amended, will require that the disclosure of adjustments of the beginning-ofyear valuation allowance balance should include any acquisition-date income tax benefits or expenses
recognized from changes in the acquirer’s valuation allowance for its previously existing deferred tax
asset as a result of a business combination.
•
ASC 350-20-50-1, as amended, will specify additional items that must be disclosed in the
reconciliation of beginning to end of period goodwill carrying amounts.
The acquisition-date disclosures for intangible assets acquired in a business combination that are required
by paragraphs 52(a) and 52(b) of Statement 141 will continue to be required. However, those disclosure
requirements will be included in ASC 350-30-50-1, as amended, rather than in the standard section of
ASC 805.
SAB 74 (Topic 11:M) disclosures for SEC registrants
SEC Staff Accounting Bulletin 74 (Topic11:M), Disclosure Of The Impact That Recently Issued
Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A
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Future Period, discusses disclosures that a registrant should provide in its financial statements and/or in
Management's Discussion and Analysis of Results of Operations and Financial Condition regarding the
estimated impact of recently issued accounting standards will have on its financial statements when the
standard is adopted in a future period.
An SEC registrant should include consideration of Statement 141R (ASC 805) amendments to other
accounting standards in its disclosure of the impact of the new Statement. For example, the Statement
141R (ASC 805) amendments to ASC 740 and ASC 350 will change prospectively the accounting for
certain amounts (valuation allowances on acquired deferred tax assets, acquired tax positions, and
goodwill) recognized in business combinations that occurred before the effective date of ASC 805.
F. Effective date and transition
ASC 805 applies prospectively to business combinations with an acquisition date on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is
prohibited. Therefore, ASC 805 is effective January 1, 2009 for companies with a calendar year-end.
For mutual entities with goodwill or intangible assets acquired in combinations accounted for using the
purchase method under APB Opinion 16 or Statement 72, ASC 805-10-65-1 provides transitional
guidance similar to that in Statement 141 and Statement 147. Mutual entities with previously recognized
goodwill must perform a transitional goodwill impairment test as of the beginning of the first annual
reporting period beginning on or after December 15, 2008.
Transition for amendments to ASC 740
After the effective date of ASC 805, the amendments to ASC 740 will be applied prospectively to
previous business combinations. ASC 805 will not change the accounting recognized in previous periods
(a) for business combinations or (b) for changes in either an acquired tax position or valuation allowances
on an acquired deferred tax asset. However, changes in an acquired tax position or changes in the
valuation allowance for an acquired deferred tax asset that occur after the effective date of ASC 805 will
be recognized as adjustments to income tax expense or contributed capital, as appropriate, in accordance
with the amended guidance in ASC 805-740.
G. International convergence
The FASB and the IASB reached the same conclusions on most, but not all, of the issues addressed in
ASC 805 and revised IFRS 3. Appendix G in Statement 141R (appendix not included in Codification)
summarizes the remaining substantive differences between the business combinations guidance in ASC
805 and the revised IFRS 3.
Two significant differences between ASC 805 and revised IFRS 3 exist because the FASB and the IASB
reached different conclusions on the initial measurement of noncontrolling interests in the acquiree and on
the new standards’ effective dates, as follows:
•
The acquisition-date measurement of noncontrolling interests in an acquiree: ASC 805 requires
noncontrolling interests to be measured and recognized at acquisition-date fair value. Revised IFRS 3
permits the acquirer to measure the noncontrolling interest either at fair value or as its proportionate
share of the acquiree’s net identifiable assets. As a result, under revised IFRS 3, the acquirer that
elects not to measure the noncontrolling interest at fair value would not recognize any goodwill
inherent in the noncontrolling interest.
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Effective dates: The revisions to IFRS 3 will be effective for business combinations with an
acquisition date on or after the beginning of the first annual reporting period beginning on or after
July 1, 2009 with early application permitted. ASC 805 is effective for business combinations with an
acquisition date on or after the beginning of the first annual period beginning on or after December
15, 2008 and prohibits early application.
Other differences between ASC 805 and revised IFRS 3 result from the Boards’ decisions to remain
consistent with other existing FASB and international accounting standards that have not yet been
converged. Such differences exist in the following areas:
•
Control and fair value definitions
•
Leases
•
Assets and liabilities arising from contingencies
•
Income taxes
•
Employee benefit arrangements
•
Replacement share-based payment awards
•
Contingent consideration
•
Certain disclosures
© 2008 Grant Thornton LLP, U.S. Member of Grant Thornton International Ltd. All rights reserved.
This Grant Thornton LLP bulletin provides information and comments on current accounting and tax
issues and developments. It is not a comprehensive analysis of the subject matter covered and is not
intended to provide accounting, tax, or other advice or guidance with respect to the matters addressed in
the bulletin. All relevant facts and circumstances, including the pertinent authoritative literature, need to
be considered to arrive at conclusions that comply with matters addressed in this bulletin.
Moreover, nothing herein shall be construed as imposing a limitation on any person from disclosing the
tax treatment or tax structure of any matter addressed herein. To the extent this bulletin may be
considered to contain written tax advice, any written advice contained in, forwarded with, or attached to
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For additional information on topics covered in this document, contact your Grant Thornton LLP adviser.
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Appendix A
Amendments of other accounting standards [appendix E of Statement 141R]
Appendix E of Statement 141R (appendix E is not included in the Codification, rather the amendments
are included in each applicable Codification topic) makes significant amendments to or nullifies other
authoritative accounting pronouncements categorized as level (a) in the hierarchy of generally accepted
accounting principles (GAAP) discussed in AICPA Statement on Auditing Standards 69, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles.
This appendix summarizes the effects of the Statement 141R (ASC 805) amendments to other FASB
statements and interpretations that are discussed throughout this bulletin and identifies other level (a)
GAAP pronouncements that are amended or nullified by appendix E of Statement 141R. It is not a
complete listing of conforming changes Statement 141R (ASC 805) makes to authoritative accounting
literature and does not address amendments and nullifications of level (a) GAAP that Statement 141R
(ASC 805) carries forward from superseded and nullified pronouncements.
This appendix does not include the changes to accounting literature in categories (b), (c),
and (d) in the GAAP hierarchy, which are addressed in appendix F of Statement 141R
(not included in Codification), such as the nullification of numerous EITF Issues.
None of the changes to authoritative accounting literature in either appendix E or F of
Statement 141R applies to mergers and acquisitions by not-for-profit organizations.
Amendments to level (a) GAAP discussed in this New Developments Summary
Statement 2, Accounting for Research and Development Costs (ASC 730-10)
•
Removes from the scope of Statement 2 (ASC 730-10) any research and development assets acquired
in a business combination under ASC 805, which will require such assets to be recognized at their
acquisition-date fair value regardless of whether they have an alternative future use
•
Requires tangible research and development assets recognized in a business combination to be
subsequently accounted for in accordance with their nature
•
Requires intangible research and development assets recognized in a business combination under
ASC 805 to be subsequently accounted for in accordance with ASC 350-30-35-17A, as amended by
ASC 805
Statement 5, Accounting for Contingencies (ASC 450)
•
Removes from the scope of Statement 5 (ASC 450) the initial recognition and measurement of assets
and liabilities arising from contingencies recognized at the acquisition date of a business combination
Statement 60, Accounting and Reporting by Insurance Enterprises (ASC 944-805)
•
Provides new accounting and reporting requirements for insurance and reinsurance contracts acquired
in a business combination
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Statement 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed (ASC 985-20)
•
Removes from the scope of Statement 86 (ASC 985-20) any research and development assets
acquired in a business combination under ASC 805. Costs incurred after the date of the business
combination continue to be within the scope of Statement 86 (ASC 985-20).
Statement 87, Employers’ Accounting for Pensions (ASC 805-20-25-23)
•
Eliminates consideration of the effects of expected plan amendments, terminations, or curtailments
from the acquisition-date measurement of the projected benefit obligation of an acquired single
employer plan
•
Requires recognition of a withdrawal liability for a multiemployer plan in accordance with ASC 450
if it is probable as of the acquisition date that the acquirer will withdraw from the plan
Statement 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (ASC 805-2025-25)
•
Eliminates consideration of the effects of expected plan amendments, terminations, or curtailments
from the acquisition-date measurement of the accumulated postretirement benefit obligation of an
acquired single-employer plan
•
Requires recognition of a withdrawal liability for a multiemployer plan in accordance with ASC 450
if it is probable as of the acquisition date that the acquirer will withdraw from the plan
Statement 109, Accounting for Income Taxes (ASC 740 and ASC 805-740)
•
Requires that the effect of the business combination on the acquirer’s existing deferred tax asset
allowance be accounted for separately from the business combination and disclosed
•
Specifies that changes in a valuation allowance for an acquired entity’s deferred tax asset after the
acquisition date, that meet the conditions for recognition as a measurement-period adjustment, are the
only changes that may be recorded as adjustments to goodwill from the acquisition
•
Requires, as part of the business combination, the acquisition-date recognition of a deferred tax asset
for the tax benefits arising from tax deductible goodwill in excess of goodwill for financial reporting.
ASC 740, as amended, continues to prohibit recognition of a deferred tax liability if the reported
amount of goodwill exceeds the amount of goodwill deductible for tax purposes.
Statement 142, Goodwill and Other Intangible Assets (ASC 350)
•
Removes intangible assets recognized for acquired insurance contracts under the requirements of
ASC 944 from the scope of ASC 350
•
Redefines goodwill as “an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognized”
•
Requires that the measurement and recognition guidance in ASC 805 be used in the second step of the
goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill
•
Provides new guidance on accounting after the acquisition date for intangible research and
development assets and reacquired rights recognized in a business combination
•
Requires mutual entities to apply ASC 350 in its entirety as of the beginning of the first annual period
beginning on or after December 15, 2008, regardless of when those assets were initially recognized,
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thereby removing the deferral of the effective date of ASC 350 for goodwill and intangible assets
acquired in a combination between mutual entities
•
Requires expanded disclosure of changes in the reconciliation of beginning- to end-of-period
goodwill carrying amounts
•
Requires the acquisition-date disclosures about intangible assets acquired in a business combination
that are required by paragraphs 52(a) and 52(b) of Statement 141 but not carried over in the disclosure
requirements listed in the standard section of Statement 141R (ASC 805)
Statement 146, Accounting for Costs Associated with Exit or Disposal Activities (ASC 420)
•
Expands the scope of Statement 146 (ASC 420) to include exit activities associated with a business
combination
FASB Interpretation 21, Accounting for Leases in a Business Combination (ASC 840)
•
Clarifies that modifications that are planned as of the acquisition date, but made after the acquisitiondate, are to be accounted for as postcombination events
FASB Interpretation 46R, Consolidation of Variable Interest Entities (ASC 810-10, “Variable Interest
Entities”)
•
Conforms the definition of a business used in ASC 810-10, “Variable Interest Entities” to the
definition in ASC 805
•
Provides that the initial consolidation of a variable interest entity that is a business by its primary
beneficiary is a business combination in the scope of ASC 805
•
Requires that the initial consolidation of a variable interest entity that is not a business use the
measurement and recognition guidance in ASC 805 for identifiable assets acquired and liabilities
assumed (except for enterprises under common control or assets and liabilities that are consolidated
shortly after transfer from the primary beneficiary to the variable interest entity)
FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (ASC 740)
•
Provides guidance on accounting for income tax positions acquired in a business combination
Other level (a) GAAP pronouncements amended in appendix E of Statement 141R
Appendix E of Statement 141R also makes conforming amendments to the following pronouncements:
•
ARB 43, Restatement and Revision of Accounting Research Bulletins, Chapter 1A, “Prior Opinions;
Rules Adopted by Membership” (amendment to delete paragraph 3 - so not included in Codification)
•
APB Opinion 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
(ASC 470-20)
•
APB Opinion 18, The Equity Method of Accounting for Investments in Common Stock (ASC 323)
•
APB Opinion 28, Interim Financial Reporting (ASC 270)
•
APB Opinion 29, Accounting for Nonmonetary Transactions (ASC 845)
•
APB Opinion 30, Reporting the Results of Operations: Reporting the Effect of Disposal of a Segment
of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions
(ASC 225-20 Glossary)
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•
FASB Statement 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (ASC
310-40 and ASC 470-60)
•
FASB Statement 45, Accounting for Franchise Fee Revenue (ASC 952-605)
•
FASB Statement 52, Foreign Currency Translation (ASC 830)
•
FASB Statement 68, Research and Development Arrangements (ASC 730-20)
•
FASB Statement 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments (ASC 944)
•
FASB Statement 113, Accounting and Reporting for Reinsurance of Short-Duration and LongDuration Contracts (ASC 944)
•
FASB Statement 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts (ASC 944-20)
•
FASB Statement 123 (revised 2004), Share-Based Payment (ASC 718)
•
FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities (ASC 815)
•
FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10,
“Impairment or Disposal of Long-Lived Assets”)
•
FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (ASC 480)
•
FASB Statement 154, Accounting Changes and Error Corrections (ASC 250)
•
FASB Interpretation 26, Accounting for Purchase of a Leased Asset by the Lessee during the Term of
the Lease (ASC 840-30-35-14)
•
FASB Technical Bulletin 84-1, Accounting for Stock Issued to Acquire the Results of a Research and
Development Arrangement (not included in Codification)
•
Statement 133 Implementation Issue E15, “Continuing the Shortcut Method after Purchase Business
Combination” (ASC 815-20-55-199 through 55-203)
FASB Statements, Interpretations, Technical Bulletin, and Staff Position nullified
Appendix E of Statement 141R nullifies the following pronouncements:
•
FASB Statement 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions (not
included in Codification)
•
FASB Statement 147, Acquisitions of Certain Financial Institutions (not included in Codification)
•
FASB Interpretation 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted
for by the Purchase Method (not included in Codification)
•
FASB Interpretation 9, Applying APB Opinion 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 (not included in Codification)
•
FASB Technical Bulletin 85-5, Issues Relating to Accounting for Business Combinations (not
included in Codification)
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FASB Staff Position FAS 141-1 and 142-1, “Interaction of FASB Statements No. 141 and 142 and
EITF Issue No. 04-2” (not included in Codification)
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Appendix B: Disclosure supplement
ASC 805-10-50-1 through 50-8
ASC 805-10-50-1 establishes two broad disclosure objectives and a list of specific disclosure
requirements to meet those objectives. However, the reporting enterprise is responsible for making any
additional disclosures that may be necessary to meet those objectives.
Objective:
The acquirer shall disclose information that enables users of its financial statements to
evaluate the nature and financial effect of a business combination that occurs either (a)
during the current reporting period or (b) after the reporting date but before the financial
statements are issued.
The following disclosures are required for each business combination that occurs during the reporting
period, or between the reporting date and the financial statement issuance date:
•
The name and description of the acquiree
•
The acquisition date
•
The percentage of voting equity interests acquired
•
The primary reasons for the business combination
•
A description of how the acquirer obtained control of the acquiree
The following disclosures are required for each business combination, or in aggregate for immaterial
business combinations that are collectively material, that occurs during the reporting period or between
the reporting date and the financial statement issuance date:
•
A description of the factors that make up the goodwill recognized
•
For consideration transferred, the acquisition-date value, in total and by major class
−
For equity interests of the acquirer included in consideration transferred, the disclosure includes
the number of instruments or interests issued or issuable and the method of determining the fair
value of those instruments or interests
•
For contingent consideration arrangements and indemnification assets, the acquisition-date amount
recognized, a description of the arrangement and the basis for determining the payment amount, an
estimate of the range of undiscounted outcomes or the reasons why a range could not be estimated,
and the fact that payment is unlimited, if applicable
•
For each major class of receivables acquired (except for receivables that are subject to AICPA
Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(ASC 310-30)), the fair value of the receivables, the gross contract amounts receivable, and the best
estimate as of the acquisition date of the contractual cash flows not expected to be collected
•
The acquisition-date amounts recognized for each major class of assets acquired and liabilities
assumed
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•
For assets and liabilities arising from contingencies, the acquisition-date amount recognized or the
reason why no amount was recognized, the nature of the recognized and unrecognized contingencies,
and an estimate of the range of undiscounted outcomes for contingencies or the reasons why a range
could not be estimated. The disclosures may be aggregated for contingencies of a similar nature.
•
For goodwill recognized in an acquisition, the total amount of goodwill that is expected to be tax
deductible, the amount of goodwill by reportable segment (if the acquirer is required to disclose
segment information in accordance with ASC 280, Segment Reporting (FASB Statement 131,
Disclosures About the Segments of an Enterprise and Related Information), and, if applicable, the fact
that the assignment of goodwill to reporting units required by ASC 350 has not been completed
•
For transactions accounted for separately from the business combination, a description of the
transaction, how it was accounted for, the amount recognized, the financial statement line item in
which it was recognized, and how the amount of an effective settlement of a preexisting relationship
was determined, if applicable
−
For acquisition-related costs, the amount of such costs, the amount recognized as expense and the
income statement line items in which the expense was recognized, and the amount of any debt or
equity issuance costs not recognized as expense and how they were recognized
•
The amount of and reasons for any gain recognized in a bargain purchase and the income statement
line item where it is recognized
•
The acquisition-date fair value of any noncontrolling interest in the acquiree and the valuation
techniques and significant inputs used to determine that value
•
The acquisition-date fair value of any equity interest in the acquiree held by the acquirer immediately
before the acquisition date, the amount of gain or loss on remeasurement to fair value, and the income
statement line item that includes the gain or loss
•
For a public business enterprise (as defined in ASC Glossary) the following disclosures:
•
−
The amount of revenue and earnings of the acquiree since the acquisition date included in the
consolidated income statement for the period
−
Supplemental pro forma information: The combined entity’s revenues and earnings as though the
acquisition date for all business combinations that occurred during the year was (a) the first day
of the annual reporting period and (b) if comparative financial statements are presented, the first
day of the prior annual reporting period
−
The reason why it is impracticable to disclose any information required in the public business
enterprise disclosures, if applicable
A description of the required disclosures that could not be made, and the reason why, for a business
combination with an acquisition date between the report date and the financial statement issuance
date and for which the initial accounting is not complete.
Objective:
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
that relate to business combinations that occurred in the current or previous reporting
periods.
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The following disclosures for each business combination, or in aggregate for immaterial business
combinations that are collectively material, are required to meet that objective:
•
•
•
•
If the initial accounting for a business combination is incomplete:
−
The assets, liabilities, equity interests, or consideration items for which the initial business
combination accounting is incomplete and the reasons why the accounting is incomplete
−
The nature and amount of any measurement-period adjustments recognized during the reporting
period
For contingent consideration, the following disclosures for each reporting period until the entity
collects, sells, or loses the right to receive a contingent consideration asset, or settles a contingent
consideration liability to pay contingent consideration, or the liability is cancelled or expires:
−
Any changes in the recognized amounts and the reasons for the change
−
Any change in the range of undiscounted outcomes and the reasons for the change
−
The disclosures required by 820-10-50-1 through 50-3
For contingencies, the following disclosures until the acquirer collects, sells, or loses the right to
receive an asset arising from a contingency, or settles a liability arising from a contingency, or the
liability is cancelled or expires:
−
Any change in the recognized amounts and the reasons for the change
−
Any change in the range of undiscounted outcomes for recognized and unrecognized assets or
liabilities arising from contingencies and the reasons for the change
A reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period
as required by ASC 350-20-50-1
Statement 60 (ASC 944-805-50-1), as amended by Statement 141R (ASC 805)
Statement 141R (ASC 805) amends Statement 60 (ASC 944) to require disclosures in ASC 350-30-50-1
through 50-3 for intangible assets arising from the rights and obligations of insurance and reinsurance
contracts acquired in a business combination. (As amended by Statement 141R (ASC 805), Statement 60
(ASC 944), rather than Statement 142 (ASC 350), provides the accounting and disclosure requirements
for insurance and reinsurance contracts acquired in a business combination.)
Statement 109 (ASC 740-10-50-9), as amended by Statement 141R (ASC 805)
ASC 805 amends ASC 740 to require that the disclosure of adjustments of the beginning-of-year
valuation allowance balance should include, for example, 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.
Statement 142 (ASC 350), as amended by Statement 141R (ASC 805)
For intangible assets acquired in a business combination, ASC 350, as amended by ASC 805, will require
the disclosures that are currently required by paragraphs 52(a) and 52(b) of Statement 141.
ASC 805 also amends ASC 350 to require disclosing the following items separately in the reconciliation
of goodwill carrying amounts at both the beginning and end of the reporting period (by reportable
segment if segments are reported under ASC 280):
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Beginning of period: gross carrying amount and accumulated impairment losses
•
Changes during the period:
•
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−
Goodwill recognized, except for goodwill included in a disposal group classified as held for sale
as of the acquisition date
−
Adjustments from the subsequent recognition of deferred tax assets in accordance with 805-74025-3 through 25-4 and 805-740-45-2, as amended by ASC 805
−
Goodwill included in a disposal group classified as held for sale and goodwill derecognized
without having been in a disposal group classified as held for sale
−
Impairment losses recognized
−
Net exchange differences under ASC 830
−
Any other changes
End of period: gross carrying amount and accumulated impairment losses
SEC Staff Accounting Bulletin 74 (Codification of Staff Accounting Bulletins Topic 11 M), Disclosure of the
Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the
Registrant When Adopted in a Future Period
SEC Staff Accounting Bulletin 74 (Topic11:M), Disclosure Of The Impact That Recently Issued
Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A
Future Period, discusses disclosures that a registrant should provide in its financial statements and/or in
Management's Discussion and Analysis and Results of Operations and Financial Condition regarding the
impact that recently issued accounting standards will have on its financial statements when the standard is
adopted in a future period.
An SEC registrant should include consideration of the potential impact of amendments to other
accounting standards in its disclosure of the impact that Statements 141R (ASC 805) will have on its
financial statements when adopted. For example, the Statement 141R (ASC 805) amendments to
Statements 109 (ASC 740) and 142 (ASC 350) will change prospectively the accounting for amounts
(valuation allowances on acquired deferred tax assets, acquired tax positions, and goodwill) recognized in
business combinations that occurred before the effective date of Statement 141R (ASC 805).