Accounting and Reporting for Business Combinations –
Key Implementation Considerations
POWERFUL INSIGHTS
Issue
• Tax adjustments
The Financial Accounting Standards Board (FASB) has
continued its efforts to converge with International Financial
Reporting Standards (IFRS) by issuing revised guidance for
business combinations – SFAS 141(R), Business Combinations. This guidance has eliminated all of the significant
differences between U.S. GAAP and IFRS in accounting for
acquisitions. The adoption of SFAS 141(R), which became
effective for companies for the first annual reporting period
beginning on or after December 15, 2008 (January 1, 2009,
for calendar-year companies), impacts how companies
account for and report business acquisitions.
• Bargain purchases
Challenges and Opportunities
• SFAS 133, Accounting for Derivative Instruments and
Hedging Activities
Not only have critical requirements for accounting for
acquisitions changed significantly, but the FASB has
expanded the definition of a “business.” Under SFAS
141(R), for an acquired entity to be considered a business,
it must have inputs and processes that make it capable of
generating a return or creating an economic benefit for the
acquirer’s investors.
Companies must not only understand how these items are
treated differently under SFAS 141(R), but they must also
make and document decisions on how they link this standard with SFAS 157 – Fair Value Measurements, along with
other standards, including:
• SFAS 95, Statement of Cash Flows
• SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity
• SFAS 142, Goodwill and Other Intangible Assets
• SFAS 144, Accounting for Impairment of Long-Lived Assets
• Various Emerging Issues Task Force (EITF) issues and SEC
reporting guidance and consensuses
• Transaction costs
As noted, one of the most significant changes relates to
how the FASB defines a business. This change creates both
challenges and opportunities for companies looking to complete an acquisition, as well as for those businesses and
activities that are seeking an exit strategy from their current
environment. Also of note, this change in definition is likely
to impact some industries more than others, including real
estate, pharmaceuticals, technology, energy and mining,
and retail and consumer.
• Restructuring costs
Our Point of View
• Acquired contingencies
The adoption of SFAS 141(R) will have financial, operational
and compliance implications for an organization’s people,
processes and technology that management must consider.
From a financial perspective, the transition from SFAS 141
to the more principles-based approach under SFAS 141(R)
requires companies to carefully analyze and document the
facts and circumstances unique to the proposed transaction.
The requirements of SFAS 141(R) impact critical components of a transaction and change the related accounting.
A few of the areas impacted include:
• Definition of control
• In-process research and development (IPR&D)
• Equity securities – measurement date
• Allowances
• Contingent consideration (“earn-outs”)
• Measurement period
From an operational perspective, companies should evaluate the potential impact of acquisitions on the company’s
infrastructure, including but not limited to corporate
culture, information technology, and finance and accounting functions. They also should develop and implement a
post-merger integration plan.
In addition, as with all significant acquisitions, companies
should assess their impact on corporate governance and
regulatory compliance efforts, and should determine if
their Sarbanes-Oxley and internal audit programs need
to be rescoped.
PROVEN DELIVERY
How We Help Companies Succeed
Our Financial Remediation and Reporting Compliance
(FRRC) practice helps companies improve how they manage
risk related to accounting and reporting standards, complex
financial estimations, or unique business transactions. Our
FRRC practice offers services to address the challenges to
people, process and technology that result from changes to
accounting and reporting rules, a company’s operations, or
other factors. Our professionals bring a proven methodology that includes assessing and defining issues, gathering
facts, assisting companies in assessing and documenting
their conclusions, and knowledge transfer.
Examples
We have assisted clients in numerous capacities involving a
variety of business combination transactions:
• Training service provider – We helped this client with an
appraisal of the acquisition of another service provider. Our
efforts included assistance with developing purchase price
allocation among the assets acquired, including customer
relationships, noncompete agreements and goodwill.
• Bottling company – We assisted our client with the
assessment of the people, process, technology and documentation needs (considering both U.S. GAAP and IFRS)
related to the potential acquisition and development of a
shared service organization.
• Private equity firm – We performed project management
for this client and assisted with the development and
synthesis of an entire complement of accounting policies
and procedures. Our efforts included establishing U.S.
GAAP and IFRS policies with regard to purchase accounting and consolidation.
• Media company – We performed project management
regarding the development of position papers and ongoing analytical processes for various elements of business
combinations and subsequent measurement.
• High-tech manufacturer – We assisted management in
synthesizing and documenting its views as to whether
a potential transaction met the definition of a business,
defining the consideration paid, assets acquired and
liabilities assumed.
Contacts
Christopher Wright
+1.212.603.5434
christopher.wright@protiviti.com
Charles Soranno
+1.732.326.4518
charles.soranno@protiviti.com
Steve Hobbs
+1.408.808.3253
steve.hobbs@protiviti.com
Patrick Scott
+1.312.476.6397
patrick.scott@protiviti.com
Russ Collins
+1.469.374.2549
russ.collins@protiviti.com
About Protiviti
Protiviti (www.protiviti.com) is a global business consulting and internal audit firm composed of experts specializing in risk, advisory
and transaction services. The firm helps solve problems in finance and transactions, operations, technology, litigation, governance,
risk, and compliance. Protiviti’s highly trained, results-oriented professionals provide a unique perspective on a wide range of critical
business issues for clients in the Americas, Asia-Pacific, Europe and the Middle East.
Protiviti has more than 60 locations worldwide and is a wholly owned subsidiary of Robert Half International Inc. (NYSE symbol: RHI).
Founded in 1948, Robert Half International is a member of the S&P 500 index.
© 2009 Protiviti Inc. An Equal Opportunity Employer. PRO-0909-107067
Protiviti is not licensed or registered as a public accounting firm and does
not issue opinions on financial statements or offer attestation services.