New Accounting for Business
Combinations and Minority Interests
John Scott
Senior Manager, Enterprise Group
Travis Wolff
January 19, 2010
Agenda
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Overview and background of the new standards- ASC 805 (FAS 141R)
and ASC 810 (FAS 160)
Business Combinations- Major Changes
Acquisition Method Steps
Use of Fair Value in Business Combination
Selected Examples
Disclosures
Non-controlling interest
Questions
Overview of business combination- ASC 805
(FAS 141R)

Extensive changes to the business combination standards, which will
make M&A much more complicated

Accounting rules will become a significant factor in M&A:
•Deal planning
•Deal structure
•Deal timing
•Significant impact to financial statement post-deal
Overview, cont.

Changes accounting for minority interest (non-controlling interest)

Does not apply to not-for-profits (Not-for-profits should continue to
apply ARB 51)

Also does not apply to:
•The formation of joint ventures
•The acquisition of an asset or a group of assets that do not constitute a business
•A combination between entities or businesses under common control
Effective Dates

Effective January 1, 2009 for calendar year-end companies (for fiscal
years beginning after December 15, 2008)
 Applied prospectively as of beginning of fiscal year, and earlier
adoption is prohibited.
Business Combinations - Major Changes

New definition of a business and business combination
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Measurement date
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Measurement period

Deal costs
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Restructuring activities
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Contingent consideration (earn-outs)
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Contingencies
Major Changes (continued)
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Recognizing and measuring
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In process R&D
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Income taxes

Increase in ownership interest

Significantly incorporates fair value into recording of business
combination
Business Combinations
Acquisition Method:
Identify the acquiree
Determine the acquisition date
Recognize and measure the
•Net assets
•Liabilities assumed
•Any non-controlling interest
Recognize and measure goodwill
•Potential gain from bargain purchase
Use of Fair Value in Business Combination
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Acquirer shall record assets acquired and liabilities assumed and noncontrolling interest at acquisition date fair value ASC 820 (FAS157).
Clarification of fair value fair value in distressed markets including use
of multiple valuation techniques and building liquidity risk into discount
rate.
Asset reserves and allowances are unnecessary with fair value
measurements.
Fair value calculation is not related to the intended use of the asset.
Selected Examples
100% Acquisition
DB
Assets Acquired
DB
Goodwill
(100% FV)
CR
Liabilities Acquired
CR
Cash (consideration given)
(100% FV)
XXXX
Acquisition related costs
CR
Cash
XXXX
DB
(100% FV)
XXXX
Selected Examples
70% Acquisition
DB
Assets Acquired
DB
Goodwill
(100% FV)
CR
Liabilities Acquired
CR
Non-controlling interest
CR
Cash (consideration given)
(100% FV)
(FV)
XXXX
Acquisition related costs
CR
Cash
XXXX
DB
(100% FV)
XXXX
Selected Examples
Staged Acquisition Facts
• F Inc. acquires 40% of M Company on January 1, 20X1 for $2,000,000.
The 40%
does not constitute control.
• On January 1, 20X3, F Inc. acquires an additional 25% of M Company for $3,000,000.
F Inc. now has control of M Company.
• On January 1, 2003, the fair value of F’s initial investment of 40% is $4,800,000 when
its book value $2,300,000.
• On January 1, 2003, the fair value of M’s net assets is $9,000,000.
• On January 1, 2003, the fair value of M’s non-controlling interest (35%) is $4,000,000
(considers minority discount).
Selected Examples (continued)
Staged Acquisition Journal Entries
1/1/20X1
DB
20X1 and
DB
20X2 Adj.
Investment (40%)
CR
Cash
Investment (40%)
CR
Net Income
2,000,000
2,000,000
300,000
300,000
Selected Examples (continued)
Staged Acquisition Journal Entries
1/1/20X3
1/1/2003
DB
DB
Investment (25%)
CR
Cash
3,000,000
3,000,000
Investment (40%)
2,500,000
CR
Gain
2,500,000
(Adjust initial investment to fair value)
Selected Examples (continued)
Staged Acquisition Journal Entries
Business combination entry:
1/1/2003
DB
Net Assets (FV)
9,000,000
DB
Goodwill (FV)
2,800,000
CR
Investment
CR
Non-controlling Interest (FV)
7,800,000
4,000,000
Selected Examples (continued)
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When a business combination effectively settles a pre-existing
contractual relationship, the acquirer should recognize a gain or loss
based on the lesser of:
• The amount of the favorable or unfavorable contract compared to current
market prices for the same or similar transactions, or
• The amount of any settlement provision in the contract if the contract is
unfavorable.
Selected Examples (continued)
Favorable or unfavorable operating leases at fair value facts:
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Acquiree has a favorable lease when compared to market rates for
comparable space
The lease has 24 remaining payments at $3,000 a month while
comparable lease terms would be $4,000 a month
The acquirer in a business combination is acquiring an asset equal to the
present value of the difference in payment terms for the remaining lease
term
Selected Examples (continued)
Favorable or unfavorable operating lease at fair value:
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DB
If the entry was booked separately, the business combination journal
entry for the favorable lease assuming the present value of the $1,000 a
month difference for twenty-four months is $22,500:
Favorable Lease Asset $22,500
CR
Goodwill
$22,500
NOTE – Total assets is unchanged; goodwill is adjusted for the fair value
of the favorable lease (A LIABILITY IS RECOGNIZED FOR AN
UNFAVORABLE LEASE)
Disclosures
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The acquirer should disclose information that enables the 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 current or prior reporting periods.
Definitions attributable to SFAS 160

Noncontrolling Interest: The portion of equity (net assets) in a
subsidiary not attributable, directly or indirectly, to a parent. A
noncontrolling interest is sometimes called a minority interest.
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Parent: An entity that has controlling financial interest in one or more
subsidiaries. (Also, an entity that is the primary beneficiary of a variable
interest entity).
Differences between SFAS 160 and ARB 51
Name
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ARB 51- Minority Interest
SFAS 160-Noncontrolling Interest
Balance Sheet Presentation
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ARB 51- Mezzanine (between liabilities and equity)
SFAS 160 – Separate component of equity
Differences between ARB 51 and SFAS 160
(continued)
Income Statement Presentation
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ARB 51-bottom line is net income after deducting minority interest
SFAS 160-bottom line is net income attributable to controlling interest
after subtracting net income attributable to the noncontrolling interest.
However, a total net income from the entire company is reflected before
net income from noncontrolling interests.
Differences between ARB 51 and SFAS 160
(continued)
Accumulated Losses
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ARB 51-accumulated losses were suspended with minority interest
rarely reflected as an asset
SFAS 160-noncontrolling interest could have a negative balance or a
debit balance in equity
Differences between ARB 51 and SFAS 160
(continued)
Parent’s ownership in subsidiary changes but there is no change in control
(Parent still owns more than 50%)
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ARB 51-can recognize gain or loss
SFAS 160-equity transaction (changes in additional paid in capital)
Impact
The following are among the more significant changes from current practice
introduced by FAS 160:
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Noncontrolling interest (previously referred to as minority interest) is recognized
in the equity section, presented separately from the controlling interest’s equity
Losses will continue to be allocated to the NCI even if the NCI is placed in a
deficit position.
Impact (continued)
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If control is maintained, changes in ownership interests will be treated as equity
transactions.
Upon a loss of control, any gain or loss on the interest sold will be recognized in
earnings. Additionally, any ownership interest retained will be remeasured at fair
value on the date control is lost, with any gain or loss recognized in earnings.
Impact (continued)
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Despite the new net income amount, earnings attributable to the parent company
will be presented in the income statement, which will be consistent with net
income as previously reported.
Earnings Per Share will still be calculated based on earnings attributable to the
parent company shareholders.
FAS 160
Balance Sheet Placement
Old – mezzanine
Now – separate
component of equity
Total liabilities
Minority interest
Equity:
Stock
Retained earnings
Controlling interest
Noncontrolling interest
Total equity
Total
Old
$500
50
Now
$500
-
50
50
400
400
450
450
50
450
500
$1,000 $1,000
FAS 160
Income Statement
Old – bottom line is net income
after deducting minority interest
Now – bottom line is net
income attributable to
controlling interest after
subtracting net income
attributable to the
noncontrolling interest.
However, a total net income for
entire entity is shown before
net income from
noncontrolling interests.
Pre-tax income
Tax
Less minority interest
Net/for entire company
Less attributed to
noncontrolling interest
Net attributable to
controlling interest
Old
$200
(80)
(30)
$90
Now
$200
(80)
$120
-
(30)
-
$90
Losses to NCI results in a debit balance in
stockholder’s equity
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Losses from NCI are recorded, even if it results in a deficit
The Company must prospectively attribute any future losses to the NCI if in
the past the Company stopped attributing losses to the NCI because losses
exceeded the NCI’s carrying amount.
Losses to NCI results in a debit balance in
stockholder’s equity
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The Company should not revise prior years (no restatement) consolidated
net income attributable to the parent to deduct losses. Rather, on the date of
adoption, the NCI should be recorded at zero (i.e. the previous carrying
amount for the minority interest), and earnings or losses after that date
should be attributable to the NCI.
Changes in ownership – no loss of control
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Changes in ownership interests in a subsidiary that don’t lose control are
equity transactions
Issuing shares to a third party, thereby diluting the controlling interest’s
ownership percentage, will be an equity transaction and no gain or loss
will be recognized (assuming the Parent retains control)
Events that trigger a control loss
A parent should deconsolidate a subsidiary at the date the parent losses control of
the subsidiary. Events include:
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A parent sells all or part of its ownership in its subsidiary, thereby losing
control
A contractual agreement giving control over the subsidiary expires
The subsidiary issues shares, thereby reducing the parent’s ownership interest
so that the parent no longer has a controlling financial interest in the subsidiary
Control is Lost and Noncontrolling Investment Remains
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Change the classification and measurement of the investment (deconsolidate)
Cease consolidation accounting and begin accounting for the investment under
other applicable literature (any retained equity investment is remeasured at fair
value)
Recognize in earnings realized gains and losses and holding gains and losses
Disclosure requirements:
Companies are required to present on the face of the financial statements
net income or loss and consolidated comprehensive income or loss:
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For the consolidated entity
Attributable to the parent Company
Attributable to the noncontrolling interest
Q&A
Impact of ASC 805 (Statement 141R)
Page 1 of 2
Statement 141
& ARB 51
Definition of a
business
Measurement
Acquisitionrelated costs
Restructuring
costs
Contingent
consideration
Recognizing
and measuring
assets
acquired,
liabilities
assumed, and
noncontrolling
interest
A business is defined as a selfsustaining integrated set of activities
and assets conducted and managed
for the purpose of providing a return
to investors. An early-state
development state entity is not
resumed to be a business.
Measurement date – Stock used as
consideration is measured at the
announcement date (when
agreement is reached).
Measurement period – An allocation
period (generally one year) was
allowed to record estimates to preacquisition contingencies.
Adjustments were made
prospectively.
The purchase price includes the
direct costs of the business
combination (including legal,
accounting, investment banking,
consulting, and due diligence),
which were added to the deal
consideration and were capitalized
(goodwill).
The cost of an acquirer’s planned
restructuring of the acquired
company’s operations (employee
termination, facility shut-down)
were recorded as a liability as part of
the acquisition, resulting in higher
goodwill.
Contingent consideration based on
earnings is recognized as an
adjustment to the purchase price
when the contingency is resolved
and consideration is issued or
issuable. Contingent consideration
based on the acquirer’s security
price is recognized as an adjustment
to paid in capital when the
contingency is resolved and the
consideration is issued or issuable.
The assets acquired and liabilities
assumed are adjusted only for the
acquirer’s share of the fair value.
Noncontrolling interest and their
share of the acquirer’s assets and
liabilities are measured based on the
carrying amount of the recognized
assets and liabilities in the acquirer’s
financial statements.
Statement 141R
Impact
The definition is expanded. A business or group
of assets no longer must be self-sustaining to be
a business; it must be capable of generating a
revenue stream. The previous presumption that
an early-stage development state entity is not a
business has been removed.
Expands the types of
transactions that would
be considered business
combinations.
Measurement date – All consideration must be
measured at the closing date (i.e., in stock for
stock deals the purchase price will not be known
until the day of the closing).
Measurement period – Acquirers will have a
period of time after the acquisition to true-up
accounting; however 141R required restatement
of prior period financial statements for materials
adjustments.
Measurement date –
Timing of purchase
could affect the
amount paid and the
market’s reaction to
the deal.
Measurement period –
Large increase in
acquisition-related
restatements.
May negatively impact
pre-deal earnings.
Financial covenants
may be affected.
Deal costs must be expensed as incurred.
Generally precluded acquirer from recording a
liability related to planned restructuring of the
acquired company’s operations unless certain
stringent criteria are met.
Expensing of
restructuring costs
results in an increased
charges to earnings.
Contingent consideration is recognized and
measured at fair value on the acquisition date.
Subsequent changes in fair value of liabilityclassified contingent consideration are
recognized in earnings and not as an adjustment
to the purchase price. Equity classified
contingent consideration is not measured after
the acquisition date.
Earnings will be
affected by changes in
contingent
consideration.
Whether the acquirer acquires all or a partial
interest in the acquiree, the full fair value of the
assets acquired, liabilities assumed, and
noncontrolling interests is recognized. The
carrying amounts of previously acquired tranches
are adjusted to fair value at the date control is
obtained, and the acquirer recognized the
differences as a gain or loss in income at the
acquisition date.
Any bargain purchase
gain is recognized
immediately rather
than over time.
Impact of ASC 805 (Statement 141R)
Page 2 of 2
Statement 141
& ARB 51
Contingencies
The fair value of a contingent
liability is recognized at the date of
acquisition only if it is probably and
reasonably estimable. It is measured
at the best estimate of the settlement
amount, rather than its fair value.
IPR&D
The fair value of intangible assets to
be used in IPR&D projects that have
no alternative future use is charged
to expense at the acquisition date.
Tax benefits
The acquirer’s unrecognized tax
benefits that are recognizable as a
result of an acquisition are recorded
in purchase accounting at the
acquisition date. A decrease in a
valuation allowance related to the
acquirer’s tax benefits is an
adjustment to the purchase
accounting.
The cost of each investment tranche
is reflected in the financial
statements with a separate purchase
adjustment and goodwill amount
related to each tranche.
Increases in
ownership
interest
Statement 141R
Impact
Contractual contingencies are recognized and
measured at fair value on acquisition date of the
acquisition date fair value of that asset or
liability can be determined during the
measurement period. If fair value cannot be
determined during measurement period, it can
only be recognized if:
(1) Probably asset or liability existed at
acquisition date.
(2) Amount can be reasonably estimated.
The acquirer’s IPR&D projects are recognized as
an intangible asset and measured at fair value.
The IPR&D asset is treated as an indefinite-lived
intangible asset and therefore is capitalized, but
it not subject to amortization until the project is
completed or abandoned. The prior requirement
that the asset be completed or have an alternative
use is eliminated.
The acquirer’s unrecognized tax benefits that are
recognizable as a result of an acquisition are
recognized as a reduction of income-tax expense.
Adjustments to recognized tax benefits related to
the acquiree that are recognized subsequent to
the acquisition date are generally recognized as
income rather than as an adjustment to the
acquisition accounting.
Contingent liabilities
expense will be higher
based upon fair value
versus best estimate of
settlement cost.
Increases in the parent’s share of ownership after
control is obtained are accounted for as capital
transactions.
Under current
requirements, each
investment tranche is
reflected in the
financial statements
with a separate
purchase adjustment
and goodwill amount.
Under 160, when less
than 100% controlling
interest is acquired,
100% of the net assets
of the acquired
business (including
goodwill) are recorded
at fair value. This will
have implications on
financial ratios and net
income.
IPR&D assets are
capitalized at fair
value at acquisition
date rather than
expensed as is
currently required.
Tax benefits are
shifted to the company
as they occur
following the
transaction date.
Impact of ASC 810 (Statement 160)
Page 1 of 3
Summary of Accounting for Changes in Ownership Interests
Type of Change in
Ownership
Interests
Partial acquisition:
Control is obtained,
but less than 100
percent of the
business is acquired
(FAS 141(R), pars.
47−48).
Partial acquisition:
The previously held
equity interest is
increased to a
controlling
investment (i.e., a
step acquisition).3
Result
Impact
Consolidate as of the date control is
obtained.
100 percent of identifiable assets and
liabilities are recognized at fair value.
Recognize the NCI in equity.
Goodwill attributable to both the controlling
and noncontrolling interests is recognized.
Change the classification and
measurement of previously held equity
interest.
Consolidate as of the date control is
obtained.
Remeasure previously held equity
interest at fair value.
Recognize in earnings holding gains and
losses.
The NCI is recognized at fair value in equity.
100 percent of identifiable assets and
liabilities are recognized at fair value.
Previously held equity interest of the
acquirer is remeasured at fair value, and any
difference between the fair value and the
carrying value is recognized as a gain or loss
in earnings.
Goodwill attributable to both the controlling
and noncontrolling interests is recognized.
The NCI is recognized at fair value in equity.
Reduction in parent's
ownership interest:
Control is
maintained.4
If less than 100 percent of the business is
acquired, recognize the NCI in equity.
Account for as an equity transaction.
Additional interest in subsidiary assets
acquired and liabilities assumed is not
remeasured.
Differences between the fair value of the
consideration paid and the related carrying
value of the NCI acquired are recognized in
the controlling interest’s equity (e.g.,
additional paid-in capital).
Reclassification of the carrying value of the
NCI obtained from the NCI to the controlling
interest's equity.
Reduction in parent's
ownership interest:
Control is
maintained.4
Account for as an equity transaction.
Accumulated other comprehensive income
(AOCI) is reallocated proportionately
between the controlling interest and the NCI
(i.e., classification is changed from
additional paid-in capital to AOCI).
No gain or loss is recognized in earnings.
The difference between the fair value of the
consideration received and the related
carrying value of the controlling interest sold
is recognized in the controlling interest’s
equity (e.g., additional paid-in capital).
Impact of ASC 810 (Statement 160)
Page 2 of 3
Type of Change in
Ownership
Interests
Reduction in parent's
ownership interest:
Control to
noncontrolling
investment.4
Result
Change the classification and
measurement of the investment.
Cease consolidation accounting and
begin accounting for the investment
under other applicable literature.
Recognize in earnings realized gains and
losses and holding gains and losses.
Impact
The investment is deconsolidated.
Any retained equity investment is
remeasured at fair value.
Recognize gain or loss on interest sold and
holding gain or loss on the equity interest
retained in earnings.
3. Meets the definition of a business combination, as discussed in FAS141R.
4. Reduction in a parent’s ownership interest may occur for different reasons, including (1) the parent
sells a portion of the subsidiary’s shares that it holds, or (2) the subsidiary issues additional shares [FAS
160.A1, par.32].
Impact of ASC 810 (Statement 160)
Page 3 of 3
Summary of Changes in Key Provisions
Key Provision
The NCI is
recognized in the
equity section.
Current GAAP
In general, the minority
interest or the NCI is
recorded in the
mezzanine section.
Losses are allocated
to noncontrolling
interest.
Losses are not allocated
to the NCI if it would
place the NCI in a
deficit position and there
is no obligation for the
NCI to fund the losses.
A change in interest
occurs after control is
obtained.
Increases in the parent's
equity interest are
accounted for by the
purchase method.
Ownership interest is
retained after control
is lost.
Depending upon the
nature of the transaction,
decreases in the parent's
equity interest is
accounted for either as
an equity transaction or
as a transaction with
gain or loss recognition.
Any retained ownership
interest is not
remeasured.
Net Income includes
earnings attributable
to the parent and the
NCI.
Net income excludes
earnings attributable to
the NCI.
Earnings Per Share is
calculated based on
earnings to the parent
company
shareholders.
Net income excludes
earnings attributable to
the NCI. No adjustments
to income available to
common shareholders
are necessary for
earnings attributable to
the NCI.
FAS 160
The NCI is recognized
in the equity section,
presented separately
from the controlling
interest’s equity.
Losses will continue to
be allocated to the NCI
even if the NCI is placed
in a deficit position.
Subsequent increases or
decreases of interest that
do not result in a change
in control are accounted
for as equity
transactions.
Any retained ownership
interest is remeasured at
fair value on the date
control is lost, and any
gains or losses are
recognized in earnings.
Net income includes
earnings attributable to
the NCI.
Net income includes
earnings attributable to
the NCI. An adjustment
to net income for
earnings attributable to
the NCI is necessary to
determine income
available to common
shareholders of the
controlling interest.
Implication
Because the NCI will be
reported as part of equity, the
NCI is likely to increase the
consolidated equity balance on
the date of adoption.
The controlling interest will
record only its proportionate
share of losses, even if the NCI
is in a deficit position, resulting
in potentially fewer losses
being recognized by the
controlling interest.
Changes in the NCI balance
will affect the controlling
interest’s equity balance.
Differences between the fair
value of the consideration
received or paid and the related
carrying value of the NCI will
be recognized in the controlling
interest’s equity.
Recognition of holding gains
and losses may result in more
volatility in earnings.
Despite the new net income
amount, earnings attributable to
the parent company will be
presented in the income
statement, which will be
consistent with net income as
previously reported
EPS will still be calculated
based on earnings attributable
to the parent company
shareholders.