Statement of Financial Accounting Standards 141(R) - Business Combinations: Applying the Acquisition Method
6/22/2009
In December 2007, the Financial Accounting Standards Board (FASB) issued its new standard on business combinations, SFAS 141 (R) – Business Combinations. This statement is a collaborative effort between the FASB and the International Accounting Standards Board (IASB and is effective for acquisitions that close after December 31, 2008 for calendar year-end companies.
The standard includes certain changes to the previous business combination standard, SFAS 141 – Business Combinations.
Some of the most significant changes are as follows:
- Acquisition–related costs (e.g. finder’s fees, advisory fees, legal fees, accounting fees, and other professional fees) are expensed as incurred. Under SFAS 141, these costs were capitalized as part of the fair value of the consideration paid in a business combination, and were included in measuring the fair value of the acquired company’s assets acquired and liabilities assumed.
- Contingent consideration (e.g., transfer of cash to former owners if the acquired company reaches specified targets subsequent to the acquisition) is measured as of the acquisition date (included in the purchase price) at the fair value on the date of the acquisition. If classified as a liability, any change to the fair value of the consideration in subsequent reporting periods is recorded in the income statement. Contingent consideration classified as equity is not re-measured.
- Negative goodwill arises when the consideration paid is less than the fair value of the net assets acquired (a bargain purchase). The assets acquired and liabilities assumed will be recorded at their fair values and the bargain purchase element is recognized as a gain in the income statement. Previously, SFAS 141 provided that negative goodwill should be allocated to certain acquired assets prior to recognizing the excess negative goodwill as a gain.
- If purchasing less than a 100 percent controlling interest in the acquired entity, all of the goodwill of the acquired entity, not just the acquirer’s share, is recognized. In other words, a write-up of the minority interest to fair value would be required. Goodwill is measured as the difference between the fair value of the acquired entity taken as a whole and the sum of the fair values of all of the identifiable assets acquired at the date control is obtained. Under SFAS 141, minority interest was recorded at its carryover cost.
- Equity securities issued as consideration in a business combination are measured at their fair value on the acquisition date. The acquisition date would be defined as the date the acquirer gains control over the target entity, rather than the announcement date under SFAS 141. This change may significantly alter the amount recorded for the acquired business if share prices change materially between the announcement date and the acquisition date.
- In–process research and development projects (IPR&D) are recognized as an intangible asset with an indefinite life until the completion or abandonment of the research and development effort. Under SFAS 141, these costs were expensed. Accordingly, under the new standard, IPR&D not amortized is subject to impairment testing and is measured at fair value as of the acquisition date. Subsequent costs are expensed.
The following represents specific guidance included as part of the standard when measuring the assets acquired and the liabilities assumed:
- All accounts receivables will be measured at fair value, after consideration of credit concerns. Accordingly, a separate valuation allowance for uncollectible amounts will not be recorded as of the acquisition date.
- If the acquired company has a reserve for costs related to a restructuring and the liability will be assumed at the acquisition date, then the acquiring company should treat these costs as an assumed liability. However, if no reserve had been previously recorded by the acquiree, all applicable amounts are expensed when incurred.
For more information about SFAS 141(R) - Business Combinations and its potential impact on your business, please contact your J.H. Cohn professional at 877-704-3500.