Summary of Statement No. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, this Statement establishes principles and requirements for how the acquirer: Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. What Is the Scope of This Statement? This Statement applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations.
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Post-transaction, the changes will likely increase income-statement volatility as restructuring expenses are recognized and acquisition-related contingencies change or are resolved.
The Standard also applies to mutual entities, step acquisitions and variable interest entities. In applying the acquisition method, the acquirer must determine the fair value of the acquired business as of the acquisition date and recognize the fair value of the assets acquired and liabilities assumed. The acquisition date is the date on which the acquirer obtains control of the target, generally the closing date. Under SFAS , the purchase price was measured at the announcement date while assets and liabilities were measured at the acquisition date.
SFAS vs. SFAS R Under SFAS , companies were required to allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.
In contrast, SFAS R requires a company to recognize the fair value of the assets acquired, liabilities assumed and any noncontrolling interest with limited exceptions. SFAS allowed a company one year to complete its purchase accounting.
SFAS R requires companies to report provisional amounts in their financial statements in the reporting period in which the transaction occurs. Subsequently, during the measurement period, these provisional amounts are adjusted retrospectively to reflect information about facts and circumstances that existed as of the acquisition date.
Instead, contingent liabilities were handled by SFAS 5, Accounting for Contingencies, and contingencies were not recognized. Under SFAS R, contingencies are divided into two categories: contractual, such as a warranty, and non-contractual, such as a lawsuit.
Contractual contingencies are measured at fair value as of the acquisition date. Non-contractual contingencies will be measured at fair value only if it is determined that the liability or assets is more likely than not to exist i. Subsequently, if new information is obtained, the company will report contingent liabilities acquired in a business combination at the higher of day one fair value or the amount that would be recognized if applying SFAS 5.
Similarly, a contingent asset acquired in a business combination is measured at the lower of day one fair value or the best estimate of its future settlement amount. Controversy still surrounds contingent assets and liabilities. Additional guidance may be forthcoming. Under SFAS , transaction costs, such as legal fees, banking fees, or fees for valuation services, were included in the purchase price.
SFAS R mandates that transaction costs be expensed. Similarly, restructuring costs will be recognized when they meet the criteria in SFAS Valuation Considerations SFAS R increases the need for valuation services in connection with a business combination. The requirement to disclose provisional amounts in the period of the transaction will likely lead to earlier, potentially pre-transaction, the inclusion of an outside valuation professional.
Additionally, there are increased fair value requirements including consideration exchanged, the net assets acquired, and contingent assets and liabilities.
FAS 141(R) - Impact On The Accounting For Income Taxes
The objective of FAS R , per Paragraph 1, "is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects" To accomplish this objective, FAS R establishes guidance for how an acquirer recognizes and measures identifiable assets, assumed liabilities, and any noncontrolling interest in an acquiree and also how an acquirer recognizes and measures goodwill related to a business combination. FAS R also requires additional financial statement disclosures to assist financial statement users with the evaluation of the economic impact of a business combination. FAS R applies to all business combinations in which an acquirer obtains control of one or more businesses. However, it does not apply to the formation of a joint venture, the acquisition of an asset or a group of assets that does not constitute a business, a combination between entities or businesses under common control, or a combination of not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization.
Important Accounting Changes
Recognize as a liability at the acquisition date. Expense separately from the transaction as incurred. Partial Acquisitions Where a Controlling Interest is Acquired 1 Only the controlling interest is recorded at fair value FV , while the remaining noncontrolling interest is recorded at its carrying value. Acquired Contingent Assets and Liabilities Defer recognition of preacquisition contingencies until payment is deemed probable and can be estimated. Recognize contractual contingencies as of the acquisition date, measured at their acquisition-date FVs. Recognize noncontractual contingencies as of the acquisition date, measured at their acquisition-date FVs, only if it is more likely than not that they meet the definition of an asset or a liability.
Effective Date for SFAS 141R Approaching Fast
Summary of Statement No. All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. Reasons for Issuing This Statement Under Opinion 16, business combinations were accounted for using one of two methods, the pooling-of-interests method pooling method or the purchase method. Use of the pooling method was required whenever 12 criteria were met; otherwise, the purchase method was to be used. Because those 12 criteria did not distinguish economically dissimilar transactions, similar business combinations were accounted for using different methods that produced dramatically different financial statement results. Consequently: Analysts and other users of financial statements indicated that it was difficult to compare the financial results of entities because different methods of accounting for business combinations were used. Users of financial statements also indicated a need for better information about intangible assets because those assets are an increasingly important economic resource for many entities and are an increasing proportion of the assets acquired in many business combinations.
NEWS RELEASE 12/04/07
In the News. Effective for fiscal years beginning after December 15, , the standards will improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. Michael Crooch. Statement R improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements.