Volume 1 Issue 4
Accounting for Business Combinations under SFAS 141(R) [FASB ASC 805]
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, (SFAS 141R), now codified in FASB ASC 805, which changes accounting and reporting requirement for business acquisitions. As part of the Board’s desire to align U.S. accounting practices with international financial reporting standards, FASB ASC 805 requires companies to measure certain contingent liabilities in a merger and acquisition transaction at fair value. FASB ASC 805 establishes the following principles and requirements:
- With limited exceptions specified in the Statement, an acquirer is required to recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, measured at their fair values as of the acquisition date. This replaces the original Statement 141’s cost allocation method, which resulted not only in not recognizing some assets and liabilities but also in measuring some assets and liabilities at amounts other than their fair values at the acquisition date.
- An acquirer in a business combination achieved in a series of purchases (a step acquisition) is required to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with this Statement, which results in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer, improving the completeness of the resulting information and making it more comparable across entities.
- An acquirer is required to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. An acquirer is required to recognize assets or liabilities arising from all noncontractual contingencies as of the acquisition date, measured at their acquisition-date fair values, only if it is more likely than not that they meet the definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements. If that criterion is not met at the acquisition date, the acquirer instead accounts for a noncontractual contingency in accordance with other applicable generally accepted accounting principles, including Statement 5, as appropriate.
- An acquirer is required to recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase. FASB ASC 805 defines a bargain purchase as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer. The original Statement 141 required that “negative goodwill” amount to be allocated as a pro-rata reduction of the amounts that otherwise would have been assigned to particular assets acquired, and there was no immediate impact to the acquirer’s income statement.
- To allow users of the financial statements to evaluate the nature and financial effects of the business combination, the acquirer is required to make certain specific disclosures or, if disclosure of any of the information is impracticable, the acquirer is required to disclose that fact and explain why the disclosure is impracticable.
FASB ASC 805 applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. It applies to all business entities, including credit unions and other mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. It does not apply to 1) the formation of a joint venture 2) the acquisition of an asset or a group of assets that does not constitute a business 3) a combination between entities or businesses under common control and 4) a combination between not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization.
FASB ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Please keep in mind, the information included above is only a brief summary of FASB ASC 805. If you would like more information on FASB ASC 805, please contact us at 301-948-9825.
Allen DeLeon, CPA
P: 301-948-9825 ex. 203
Lutamila Sallu, CPA
P:301-948-9825 ex 218
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