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.
Challenges and Opportunities
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.
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)
- Transaction costs
- Restructuring costs
- Acquired contingencies
- Equity securities – measurement date
- Contingent consideration (“earn-outs”)
- Measurement period
- Tax adjustments
- Bargain purchases
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 133, Accounting for Derivative Instruments and Hedging Activities
- 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
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.
Our Point of View
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.
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.
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.
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.