Academic journal article Journal of Accountancy

A New Day for Business Combinations: Recognizing the Whole Enterprise

Academic journal article Journal of Accountancy

A New Day for Business Combinations: Recognizing the Whole Enterprise

Article excerpt

[ILLUSTRATION OMITTED]

EXECUTIVE SUMMARY

* FASB outlined a major overhaul of GAAP related to mergers and acquisitions when it issued Statement no. 141 (revised), Business Combinations, in December 2007. The standard is effective for fiscal years beginning after DeG, 15, 2008.

* A fundamental concept at the core of Statement no. 141(R) is that the reporting entity is the entire economic enterprise created by the combination. As such, the consolidated statement of financial position will describe 100% of the acquired assets and liabilities. Any minority interest-called a noncontrolling interest-will be considered to be stockholders' equity.

* The new approach will use the full fair values for both the debits and credits to record transactions, even to the point of recognizing a gain from bargain purchase in rare cases in which the acquired value exceeds the purchase price.

* Statement no. 141 (R) won't abandon the residual cost approach to goodwill measurement. However, its implementation will be improved because acquirers will have to value and record many additional assets and liabilities, including R&D and contingencies. In addition, the acquisition entry credits will include the fair value of previous holdings and any noncontrolling interest.

After 25 years of work on business combination standards, FASB rolled out a major overhaul of GAAP related to mergers and acquisitions when it issued Statement no. 141(R), Business Combinations, in December 2007.

In its joint project with the International Accounting Standards Board, FASB's overall goal was to produce more complete statements of financial position and income to help users make better decisions. The approach continues the shift away from historical costs to reliance on fair value. In addition, Statement no. 141(R) and Statement no. 160, Noncontrolling Interests in Consolidated Financial Statements, call for recognizing certain assets and liabilities that previously escaped recognition. The standards also alter income statements by introducing new items, eliminating some old ones and providing a new structure.

This article discusses the conceptual foundation for Statement no. 141(R), which is effective for fiscal years beginning after Dec. 15, 2008, and explains nine significant changes created by the revised standard. It also ponders how the new train of thought behind Statement no. 141 (R) may drive behaviors and attitudes.

THE CONCEPTUAL FOUNDATION

Combination accounting has long been controversial because of divergent views on how to provide the most useful information. In addition, many implementation problems arise from specific and often unique features of individual combinations. The accounting profession's struggles with these challenges are reflected in diverse and often inconsistent practices. Debate has swirled around goodwill and other intangibles. Minority interests have also been reported in several ways. These inconsistencies diminished the usefulness of the information to the point that new standards were needed.

The most fundamental concept expressed in Statement no. 141(R) is that the reporting entity is the entire economic enterprise created by the combination. As such, the consolidated statement of financial position will describe 100% of the acquired assets and liabilities. Any minority interest--called a noncontrolling interest--will be considered stockholders' equity instead of a liability or mezzanine item that is not specifically classified as a liability or equity.

Income statements will present results for the entire enterprise with the bottom line followed by a schedule that divides income into portions attributable to the controlling and noncontrolling interests. Notably, displayed earnings-per-share results will be based only on income attributable to controlling interest stockholders. Cash flow and equity statements will be reconfigured to describe the whole enterprise so users can see more of what is under the parent's management. …

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