An Analysis of the Initial Adoption of Fas 141 and 142 in the Pharmaceutical Industry

Article excerpt

ABSTRACT

In 2001 the Financial Accounting Standards Board issued FAS 141 Business Combinations, and FAS 142 Goodwill and Intangible Assets. These new accounting standards significantly changed the accounting for mergers and acquisitions, dramatically altering how business combinations are reflected in the surviving company's financial statements. These new rules are particularly relevant for companies in industries that rely heavily on intellectual capital to generate future cashflows, or those that are characterized by considerable mergers and acquisitions activity.

Documenting how these new standards are initially applied provides valuable insight into their impact on the structure and content of the resulting financial statements. This study addresses this issue by examining and documenting initial FAS 141 and 142 disclosures for firms in the pharmaceutical industry. We focus on the pharmaceutical industry because it is dominated by a few well defined business models, and is characterized by firms that rely heavily on intangible assets and have considerable mergers and acquisitions activity.

The results of our analysis identify several emerging trends within the pharmaceutical industry. First, strategic analysis indicates that a variety of business models currently exist in the pharmaceutical industry, and most pharmaceutical companies pursue more than one business model. Second, financial disclosure analysis reveals that although different business models led to some variation in disclosures, disclosure practice across firms in the pharmaceutical industry is fairly consistent. Finally, analysis of recent acquisitions provides evidence of consistent reporting and disclosure of purchase type business combinations under FAS 141 and 142. These results provide a benchmark/or industry practice that can be used to identify trends in financial reporting and disclosure related to these two accounting standards.

INTRODUCTION

In 2001 the Financial Accounting Standards Board issued FAS 141 Business Combinations, and FAS 142 Goodwill and Intangible Assets. These new accounting standards represented a significant shift in the accounting for mergers and acquisitions, and dramatically changed how business combinations are reflected in the surviving company's financial statements. The most notable aspects of these new accounting rules were the elimination of the pooling-of-interest method of accounting for business combinations, the elimination of the periodic amortization of goodwill in favor of an impairment testing model, and the requirement that identifiable intangible assets be recognized separately in a business combination. These changes were particularly relevant for companies in industries that rely heavily on intellectual capital to generate future cash flows, or those that are characterized by considerable mergers and acquisitions activity.

Documenting how these standards are initially applied provides valuable insight into how these changes affect the structure and content of the resulting financial statements. This study addresses this issue by examining and documenting initial FAS 141 and 142 disclosures for firms in the pharmaceutical industry. We focus on the pharmaceutical industry because it is represented by a few well defined business models, and is characterized by firms that rely heavily on intangible assets and have considerable mergers and acquisitions activity. The analysis reviews financial disclosures of a sample of publicly listed pharmaceutical companies, documenting how these companies implement the new accounting standards, and examining the consistency in which these standards are applied. The results provide a benchmark for industry practice in the application of FAS 141 and 142. This data can then be used to identify trends in financial reporting and disclosure related to FAS 141 and FAS 142.

The study examines three categories of pharmaceutical companies that are directly related to business combinations and intangible assets: (1) company strategy and lines of business, (2) goodwill and intangible asset disclosures, and (3) strategic acquisitions. …

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