Magazine article The CPA Journal

What You Need to Know about New FASB Pronouncements That Target Business Combinations and Goodwill

Magazine article The CPA Journal

What You Need to Know about New FASB Pronouncements That Target Business Combinations and Goodwill

Article excerpt

News & Views

Goodwill should be assigned to the reporting units that benefit from the factors that give rise to the goodwill.

Two recent FASB pronouncements will profoundly affect how companies account for business combinations, goodwill, and other acquired intangible assets. SFAS 141, Business Combinations, requires that entities account for all combinations initiated after June 30, 2001, using only the purchase method. SFAS 142, Goodwill and Other Intangibles, eliminates the amortization of goodwill and requires annual impairment testing of goodwill using a complex two-- step, fair value method.

SFAS 142 must be adopted in fiscal years beginning after December 15, 2001, as of the beginning of the year. Companies with fiscal years beginning after March 15,2001, may adopt the standard early if they have not yet issued their first-quarter financial statements.

Dealing with Intangibles

Among other requirements, entities must now identify and account for intangible assets acquired in a business combination apart from goodwill if the intangible assets arise from either contractual or other legal rights or are separable. Intangibles must be reported at fair value. Where fair values are determined using present value techniques, estimates of future cash flows should incorporate marketplace assumptions.

"As a first step, management should identify all intangible assets acquired in prior business combinations, and evaluate them to determine if they may be recognized apart from goodwill under the provisions of SFAS 141," advises Eric W. Casey, a partner with KPMG's department of professional practice. "If not, they should be folded into goodwill as of the date SFAS 142 is adopted? Casey adds that the remaining useful lives of all intangible assets should be evaluated as of the date SFAS 142 is adopted.

"Intangible assets with estimable useful lives should continue to be amortized over their respective remaining useful lives, with adjustments made as appropriate." says Casey. "Meanwhile, companies must discontinue amortizing those intangible assets acquired prior to June 30, 2001, that are determined to have indefinite useful lives as of the SFAS 142 adoption date, and test them for impairment within the first quarter after adoption. Any impairment losses on these intangible assets should be recognized within the first quarter of adoption, as a cumulative effect of a change in accounting principle.Valuations must be as of the date of adoption."

Impairment Issues

Another impact of the new statements is that a company will test goodwill for impairment at the new reporting unit level, not the acquisition specific level. …

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