Accounting for Business Combinations and Intangible Assets
Cocco, Anthony F., Moores, Tommy, The CPA Journal
THE FAIR VALUE OF THE ASSETS DISTRIBUTED AND LIABILITIES INCURRED should be used to measure the cost of the acquired entity.
In 1996, FASB decided to readdress the issues of business combinations and intangible assets. The prevailing accounting standards at that time were APBs 16 and 17, dating from 1970. In the interim, an increase in merger and acquisition activity highlighted the following problems:
* Economically similar transactions could produce dramatically different financial statement results when accounted for as a pooling of interests.
* Entities that could not meet all of the conditions for the pooling method believed that they faced an uneven playing field in competing for acquisitions.
* The numerous inquiries regarding APBs 16 and 17 received by the staffs of FASB and the SEC consumed up to half of their time.
* The demand for internationally comparable accounting standards became more important.
A FASB special report, Issues Associated with the FASB Project on Business Combinations, was issued in June 1997. In 1998, the G4+1 issued a position paper, Recommendations for Achieving Convergence on the Methods of Accounting for Business Combinations, in which it recommended using only the purchase method. In December 1998, FASB issued an invitation to comment on the G4+1 position.
After considering the responses, in September 1999 FASB issued an exposure draft, Business Combinations and Intangible Assets, which indicated that only the purchase method should be used to account for business combinations. FASB also concluded that certain changes were necessary in the purchase method. In addition, based on numerous comments received on the 1999 exposure draft, FASB decided to reconsider accounting for goodwill. In 1999, an exposure draft proposed that goodwill should be amortized over a period not to exceed 20 years. In February 2001, FASB issued a revised exposure draft that separated goodwill and other intangible assets from business combinations. The new exposure draft reiterated FASB's commitment to disallow the pooling method and established goodwill impairment testing to replace amortization. FASB issued two final documents, SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 supersedes APB 16, Business Combinations, and SFAS 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS 142 supersedes APB 17, Intangible Assets.
SFAS 141 requires that one of the entities involved in the business combination be designated as the acquiring entity. If the combination involves only the distribution of cash or other assets or the incurring of liabilities, the entity that distributes the cash or other assets or incurs the liabilities is usually the acquiring entity. In most business combinations that involve an exchange of equity interests, the entity that issues the equity securities is usually the acquiring entity. In cases involving the creation of a new entity, one of the existing combining entities must be determined as the acquiring entity. In some cases involving an exchange of equity interests, identification may be more difficult. In those cases, all relevant facts and circumstances should be considered, including the following:
* The relative voting rights in the combined entity
* The existence of a large minority voting interest in the combined entity
* The composition of the governing body of the combined entity
* The composition of the senior management of the combined entity
* The terms of the exchange of equity securities.
Cost of the Acquired Entity
Where applicable, the fair value of the assets distributed and liabilities incurred should be used to measure the cost of the acquired entity. If the acquiring entity issues securities, the fair value of those securities should normally be used. …