In December 2007, FASB issued revised FAS 141R, Business Combinations, which supersedes
FAS 141 and applies to business combinations occurring in annual reporting periods beginning on or after Dec. 15, 2008; early adoption is not allowed. For calendar year-end entities, the guidance
becomes effective on Jan. 1, 2009. Treasury & Risk asked Mark Wells, an executive editor with Thomson Reuters' tax and accounting group, about FAS 141R and how it affects merger and
acquisition activities that will be completed in 2009 or later.
T&R. Why did FASB undertake this project?
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Wells: The primary reason was the continued convergence of U.S. GAAP with International Financial Reporting Standards (IFRS). Acquisitions are often global transactions so having similar guidance throughout the world is very helpful. FAS 141R is very similar to IFRS 3, Business Combinations, as revised in 2007.
T&R: What's different in FAS 141R?
Wells: The term "purchase method" is now replaced with the term "acquisition method." Other key differences concern the accounting for acquisition costs, the recognition of contingencies, the measurement and recognition of identifiable assets and liabilities, the accounting for acquired research and development assets, and the recognition of partial acquisitions.
T&R: What types of expenses does accounting for acquisition costs include and how has that changed?
Wells: Professional fees are often incurred in mergers and acquisitions for legal, accounting, valuation and other consulting matters. Other direct expenses may also be incurred for travel, administrative support and other related items. Before FAS 141R, many of the direct costs were included in the cost of the business acquired and thus not expensed as incurred. However, FAS 141R requires that acquisition costs be expensed as incurred, with one exception: costs incurred to issue debt or equity securities should be treated according to other existing guidance.
T&R: Can you elaborate regarding contingencies?
Wells: Under FAS 141R, all contractual contingencies are recognized at their fair value at the date of acquisition. The contingencies acquired or assumed that are noncontractual, such as lawsuits, should be recognized at their fair value as of the acquisition date if it is "more likely than not" that the contingency creates an asset or liability. This "more likely than not" criteria has the same meaning as used in other standards and implies a greater than 50% likelihood.
T&R: What other changes should be noted?
Wells: Just a couple of items. First, FAS 141R changed how identifiable assets and liabilities are recognized. Prior to this guidance, the purchase price was allocated to the assets and liabilities and any remaining amount was recognized as goodwill. Now, virtually all identifiable assets and liabilities are recognized at fair value, as defined in FAS 157. Finally, FAS 141R nullifies or amends a significant amount of prior guidance so those affected by it need to be aware of those changes.
Mark Wells, CPA, is an executive editor in Thomson Reuters' tax and accounting business. He specializes in technical content for a number of guides for accountants. Prior to joining Thomson Reuters, he was a manager of international accounting for a multinational company and an audit manager with a large national firm.
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