A post-implementation review of the Financial Accounting Standards Board’s business combinations standard found lingering questions in the minds of some investors, particularly about fair value, despite improvements in the usefulness of the information.
FASB’s parent organization, the Financial Accounting Foundation, released a report Wednesday on its post-implementation review of the standard, which was revised in 2007. The FAF also announced Wednesday that the next standard selected for the post-implementation review process would be FAS 157, Fair Value Measurement. FAS 157 provoked controversy in the aftermath of the financial crisis in 2008 and 2009, when banks pressured FASB and Congress to eliminate the requirements for mark-to-market accounting as they were unable to find a market for their mortgage-backed assets.
One of the problems identified by investors with the business combinations standard pertained to fair value measurement. The post-implementation review of FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141R) (codified in Accounting Standards Codification Topic 805, Business Combinations), found that some investors questioned the reliability of reported information related to assets and liabilities that are difficult to measure at fair value, that result in a bargain purchase, or that may be asset purchases. While Statement 141R achieved improvements in the relevance and completeness of business combination information, the review team found that it did not fully improve the comparability, reliability and representational faithfulness of that information, largely because of unresolved questions about the reliability of fair value measurement requirements.
The requirements in Statement 141R that stakeholders had the most difficulty applying relate to measuring assets acquired and liabilities assumed using the fair value requirements in FASB Statement No. 157, Fair Value Measurements; measuring the fair value of contingent consideration; and determining whether a transaction is a business combination or an asset purchase. Preparers for small and midsize organizations said they had the most difficulty applying the standard.
The review also found that the business combinations standard introduced more costs and complexity in certain areas than FASB had expected. Most of the complexity related to the application of Statement 157’s measurement requirements to certain items. The costs stemmed from the extensive external valuation expertise sought by both preparers and auditors of financial statements. Smaller organizations could face extra costs to get timely access to external resources, the review team noted.
The Statement 141R review team received input from investors and other financial statement users, auditors, academics, financial regulators and preparers of various sizes, industries and levels of experience with the standard. Based on its research, the review team concluded that Statement 141R resolved some of the practice issues associated with the purchase method of accounting for business combinations. But some practice issues remained unresolved, including identifying when a new basis of accounting was appropriate and accounting for combinations between joint ventures and organizations under common control.
The International Accounting Standards Board also is conducting a post-implementation review of International Financial Reporting Standards 3 (revised 2007), Business Combinations, which was issued at the same time as Statement 141R. Statement 141R is similar to IFRS 3 in many areas, but some differences remain between the requirements of the two standards so they are not fully converged.
On the positive side, the post-implementation review acknowledged that the standard resolved some of the issues associated with the purchase method of accounting for business combinations. The PIR team agreed that its principles and requirements generally are understandable and could be applied as intended. Investors indicated they generally found the resulting information to be useful.
“The post-implementation review report on Statement 141R identified many positive aspects of the business combinations standard, including the resolution of prior practice issues as well as enhancements in the usefulness of information about a business combination,” FASB chairman Leslie F. Seidman said in a statement. “The report also identified some stakeholder concerns, many of which the board has already begun to address, for example, push-down accounting and the definition of a business. Because this is a converged standard, we plan to coordinate our review efforts with the IASB.”
The review of Statement 141R was undertaken by an independent FAF team working under the oversight of the FAF board of trustees. “The PIR team performed a robust, independent review of Statement 141R, and we believe that the findings and recommendations will help improve the standard-setting process for the FASB,” said FAF president and CEO Teresa S. Polley in a statement. “We thank all of the stakeholders from various backgrounds and industries who contributed important feedback to the PIR team on the real-world technical application, operationality, usefulness and cost-effectiveness of the business combinations standard.”
The post-implementation review team also recommended a number of improvements to the standard-setting process. They suggested that FASB should enhance and formalize the process for identifying, prioritizing, tracking and resolving significant financial reporting issues. FASB should regularly report on and update the status of those issues and their relative priorities. In addition, they recommended that FASB clearly identify and document the need that a project will address and how that determination was made. When resuming a deferred project, FASB should document its reassessment of the need for the project.
The team also suggested that FASB consistently conduct key research (such as field work and reviewing academic studies) as early as possible in the agenda-setting and deliberation phases. In addition, the board should fully identify, in a standard’s basis for conclusions, any research and economic principles the board relied upon when deciding on a significant issue.
Stakeholders who would like the opportunity to participate in the FAF’s next post-implementation review survey, on the fair value measurement standard, Statement 157, can register online.