A new accounting standard is giving executives second thoughts about plans for mergers and acquisitions.

Statement of Financial Accounting Standards No. 141 (R), "Business Combinations," issued by the Financial Accounting Standards Board, promises to change how companies approach financial planning and reporting around mergers, acquisitions and ownership changes.

Statement 141 (R), effective for companies with fiscal years beginning after Dec. 15, 2008, covers how an acquirer should recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase; and determine what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

In a poll conducted by Deloitte of more than 1,850 executives, 40 percent said the revised standard would cause them to rethink deal strategy or have an impact on their planned deal activity. Only 4 percent of the survey respondents said their companies had finished assessing the valuation impact of the revised standard.

"Generally, just because of the nature of the accounting change, there are things that are going to have to be fair valued as part of a business combination and new aspects that weren't part of the accounting before," said Deloitte Financial Advisory Services director Greg Forsythe. "Some more assets and liabilities may be recognized under fair value principles. There are more aspects where, on an ongoing basis, fair value may need to be continually monitored."

The changes could affect different industries, he noted. Deloitte recommends that deal teams prepare for some key changes in the standard, including:

* In-process research and development: Currently, IPR&D is included in a purchase price allocation, but is immediately written off. Statement 141(R) mandates recognition of IPR&D as an intangible asset separate from goodwill at the acquisition date, with no immediate write-off.

* Initial recognition of contingent assets and liabilities: Currently, pre-acquisition contingencies, such as an outstanding lawsuit, are recorded at fair value if they can reasonably be determined during the allocation period. Statement 141 (R) will set fair value for all contractual and certain noncontractual contingencies at the acquisition date.

* Step acquisitions - Currently, if a company has an equity interest in another company and purchases an additional interest and obtains control, there is no adjustment to the initial interest. Under Statement 141 (R), the previously held interest must be re-measured at fair value.

* Measurement date for equity securities that are issued in a business combination: Currently, an entity would value equity securities issued in a combination a few days before and a few days after the terms of the arrangement are agreed and announced. Under the new rule, the acquisition date becomes the measurement date.

* Recognition of contingent considerations at acquisition date and in subsequent periods: Currently, only contingency amounts that are determinable at the date of acquisition are included in the cost of the acquired business. Under Statement 141 (R), in addition to being recorded at fair value at the acquisition date, contingent consideration arrangements recorded as liabilities must be marked to market each period through earnings.

* Acquisition-related costs of the acquirer: Currently, direct and incremental costs, such as investment banking fees, accounting fees and legal fees, are capitalized as part of the business combination. Under Statement 141 (R), acquisition-related costs need to be accounted for separately in the business combination. In general, transaction costs will be expensed and will not be accounted for as a component of goodwill.

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