Completing their first major joint project, the Financial Accounting Standards Board and the International Accounting Standards Board have agreed on two new standards on accounting for business combinations.FASB member G. Michael Crooch termed the new guidance “a significant convergence milestone [that] improves reporting while eliminating differences” between the standards that were previously promulgated by the two boards.
FASB’s Statement 141, Business Combinations, completes the second phase of the project that resulted in the original Statement 141, which was issued in June of 2001. That statement settled certain broad issues, such as the use of the purchase method of reporting on mergers and acquisitions, the amortization of goodwill, and the treatment of intangible assets.
Concurrently, FASB issued Statement 160, Noncontrolling Interest in Consolidated Financial Statements. International standards require non-controlling interest in subsidiaries to be classified as equity in consolidated financial statements. U.S. GAAP, however, has been unclear, requiring mezzanine presentation between liabilities and equity for Securities and Exchange Commission registrants, but not necessarily other companies.
Statement 160 now requires that all non-controlling interest be classified as equity. Transactions between an entity and non-controlling interests are to be treated as equity transactions.
Statement 141(R) provides guidance on purchase method procedures, such as contingent considerations and step-acquisition accounting. In a change from current practice in the U.S., bringing generally accepted accounting principles into line with International Financial
Reporting Standards, step acquisitions will be required to be recorded at fair value.
Grey Forsythe, a director in valuation services at Deloitte Financial Advisory Services, said that the revised statement improves and clarifies accounting for mergers and acquisitions, but that preparers will have to make substantial adjustments to their accounting and reporting procedures. They have been given time to do so, however, as both statements go into effect only for fiscal years beginning after Dec. 15, 2008.
THE FAIR VALUE EXERCISE
They’ll also have to put a little more elbow grease into their calculations.
“The change in and of itself will create more work,” Forsythe said. “I would expect that, since there are more aspects within 141(R) where fair value is needed than there were under 141, and the change will cause an increase in the fair value exercise. But at the same time, some aspects of the accounting that weren’t under fair value, the historical decision-making, won’t be there.”
Forsythe also said that the new standard has the potential of resulting in increased volatility in earnings, not just as the change goes into effect but continuously into the future. “The revised standard could potentially lead to more volatility in earnings going forward because of the way we will need to reassess fair value of certain aspects,” he said. “If you assess a certain liability at X in one period and reassess it in the next period at Y, that difference will flow through the income statement, so there will be expenses being caused by that change in fair value.”
FASB and the IASB had hoped to issue their respective statements, which are identical except for a few variations in nuance, at the same time, but the IASB will need to issue its statements, IFRS 3 (Revised), Business Combinations, and International Accounting Standard 27 (Revised), Consolidated and Separate Financial Statements, early in 2008.
The boards still have more work to do on certain aspects of reporting on business combinations. While FASB defines fair value in Statement 157, Fair Value Measurement, the IASB has yet to formalize its own definition, though it is in the process of doing so. The boards also hold divergent standards on identifying acquirers in consolidations, though the two standards are very similar. There are also slight differences in the measuring of certain assets and liabilities, such as income taxes, operating leases and employee benefits. These differences are in other standards that are referred to in the business combination standards of both boards. The differences will be eliminated by converging those other standards, not by revisions to the business combination standards.
