KPMG On-Screen Enhanced US

Transcript KPMG On-Screen Enhanced US

Business Combinations: What you need to know about FASB Statements No. 141R and No. FAS 160 Michael Nesta, Director – KPMG LLP Daniel McCain, Sr. Manager – KPMG LLP 1

Overview – FAS 141R & FAS 160

Joint project with International Accounting Standards Board (IASB)

IFRS standards - revised IFRS 3 and amended IAS 27 Some differences remain with IFRS

Replaced FAS 141 and amended ARB 51

Guidance on consolidation remains unchanged

Effective for periods beginning on or after December 15, 2008; early adoption is prohibited

Scope

Applies to all transactions or events in which acquirer obtains control of one or more businesses

New scope inclusions for: Mutual entities (eliminates “as if pooling method”) Acquisitions of control without a transfer of consideration Continuing scope exclusions for: Formation of joint ventures Asset acquisitions Combinations between entities under common control Business combinations involving not-for-profit organizations ©2009 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

Scope – Definition of Business

Broadens definition of a business

Integrated set of activities and assets that are

capable

of being managed to provide a return to investors or economic benefits to owners, members, or participants

Will result in more transactions being accounted for as business combinations

Consideration Transferred

Must determine the acquisition-date fair value of the consideration transferred (purchase price) for the acquiree rather than the acquisition cost

Generally, fair value of consideration transferred by the acquirer to the acquiree or its owners would be used

Acquirer’s equity securities measured at acquisition date fair value Acquisition-related costs are not part of fair value of acquiree – expensed as incurred except cost to issue debt or equity securities

Contingent Consideration

Contingent consideration is recognized and measured at fair value on acquisition date Any subsequent changes to the FV of the contingent consideration that is asset or liability-classified are recognized in earnings Contingent consideration that is equity-classified is not remeasured

Recognizing and Measuring Acquired Assets, Liabilities and Noncontrolling Interests

Recognize and measure assets, liabilities, and noncontrolling interests at full fair value with limited exceptions as follows:

Recognition only Contingencies acquired in a business combination Recognition and measurement: Deferred taxes (FAS 109, FIN 48) Indemnification assets Employee benefits (APB 12, FAS 43, 87, 88, 106, 112, 146) Measurement only: Reacquired rights Share-based payment awards (FAS 123R) Assets held for sale (FAS 144)

Fair value should reflect the market participants’ perspective Adjustments to “provisional” amounts during “measurement period” reflected retrospectively

Contingencies

FASB Staff Position No. FAS 141(R)-1 issued in April 2009 amends the Statement’s original guidance on contingencies Reinstates most of Statement 141’s requirements

Initial recognition and measurement Recognize and measure at fair value if determinable during the measurement period If fair value cannot be determined, recognize if it is probable that an asset existed or liability was incurred at the measurement date Subsequent accounting – Acquirers should develop a “systematic and rational” approach ©2009 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

Contingencies, cont’d

Contingent consideration assumed in a business combination

Not considered pre-acquisition contingencies and should be accounted for under existing guidance in Statement 141(R)

Disclosures

Separately disclose the amounts, measurement basis and nature of acquired contingencies recognized Unrecognized contingencies are subject to Statement 5’s disclosure requirements ©2009 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

Restructuring Costs

Generally, restructuring costs are not a part of purchase accounting

Can recognize the acquisition date fair value of restructuring and exit activities only if recognition criteria under FAS 146 are met prior to the acquisition date Otherwise, accounted for separately from the business combination, generally as post-combination expense of the combined entity ©2009 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

In-Process Research & Development

IPR&D measured at fair value and recognized as an asset rather than expensed

Capitalized IPR&D treated as indefinite-lived intangible assets – no amortization until completion or abandonment of R&D effort Subsequent R&D costs expensed as incurred ©2009 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

Deferred Taxes

Unrecognized pre-acquisition tax benefits of acquirer that are recognizable as a result of the acquisition are not included in acquisition accounting

Rather, amounts are recognized in income tax expense

Adjustments for recognized tax benefits related to the acquiree (e.g., changes to a valuation allowance) are recognized subsequent to measurement period in tax provision, not as an adjustment to acquisition accounting

Applies to both pre and post-FAS 141R business combinations

Deferred tax asset recognized in acquisition accounting for portion of share based payment included in consideration transferred

Partial Acquisitions

Identifiable net assets reported at 100% of their fair values rather than mixture of fair value and historical carry over value Amount reported as noncontrolling interest will be its acquisition-date fair value Goodwill is based on 100% of the acquired entity’s goodwill rather than the goodwill related to the controlling interest only

Step Acquisitions

Acquirer remeasures preacquisition investments at fair value at the date control is obtained Any unrealized holding gains or losses will be recognized in the consolidated net income for the period

Noncontrolling Interests

Reported as part of equity (not liability or mezzanine) Changes in controlling interests (while maintaining control) are accounted for as capital transactions Loss of control results in recognition of gain or loss:

realized gain or loss related to the portion of the ownership interest sold; and unrealized gain or loss on remeasurement to fair value of any retained ownership interest

U.S. GAAP compared to IFRS

FAS 141R requires NCI to be measured at fair value resulting in goodwill attributable to NCI

IFRS 3 allows acquirer to measure NCI at fair value or as proportionate share of the acquiree’s identifiable net assets

FAS 141R and FAS 160 apply to periods beginning on or after December 15, 2008; early adoption is prohibited

IFRS 3 and IAS 27 apply to periods commencing on or after July 1, 2009; early adoption is permitted ©2009 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.

U.S. GAAP compared to IFRS, cont’d

FAS 141R requires recognition at acquisition-date fair value of all contingencies (liability or asset) when fair value can be determined, otherwise recognize if Statement 5 criteria are met

IFRS 3 requires recognition at fair value of contingent liabilities (not asset) if it meets the definition of a present obligation and is reliably measurable Also subsequent measurement differences

Both FAS 141R and IFRS 3 cross-reference to existing guidance for share-based payment awards, deferred income taxes, classification of contingent consideration, acquisition-related costs and employee benefits which have existing GAAP differences

Questions?

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.