Transcript FASB Accounting Standards Codification

Update on
FASB ASC 740
(FIN No. 48)
By Steve Johnson, CPA
Principal
Olsen Thielen & Co., Ltd.
FIN 48 Timeline
• The original proposed interpretation was released in 2005. It
was expected to be effective as of the close of the first fiscal
year ending after 12/15/05, with earlier application
encouraged.
• FIN 48 was issued in 2006 and was to be effective for fiscal
years beginning after 12/15/06, with earlier application
permitted.
• FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 for
Certain Nonpublic Enterprises, was posted February 1, 2008.
The FSP deferred the effective date of FIN 48 for certain
nonpublic enterprises (including nonpublic not-for-profit
organizations) to fiscal years beginning after 12/15/07.
FIN 48 Timeline (Continued)
• FSP FIN 48-3, Additional Delay of the Effective Date of FASB
Interpretation No. 48 for Certain Nonpublic Entities.
– Allowed election of deferral of one additional year to fiscal years
beginning after 12/15/08.
– Required an electing entity to disclose (1) the fact of the deferral, and (2)
its accounting policy for evaluating uncertain tax positions.
• In September of 2009 FASB issued ASU 2009-06, Implementation
Guidance on Accounting for Uncertainty on Income Taxes and
Disclosure Amendments for Nonpublic Entities.
– For entities currently applying FIN 48, the changes are effective for
interim and annual periods ending after 9/15/09.
– For entities who deferred application under FSP FIN 48-3, the effective
date coincides with the date FIN 48 is applied.
ASU 2009-06 Amendments to Subtopic 740-10
• Adds to the definition of a tax position an entity’s status,
including its status as a pass-through entity or a tax-exempt
not-for-profit entity.
• Includes within the scope of entities subject to accounting for
uncertain tax positions tax exempt not-for-profits, pass-through
entities, and entities that are taxed in a manner similar to passthrough entities.
• Excludes nonpublic entities from certain disclosure
requirements:
– Tabular reconciliation of the total amount of unrecognized tax
benefits at the beginning and end of the period.
– Amount of unrecognized tax benefits, which, if recognized, would
have an impact on the effective tax rate.
Clarifying Examples Added to Subtopic 740-10-55
• Evaluating nexus for all jurisdictions in which an entity may be
subject to income taxes, even if there is no physical presence.
• Decisions regarding built-in gains tax upon tax conversions.
• Characterization of activities as related or unrelated to an
entity’s tax exempt status.
• Determination of whether income taxes are attributable to an
entity or to its owners. Should be based on the laws and
regulations of the taxing authority, rather than on the party that
actually pays the income taxes or on obligations imposed by
agreements between the entity and its owners.
• Consolidated or combined financial statements must include
all tax positions for each of the entities within the group (even
if one or more of the entities is a pass-through entity).
FASB Accounting
Standards Codification
By Steve Johnson, CPA
Principal, Olsen Thielen & Co., Ltd.
FASB Accounting Standards Codification Overview
• The Codification was released by the FASB on July 1, 2009
• Effective for interim and annual periods ending after
September 15, 2009 as established in SFAS No. 168
• It is the single source of authoritative non-governmental U.S.
GAAP
• All existing accounting standards documents are superseded,
and any literature not included in the Codification is considered
to be non-authoritative
• Combines thousands of GAAP pronouncements into around
90 topics and displays them in a consistent structure
Goals for the New System
• Reduce the time it takes to research different topics and
issues
• Mitigate the risk of noncompliance with standards since all the
literature is organized in a central location
• Provide real-time updates as soon as standards are released
• Help the FASB with the research and convergence required
during the standard setting process
• Become the authoritative source of literature of the completed
XBRL taxonomy
What is included in the Codification?
• The Codification includes all authoritative U.S. GAAP
– As mentioned before, all existing accounting standards
documents are superseded
– This includes FASB, AICPA, and EITF pronouncements as
well as relevant portions of authoritative content issued by
the SEC (e.g. Regulation S-X and Staff Accounting
Bulletins)
– All codified literature will carry the same level of authority
• The Codification does NOT include non-authoritative sources
(e.g. IFRS, FASB Concepts Statements, AICPA Issues Papers,
textbooks, handbooks, articles, etc.)
How is the Codification structured?
Areas
Topics
Subtopics
Sections
Subsections
How is the Codification structured? (Continued)
• Topics represent a collection of related guidance. The topics
are further broken out into subtopics, sections, and
subsections.
• Note that subsections are not numbered and are limited in
occurrence
• Topics reside in four main areas
The Four Main Areas of the FASB ASC
1. Presentation (Topic Codes 205-299)
• Topics relate only to presentation matters
• Do not address recognition, measurement and
derecognition
2. Financial Statement Accounts (Topic Codes 305-700)
• Topics relate to specific accounts (e.g. cash, inventory,
debt, taxes)
3. Broad Transactions (Topic Codes 805-899)
• Topics are transaction oriented (e.g. consolidation, leases,
financial instruments, related party disclosures)
The Four Main Areas of the FASB ASC (Continued)
4. Industries (Topic Codes 905-999)
• Topics relate to accounting for specific types of industries
and/or activities (e.g. agriculture, health care, not-for-profit
entities, real estate)
How will the Codification be updated?
• Changes are communicated through Accounting Standards
Updates (ASUs)
• ASUs will be published for all authoritative U.S. GAAP
pronouncements, as well as for amendments to SEC content
• An ASU is a transient document that summarizes the changes
and explains the basis for the FASB’s decisions
• Note that ASUs update FASB Codification but are NOT
authoritative in their own right
• The FASB will not amend ASUs, it will only amend the
Codification
SFAS 168 The FASB ASC and the Hierarchy of GAAP
• SFAS 168 replaces SFAS 162 The Hierarchy of GAAP
• It establishes a new hierarchy of GAAP sources for nongovernmental entities under the Codification
• The Codification contains certain software revenue recognition
guidance from Section 5100 “Revenue Recognition” of the
AICPA Technical Inquiry Service, which may not have been
previously followed by some non-public entities. For these
entities, it is possible that the effect of applying the provisions
of SFAS 168 could result in a change in accounting principle
or correction of an error
Statement of Financial
Accounting Standards No.
141(R) and No. 164
Business Combinations
Not-for-Profit Entities:
Mergers and Acquisitions
TELERGEE CFO &
Controllers Conference
October 15, 2009
Steve Johnson
Prior to SFAS No. 141
• APB No. 16 issued August 1970 was the main authoritative
pronouncement on accounting for business combinations.
• Two accepted methods of accounting:
– Purchase Method accounted for the combination as the
acquisition of one company by another.
– Pooling of Interests Method accounted for the combination
as the uniting of ownership interests of two or more
companies by exchange of equity securities. All of a series
of conditions had to be met for this method to be applied.
• Not-for-profit combinations would use the Pooling of Interests
method if certain circumstances existed.
SFAS No. 141
• Superseded APB No. 16
• Effective for business combinations initiated on or after July 1,
2001.
• Statement 141 did not apply to:
– The formation of a joint venture.
– Combinations between not-for-profit organizations.
– Acquisition of a for-profit business by a not-for-profit entity.
– Combinations of two or more mutual enterprises.
SFAS No. 141 (Continued)
• Purchase accounting required for business combinations
covered by SFAS No. 141.
• Pooling of interests method is not longer permitted.
• Statement 141 did not fundamentally change the manner in
which purchase accounting is applied:
– Carries forward guidance concerning (1) determination of
cost, (2) allocation of purchase price to assets acquired
and liabilities assumed, and (3) determination of date of
acquisition.
– Keeps guidance re: preacquisition contingencies.
• Provides new guidance for recognizing intangible assets (apart
from goodwill) and calls for additional disclosures.
FASB ASC 805, Business Combinations
[SFAS No. 141(R)]
• Effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
• Same effective date as SFAS No. 160 on noncontrolling
interests.
• Retains fundamental requirements of the purchase method.
However, purchase method is now referred to as the
acquisition method.
• The revised statement marks the FASB’s full transition to fair
value accounting for business combinations.
• SFAS 141(R) was written in collaboration with the International
Accounting Standards Board to promote international
convergence of accounting standards.
Applicability of SFAS No. 141(R)
• Statement 141(R) broadens the scope of activities that may be
classified as a business combination.
– SFAS No. 141 only applied to business combinations in which
control was obtained by transferring consideration.
– SFAS No. 141(R) applies to all transactions and other events in
which one entity obtains control over another (example: by
contract alone or through lapse of minority veto rights).
• Applies to mutual entities.
• Mutual entity – “An entity other than an investor-owned entity that
provides dividends, lower costs or other economic benefits directly or
proportionately to its owners, members, or participants. Mutual
insurance entities, credit unions, and farm and rural electric
cooperatives are examples of mutual entities.
SFAS No. 141(R) Does Not Apply to:
• The formation of a joint venture.
• The acquisition of an asset or a group of assets that does not
constitute a business.
• A combination between entities or businesses under common
control.
• A combination between not-for-profit organizations or the
acquisition of for-profit businesses by a not-for-profit
organization.
141(R) Major Changes from Previous Standard
• The date on which the acquirer obtains control of the acquiree
has been established as the acquisition date.
• Defines the acquirer.
• Applies to all business combinations, including those in which
control is obtained without the transfer of consideration.
• 141(R), with limited exceptions, requires assets acquired and
liabilities assumed to be recognized at their fair values. That
requirement replaces the cost-allocation process in SFAS No.
141, under which the cost of an acquisition is allocated to
individual assets and liabilities based on estimated fair values.
Cost allocation under 141 often resulted in the measurement of
some assets acquired and liabilities assumed at amounts other
than fair value.
141(R) Major Changes from Previous Standard (Continued)
• Under 141, costs incurred to effect the business combination
are included in the allocated cost. 141(R) requires acquisitionrelated costs to be recognized separately from the acquisition.
(Generally that means expensed as incurred.)
• Under 141, restructuring costs the acquirer expected to incur
were recognized as if they were a liability assumed at the
acquisition date. Under 141(R), such costs are recognized
separately from the acquisition.
• Requires noncontrolling interests to be measured at fair value.
141(R) Major Changes from Previous Standard (Continued)
• Under 141 goodwill recognized represented only the amount
attributable to the acquirer. Under 141(R) because the
noncontrolling interest is measured at fair value, the goodwill
recognized is attributable to both the acquirer and the
noncontrolling interest.
• Changes handling of assets and liabilities arising from
contingencies.
• Changes handling of so-called “negative goodwill”.
Assets and Liabilities Arising from Contingencies
• Acquirer required to recognize assets and liabilities assumed
arising from contractual contingencies as of acquisition date at
fair value.
• Non-contractual contingencies recognized at acquisition date
only if “more likely than not”.
• Subsequent to acquisition date acquirer will continue to value
assets/liabilities arising from a contingency at its acquisitiondate fair value. When new information is obtained about the
possible outcome:
a) Liability measured at higher of acquisition date fair value or
amount that would be recorded under FASB 5.
b) Assets measured at lower of acquisition date fair value or best
estimate of future settlement amount.
Goodwill and Gains from Bargain Purchases
• Goodwill recognized as of the acquisition date.
• All consideration paid for an acquisition (including contingent
consideration such as an earn-out) must be included in the
purchase price.
• The original SFAS No. 141 requires negative goodwill to be
allocated as a pro rata reduction to net assets.
• With the revision, negative goodwill is required to be
recognized as an immediate gain on the income statement.
Timing is Critical
• Transactions and any related consideration should be valued
on the date the transaction closes (previously stock was
valued as of the announcement date).
• Accounting estimates related to the acquisition must be
booked as of the closing date (previously they could be
adjusted after the closing date).
• Transaction costs are expensed rather than capitalized.
• Measurement period (period where the acquirer may adjust
the provisional amounts recognized when new information is
available that existed as of the acquisition date) not to exceed
one year after acquisition date.
Disclosures – Acquisition
Disclose the following information:
a)
b)
c)
d)
e)
f)
g)
h)
Name and description of the acquiree.
Acquisition date.
Percent of ownership interests acquired.
Primary reasons for the acquisition and description of how control was
obtained.
Fair value of consideration transferred and fair value of each major
class of consideration.
Amounts recognized as of acquisition date by major class of assets
acquired and liabilities assumed.
Description of qualitative factors that make up goodwill recognized.
Goodwill expected to be deducted for tax purposes.
Disclosures - Acquisition (Continued)
• There are additional disclosures for contingencies, public
companies, segment information, bargain purchases, noncontrolling interests, combinations achieved in stages.
• If the date of an acquisition is after the reporting date but
before the financial statements are issued, the acquirer shall
disclose:
a) Disclosure requirements from previous slide and above.
b) If acquisition information is incomplete at the time financial
statements are issued the acquirer shall describe which
disclosures could not be made and the reason why they could
not be made.
Steps in Recording a Combination
• Assets acquired must be a business.
• Applying the acquisition method:
a) Identify the acquirer.
b) Determine acquisition date (date obtains control).
c) Recognizing and measuring the identifiable assets acquired and
liabilities assumed and any non-controlling interest in the
acquiree.
d) Recognizing and measuring goodwill.
e) Measurement is as of the acquisition date.
Why FASB Issued SFAS No. 164
• SFAS 141, SFAS 141(R) and SFAS 142 did not address notfor-profit entities.
• Will improve relevance, representational faithfulness, and
comparability of the information a not-for-profit provides in its
financial statements about a combination with one or more
not-for-profit entities.
• Incorporates the unique characteristics of not-for-profit
enterprises and of their business combinations.
Scope and Applicability of 164
• Generally, any transaction that is deemed a merger of not-forprofit entities or an acquisition by a not-for-profit entity.
• Merger – transaction or other event in which the governing
bodies of two or more not-for-profit entities cede control of
those entities to create a new not-for-profit entity. Merging
entities do not retain shared control of the newly created entity
and a newly formed governing body needs to have been
established.
• Acquisition – transaction in which a not-for-profit acquirer
obtains control of one or more nonprofit activities or
businesses and the assets and liabilities of the acquiree are
recognized in the acquirer’s financial statements.
Combinations Exempt from FASB 164
• Joint Ventures.
• Acquisition of an asset or group of assets that does not
constitute either a business or nonprofit activity.
• A combination between not-for-profit entities, businesses
under common control.
• A transaction in which the not-for-profit entity obtains control of
another entity but does not consolidate as permitted or
required by AICPA Statement of Position 94-3.
Effective Date of 164
• Mergers for which the merger date is on or after the beginning
of an initial reporting period beginning on or after December
15, 2009.
• Acquisitions for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after
December 15, 2009.
Requirements of the Standard
• Determines whether a combination is a merger or acquisition.
• Applies the carryover method in accounting for a merger.
• Applies the acquisition method in accounting for an
acquisition.
• Determines what information to disclose.
Applying the Carryover Method to Merger
• The combined entity’s initial set of financial statements carry
forward the assets and liabilities of the combining entities.
• Measured at their carrying amounts in the books of the
combining entities at the merger date.
• No goodwill or intangibles recognized.
• Similar to pooling of interest from APB 16 although the
measurement date is now the date of the merger. (Pooling of
interests measurement date was the beginning of the period in
which the merger occurred.)
• New reporting entity created.
• Entity’s history begins at inception.
Applying the Acquisition Method
•
•
•
•
Similar to acquisition method as described in FASB 141(R).
Identifying the acquirer.
Determine the acquisition date.
Recognize and measure the identifiable assets acquired and
liabilities assumed.
• FASB 164 has additional guidance on items unique to not-forprofits and elimination of 141(R) guidance that does not apply
to not-for-profits.
• Differences in terminology and a few details unique to not-forprofit entities.
Recognizing Goodwill or a Contribution Received
• Areas that differ the most from FASB141(R):
a) Goodwill recognized as a separate charge to the Statement of
Activities for not-for-profit entities that are predominantly
supported by contributions and investment income. (“Excess of
consideration paid over net assets acquired in Acquisition of
Entity XY”)
b) Many not-for-profit acquisitions constitute an inherent
contribution received because acquirer receives assets without
transferring consideration. The contribution would be recorded as
a separate credit in the Statement of Activities (“Excess of assets
acquired over liabilities assumed in donation of Entity XY”)
Other Issues
• This Statement requires that a recognized non-controlling
interest in another entity, whether a business or not-for-profit
entity, be measured at fair value at the acquisition date.
• The Statement establishes exceptions to the recognition
principle for donor relationships, collections, promises to give,
contingencies.
• Cash flow presentations for items that are unique (such as
goodwill and inherent contributions received).
• Does this statement affect convergence with IFRS?
• A not-for-profit entity shall apply FASB 142, in subsequent
accounting for goodwill and other intangible assets.
Disclosures - Merger
• New entity’s initial reporting period begins with merger date.
• Disclose the following information:
a)
b)
c)
d)
e)
f)
Name of merged entity.
Merger date.
Reasons for merger.
Amounts recognized as of merger date by major class.
If there are any significant amounts that GAAP doesn’t require to
be measured.
Any significant adjustments needed to conform the individual
accounting policies of the merging entities.
Disclosures - Acquisition
Disclose the following information:
a)
b)
c)
d)
Name and description of the acquiree.
Acquisition date.
If applicable, percent of ownership interests acquired.
Primary reasons for the acquisition and description of how control
was obtained.
e) Fair value of consideration transferred and fair value of each
major class of consideration.
f) Amounts recognized as of acquisition date by major class of
assets acquired and liabilities assumed.
g) Description of qualitative factors that make up goodwill
recognized (either on Statement of Financial Position or
Statement of Activities).
Disclosures - Acquisition (Continued)
• There are additional disclosures for contingencies, collections,
conditional promises and inherent contributions received.
• If the date of an acquisition is after the reporting date but
before the financial statements are issued, the acquirer shall
disclose:
a) Disclosure requirements from previous slide and above.
b) If acquisition information is incomplete at the time financial
statements are issued the acquirer shall describe which
disclosures could not be made and the reason why they could
not be made.
Questions?
Thank You