Transcript New accounting rules for Business Combinations (141R) and Noncontrolling Interests (160) March 2008

New accounting rules for Business
Combinations (141R) and
Noncontrolling Interests (160)
March 2008
John Lathrop, Partner
1000 Walnut Street, Suite 1000
Kansas City, MO 64106
816-802-5882
[email protected]
John has 26 years of public accounting experience. He has extensive experience in
providing audit and process review services for utility/energy companies. Since 2003
John has served as lead engagement partner for four SEC registrants including two
investor owned utilities. John also has significant experience in working with municipal
utilities. In addition he has substantial experience in Sarbanes requirements, regulation,
IPO’s, registration statements and business combinations and international audits. He
has testified in regulatory proceedings before the Kansas Corporation Commission.
Background
John graduated from the University of Missouri in Columbia. He is a licensed CPA, as
well as a member of the American Institute of Certified Public Accountants and Missouri
and Kansas Certified Public Accountants societies. John is a past Advisory Board
member for the University of Missouri School of Accounting and is a presenter at various
energy & utility industry conferences.
New Accounting Rules for Business
Combinations and Noncontrolling Interests
FASB 141R and 160 require most identifiable
assets, liabilities, noncontrolling interests, and
goodwill acquired in a business combination to be
recorded at “full fair value” and require
noncontrolling interests (previously referred to as
minority interests) to be reported as a component
of equity, which changes the accounting for
transactions with noncontrolling interest holders.
New Accounting Rules for Business
Combinations and Noncontrolling Interests
New statements are effective January 1,
2009 for calendar year ends. Statement 160
will be applied prospectively to all
noncontrolling interests, including any that
arose before the effective date. Early
adoption prohibited.
New Accounting Rules for Business
Combinations and Noncontrolling Interests
Key Objectives:
• Improve certain purchase accounting rules by
increasing (1) transparency of business
combinations to users of financial statements
and (2) consistency with the Conceptual
Framework
• Move closer to the fair value model
• Greater convergence with international
reporting (IFRS)
History of Accounting for Business
Combinations/Intangible Assets
APB 16 & 17 - 1970
•
•
Poolings
– Combination of shareholder interests (stock for
stock)
– Carryover basis
– Goodwill not recorded as an asset
Purchase
– Amortizable goodwill
– Transaction costs capitalized
– Restructuring costs accrued under certain conditions
History of Accounting for Business
Combinations/Intangible Assets
APB 16 & 17 - 1970
•
Poolings
– Attractive to regulated entities
– More consistent with original cost model
– Considerable time and effort expended to structure
transactions to meet the pooling requirements
History of Accounting for Business
Combinations/Intangible Assets
• In 1996 FASB initiates project to reexamine
rules. FASB was not satisfied with significantly
different results of pooling versus purchase
transactions.
• 2001 FASB issues 141 and 142
– Pooling eliminated
– All combinations accounted for as purchases
– Goodwill not amortized but tested annually for
impairment
– Required identification and recognition of intangible
assets separately from goodwill
Key Terms
• The acquiree is the business or businesses
that the acquirer obtains control of in a business
combination
• The acquirer is the entity that obtains control of
the acquiree. However, in a business
combination in which a variable interest entity is
acquired, the primary beneficiary of that entity
always is the acquirer.
• The acquisition date is the date on which the
acquirer obtains control of the acquiree.
Key Terms
•
A business is an integrated set of activities and
assets that is capable of being conducted and
managed for the purpose of providing a return in the
form of dividends, lower costs, or other economic
benefits directly to investors or other owners,
members, or participants.
•
A business combination is a transaction or other
event in which an acquirer obtains control of one or
more businesses. Transactions sometimes referred
to as “true mergers” or “mergers of equals” also are
business combinations as that term is used in this
Statement.
Key Terms
•
Contingent consideration usually is an obligation of the
acquirer to transfer additional assets or equity interests to the
former owners of an acquiree as part of the exchange for
control of the acquiree if specified future events occur or
conditions are met. However, contingent consideration also
may give the acquirer the right to the return of previously
transferred consideration if specified conditions are met.
•
Control has the meaning of controlling financial interest in
paragraph 2 of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, as amended.
•
The term equity interests is used broadly to mean ownership
interests of investor-owned entities and owner, member, or
participant interests of mutual entities.
Key Terms
•
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date (FASB Statement No. 157,
Fair Value Measurements, paragraph 5).
•
Goodwill is an asset representing the future economic benefits
arising from other assets acquired in a business combination that
are not individually identified and separately recognized.
•
An asset is identifiable if it either:
– Is separable, that is, capable of being separated or divided from
the entity and sold, transferred, licensed, rented, or exchanged,
either individually or together with a related contract, identifiable
asset, or liability, regardless of whether the entity intends to do
so; or
– Arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity
or from other rights and obligations.
Key Terms
•
An intangible asset is an asset (not including a financial asset) that
lacks physical substance. As used in 141R, the term intangible
asset excludes goodwill.
•
A mutual entity is an entity other than an investor-owned entity that
provides dividends, lower costs, or other economic benefits directly
to its owners, members, or participants. For example, a mutual
insurance company, a credit union, and a cooperative equity are all
mutual entities.
•
Noncontrolling interest is the equity in a subsidiary not
attributable, directly or indirectly, to a parent (ARB 51, as amended).
•
The term owners is used broadly to include holders of equity
interests of investor-owned entities and owners, members of, or
participants in, mutual entities.
Significant Changes
OLD RULES
NEW RULES
Definition of a business—A business is defined
as a self-sustaining integrated set of activities
and assets conducted and managed for the
purpose of providing a return to investors. An
early-stage development stage entity is
presumed not to be a business.
The definition is expanded. A business or group of
assets no longer must be self-sustaining to be a
business; it must be capable of generating a
revenue stream. The previous presumption that an
early stage development stage entity is not a
business has been removed.
Measuring equity instruments issued—Equity
instruments issued by the acquirer as
consideration are measured using the price a
few days before and after the measurement date
(i.e., date when the terms and conditions have
been agreed and the acquisition announced).
Equity instruments issued by the acquirer as
consideration are measured at fair value on the
acquisition date.
Acquisition-related costs—The purchase price
includes the direct costs of the business
combination.
Direct costs of a business combination are not part
of the acquisition accounting. Instead they are
accounted for under other GAAP and generally will
be expensed if they are not costs associated with
issuing debt or equity securities.
Significant Changes
OLD RULES
NEW RULES
Contingent consideration—Contingent
consideration based on earnings is recognized
as an adjustment to the purchase price when the
contingency is resolved and consideration is
issued or issuable. Contingent consideration
based on the acquirer’s security price is
recognized as an adjustment to paid-in capital
when the contingency is resolved and the
consideration is issued or issuable.
Contingent consideration is recognized and
measured at fair value on the acquisition date.
Subsequent changes in fair value of liability
classified contingent consideration are recognized
in earnings and not as an adjustment to the
purchase price. Equity-classified contingent
consideration is not remeasured after the
acquisition date.
Recognizing and measuring assets acquired,
liabilities assumed, and noncontrolling
interests—The assets acquired and liabilities
assumed are adjusted only for the acquirer’s
share of the fair value. Noncontrolling interests
and their share of the acquiree’s assets and
liabilities are measured based on the carrying
amount of the recognized assets and liabilities in
the acquiree’s financial statements.
Whether the acquirer acquires all or a partial
interest in the acquiree, the full fair value of the
assets acquired, liabilities assumed, and
noncontrolling interests is recognized. The carrying
amounts of previously acquired tranches are
adjusted to fair value at the date control is
obtained, and the acquirer recognizes the
differences as a gain or loss in income at the
acquisition date.
Significant Changes
OLD RULES
NEW RULES
Contingencies—If the fair value of a contingent
liability is not readily determinable at the
acquisition date, a contingent liability is
recognized at the date of acquisition only if it is
probable and reasonably estimable. It is
measured at the best estimate of the settlement
amount, rather than its fair value.
A liability is recognized at fair value on the
acquisition date for contractual contingencies. A
liability is recognized at fair value on the
acquisition date for noncontractual contingencies if
it is more-likely-than-not that the liability exists.
Restructuring costs—Restructuring costs for
plans to be implemented subsequent to the
acquisition are recognized as a liability in
purchase accounting if criteria established in
EITF 95-3 are met within a short period of time
after the acquisition date.
Restructuring costs are not recognized as a liability
in acquisition accounting unless the criteria in
Statement 146 are met at the acquisition date.
IPR&D—The fair value of intangible assets to be
used in IPR&D projects that have no alternative
future use is charged to expense at the
acquisition date.
The acquiree’s IPR&D projects are recognized as
an intangible asset and measured at fair value.
The IPR&D asset is treated as an indefinite-lived
intangible asset and therefore is capitalized, but it
is not subject to amortization until the project is
completed or abandoned.
Significant Changes
OLD RULES
NEW RULES
Tax benefits—The acquirer’s unrecognized tax
benefits that are recognizable as a result of an
acquisition are recorded in purchase accounting
at the acquisition date. A decrease in a valuation
allowance related to the acquiree’s tax benefits
is an adjustment to the purchase accounting.
The acquirer’s unrecognized tax benefits that are
recognizable as a result of an acquisition are
recognized as a reduction of income-tax expense.
Adjustments to recognized tax benefits related to
the acquiree that are recognized subsequent to the
acquisition date are generally recognized in
income rather than as an adjustment to the
acquisition accounting.
Increases in ownership interest—The cost of
each investment tranche is reflected in the
financial statements with a separate purchase
adjustment and goodwill amount related to each
tranche.
Increases in the parent’s share of ownership after
control is obtained are accounted for as capital
transactions.
Decreases in ownership interest—Decreases in
ownership interest generally result in a gain or
loss.
Decreases in the parent’s share of ownership while
retaining control are accounted for as capital
transactions. A transaction that results in the loss
of control results in a gain or loss comprising a
realized portion related to the portion sold and an
unrealized portion on the retained noncontrolling
investment that is remeasured to fair value.
Summary
•
All business combinations accounted for by acquisition method.
•
Acquisition date will now typically be closing date.
•
Most assets acquired, liabilities assumed and noncontrolling interests
recorded at full fair value at acquisition date. Exceptions for income taxes,
employee benefits, assets held for sale, indemnification assets and share
based payments.
•
Transaction costs generally expensed.
•
Contingent consideration measured at fair value at the acquisition date.
•
Indemnification assets recognized equal to recognized amount for related
contingency.
•
Noncontrolling interests recorded as separate component of equity, not as a
liability or other item outside equity. Increases and decreases is ownership
accounted for as capital transactions.