In December 2007, the FASB introduced FAS 141r and FAS 160, changing longstanding accounting rules for business combinations and noncontrolling (minority) interests, respectively. FAS141r replaces FAS 141 and FAS 160 amends ARB 51. The FASB revised these accounting standards to more faithfully represent economic events and to further FASB's goal of convergence with international accounting standards (IFRS 3 and IAS 27, respectively). Both revisions are effective for annual reporting periods beginning on or after December 15, 2008.
We highlight some of these changes below, but this list is not complete. Our lesson on noncontrolling interests details changes specific to FAS 160. Also, PwC has a very thorough summary of these accounting changes that is worth a read. Our remaining M&A topics and examples assume the new accounting rules, unless otherwise stated or implied.
Exhibit – Accounting Changes
|Topic||Old Method||New Method|
|Valuing Equity Consideration||Value equity securities issued as consideration at the deal announcement date.||Value equity securities issued as consideration at the deal closing date.|
|Transaction Costs||Include in the purchase price, with the exception of debt and equity issuance costs.||Expense as incurred rather than include in the purchase price, with the exception of debt and equity issuance costs.|
|Restructuring Charges||Recognize as a liability at the acquisition date.||Expense separately from the transaction as incurred.|
|Partial Acquisitions Where a Controlling Interest is Acquired (1)||Only the controlling interest is recorded at fair value (FV), while the remaining noncontrolling interest is recorded at its carrying value.||Even when less than a 100% controlling interest is acquired, 100% of the acquired net assets are recorded at FV.|
|In-Process R&D (IPR&D) (2)||Expense immediately upon completion of the transaction if the acquired IPR&D has no alternate future use.||Do not expense, regardless of whether or not the acquired IPR&D has an alternate future use. Instead, acquired IPR&D becomes an intangible asset classified as indefinite-lived until the completion or abandonment of the associated R&D effort.|
|Acquired Contingent Assets and Liabilities||Defer recognition of preacquisition contingencies until payment is deemed probable and can be estimated.||Recognize contractual contingencies as of the acquisition date, measured at their acquisition-date FVs.
Recognize noncontractual contingencies as of the acquisition date, measured at their acquisition-date FVs, only if it is more likely than not that they meet the definition of an asset or a liability. If not, account for a noncontractual contingency in accordance with other applicable GAAP.
|Contingent Consideration (e.g. Earn-Outs)||Defer recognition until the contingency is resolved and the consideration is issued or becomes issuable. Recognition of contingent consideration results in an adjustment to goodwill.||Record contingent consideration on the acquisition date, measured at FV on such date, as a liability or equity in accordance with other applicable GAAP.|
|Bargain Purchases (Negative Goodwill)||Allocate negative goodwill to the acquired assets pro rata, reducing their allocated FVs to zero. Record immediately any goodwill remaining following the pro rata allocation as an extraordinary gain.||Immediately recognize negative goodwill in earnings as a gain to the acquirer that increases goodwill from a would-be negative value to zero.|
|Terminology||"purchase" method of accounting
|"acquisition" method of accounting
(1) Note that the new rules will result in goodwill attributable to both the acquirer and the noncontrolling interest. Goodwill attributable to the acquirer is measured as the FV of the controlling interest's portion of the target less the acquirer's percentage share of the FV of the net assets acquired. Goodwill attributable to the noncontrolling interest is measured as the total amount of goodwill created in the transaction less the goodwill attributable to the acquirer. We'll go through an example on purchase price allocation and goodwill calculation under the new rules in our lesson on noncontrolling interest.
(2) FAS 141r does not change the requirement to immediately expense IPR&D in asset acquisitions other than business combinations (e.g. a buyer acquires only an R&D asset rather than the whole business). However, the FASB is considering changing the requirement to expense IPR&D in such cases to conform to rules governing IPR&D in business combinations under FAS 141r.