New accounting pronouncement impacts mergers and acquisitions

If your bank or thrift is considering acquisitions to build stockholder value and market penetration, you’ll need to understand how Financial Accounting Standards Board Statement No. 141 R (FAS 141R) will change the accounting treatment.
RSM McGladrey
2008/06/13
FAS 141R becomes effective for acquisitions consummated on or after the beginning of the first annual reporting period (beginning on or after Dec.15, 2008).
Some FAS 141R key changes include:
No carryover of the acquired institution’s allowance for loan loss balance
Transaction costs and restructuring costs will be expensed
Contingent consideration will have to be estimated at the acquisition date
Fair value adjustment in the measurement period will require revision of prior period financial statements
Acquirer stock values will be as of the acquisition date
In addition, assets and liabilities will be recorded at their fair values on the date of acquisition. Since the acquired assets will be at their fair value, the asset reserves will be eliminated. For loans, that means the allowance for loan losses will not carry forward to the acquirer as it does under current practice.
Transaction costs — which include direct payments to investment bankers, attorneys, appraisers and accountants — were previously capitalized as part of the purchase price creating higher goodwill. FAS 141R will require that these costs be expensed as incurred. This accounting change will reduce earnings in periods prior to the acquisition date.
According to FAS 141R, only restructuring costs that meet the definition of a liability as of the acquisition date will be included as part of the purchase price. Any other costs will be considered post-acquisition costs and will need to be expensed as incurred.
Contingent consideration (most commonly earn-outs) has been deemed part of the acquisition cost and wasn’t accounted for until they were settled. Under the current accounting standards these payments usually increased goodwill. FAS 141R requires contingent payments to be estimated as of the acquisition date and recorded at fair value, regardless of the likelihood of the payment occurring. Changes to the estimate of the fair value of those contingent payments will be recorded through the income statement.
Acquirers have a period of time after the acquisition date to finalize the fair value adjustments and accounting estimates. FAS 141R has made a significant change in the reporting of these adjustments. The new standard will require the revision of prior-period financial statements to record adjustments to the fair values documented as of the acquisition date. (Under the current accounting guidelines these adjustments are accounted for prospectively.)
The value of the acquirer’s stock issued as part of the consideration of the purchase price will be measured as of the acquisition closing date not as of the announcement date — which is currently used. This change will bring into consideration of the acquired bank and the fluctuation in stock price of the acquirer for the period between announcement and closing.
FAS 141R will cause acquirers to modify their acquisition modeling. With the earnings impact of the transaction and restructuring costs, the allowance for loan losses not carrying over, as well as the result of the contingent payments the metrics used to evaluate the acquisition, changes dramatically.
FAS 141R has several other amendments that effect step acquisitions, minority interests, acquired contingencies, deferred taxes, among other areas. Entities that will be involved with acquisitions should consult with their advisors about those changes.
Dan Trigg is a managing director with RSM McGladrey. For more information, contact him at dan.trigg@rsmi.com.