Significant changes created by Statement 141R

As a result of a recently issued standard by the Financial Accounting Standards Board (FASB)—FASB Statement No. 141 (revised 2007), Business Combinations—a number of changes may give acquiring businesses more than they bargained for, if they close the deal in 2009 or later.

RSM McGladrey

2009/04/13

While the modifications to business combination accounting are signs of the industry’s move toward increasing the usage of a fair value model, as well as further alignment with International Financial Reporting Standards, some of the revisions are significant and are considered by some to be controversial.

These are a few of the most significant changes created by Statement 141R, but the standard’s many revisions will affect business combinations in different ways.

All assets and liabilities of the target are required to be recognized and measured—even those in a partial acquisition.

The use of a “fair value” model, rather than a “cost allocation” model will be used to measure assets acquired and liabilities assumed. Further, Statement 141R uses the fair value model rather than a “carryover basis” or “book value” model to determine the non-acquired (or non-controlling) interest in the target.

Deal costs incurred by the buyer are no longer included in the purchase price of the target when accounting for a business combination.

The new guidance now distinguishes between contingencies of the target that are contractual and non-contractual.

The recognition of the fair value of earn-outs (i.e., contingent consideration) in the initial accounting for the acquisition.

The elimination of the recognition of liabilities for restructuring costs expected to be incurred since they do not represent a liability as defined in Concepts Statement 6.

The reduction of the valuation allowance in income tax expense, if a buyer determines some or all of its previously recognized valuation allowance is no longer needed as a result of the business combination.

The recognition of a gain from a bargain purchase — if applying Statement 141R results in negative goodwill, the buyer is required to perform a review of the factors; if negative goodwill still exists, the buyer recognizes a gain from a bargain purchase.

The new standard is effective for business combinations with acquisition dates that occur on or after the beginning of the first annual reporting period of the fiscal year beginning on or after December 15, 2008. For calendar year companies, the standard is applicable to business combinations with acquisition dates of January 1, 2009, or later.

Bill Spizman is managing director with RSM McGladrey. For more information, contact him at william.spizman@rsmi.com.