effective date of transition.
Scope
FAS 141(R) applies to all transactions or other events in which an entity obtains control of one or more businesses. Prior to revision, FAS 141 only applied only to business combinations in which control was obtained by transferring consideration. The revised statement covers all mergers with the exception of the following:
-Joint Ventures
-Acquisition of a group of assets that does not constitute a business
-Combination of entities or businesses under common control
-Combination between not-for-profits (NFP) or the acquisition of a for-profit company by a NFP
The method of accounting for acquisitions prescribed in FAS 141(R) is known as the acquisition method. Under the original statement this method was known as the purchase method. The fundamental requirements of the two are the same. FASB defines the "acquirer" in a merger transaction as the entity that "obtains control of one one or more businesses in the business combination." The acquisition date is defined as the date that the acquirer achieves control.
Requirements
1) Fair Value Measurement - FAS 141(R) requires the acquirers in all business combinations to record the assets and liabilities of the acquired business at fair values, with very few exceptions. This requirement replaces the original statement's cost-allocation process, which allocated the cost of an acquisition to the individual assets and acquired and liabilities assumed based on their estimated fair values. The result of this practice was not recognizing some assets and liabilities at the acquisition date and measuring some assets and liabilities at other than their fair values at the acquisition date. Fair market value will now be based on market participant assumptions, rather than company specific assumptions.
2) Acquisition Costs Expensed as Incurred - This is one of the most notable differences, as acquisition costs were previously included in the purchase price and allocated to the assets and liabilities. The new expensing provision will result in lower earnings, primarily in periods leading up to combination periods.
3) Contingent Consideration - Under the original statement, recognition of preacquisition contingencies were able to be deferred until the full recognition criteria of FAS 5 were met. Going forward, contractual contingencies resulting in assets and liabilities are to be measured and recorded at their fair value, only if it is more likely than not that they meet the definition of an asset or liability in FASB Concepts Statement No. 6. The measurement techniques used to measure these assets and liabilities are likely to be complex and highly subjective. Further, contingent liabilities will result in fair value remeasurements and adjustments that will directly impact earnings, rather than additional purchase price.
4) Restructuring Costs - Previously, restructuring costs that the acquirer expected but was not obligated to incur were recognized as if they were a liability assumed at the acquisition date. Going forward, these costs are to be expensed in periods after the acquisition date. The result of this will be increased charges to earnings over several reporting periods, as the new business is integrated.
5) In Process Research and Development (IPR&D) - Under FASB Interpretation No.4, IPR&D assets acquired in a business combination that had no alternative future use were measured at their acquisition date fair values and then immediately charged to expense. Under the new statement, IPR&D will now be recorded at fair value as an indefinite-lived intangible asset and impaired or amortized in future periods, rather than being expensed immediately.
6) Measurement Date - The fair value of the purchase price when issuing equity securities will be determined at the acquisition date. Prior guidance stipulated the use of the announcement date as the date that equity securities were to be valued. The result of this switch will likely be volatility and uncertainty in estimating the final purchase price due to market price changes between the announcement date and the acquisition date.
Effective Date
The new statement will be effective for annual periods beginning after December 15, 2008, with early adoption prohibited. The statement will be applied prospectively.
