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 firstname.lastname@example.org 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.
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.