Business combinations: requiring the acquisition method.

• Author: Harden, Stuart

Could it be almost five years since FASB sent the business world's head spinning when it simultaneously proposed FASB statements nos. 141 and 142?

Well, it's time to pay attention again as FASB Statement No. 141 is likely to be replaced by the recently Proposed Statement of Financial Accounting Standards, Business Combinations. The International Accounting Standards Board has issued a proposed statement that would replace IASB Statement No. 3, concurrently with the FASB effort. The two proposed statements would generally bring international and U.S. standards into harmony.

The most significant change from FAS 141 is to require the acquisition method of accounting for business combinations, which is the focus of this article. FAS 141 requires the use of the purchase method of accounting for all business combinations and prohibits the pooling of interests method.

In the spirit of principles-based accounting standards, the standard itself comprises only 21 of the exposure draft's 234 pages. The proposed statement applies to all business combinations other than those involving not-for-profit organizations. The proposed statement also does not apply to formations of joint ventures or combinations involving businesses under common control, which would continue to be accounted for at their carrying amounts.

APPLYING THE ACQUISITION METHOD

There are four steps to applying the acquisition method:

* Identify the acquirer;

* Determine the acquisition date;

* Measure the fair value of the acquiree; and

* Measure and recognize the assets acquired and liabilities assumed.

>Identify the Acquirer In identifying the acquirer, the proposed statement makes reference to another exposure draft, Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries. That exposure draft refers to the parent (acquirer) as an entity having controlling financial interest in another.

In addition, the proposed statement refers to FASB Interpretation No. 46 and notes that the primary beneficiary in a variable interest entity is always the acquirer.

Generally, the proposed statement notes that the acquirer is the entity that gives up consideration (in the form of cash or other assets, or issues equity interests) and receives control of the combined entity (through voting rights or management control). Size of the entity may provide some insight into the acquirer, but not always.

>Determine the Acquisition Date The acquisition...