New FASB rules for acquisitions and valuation: 141R, 160.

• Author: Beaton, Neil
• Position: Financial reporting - Financial Accounting Standards Board

Last December, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 141 (revised 2007), Business Combinations, (FAS 141R), which changes accounting and reporting requirements for business acquisitions in fiscal years beginning on or after Dec. 15, 2008. When effective, FAS 141R will replace the original FAS 141 in its entirety. Now is a good time for financial executives to become familiar with the new accounting standards, so there are no surprises later.

In general, FAS 141R will require measuring and recognizing the business acquired at full acquisition-date fair value. In that respect, the acquirer's consolidated balance sheet at the acquisition date will more accurately capture current value of the assets and liabilities of the acquired business than it would under the traditional cost-based approach.

The value of the business acquired under the new standard will usually be measured as the sum of the acquisition-date fair values of the following three items: Consideration transferred for the acquiree; for step acquisitions (those achieved in stages), equity interests in the acquiree held by the acquirer immediately before the acquisition date; and for a partially owned subsidiary, noncontrolling interests in the acquiree held by third parties.

There are five specific areas where FAS 141R has changed acquisition-date fair value accounting and their specific impacts (see below for elaboration on each):

1. accounting for transaction costs; 2. contingency consideration (earn-outs); 3. in-process research and development (IPR & D); 4. acquired contingencies; and 5. partial or step acquisitions.

Broader Scope than Predecessor

Under FAS 141R, business combination accounting will apply to a wider range of transactions or events than FAS 141, including the following:

- The acquirer obtains control of a business without exchange of consideration; or by contract alone (without holding any ownership interest in the acquired business).

- The acquirer becomes the primary beneficiary of a variable interest entity.

- The acquirer combines two or more mutual entities (such as credit unions).

- The acquirer obtains control of certain development-stage companies.

- The new standard continues to exclude joint ventures, common control transactions and mergers and acquisitions between not-for-profit organizations.

* TRANSACTION COSTS. Under FAS 141R, the direct costs of a business combination--such as...