A step towards convergence in M & A accounting.

• Author: de Mesa Graziano, Cheryl
• Position: Cover story

Many in the U.S. didn't have a problem with them, yet the business combinations standards have been modified--an early sign of the strengthening trend towards developing a high-quality, global set of accounting standards. Financial Executive and Financial Executives Research Foundation asked several experts to weigh in.

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Had Time Warner Inc.'s $15 billion Adelphia acquisition in 2006 been made under the recently revised accounting rules, Time Warner's financial statement would have looked quite different. Likewise for The Procter & Gamble Co.'s $55 billion-plus purchase of Gillette in 2005, and for privately held Koch Industries Inc.'s $21 billion purchase of Georgia Pacific in the same year. Different? Yes. Significant? It depends.

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And, whether the difference is good, bad or somewhere in between, that, too, depends on who you ask--whether it be a standard-setter, a user or a preparer of a multinational public or private company.

Such is the initial response to the first completed standards under the convergence efforts between the Financial Accounting Standards Board (FASB), for users of generally accepted accounting principles (GAAP), and the London-based International Accounting Standards Board (IASB), for users of International Financial Reporting Standards (IFRS).

The resulting new U.S. standards, Statement of Financial Accounting Standards (FAS) No. 141 Revised (141R) Business Combinations and FAS 160, Noncontrolling Interests in Consolidated Financial Statements, have spawned more differences for U.S. GAAP, versus those introduced by IFRS 3 Business Combinations and the revised International Accounting Standard (IAS) 27 Consolidated and Separate Financial Statements. The U.S. standards are effective for fiscal years, and interim periods within those fiscal years, beginning on or after Dec. 15, 2008. International standards are effective for July 1, 2009.

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The changes include, among others, the accounting for goodwill, noncontrolling interests and acquisition and restructuring costs. The two standard-setting boards have described these standards as the first major common standard developed together. However, there remain a few differences between the U.S. GAAP and IFRS versions.

Many of those differences arise because of differences between other standards. Most will "fall away" as those other standards are converged from ongoing or future convergence projects, says Suzanne Q. Bielstein, FASB director, Major Projects and Technical Activities. While some might criticize the boards for not achieving "true" convergence in this instance, she prefers to focus instead on the many differences between IFRS and U.S. GAAP eliminated by this project. "We can't let perfection get in the way of progress," she says.

However, those differences (between FAS 141R and 160 and IFRS 3 and IAS 27) cause Time Warner Senior Vice President and Controller Pascal Desroches to comment: "There are going to be significant costs incurred in adopting these new rules, in educating the investment community, educating [company] audit committees and executive management as to how the new rules work." As such, he asks: "If we haven't achieved convergence and we're not measurably improving those standards, then why are we doing it?"

Change for a Greater Good?

Is it a natural inclination to resist change? Is it an "us versus them" scenario--preparers versus standard-setters? Do preparers share the same view? Preparers of three major U.S. companies included here tend to agree that from a broad perspective, the new rules won't have much impact on their company's overall acquisition strategies. However, depending on the individual transactions, the same cannot be said for their financial statements. Bielstein, on the other hand, points out that users welcome the changes and support the potential for the transparency that will result.

Alan Teixeira, senior project manager for IASB, agrees, and provides a broader perspective on the joint standards. Overall, he says that merger and acquisition activity accounts for 10 percent of the global market capitalization, to the tune of $4 trillion per year. He adds that there has been a five-fold increase in terms of transatlantic M & A activity, and while the accounting wasn't a major impediment, it certainly was not helpful, and made multinational entity comparisons and combinations difficult.

"We weren't even recording the asset at the same starting point," he explains. So, when starting miles away, "any other differences that might be causing you a problem just become amplified."

Teixeira says the standard-setting boards believe most of the changes are improvements, while they recognize the impact on U.S. companies. In the U.S., he says, preparers will argue that accounting for noncontrolling interests (a partial acquisition, not 100 percent of the company) will have the most significant effect on the balance sheet.

Then and Now: What's Different?

Richard K. Dinkel, corporate controller for privately held Koch, observes that there is more application of fair value accounting with the new standards that will require some companies to take a harder look at all the liabilities and assets they are acquiring to appropriately reflect their value on the balance sheet.

It's something they should have already been doing from a due-diligence perspective, he says, and adds, "The rigor around the measurements to justify them with auditors will certainly increase"--and, valuation firms "are definitely one of the winners with the new standards," he quips.

Mick Homan, vice president and controller of corporate accounting for Procter & Gamble (P & G) and an FEI member, says this could result in recording quite a few assets that may never be realized and liabilities that may never have to be...