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December 2007 SFAS 141R and the Valuation of Identifiable
Intangible Assets
SFAS 141R revises
some key rules that dictate the manner in which the purchase of a business
is
recorded on the books of the acquiring company
In December 2007 the Financial Accounting Standards
Board (FASB) issued its widely anticipated revision to Statement of Financial
Accounting Standards 141. SFAS 141R, Business Combinations, revises some key
rules that dictate the manner in which the purchase of a business is recorded on
the books of the acquiring company. The FASB determined that a revision was
necessary in order to “improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects.” The statement retains the guidance provided in the
original SFAS 141 with respect to identifying and recognizing intangible assets
separately from goodwill. The main features of the revised statement and the
more significant improvements over its predecessor are described below.
Shift from Allocation Model to Valuation Model SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of the acquisition date. That replaces the original
Statement 141’s “cost allocation” method, which required the costs of a purchase
to be allocated to the various assets acquired and liabilities assumed. The old
allocation method often resulted in assets or liabilities to be recognized on
the balance sheet at amounts other than their fair values. For example, the
original Statement 141 required the acquirer to include the costs associated
with the acquisition in its total amount to be allocated to the assets and
liabilities. Additionally, in the event of a bargain purchase by the acquirer,
the amounts recorded for the assets of the acquired were often systematically
reduced so that the total of the assets recorded equaled the total purchase
consideration. Assets and Liabilities Arising from
Contingencies One of the more
significant revisions included in 141R is that it requires the recognition of
assets or liabilities associated with contingencies. The fair value of
contingencies (both contractual and non-contractual) will have to be estimated
based on information known as of the acquisition date. SFAS 141R provides
specific guidance on the subsequent accounting for assets and liabilities
arising from contingencies. Specifically, it requires that an acquirer continue
to report an asset or liability arising from a contingency at its
acquisition-date fair value absent new information about the possible outcome.
When new information is obtained, the acquirer evaluates that new information
and measures a liability at the higher of its acquisition-date fair value or the
amount that would be recognized if applying FASB Statement No. 5 (Accounting for
Contingencies), and measures an asset at the lower of its acquisition-date fair
value or the best estimate of its future settlement amount.
Bargain Purchase SFAS 141R defines a bargain purchase as a business
combination in which the total acquisition-date fair value of the identifiable
net assets acquired exceeds the fair value of the consideration transferred plus
any non-controlling interest in the acquiree, and it requires the acquirer to
recognize that excess in earnings as a gain attributable to the acquirer. In
contrast, the original Statement 141 required that “negative goodwill” amount to
be allocated as a pro-rata reduction of the amounts that otherwise would have
been assigned to particular assets acquired, and there was no immediate impact
to the acquirer’s income statement. In-Process Research
& Development The revised statement also changes the manner in which acquired in-process
research and development (“IPR&D”) is recorded. Prior standards required that
research and development assets acquired in a business combination that have no
alternative future use to be measured at their acquisition-date fair values and
then immediately charged to expense. Under SFAS 141R, the acquirer will
recognize separately from goodwill the acquisition-date fair values of research
and development assets acquired in a business combination, which improves the
representational faithfulness and completeness of the information provided in
financial reports about the assets acquired in a business combination. These
IPR&D assets will remain on the books as an indefinite-lived asset pursuant to
an amended SFAS 142 (Goodwill and Other Intangible Assets) until either the
specific project is deemed a success, at which time the company will begin to
amortize the asset over the estimated useful life of the technology, or if the
research project is abandoned, the IPR&D asset booked at the date of acquisition
associated with the project will be impaired pursuant to SFAS 144 (Accounting
for the Impairment or Disposal of Long-Lived Assets).
Effective Date This statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Summary With the release of SFAS 141R, the FASB continues
to converge U.S. generally accepted accounting principals with international
standards, and GAAP-based balance sheets continue an evolution toward fair value
reporting as opposed to purely historical-cost-based reporting. At Kotzin
Valuation Partners, we look forward to working with companies and their auditors
in navigating the complexities of this new pronouncement. ■ |
