Business Combinations with SFAS 141 R, 157, and 160: A Guide to Financial Reporting

About the Authors.

Michael J. Mard, CPA/ABV, ASA.

Steven D. Hyden, CPA/ABV, ASA.

Edward W. Trott.

Acknowledgments.

Preface.

Introduction.

Philosophy of Fair Value.

SFAS 157.

Fair Value Philosophy.

Convergence with IFRS.

Norwalk Agreement.

The IASB.

Use of Valuation Specialists by Accountants and Auditors.

Fair Value and SFAS 157.

Scope.

Fair Value Definition.

Principal (or Most Advantageous) Market.

Transaction Costs.

Transportation Costs.

Market Participants.

Highest and Best Use and Valuation Premise.

Applicability to Liabilities.

Entry Price Versus Exit Price.

Valuation Techniques: Market, Income, and Cost Approaches.

Cost Approach.

Income Approach.

Examples of Present Value Techniques.

Market Approach.

Risk/Uncertainty Premiums.

Inputs: Observable and Unobservable.

Fair Value Hierarchy.

Inputs Based on Bid and Ask Prices.

Restrictions.

Stock.

Assets.

Events Subsequent to a Quoted Price.

Securities Owned as an Asset and Blockage Discounts.

Disclosures.

Subsequent Guidance about SFAS 157.

EITFs.

FSPs.

Preparer’s Guidance Flowchart of SFAS 157.

SFAS 141R.

Overview and Objective.

Statement 141R and IFRS 3 (as revised).

Statement of 141R Reduces the Volume of US GAAP.

Expanded Scope of Applying the Acquisition Method.

Transactions Not Covered by 141R.

The Acquisition Method.

Identifying the Acquirer.

Determining the Acquisition Date.

Recognition and Measurement.

Postcombination Expenses (Restructuring or Exit Activities).

Acquisition-Related Costs.

Determining What Is Part of a Business Combination.

Preexisting Relationships or Arrangement.

Compensation Arrangements.

Hidden Acquisition Costs.

Classifying or Designating Assets and Liabilities.

Examples of Acquired Assets and Assumed Liabilities Initially Recognized at Fair Value.

Assets.

Liabilities.

Recording Assets and Liabilities at SFAS 157 Fair Value Differs from Guidance in SFAS 141.

Exceptions to the Recognition or Measurement Principles.

Assets/Liabilities Arising from Contingencies.

Acquirer Obtains a Reacquired Right.

Share-Based Payment Awards.

Assets Held for Sale.

Income Taxes, Tax Uncertainties, and Tax Valuation Allowance.

Employee Benefits.

Indemnification Assets.

Additional Specific Guidance.

Operating Leases.

Capital Leases.

Intangible Assets.

Intangible Assets Not Recognized by Acquiree.

Research and Development Assets.

Assets an Acquirer Does Not Plan to Use or Sell.

Recording the Consideration Transferred to Acquire the Acquiree, Including Contingent Consideration.

Contingent Consideration.

Calculation of Goodwill and Recording Noncontrolling Interest in the Acquiree.

Goodwill Calculation in a 100% Acquisition.

Goodwill Calculation in a Full Acquisition (Acquirer Has an Existing Investment).

Calculation of Goodwill in a Partial Acquisition and Recording Noncontrolling Interest.

Gain from a Bargain Purchase.

The Measurement Period for Recording a Business Combination.

Disclosures about a Business Combination.

Selected Disclosure Requirements.

Effective Date and Transition.

Other Guidance in Statement 141R.

Subsequent Guidance about SFAS 141R.

EITFs.

Statement 160 and Noncontrolling Interest.

Objective and Scope.

Definition.

Transactions that Change the Parent’s Ownership Interest in a Subsidiary.

Purchase of Noncontrolling Interest (Minority Interest).

Reduction in Parent Ownership Interest.

Deconsolidation of a Subsidiary.

Classification of Noncontrolling Interest.

Changes to the Balance Sheet.

Changes to the Income Statement.

Additional Points about Noncontrolling Interest.

Disclosures about Noncontrolling Interests.

Selected Disclosure Requirements.

Effective Date and Transition.

Subsequent Guidance about SFAS 160.

Comparing SFAS 141 with SFAS 141R.

(New) SFAS 141R.

(Old) SFAS 141.

141R Flowchart.

Case Study: Determining the Value of Goodwill and Other Intangible Assets in a Business Combination.

Consideration and Calculation of the Total of Intangible Assets and Goodwill.
Identifying Intangible Assets.

Remaining Useful Life Analysis.

Business Enterprise Analysis.

Discounted Cash Flow Method.

Discount Rate.

Valuation of Tangible Assets.

General Discussion.

Marketable Securities.

Accounts Receivable.

Inventory.

Prepaid Expenses.

Land and Building.

Machinery and Equipment.

Organization Cost and Existing Goodwill.

Summary of Values.

Valuation of Intangible Assets.

Rates of Return.

Acquired Software.

Amortization Benefit.

Discount Rate for Amortization Benefit.

Assembled Workforce.

Trade Name.

Noncompete Agreement.

Technology (Existing and In-process) and Customer Relationships.

The Multiperiod Excess Earnings Method.

Existing Technology.

In-Process Research and Development.

Customer Relationships.

Valuation of Goodwill.

Weighted Average Return on Assets.

Case Study Accounting Entry.

Abbreviated Sample Worksheet.

Sample Balance Sheet.

Case Study Exhibits.

Other Discussion Issues.

FASB’s Valuation Resource Group.

Issue No. 2008-19 – Impact of Valuing Contingent Liabilities under FAS 141(R) – Gross Versus Net Analysis.

Issue No. 2008-18 – Fair Value of a Noncontrolling Interest and a Previously held Equity Interest.

Issue No. 2008-17 – Identification and Allocation of Market Participant Synergies.

Issue No. 2008-16 – Fair Value of Accounts Receivable, Account Payable, and Other Accrued Liabilities.

Issue No. 2008-15 – Allocation of In-use Valuation to Individual Unit of Account.

Issue No. 2008-14 – Fair Value Measurement of Liabilities Under FAS 157.

Issue No. 2008-13 – Observable Versus Unobservable Inputs.

Issue No. 2008-12 – Fair Value Disclosures.

Issue No. 2008-11 – IASB Expert Advisory Panel White Paper.

Issue No. 2008-10 – Contingent Liabilities.

Issue No. 2008-9 – Employee Benefit Plans.

Issue No. 2008-8 – Determining Whether a Discount Should be Applied for a Restriction on Sale.

Issue No. 2008-7 – Observable versus Unobservable Fair Value Measurements in the Current Credit Environment.

Issue No 2008-6 – Allocation of Portfolio-based Credit Adjustments for Hedge Effectiveness Testing.

Issue No. 2008-5 – Fair Value of Inventory.

Issue No. 2008-4 – Meaning of Legally Permissible in Assessing Highest and Best Use.

Issue No. 2008-3 – Valuation of Intangible Assets Using “Current Replacement Cost”.

Issue No. 2008-2 – Customer Relationships.

Issue No. 2008-1 – Accounting for Assets that the Acquirer Does Not Intend to Use or Intends to Use in a Way Other than its Highest and Best Use.

Issue No. 2007-16 – Use of Net Asset Value in Fund of Funds Investments.

Issue No. 2007-15 – Accounting for Held to Maturity Debt Instruments.

Issue No. 2007-14 – Pension Plan Disclosures.

Issue No. 2007-13 – Accounting for Transaction Costs in Determining the Fair Value of an Investment.

Issue No. 2007-12 (to Be Discussed with Issue No. 11) – Adjustments to Level 2 Inputs (Related to Definition of Significant).

Issue No. 2007-11 (to Be Discussed with Issue No. 12) – Definition of Significant.

Issue No. 2007-10 – Fair Value of Asset Acquired Through the Highest Bid in Auction.

Issue No. 2007-9 – Highest and Best Use Land Example.

Issue No. 2007-8 – Fair Value of a Liability with Third-Party Guarantees.

Issue No. 2007-7 – Assets without Markets.

Issue No. 2007-6 – Defensive Value: Accounting Impact of Using Marketplace Participant Assumptions to Measure the Fair Value of an Asset That the Combined Entity Does Not Intend to Use or Sell.

Issue No. 2007-5 – Determination of Principal Market.

Issue No. 2007-4 – Elements of Consideration for Determination of “Active Market”.

Issue No. 2007-3 – How to Factor Liquidity into Fair Value Measures.

Issue No. 2007-2 – Unit of Account Decomposition of an Asset.

Issue No. 2007-1 – Fair Value of Mortgage Loans.

Other Implementation Aids.

Fair Value Measurement Checklist.

Preparer’s Conclusions Worksheet.

Acquiree Management Interview – Operations.

Acquiree Management Interview – Financial Review.

Data Request Related to Intangible Assets Acquired.

Procedures for the Valuation of Intangible Assets.