8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 1/286
Accounting for Business
Combinations and Related TopicsA Roadmap to Applying FASBStatements 141(R), 142, and 160
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 2/286
Port ions of various FASB pronoun cements, copyrigh t by t he Financial Account ing Foundat ion, 401 M errit t 7, PO Box 5116, Norw alk, CT 06856-5116, are reproduced
wit h permi ssion. Complete copies of th ese documents are available fr om t he FAF.
APB Opinions and Accounti ng Research Bullet ins: Copyrigh t 2008, by t he American Instit ute of Certi fied Public Accountant s, Inc. All ri ght s reserved. Reproduced w ith
permission.
This publication i s provided as an inf ormat ion service by the Accountin g Standard s and Communicatio ns Group of Deloit te & Touche LLP. It d oes not address all
possible f act patt erns and the gu idance is subject t o change. Deloitt e & Touche LLP is not, b y means of t his publicatio n, rendering account ing, bu siness, fi nancial,
investm ent, l egal, tax, or ot her prof essional advice or services. This publication is not a substitu te f or such prof essional advice or services, nor should it be used as a
basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a
qualif ied pro fessional advisor. Deloitt e & Touche LLP shall no t b e responsible f or any lo ss sustained by any person w ho reli es on t his publication .
January 2009
i
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 3/286i i
Contents
Executive Summary 2
Background 2
EffectiveDateandTransition 3
OverviewofSignificantAccountingChanges 3
HowThisRoadmapIsStructured 7
Section 1 — Scope of Statement 141(R) 9
OccurrenceofaBusinessCombination 9
ObtainingControl 9
DefinitionofaBusiness 10
AcquiringNetAssetsorEquityInterestsThatDoNotMeettheDefinitionofaBusiness 12IdentifyingaBusinessDuringtheAssessmentofReportingRequirementsUnderSECRegulationS-X 14
VariableInterestEntities 15
CombinationsBetweenTwoorMoreMutualEntities 16
LeveragedBuyoutTransactions 17
Additional Scope Considerations 17
ControlObtainedbutLessThan100PercentoftheBusinessIsAcquired(i.e.,PartialAcquisitions) 17
BusinessCombinationsAchievedinStages 18
AcquisitionofaNoncontrollingInterestofaSubsidiary 19
Roll-UporPut-TogetherTransactions 19
FormationofaJointVenture 19
Recapitalizations 20
TransactionsBetweenEntitiesUnderCommonControl 20
CombinationsBetweenEntitiesWithCommonOwnership 22
CombinationsInvolvingNot-for-ProfitOrganizations 23
Section 2 — Identifying the Acquirer 24
BusinessCombinationsEffectedPrimarilybyTransferringCashorOtherAssetsorbyIncurring
Liabilities 24BusinessCombinationsEffectedPrimarilybyExchangingEquityInterests 24
ConsiderationoftheRelativeVotingRightsintheCombinedEntityAftertheBusinessCombination 25
ConsiderationoftheExistenceofaLargeMinorityVotingInterestintheCombinedEntityIfNoOtherOwnerorOrganizedGroupofOwnersHasaSignificantVotingInterest 25
ConsiderationoftheCompositionoftheGoverningBodyoftheCombinedEntity 26
ConsiderationoftheCompositionoftheSeniorManagementoftheCombinedEntity 26
ConsiderationoftheTermsoftheExchangeofEquitySecurities 27
ConsiderationoftheRelativeSizeoftheCombiningEntities 27
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 4/286ii i
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
BusinessCombinationsInvolvingMoreThanTwoEntities 27
UseofaNewEntitytoEffectaBusinessCombination 27
ReverseAcquisitions 28
MergersofaPrivateOperatingCompanyIntoaNonoperatingPublicShellCorporation 30
Section 3 — Recognizing and Measuring Assets Acquired and LiabilitiesAssumed — General 31
DateofAcquisition 31
RecognitionandMeasurementPrinciples 31
MeasurementPeriod 34
ImpactonSECRegistrants 36
DeterminingWhatIsPartoftheBusinessCombinationTransaction 37
FairValueMeasurementsinBusinessCombinations 41
FairValueMeasurements—TaxAmortizationBenefits 47
UseofaThird-PartySpecialisttoAssistintheMeasurementofFairValue 48
ElectionDatefortheFairValueOption 49
UseoftheResidualMethodtoValueAcquiredIntangibleAssetsOtherThanGoodwill 50
Section 4 — Recognizing and Measuring Assets Acquired and Liabilities Assumed(Other Than Intangible Assets and Goodwill) 51
Specific Guidance for Recognizing and Measuring Assets and Liabilities at Fair Value 51
TangibleAssetsThattheAcquirerIntendsNottoUseortoUseinaWayOtherThanTheirHighestandBestUse 51
AssetsWithUncertainCashFlows(ValuationAllowances) 51Inventory 52
Property,Plant,andEquipment 52
MiningAssets 53
Leases 53
Guarantees 54
LossContractsandUnfavorableContracts 55
AmountsDuetoEmployeesoftheAcquireeUponaChangeinControl 55
LiabilitiesforExitinganActivityofanAcquiredEntity,InvoluntaryTerminationBenefits,andRelocationCosts 56
RecognitionofLiabilitiesforContractualTerminationBenefitsorChangingBenefitPlanAssumptionsinAnticipationofaBusinessCombination 56
Exceptions to the Recognition and Measurement Principles 57
AssetsandLiabilitiesArisingFromContingencies 57
IncomeTaxes 58
EmployeeBenefits 59
IndemnificationAssets 60
Share-BasedPaymentAwards 61
AssetsHeldforSale 61
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 5/286iv
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Section 5 — Recognizing and Measuring Acquired Intangible Assets andGoodwill 62
Intangible Assets 62
ExamplesofIntangibleAssetsThatAreIdentifiable 62
IntangibleAssetsThatAreNotIdentifiable 64AssembledWorkforce 64
IntangibleAssetstheAcquirerIntendsNottoUseortoUseinaWayOtherThanTheirHighestandBestUse 64
GroupingComplementaryAssets 66
CustomerLists 66
OrderorProductionBacklog 67
CustomerContractsandRelatedCustomerRelationships 67
CustomerLoyaltyPrograms 68
OverlappingCustomers 68
NoncontractualCustomerRelationships 69
ConsiderationsRegardingValuationTechniquesandAssumptionstoBeUsedinMeasuringFairValueofCustomer-RelationshipIntangibleAssets 69
In-ProcessResearchandDevelopmentAssets 70
ReacquiredRights 72
FavorableorUnfavorableOperatingLeasesWhentheAcquireeIstheLessee 73
Valuing“At-the-Money”Contracts 73
IntangibleAssetsAssociatedWithIncome-ProducingRealEstate 73
Goodwill 74
MeasurementofGoodwill 74
BargainPurchases 76
Section 6 — Recognizing and Measuring the Consideration Transferred ina Business Combination 78
ConsiderationTransferredbytheAcquiringEntitytotheFormerOwnersoftheAcquiree 78
EquitySecuritiesIssuedasConsideration 78
Share-BasedPaymentAwards 78
GainsorLossesonAssetsTransferredasConsiderationbytheAcquiringEntity 83
ContingentConsideration 84
Acquisition-RelatedCostsoftheBusinessCombination 86
Separate Transactions Not Included in the Accounting for a Business Combination 87
CompensationtoEmployeesorFormerOwnersoftheAcquireeforFutureProductsorServices 87
FactorstoConsiderinAssessingWhetherContingentPaymentIsPartoftheConsiderationTransferred 88
ReimbursementMadetotheAcquireefortheAcquirer’sAcquisition-RelatedCosts 89
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 6/286v
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Section 7 — Noncontrolling Interests 90
ScopeofStatement160 90
RecognizingandMeasuringNoncontrollingInterestsasoftheAcquisitionDate 91
MeasuringNoncontrollingInterestsinReverseAcquisitions 92
FullGoodwillApproach 92AttributingNetIncome(Loss)andComprehensiveIncome(Loss)totheParentandNoncontrolling
Interest 92
LossesinExcessoftheCarryingAmountoftheNoncontrollingInterest 93
ChangesintheParent’sOwnershipInterestinaSubsidiaryWhenThereIsNoChangeinControl 94
FormerParentRetainsaNoncontrollingInterestofaSubsidiaryAfterControlIsLost 96
MultipleArrangementsAccountedforasaSingleDisposalTransaction 97
NonreciprocalTransferstoOwners 98
ConsiderationsforaPrimaryBeneficiaryofaVariableInterestEntity 99
Section 8 — Income Tax Considerations 100
Income Taxes — General 100
Tax Treatment of Business Combinations 100
TaxStatusoftheEnterprise 100
TaxableandNontaxableTransactions 100
The Basic Model — Tax Effects of Basis Differences 101
TheBasicModel 101
ImpactofTaxPlanningandBusinessIntegrationSteps 102
Push-DownofAcquisitionAccounting 102
ProcessforRecordingDeferredTaxes 102
BasisDifferences 104
Temporary Differences and Carryforwards 106
In-ProcessResearchandDevelopment 106
ContingentEnvironmentalLiability—TaxableBusinessCombination 107
AssetsHeldforSale 107
Preexisting Relationships Between Parties to a Business Combination and Reacquired
Rights 107
PreexistingRelationshipsBetweenPartiestoaBusinessCombination 107
ReacquiredRights 109
Tax Rates 111
TaxHolidays 111
StateTaxFootprint 112
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 7/286v i
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Costs of the Business Combination 112
Acquisition-RelatedCosts 112
Acquisition-RelatedCostsIncurredinaPeriodBeforetheBusinessCombination 114
DebtIssueCosts 114
CostsofRegisteringandIssuingEquitySecurities 114
Share-Based Payment Awards Exchanged for Awards Held by the Acquiree’s Employees 115
Contingent Consideration 118
InitialMeasurementofDeferredTaxesasoftheAcquisitionDate 119
AccountingforDeferredTaxesAftertheAcquisitionDate 119
Acquirer’s Valuation Allowance 121
ChangeinanAcquirer’sValuationAllowanceasaResultofaBusinessCombination 121
Acquired Uncertain Tax Position Measurement and Recognition 121
UncertainTaxPositions—SellerIndemnification 122
Goodwill 122
GoodwillComponents 122
BookBasisExceedsTaxBasis 123
TaxBasisExceedsBookBasis 123
Bargain Purchases 126
Business Combinations Achieved in Stages 129
International Tax Considerations 131
InsideBasisDifferencesinaForeignAcquiredEntity 131
OutsideBasisDifferencesinaForeignAcquiredEntity 131
Transition Provisions 131
AcquiredUncertainTaxPositions 132
AcquiredDeferredTaxAssetValuationAllowances 133
DeferredTaxAssetforDeductibleTaxGoodwillinExcessofFinancialReportingGoodwill 133
Income Tax Disclosures for Business Combinations 136
Section 9 — Push-Down Basis of Accounting 137
EvaluatingtheApplicabilityofPush-DownAccounting 137
SECStaffAccountingBulletinTopic5.J—Push-DownBasisofAccountingRequiredinCertainLimitedCircumstances 139
AdditionalSECStaffViews—ApplicabilityofEITFTopicD-97toCertainTransactions 140
ApplicabilityofPush-DownAccountingtoCompaniesThatAreNotSECRegistrants 141
CollaborativeGroups—TopicD-97 141
AdditionalConsiderationsinDeterminingthePresenceofaCollaborativeGroupUnderTopicD-97 144
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 8/286vi i
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
DeterminingWhetheraCompanyHasBecomeSubstantiallyWhollyOwned 146
EvaluatingtheAvailabilityofthePublicDebtException 147
EvaluatingtheAvailabilityofthePreferredStockException 147
SubsequentApplicationofPush-DownAccounting 148
Push-DownofGoodwilltoaSubsidiaryofanAcquiredCompany 148
Section 10 — Subsequent Accounting for Intangible Assets (Other ThanGoodwill) 149
FiniteUsefulLifeVersusIndefiniteUsefulLife 149
InternallyDevelopedIntangibleAssets 149
Determining the Useful Life of an Intangible Asset 150
AnalyzingtheExpectedUseoftheAsset 151
AnalyzingtheRelationshipoftheIntangibleAssettoOtherAssets 151
AnalyzingLegal,Regulatory,orContractualProvisionsThatMayLimitUsefulLife 152AnalyzingtheEntity’sOwnHistoricalExperienceWithRenewingorExtendingSimilar
Arrangements 152
AnalyzingtheEffectsofObsolescence,Demand,Competition,andOtherEconomicFactors 154
AnalyzingtheLevelofMaintenanceExpenditures 154
DeterminingWhetheranIntangibleAssetHasanIndefiniteUsefulLife 154
Intangible Assets Subject to Amortization 155
DeterminingtheUsefulLifeofanIntangibleAssetSubjecttoAmortizationEachReportingPeriod 155
AccountingforaChangeinRemainingUsefulLifeofanIntangibleAssetSubjecttoAmortization 155
IntangibleAssetstheAcquirerIntendsNottoUseortoUseinaWayOtherThanTheirHighestandBestUse 156
RecognitionandMeasurementofanImpairmentLossforIntangibleAssetsSubjecttoAmortization 156
MethodofAmortization 157
Intangible Assets Not Subject to Amortization 158
DeterminingtheUsefulLifeofanIntangibleAssetNotSubjecttoAmortizationEachReportingPeriod 158
In-ProcessResearchandDevelopmentIntangibleAssetsAcquiredinaBusinessCombination 158
RecognitionandMeasurementofanImpairmentLossforIntangibleAssetsNotSubjecttoAmortization 159
TimingoftheAnnualImpairmentTest 160
UnitofAccountingforImpairmentTestingofIndefinite-LivedIntangibleAssets 160
DeterminingtheCarryingAmountofanIndefinite-LivedIntangibleAssetWhenRemovingThatAssetFromaUnitofAccounting 163
CarryingForwardtheFairValueMeasurementsofIndefinite-LivedIntangibleAssetsFromOneYeartotheNext 164
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 9/286vi i i
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Section 11 — Subsequent Accounting for Goodwill 166
IdentificationofReportingUnits 166
EquityMethodInvestmentsasReportingUnits 169
DisclosureConsiderationsRegardingReportingUnitDeterminations 169
IdentificationofReportingUnits—Examples 169ComparisonofConclusionsReachedUnderStatements131and142inIdentifyingOperating
SegmentsandReportingUnits,Respectively 171
AssigningAssetsandLiabilitiestoReportingUnits 172
AssigningAssetsandLiabilitiesWhenanEntityHasOnlyOneReportingUnit 174
AssigningAccumulatedForeignCurrencyTranslationAdjustmentstoaReportingUnit 174
AssigningGoodwilltoReportingUnits 175
AllocationofGoodwilltoReportingUnitsforaMiningEnterprise 177
ReorganizationofReportingStructure—ReassigningAssets,Liabilities,andGoodwill 177
WhentoTestGoodwillforImpairment 177
ChangeinDateoftheAnnualGoodwillImpairmentTest—PreferabilityLetterRequirements 178
PerformingtheTwo-StepGoodwillImpairmentTest 179
InteractionoftheGoodwillImpairmentTestandtheLong-LivedAssetImpairmentTest 181
ConsiderationofAssembledWorkforceinthePerformanceofStep2oftheGoodwillImpairmentTest 182
FairValueMeasurements 183
DeterminingFairValueWhenanEntityHasOnlyOneReportingUnit 184
ChangingtheMethodofDeterminingtheFairValueofaReportingUnit 184
CarryingForwardtheFairValueofaReportingUnitFromOneAnnualTestingDatetotheNext 185
ApplyingtheGoodwillImpairmentTesttoaReportingUnitWithaNegativeCarryingValue 185DeferredIncomeTaxConsiderationsinApplyingtheGoodwillImpairmentTest 186
ReportingRequirementsWhenStep2oftheGoodwillImpairmentTestIsNotComplete 187
GoodwillImpairmentTestingbyaSubsidiary 187
DisposalofAlloraPortionofaReportingUnit 188
GoodwillImpairmentTestingandDisposalofAlloraPortionofaReportingUnitWhentheReportingUnitIsLessThanWhollyOwned 188
AssessingtheImpactofGoodwillAssignmentsontheDeterminationofGainorLossonDisposalofaReportingUnit 189
EquityMethodInvestments 190
Section 12 — Financial Statement Presentation Requirements 192
Intangible Assets 192
PresentationofIntangibleAssetsintheConsolidatedStatementofFinancialPosition 192
PresentationofIntangibleAssetAmortizationExpenseandImpairmentLossesintheConsolidatedIncomeStatement 192
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 10/286ix
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Goodwill 193
PresentationofGoodwillintheConsolidatedStatementofFinancialPosition 193
PresentationofGoodwillImpairmentLossesintheConsolidatedIncomeStatement 193
Noncontrolling Interest in a Subsidiary 193
PresentationofNoncontrollingInterestsintheConsolidatedStatementofFinancialPosition 193
PresentationofNoncontrollingInterestsintheConsolidatedStatementofIncome 194
PresentationofNoncontrollingInterestsintheStatementofConsolidatedComprehensiveIncome 196
PresentationofNoncontrollingInterestsintheConsolidatedStatementofChangesinShareholders’Equity 196
Statement of Cash Flows 197
PresentationofAcquisition-RelatedCosts 197
Section 13 — Financial Statement Disclosure Requirements 198
Business Combination Disclosures 198
GeneralDisclosures 198
ConsiderationTransferred 198
ContingentConsiderationandIndemnificationAssets 199
AcquiredReceivables 199
AssetsAcquiredandLiabilitiesAssumedbyMajorClass 199
AssetsandLiabilitiesArisingFromContingencies 200
Goodwill 200
TransactionsRecognizedSeparatelyFromtheBusinessCombination 201
BargainPurchases 201
PartialAcquisitions 201
AdditionalDisclosuresbyaPublicBusinessEnterprise 202
ImmaterialBusinessCombinations 203
BusinessCombinationsCompletedAftertheBalanceSheetDate 203
InitialAccountingfortheBusinessCombinationIsNotComplete 203
Statement157DisclosureConsiderations(Postcombination) 204
InterimFinancialInformation 204
Goodwill and Intangible Assets Disclosures 205
DisclosuresinthePeriodofAcquisition 205
Disclosures,IncludingSegmentInformation,inEachPeriodPresented 205
IntangibleAssetsSubjecttoRenewalorExtension 206
IntangibleAssetImpairments 207
GoodwillImpairments 207
DisclosureConsiderationsRegardingReportingUnitDeterminations 207
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 11/286x
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Noncontrolling Interest in a Subsidiary Disclosures 207
ChangesinaParent’sOwnershipInterestinaSubsidiary 208
ExcessLosses 209
Other 209
Deconsolidations 209
IncomeTaxes 210
Section 14 — Transition Requirements and Other Adoption Considerations 211
Statement 141(R) 211
IncomeTaxes 211
ContingentConsideration 213
RestructuringandExitCostsoftheAcquiree 214
Acquisition-RelatedCostsIncurredonCurrentTransactions 215
GoodwillImpairmentConsiderations 216
SAB74Disclosures 218
SECAmendments 219
MutualEntities 219
EntitiesEmergingFromBankruptcy 221
Statement 160 221
NoncontrollingInterestsThatAreWithintheScopeofStatement160 221
CalculationofEarningsperShare 222
ChangesinaParent’sOwnershipInterestinaSubsidiary 222
AttributingNetIncomeorLosstotheParentandtheNoncontrollingInterest 223
AttributionofLossesThatExceedtheCarryingAmountoftheNoncontrollingInterestinaSubsidiary 223
GoodwillImpairmentConsiderations 225
SAB74Disclosures 228
SECAmendments 229
Appendix A — Differences Between Statements 141 and 141(R) 230
Scope 230
DefinitionofaBusiness 230
DeterminingtheAcquisitionDate 231
MeasurementDateforMarketableEquitySecuritiesoftheAcquirerIssuedtoEffectaBusinessCombination 231
ProvisionalMeasurementofAssetsAcquiredandLiabilitiesAssumed 232
AdjustmentstoValuationAllowancesforAcquiredDeferredTaxAssetsandUncertainTaxPositions 233
RecognitionofDeferredTaxAssets 234
Acquisition-RelatedCosts 235
PartialAcquisitions 235
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 12/286x i
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
InitialMeasurementoftheNoncontrollingInterestinaSubsidiary 236
RecognitionofLiabilitiesAssociatedWithRestructuringorExitActivitiesoftheAcquiree 236
ReacquiredRights 237
In-ProcessResearch&Development(IPR&D) 237
PreacquisitionContingencies 239
ContingentConsideration 240
IndemnificationAssets 240
StepAcquisitions 241
ValuationAllowanceforAssetsRecordedatFairValue 242
AssetsThatanAcquirerIntendsNottoUseorUseinaWayOtherThanTheirHighestandBestUse 243
BargainPurchase(anExcessofFairValueofAcquiredNetAssetsOverCost) 243
LeveragedBuyouts 244
Share-BasedPaymentAwardsExchangedforAwardsHeldbytheAcquiree’sEmployees 245
PensionandOtherPostretirementBenefitObligations 245
DisclosureAdditions,Modifications,andDeletions 246
Appendix B — Differences Between Pre-Amended ARB 51 and Statement 160 247
PresentationofNoncontrollingInterests—ConsolidatedStatementofFinancialPosition 247
PresentationofNoncontrollingInterests—ConsolidatedStatementofIncome 248
ChangesintheParent’sOwnershipInterestinaSubsidiaryWhenThereIsNoChangeinControl 249
AccumulatedNetLossesAttributabletotheNoncontrollingInterest 250
ParentDeconsolidatesaSubsidiarybutRetainsaNoncontrollingInvestment 251
DisclosureofChangesinEquityThatAreAttributabletotheNoncontrollingInterest 252
DisclosureofEffectsofChangesintheParent’sOwnershipInterest 252
Appendix C — Differences Between U.S. GAAP and IFRSs 253
Differences Between Statement 141(R) and IFRS 3(R) 253
Different Conclusions Reached During the Joint Business Combinations Convergence
Project 253
EffectiveDateandTransition 253
Scope 254
NoncontrollingInterests—InitialMeasurement 255
AcquiredContingencies—InitialMeasurement 256
AcquiredContingenciesRecognizedasoftheAcquisitionDate—SubsequentMeasurement 257OperatingLeasesinWhichtheAcquireeIstheLessor 257
ContingentConsiderationClassifiedasaLiability—SubsequentMeasurement 258
Disclosures—ProFormaFinancialInformation 258
Disclosures—GainorLossRecognizedAftertheAcquisitionDateforNetAssetsAcquired 259
Disclosures—Goodwill 259
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 13/286xi i
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Differences Outside the Scope of the Joint Business Combinations Convergence Project 260
DefinitionofControl 260
DefinitionofFairValue 260
ContingentConsideration—InitialClassification 260
DeferredTaxesandUncertainTaxPositions 261
EmployeeBenefits 261
Share-BasedPaymentAwards—InitialMeasurement 261
ReplacementShare-BasedPaymentAwards—AllocationofAmountstoConsiderationTransferred 261
Disclosures—AcquiredContingencies 262
Differences Between Statement 160 and IAS 27(R) 262
Differences Between Statement 142 and IAS 36/38 262
LevelofImpairmentTestingforGoodwill 262
GoodwillImpairmentTesting 263
ImpairmentTestingofIndefinite-LivedIntangibleAssets 265
IntangibleAssetRevaluations 265
InternallyDevelopedIntangibleAssets 266
AdvertisingCosts 267
Appendix D — Glossary of Standards and Regulations 268
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 14/2861
Acknowledgments
Thispublicationistheresultofacollaborativeeffort,bringingtogetherthethoughtfulleadership
ofourassuranceandtaxprofessionals.WearegratefulforthecontributionsofChrisBarton,Jason
Embick,TrevorFarber,MarkFisher,HeatherJurek,RobinKramer,ConnieLee,DerekMalmberg,Michelle
Marseglia,JeffMinick,MichaelMorrissey,RichardPaul,MikeScheiner,StefanieTamulis,andStephanie
Wolfe.Inaddition,wewouldliketoacknowledgethehardworkofourProductionGroup,specifically
LynneCampbell,DianeCastro,YvonneDonnachie,MichaelLorenzo,JoanMeyers,JeaninePagliaro,
andJosephRenouf.StuartMosssupervisedtheoverallpreparationofthispublicationandwouldliketo
acknowledgethecontributionsoftheseprofessionals,extendingtothemhisdeepestappreciation.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 15/2862
Executive Summary
Background
InDecember2007,theFASBcompletedthesecondphaseofitsbusinesscombinationsproject.Thefirstphase,completedin2001,hadresultedintheissuanceofStatements1411and142andincluded
suchchangesastheeliminationofthepooling-of-interestmethodofaccountingandtheamortization
ofgoodwill.Thesecondphaseconstitutedamajoroverhauloftheaccountingrulesforbusiness
combinationsandnoncontrollinginterests(formerlyreferredtoas“minorityinterests”)thatwerenot
reconsideredinthefirstphase(e.g.,manyaspectsofthepurchasemethodofaccounting).
TheFASBissuedthefollowingtwostandardsattheendofthesecondphase:
• StatementNo.141(R),BusinessCombinations .
• StatementNo.160,NoncontrollingInterestsinConsolidatedFinancialStatements—an
amendmentofARBNo.51.
Thenewstatementswillgenerallyrequire:
• Additionaluseoffairvaluemeasurements,bothasoftheacquisitiondateandin
postcombinationperiods,whichmayresultinincreaseduseofthird-partyvaluationspecialists.
• Recognitionofadditionalassetsandliabilities,asoftheacquisitiondateandinpostcombination
periods,inaccountingforthebusinesscombination.Theseassetsandliabilitiesinclude(1)
preacquisitioncontingencies,(2)contingentconsideration,(3)assetsthatanacquirerdoesnot
intendtouse(e.g.,defensiveintangibleassets),and(4)acquiredassetsassociatedwithresearch
anddevelopmentactivities(i.e.,acquiredin-processresearchanddevelopment(IPR&D)).• Theaccountingforcertainitems,suchasacquisitioncostsandrestructuringchargesrelatedto
theacquiredbusiness,outsideofbusinesscombinationaccounting.Thisrequirementmayresult
inearningsvolatilitybothbeforeandafterconsummationofthebusinesscombination.
• Enhanceddisclosuresaboutcompletedbusinesscombinations.
SomeoftherecentchangestobusinesscombinationaccountingwillaffectnotonlyU.S.companiesbut
alsocompaniesreportingunderIFRSs.Inthesecondphaseoftheproject,theFASBworkedwiththe
IASBtosubstantiallyconvergetheaccountingforbusinesscombinationsandnoncontrollinginterests
underU.S.GAAPandIFRSs.Thishasbeenthemostsignificantconvergenceprojecttodateandhas
helpedpavethewayforfutureconvergenceprojectsinotherareas.AfewdifferencesbetweenU.S.GAAPandIFRSsintheaccountingforbusinesscombinationsstillremain,includingthedelayedeffective
datefortheIASB’sstandardsIFRS3(R)andIAS27(R)(annualperiodsbeginningonorafterJuly1,2009)
andtheinitialmeasurementofnoncontrollinginterestsinbusinesscombinations.
Inaddition,notethatStatements141(R)and160affectareasotherthanbusinesscombinations,
including(1)theaccountingforexistingnoncontrollinginterests,(2)goodwillimpairmenttesting
(regardlessofwhenthegoodwillwasrecognized),and(3)accountingforchangesintheparent’s
ownershipinterestinasubsidiary(includingdeconsolidations).Significantchangesfromtheprevious
accountingunderU.S.GAAParedescribedinmoredetailbelow.
1 ThetitlesofthestandardsandregulationsreferencedinthisRoadmaparedefinedinAppendix D.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 16/2863
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Effective Date and Transition
Thestatements’accountingprovisionsrequireprospectiveapplicationtotransactionsconsummated
infiscalyearsbeginningonorafterDecember15,2008,withoneexceptionforcertainincometax
balances.2Earlyadoptionisprohibited.Therefore,forcalendar-year-endcompanies,thenewstatements
onlyaffecttransactionsclosingonorafterJanuary1,2009.Statement160requiresretrospective
applicationofitspresentation and disclosureprovisionsforallpriorperiodspresentedinthefinancial
statements.
Overview of Significant Accounting Changes
Contingent Consideration—Manypurchaseagreementscontaincontingentconsideration
arrangements(commonlyreferredtoas“earnouts”).Thesearrangementstypicallyobligatethe
acquirertotransferadditionalconsiderationtotheformerownersoftheacquireeifafutureeventor
conditionismet(e.g.,acontingencybasedonthepostcombinationperformanceoftheacquiredentity).
UnderStatement141(R),theacquirermust(1)recognizethearrangementintheacquisitionmethod
accountingatfairvalueand(2)classifytheamountaseitheraliabilityorequityinaccordancewith
otherexistingU.S.GAAP.Theacquirerrecognizessubsequentchangesinfairvalueofaliabilityinits
postcombinationearnings,butdoesnotadjustamountsclassifiedasequity.Underpreviousguidance,
theacquirertypicallyadjusteditspurchaseaccountingwhenthecontingencywassettledorpaid,with
nodirecteffectonpostcombinationearnings.
Thedeterminationoffairvalueinthesearrangementsandclassificationasaliabilityorequityisoften
difficultandmayrequiretheassistanceofthird-partyvaluationandfinancialinstrumentspecialists.The
structureofmanycontingentconsiderationarrangementswillmostlikelyresultinliabilityclassification
underthenewguidance,whichmayleadtopostcombinationearningsvolatility.Therefore,under
Statement141(R),entitiesmaychangethestructure,timing,anduseofearnoutsinfuturedealsto
avoiduncertaintiesintheirpostcombinationearnings.
Measurement Date of the Acquirer’s Equity Securities Issued —Statement141(R)requiresthat
equitysecuritiesissuedasconsiderationinabusinesscombinationberecordedatfairvalueasof
theacquisitiondate.Underpreviousguidance,theacquirer’sequitysecuritiesweregenerallyvalued
overareasonableperiodbeforeandafterthetermsofthebusinesscombinationareagreedtoand
announced.Becausethevalueofsecuritiesmaychangesignificantlybetweentheannouncementdate
andtheacquisitiondate,underStatement141(R),substantiallydifferentamountsmightberecordedas
considerationtransferredandthusasgoodwill.
Preacquisition Contingencies3—Theaccountingforanacquiredcontingencydependsonwhether
itiscontractualornoncontractual.Contractualcontingenciesarerecognizedattheiracquisition-datefairvalue.Noncontractualcontingenciesarerecognizedattheiracquisition-datefairvalue,butonlyif
itismorelikelythannot(i.e.,morethan50percentlikely)thatthecontingencymeetsthedefinition
ofanassetoraliability.Inotherwords,foranoncontractualcontingentliability,ifitismorethan50
percentlikelythatanacquirerhasassumedapresentobligation,therecognitionthresholdismet.If
not,noamountisrecognized.Therefore,underStatement141(R),moreacquiredcontingencieswill
2 Statement141(R)requiresthatanentityrecord,asacomponentofincometaxexpense,adjustmentsafterthemeasurementperiod(andadjustmentsduringthemeasurement
periodthatrelatetofactsandcircumstancesthatdidnotexistasoftheacquisitiondate)to(1)valuationallowancesforacquireddeferredtaxassetsand(2)uncertaintaxpositions
oftheacquiredentity.UnderthetransitionprovisionsofStatement141(R),thisrequirementappliestoallbusinesscombinations,regardlessoftheconsummationdate(i.e.,itcould
affectpriordeals).
3 Paragraph1ofStatement5definesacontingencyas“anexistingcondition,situation,orsetofcircumstancesinvolvinguncertaintyastopossiblegain...orloss...toanentity
thatwillultimatelyberesolvedwhenoneormorefutureeventsoccurorfailtooccur.”Theaccountingforcontingentconsiderationarrangementsisdiscussedseparately.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 17/2864
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
bemeasuredatfairvalueasoftheacquisitiondate.Underpreviousguidance,whenaccountingfor
acquiredcontingencies,entitiesoftendidnotrecordanyamountinthepurchaseaccountingand
generallyfollowedtheguidanceinStatement5.
Inaddition,unlikepreviousguidance,Statement141(R)coverssubsequentmeasurementof
contingenciesrecordedatfairvalueasoftheacquisitiondate.UnderStatement141(R),ifnew
informationbecomesavailableaftertheacquisitiondate,acontingentliabilityrecognizedasofthe
acquisitiondatemustberemeasuredatthehigherofitsacquisition-datefairvalueortheamount
thatwouldberecognizedunderStatement5.Acontingentassetisremeasuredatthelowerofits
acquisition-datefairvalueorthebestestimateofitsfuturesettlementamount.Inaddition,anacquired
contingencyisderecognizedonlyuponitsresolution.
Editor’s Note: OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwould
amendStatement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfair
valueasoftheacquisitiondateifsuchamountscanbereasonablydetermined.Itisexpectedthatthe
guidanceintheproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilities
atfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.
Assets That the Acquirer Intends Not to Use or to Use in a Way Other Than Their Highest
and Best Use (e.g., Defensive Value Intangible Assets) —Anacquirermaydecidenottouse
anacquiredassetforcompetitiveorotherreasons(e.g.,atradenameofanacquireethatcompetes
withtheacquirer’sowntradename),butitwouldstilldefendtheassetsothatotherscannotuseit.
UnderStatement141(R),anacquirermustrecognizeanacquiredassetandmeasureitatfairvaluein
accordancewithStatement157,evenifitdecidesnottousethatacquiredasset.Thisvaluationwould
needtoreflecttheasset’shighestandbestusefromamarketparticipant’spointofview(i.e.,someone
elsemaybewillingtopayforthisasset).Underthepreviousguidance,theacquirertypicallyassignedlittleornovaluetotheseacquiredassets.
Partial Acquisitions —Incertainbusinesscombinations,theacquirerobtainscontrol,butdoesnot
acquirea100percentinterestintheacquiree.UnderStatement141(R),onceanacquirerobtains
control,itwillmeasure100percentoftheacquirednetassetsatfairvalue(itmustmeasurefairvaluein
accordancewithStatement157)regardlessofitsownershipinterest.Underpreviousguidance,onlythe
portionofnetassetspurchasedbytheacquirerwasmeasuredatfairvalue;theremainderwasmeasured
athistoricalbookvalue.
UnderStatement141(R),anacquisitionofacontrollinginterestinanotherentitythatislessthan100
percentownedmayresultintherecognitionofhigher(1)netassetbalances,(2)depreciationandamortizationexpensesinpostcombinationperiods,and(3)assetimpairmentcharges,ascomparedwith
previousguidance.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 18/2865
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Noncontrolling Interests—Statement141(R)requiresthatthenoncontrollinginterestinabusiness
combination,ifany,bemeasuredinitiallyatfairvalue,includingitsshareofgoodwill.Inaddition,
Statement160requiresthattheparent(acquirer)presentthenoncontrollinginterestasaseparate
componentofshareholders’equity.4Underpreviousguidance,thenoncontrollinginterestwasrecorded
athistoricalbookvalue,goodwillwasonlyrecordedfortheacquirer’sinterest,andthenoncontrolling
interestwaspresentedaseithermezzanine(ortemporary)equityoraliability.
Statement141(R)’s“fullgoodwill”method(i.e.,goodwillrepresentsamountsattributabletoboththe
parentandthenoncontrollinginterest)willresultinhigherinitialamountsofgoodwillthandidthe
previousguidance.Thismayleadtolargergoodwillimpairmentchargesinpostcombinationearnings.
Furthermore,theclassificationofthenoncontrollinginterestinpermanentequitymayaffectsomekey
financialstatementratiosusedbymanagementorinvestorsandincludedindebtcovenants(e.g.,debt-
to-equityratio).
Restructuring and Exit Costs—Restructuringandexitcostsarecoststhatanacquirerexpectsto
incurforexitinganactivity,involuntarilyterminatingemployees,orrelocatingemployeesofanacquiree.
UnderStatement141(R),anacquirerwillgenerallyrecordthesecostsoutsideofacquisitionmethodaccountingthroughachargetopostcombinationearnings.Thepreviousguidancewaslessstringent
and,aslongascertaincriteriaweremet,generallyresultedinanacquirer’srecordingliabilitiesrelatedto
afuturerestructuringaspartofitspurchaseaccounting(i.e.,generallyasacomponentofgoodwill).
Acquired IPR&D—Beforeabusinesscombination,anacquireemayhaveincurredcostsassociated
withresearchanddevelopmentactivities.Thesecostsmostlikelywouldhavebeenexpensed,with
noresultingassetrecordedontheacquiree’sbooks.Inabusinesscombination,theresearchand
developmentactivitiesmostlikelyrepresentanassettotheacquirer.Statement141(R),likeprevious
guidance,requiresthatthefairvalueofsuchanassetbemeasuredasoftheacquisitiondate.However,
Statement141(R)differsfrompreviousguidanceregardingtheaccountingfortheasset.Underthe
previousguidance,theacquirerimmediatelyexpensedtheentirefairvalueoftheIPR&D(assumingit
hadnoalternativefutureuse)inthepostcombinationincomestatement.Conversely,underStatement
141(R),theacquiredIPR&Discapitalizedasanindefinite-livedintangibleassetandtestedforimpairment
atleastannually.Oncetheresearchanddevelopmentactivitiesarecomplete,theintangibleassetis
amortizedintoearningsovertherelatedproduct’susefullife.Iftheprojectissubsequentlyabandoned,
thecarryingamountwouldgenerallybeexpensedatthattime.Therefore,underStatement141(R),the
timingofwhentheacquiredIPR&Dwillaffectpostcombinationearningsislesscertain.
Adjustments to Certain Acquired Tax Balances—Statement141(R)requiresthatanentity
record,generallythroughincometaxexpense,adjustmentsmadeafterthemeasurementperiod(and
adjustmentsduringthemeasurementperiodthatrelatetofactsandcircumstancesthatdidnotexistas
oftheacquisitiondate)to(1)valuationallowancesforacquireddeferredtaxassetsand(2)acquiredtax
uncertainties.UponadoptingStatement141(R),anentitymustalsoapplythisnewguidancetotax
balancesrecordedbeforetheStatement’seffectivedate.Therefore,thisnewguidancemayaffect
remainingvaluationallowancesfordeferredtaxassetsandtaxuncertaintybalancesfrompriordeals
and,consequently,mayaffectfutureearnings.Thisnewguidancediffersfrompreviousguidancein
whichadjustmentstothesetaxbalancesweregenerallyrecordedasanadjustmenttogoodwill(i.e.,
earningsweregenerallynotdirectlyaffected).
4 Indeterminingtheappropriateclassificationofanoncontrollinginterest,anentitymustlooktootherrelevantGAAPtodeterminewhetherthefinancialinstrumentissuedbya
subsidiarycanbeclassifiedaspermanentequity(e.g.,Statements133and150,EITFTopicD-98,andSECAccountingSeriesReleaseNo.268).Morecomplexfinancialinstruments
(e.g.,thosewithcertaincallorputfeatures)maybeoutsidethescopeofStatement160and,therefore,classifiedineithermezzanine(ortemporary)equityorasliabilities.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 19/2866
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquisition-Related Costs—Statement141(R)requiresthattheacquirerexpenseallacquisition-
relatedcostsasincurred,eventhoseincurredbytheacquireeonbehalfoftheacquirer.However,
certaindirectcostspaidtoregisterdebtorequitysecuritiesaspartofabusinesscombinationmaystill
berecordedonthebalancesheetinaccordancewithotherapplicableU.S.GAAP.Acquisition-related
coststhatwillbeexpensedincludefeespaidtoinvestmentbankers,lawyers,accountants,valuation
specialists,andotherconsultants.Underthepreviousguidance,incrementalanddirectcostsofanacquisitionwerecapitalizedandgenerallyrecordedaspartofgoodwill.
Measurement-Period Adjustments—Likethepreviousguidance,thenewguidancegivesanacquirer
uptooneyear(formerlyreferredtoasthe“allocationperiod”)tofinalizeitsbusinesscombination
accounting,aslongasanyadjustmentsmadetoprovisionalamountsrelatetofactsandcircumstances
thatexistedasoftheacquisitiondate(e.g.,theacquirermaybewaitingonathird-partyvaluation
specialist’sreportthatdetailsthefairvalueofcertainassetsandliabilities).However,Statement141(R)
nowrequiresthattheacquirerrevisecomparativeprior-periodinformationforanyadjustmentsmade
toprovisionalamountsduringthemeasurementperiod(i.e.,adjustmentsaremaderetrospectively
asoftheacquisitiondate).Thisrepresentsasignificantchangefromprevailingpriorpractice,in
whichadjustmentstoprovisionalamountsweregenerallyaccountedforprospectivelyasachangeinaccountingestimate.
Therevisedguidancewillrequirethatanentityapplyadditionaleffortinrecordingmeasurement-
periodadjustments.Forexample,anentitythatsubsequentlyadjustsadepreciableasset’sprovisional
balancemustalsoretrospectivelyadjusttheasset’sdepreciationoramortizationexpense,accumulated
depreciationoramortization,andretainedearningsforallpriorperiodspresented.Additional
communicationanddisclosurestofinancialstatementusersmayalsoberequired.Publicentities
mayneedtoupdatefinancialstatementsandinformationincludedinaregistrationstatementifa
measurement-periodadjustment(1)isrecordedaftertheissuanceofthoseitemsand(2)wouldhavea
materialeffectontheamountsrecordedinthosefilings.
Bargain Purchases—Bargainpurchasesoccurwhenthefairvalueoftheconsiderationtransferred
islessthanthefairvalueofthenetassetsacquiredfromtheacquiree(thatdifferenceisreferredtoas
the“excess”).Statement141(R)requirestheacquirertorecordtheentireexcessinearnings.Under
thepreviousguidance,theacquirerwouldfirstreducethevalueassignedtocertainnoncurrentassets
acquired.Theacquirerwouldthenrecordanyremainingexcess,afterreducingthosenoncurrentassets
tozero,asanextraordinary gain.Therevisedguidancemayresultintherecognitionofalargergainby
theacquirer.Note,however,thatbargainpurchasesarenotexpectedtobecommon.
Definition of a Business—Statement141(R)significantlybroadensthedefinitionofabusiness(e.g.,
development-stageentitiesmayqualifyasabusinessunderStatement141(R),whereastheydidnot
underthepreviousguidance).Theexpandeddefinitionnotonlyaffectsthedeterminationofwhether
atransactionqualifiesasabusinesscombinationoranassetacquisition,butmayalsohaveaneffect
on(1)thegoodwillimpairmentanalysis(seebelow),(2)theconsolidationanalysisunderInterpretation
46(R),and(3)theallocationofgoodwillwhenaportionofreportingunitissoldorotherwisedisposed
of.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 20/2867
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Changes in the Parent’s Ownership Interest—UnderStatement160,afteraparent(acquirer)
obtainscontroloverasubsidiary,theparentmustaccountforadditionalpurchasesandsalesof
asubsidiary’sstockasequitytransactions(aslongascontrolisretained).Thus,theparentcannot
recognizeagainorlossinearningsondispositions,norcanitapplyadditionalacquisitionmethod
accountingforincrementalinterestsacquired.Underthepreviousguidance,salesofthesubsidiary’s
stocktothirdpartiesmayhaveresultedingainsorlossesinearningsandapurchaseofthesubsidiary’ssharesbytheparentmayhaverequiredadditionalpurchaseaccounting(whichcouldhavealsoresulted
inadditionalgoodwill).
Goodwill Impairment Testing —Statement142requiresentitiestotestgoodwillforimpairment
atleastannually.Step2ofthegoodwillimpairmenttestrequiresthattheentitycomputethecurrent
impliedfairvalueofgoodwill.Theentitythencomparesthatbalancetothecurrentcarryingamount
ofthegoodwilltodeterminewhetheranimpairmentisrequired.Theimpliedfairvalueofgoodwill
isdeterminedinthesamemannerasgoodwillrecognizedinabusinesscombination.Inotherwords,
beforetheadoptionofStatement141(R),anentitywouldrefertoStatement141forthisanalysis.After
theentityadoptsStatements141(R)and160,itmustperformstep2ofthegoodwillimpairmenttestin
accordancewithStatement141(R).Therefore,Statement141(R)willmostlikelyaffectthemechanicsinwhichstep2ofthegoodwillimpairmentanalysisisperformed.
Inaddition,goodwillimpairmenttestingisperformedatthereporting-unitlevel.Akeyfactorin
determininganentity’sreporting-unitstructureistoidentifywhichcomponentsarebusinesses,as
definedintheaccountingliterature.Aspreviouslynoted,Statement141(R)significantlybroadensthe
definitionofabusiness.Therefore,uponadoptionofStatement141(R),anentityshouldcarefullyreview
whetherthenewguidancewillaffectitsreporting-unitstructureandthusitsgoodwillimpairment
testing.
How This Roadmap Is Structured
Thispublicationconstitutesasinglesourceforboththeaccountingrequirementsfor,andtheavailable
interpretiveguidanceon,thefollowingtopics:
Initial Acquisition Accounting
• Businesscombinations.
Post-Acquisition Accounting
• Goodwillandotherintangibleassets.
• Push-downaccounting.
• Noncontrollinginterests.
Whereappropriate,wehaveincludedourownviews,whicharebasedonourexperiencewithand
understandingoftheunderlyingprinciples.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 21/2868
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
TheRoadmapisstructuredasfollows:
Accounting for Business Combinations
Section1—ScopeofStatement141(R)
Section2—IdentifyingtheAcquirer
Section3—RecognizingandMeasuringAssetsAcquiredandLiabilitiesAssumed—General
Section4—RecognizingandMeasuringAssetsAcquiredandLiabilitiesAssumed(OtherThanIntangibleAssetsandGoodwill)
Section5—RecognizingandMeasuringAcquiredIntangibleAssetsandGoodwill
Section6—RecognizingandMeasuringtheConsiderationTransferredinaBusinessCombination
Accounting for Noncontrolling Interests During andAfter a Business Combination
Section7—NoncontrollingInterests
Income Tax Considerations for Business Combinations Section8—IncomeTaxConsiderations
Accounting After a Business Combination
Section9—Push-DownBasisofAccounting
Section10—SubsequentAccountingforIntangibleAssets(OtherThanGoodwill)
Section11—SubsequentAccountingforGoodwill
Presentation and Disclosure Considerations
Section12—FinancialStatementPresentationRequirements
Section13—FinancialStatementDisclosureRequirements
Transition Issues and ConsiderationsSection14—TransitionRequirementsandOtherAdoption
Considerations
Comparisons to IFRSs and Previous U.S. GAAP
AppendixA—DifferencesBetweenStatements141and141(R)
AppendixB—DifferencesBetweenPre-AmendedARB51andStatement160
AppendixC—DifferencesBetweenU.S.GAAPandIFRSs
Index of Standards and Regulations ReferencedThroughout the Roadmap
AppendixD—GlossaryofStandardsandRegulations
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 22/2869
Section 1 — Scope of Statement 141(R)
Occurrence of a Business Combination
1.01 Paragraph3(e)ofStatement141(R)definesa“businesscombination”asfollows:
Abusinesscombination isatransactionorothereventinwhichanacquirerobtainscontrol[see
1.02–1.07]ofoneormorebusinesses[see 1.08–1.11].Transactionssometimesreferredtoas“true
mergers”or“mergerofequals”alsoarebusinesscombinationsasthattermisusedinthisStatement.
[Emphasisadded]
Obtaining Control
1.02 ParagraphA2ofStatement141(R)providesthefollowingexamplesoftransactionsoreventsthat
mayresultinanentity’sobtainingcontrolofanotherbusiness:
• Transfersofcash,cashequivalents,orotherassets(includingnetassetsthatconstituteabusiness).
• Incurrenceofliabilities.
• Issuanceofequityinterests.
• Issuanceofmorethanonetypeofconsideration.
• Othertransactionsoreventsthatdonotinvolvethetransferofconsideration,includingby
contractalone(see1.05–1.07).
1.03 Inspecifyinghowentitiesdeterminewhethertheyhaveobtainedcontrolofanotherbusiness,
Statement141(R)referstothedescriptionof“controllingfinancialinterest”inparagraph2ofARB51,
asamendedbyStatement160,whichstates:
Theusualconditionforacontrolling financial interestisownershipofamajorityvotinginterest,
and,therefore,asageneralruleownershipbyonecompany,directlyorindirectly,ofoverfiftypercent
oftheoutstandingvotingsharesofanothercompanyisaconditionpointingtowardconsolidation.
[Emphasisadded]
1.04 Acontrolassessmentisnotnecessarilybasedsolelyonavotinginterestmodelsuchasthat
describedinARB51.Entitiesmustalsodeterminewhethertheyhaveacontrollingfinancialinterestina
variableinterestentity(VIE)inaccordancewithInterpretation46(R).ControlunderInterpretation46(R)is
assessedonthebasisofeconomicrisksandrewardstotheinvestorandisnotdependentonthevoting
interest.See1.17–1.21foradiscussionoftheinteractionbetweenVIEsandStatement141(R).
1.05 Anacquirermayobtaincontrolofanacquireewithouttransferringconsiderationtotheformer
owners.Paragraph49ofStatement141(R)listscertaincircumstancesinwhichthismayoccur:
a. Theacquireerepurchasesasufficientnumberofitsownsharesforanexistinginvestor(the
acquirer)toobtaincontrol.
b. Minorityvetorightslapsethatpreviouslykepttheacquirerfromcontrollinganacquireein
whichtheacquirerheldthemajorityvotinginterest.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 23/28610
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
c. Theacquirerandacquireeagreetocombinetheirbusinessesbycontractalone.Theacquirer
transfersnoconsiderationinexchangeforcontrolofanacquireeandholdsnoequity
interestsintheacquiree,eitherontheacquisitiondateorpreviously.Examplesofbusiness
combinationsachievedbycontractaloneincludebringingtwobusinessestogetherina
staplingarrangementorformingaduallistedcorporation.[See1.06.]
1.06 Staplingarrangementsandtheformationofdual-listedcorporationsdonotoccurfrequentlyinpracticeandmostofteninvolveforeignentities.Characteristicsofsucharrangementsareasfollows:
• Staplingarrangements—Thesearegenerallycontractualagreementsbetweentwopartiesin
whichtheissuedequitysecuritiesofonelegalentityarecombinedwiththeissuedsecuritiesof
anotherlegalentity.Thesesecurities,oftenreferredtoas“stapled,”arethenquotedatasingle
marketpriceandcannotbeseparatelytradedortransferred.
• Dual-listedcorporation—Insuchtransactions,noconsiderationisexchangedbyeitherentity,
andcontractsareexecutedbetweenthepartiesthatequalizetherightsoftherespective
shareholders.Suchrightsoftenincludevoting,dividends,governance,andexecutive
managementdecisions.Althoughseparatelegalentitiesareretained(i.e.,thesecuritiesofeach
respectiveentityareusuallyseparatelyquotedandtradedinthecapitalmarkets),adual-listedcorporationissubstantivelysimilartoabusinesscombinationinthattheshareholdersofthe
respectiveentitiesbothshareintherisksandrewardsofthetwoentities.Historically,theSEC
hasrequiredsuchtransactionstobeaccountedforasabusinesscombination,andStatement
141(R)isnotexpectedtosignificantlychangethispractice.
1.07 Businesscombinationsachievedwithoutthetransferofconsiderationareaccountedforunder
theacquisitionmethodofaccounting.Paragraph50ofStatement141(R)statesthatforthoseachieved
bycontractalone,“theacquirershallattributetotheequityholdersoftheacquireetheamountofthe
acquiree’snetassetsrecognized.”Inotherwords,thenoncontrollinginterestshouldberecognizedin
theacquirer’spostcombinationfinancialstatementseveniftheresultisthatitrepresents100percentof
theacquiree’snetassets.
Definition of a Business
1.08 Anentitymayobtaincontrolofabusinessbyacquiringitsnetassetsoritsequityinterests.For
abusinesscombinationtobewithinthescopeofStatement141(R),theentityoverwhichcontrolis
obtainedmustbeabusiness.Paragraph3(d)ofStatement141(R)definesabusinessasfollows:
Abusiness isanintegratedsetofactivitiesandassetsthatiscapableofbeingconductedand
managedforthepurposeofprovidingareturnintheformofdividends,lowercosts,orother
economicbenefitsdirectlytoinvestorsorotherowners,members,orparticipants.
1.09 Statement141(R)nullifiesthedefinitionofabusinessthatwasinIssue98-3andsignificantly
broadenswhatisconsideredabusiness(seeA.05).
1.10 ParagraphsA4–A9ofStatement141(R)provideimplementationguidancetohelpentitiesidentify
whatconstitutesabusiness:
A4.ThisStatementdefinesabusinessasanintegratedsetofactivitiesandassetsthatiscapableof
beingconductedandmanagedforthepurposeofprovidingareturnintheformofdividends,lower
costs,orothereconomicbenefitsdirectlytoinvestorsorotherowners,members,orparticipants.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 24/28611
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Abusinessconsistsofinputsandprocessesappliedtothoseinputsthathavetheabilitytocreate
outputs.Althoughbusinessesusuallyhaveoutputs,outputsarenotrequiredforanintegratedsetto
qualifyasabusiness.Thethreeelementsofabusinessaredefinedasfollows:
a. Input :Anyeconomicresourcethatcreates,orhastheabilitytocreate,outputswhenone
ormoreprocessesareappliedtoit.Examplesincludelong-livedassets(includingintangible
assetsorrightstouselong-livedassets),intellectualproperty,theabilitytoobtainaccessto
necessarymaterialsorrights,andemployees.
b. Process :Anysystem,standard,protocol,convention,orrulethatwhenappliedtoaninputor
inputs,createsorhastheabilitytocreateoutputs.Examplesincludestrategicmanagement
processes,operationalprocesses,andresourcemanagementprocesses.Theseprocesses
typicallyaredocumented,butanorganizedworkforcehavingthenecessaryskillsand
experiencefollowingrulesandconventionsmayprovidethenecessaryprocessesthatare
capableofbeingappliedtoinputstocreateoutputs.(Accounting,billing,payroll,andother
administrativesystemstypicallyarenotprocessesusedtocreateoutputs.)
c. Output :Theresultofinputsandprocessesappliedtothoseinputsthatprovideorhavethe
abilitytoprovideareturnintheformofdividends,lowercosts,orothereconomicbenefits
directlytoinvestorsorotherowners,members,orparticipants.
A5.Tobecapableofbeingconductedandmanagedforthepurposesdefined,anintegratedsetof
activitiesandassetsrequirestwoessentialelements—inputsandprocessesappliedtothoseinputs,
whichtogetherareorwillbeusedtocreateoutputs.However,abusinessneednotincludeallofthe
inputsorprocessesthatthesellerusedinoperatingthatbusinessifmarketparticipantsarecapableof
acquiringthebusinessandcontinuingtoproduceoutputs,forexample,byintegratingthebusiness
withtheirowninputsandprocesses.FASBStatementNo.157,FairValueMeasurements ,describes
marketparticipantsas:
...buyersandsellersintheprincipal(ormostadvantageous)marketfortheassetorliability
thatare:
a. Independentofthereportingentity;thatis,theyarenotrelatedparties
b. Knowledgeable,havingareasonableunderstandingabouttheassetorliabilityand
thetransactionbasedonallavailableinformation,includinginformationthatmightbe
obtainedthroughduediligenceeffortsthatareusualandcustomary
c. Abletotransactfortheassetorliability
d. Willingtotransactfortheassetorliability;thatis,theyaremotivatedbutnotforcedor
otherwisecompelledtodoso.[Paragraph10;footnotereferenceomitted.]
A6.Thenatureoftheelementsofabusinessvariesbyindustryandbythestructureofanentity’s
operations(activities),includingtheentity’sstageofdevelopment.Establishedbusinessesoftenhave
manydifferenttypesofinputs,processes,andoutputs,whereasnewbusinessesoftenhavefew
inputsandprocessesandsometimesonlyasingleoutput(product).Nearlyallbusinessesalsohave
liabilities,butabusinessneednothaveliabilities.
A7.Anintegratedsetofactivitiesandassetsinthedevelopmentstagemightnothaveoutputs.Ifnot,
theacquirershouldconsiderotherfactorstodeterminewhetherthesetisabusiness.Thosefactors
include,butarenotlimitedto,whethertheset:
a. Hasbegunplannedprincipalactivities
b. Hasemployees,intellectualproperty,andotherinputsandprocessesthatcouldbeappliedto
thoseinputs
c. Ispursuingaplantoproduceoutputs
d. Willbeabletoobtainaccesstocustomersthatwillpurchasetheoutputs.
Notallofthosefactorsneedtobepresentforaparticularintegratedsetofactivitiesandassetsinthe
developmentstagetoqualifyasabusiness.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 25/28612
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
A8.Determiningwhetheraparticularsetofassetsandactivitiesisabusinessshouldbebasedon
whethertheintegratedsetiscapableofbeingconductedandmanagedasabusinessbyamarket
participant.Thus,inevaluatingwhetheraparticularsetisabusiness,itisnotrelevantwhetheraseller
operatedthesetasabusinessorwhethertheacquirerintendstooperatethesetasabusiness.
A9.Intheabsenceofevidencetothecontrary,aparticularsetofassetsandactivitiesinwhich
goodwillispresentshallbepresumedtobeabusiness.However,abusinessneednothavegoodwill.
1.11 WhileStatement141(R)providesusefulfactorstoconsider,itdoesnotprescribeadefinitive
checklistforentitiestofollowwhenassessingwhetheragroupofassetsconstitutesabusiness.
Therefore,professionaljudgmentshouldbeused.
Acquiring Net Assets or Equity Interests That Do Not Meet the Definition of aBusiness
1.12 Theaccountingrequirementsforanacquisitionofnetassetsorequityintereststhatisnot
deemedtobeabusinesscombination(see1.01)willdifferincertainrespectsfromthoseusedfor
businesscombinations.Thefollowingtableshighlightsuchdifferences.
Cost of the Acquisition
Business CombinationAcquisition of an Asset Group
Determined Not to Be a Business
Paragraph39ofStatement141(R)states:
Theconsiderationtransferredinabusinesscombinationshallbemeasuredatfairvalue,whichshallbecalculatedasthesumoftheacquisition-datefairvaluesoftheassetstransferredbytheacquirer,theliabilitiesincurredbytheacquirertoformerownersoftheacquiree,andtheequityinterestsissuedbytheacquirer.
(However,anyportionoftheacquirer’sshare-basedpaymentawardsexchangedforawardsheldbytheacquiree’semployeesthatisincludedinconsiderationtransferredinthebusinesscombinationshallbemeasuredinaccordancewithparagraph32ratherthanatfairvalue.)Examplesofpotentialformsofconsiderationincludecash,otherassets,abusinessorasubsidiaryoftheacquirer,contingentconsideration(paragraphs41and42),commonorpreferredequityinstruments,options,warrants,andmemberinterestsofmutualentities.
Thefairvalueoftheconsiderationtransferred excludesthe transaction coststheacquirerincurstoeffectabusinesscombination(acquisition-relatedcosts).
ParagraphD4ofStatement141(R)states,inpart:
Assetsarerecognizedbasedontheircosttotheacquiringentity,whichgenerallyincludes thetransaction costs of the asset acquisition,andnogainorlossisrecognizedunlessthefairvalueofnoncashassetsgivenasconsiderationdiffersfromtheassets’carryingamountsontheacquiringentity’sbooks.[Emphasisadded]
Theaccountingforcontingentconsiderationdoesnotfollowtheguidanceinparagraphs41and42ofStatement141(R).ContingentconsiderationismeasuredinaccordancewithotherapplicableGAAP,includingStatement5andStatement133,asappropriate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 26/28613
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Measuring the Assets Acquired and Liabilities Assumed
Business Combination
Acquisition of an Asset Group
Determined Not to Be a Business
Paragraph20ofStatement141(R)providesthatthe“acquirershallmeasuretheidentifiableassetsacquired,theliabilitiesassumed,andanynoncontrollinginterestintheacquireeattheiracquisition-datefairvalues.”
Paragraph34ofStatement141(R)indicatesthatgoodwillshouldberecordedasthesumofthe(1)considerationtransferred,(2)fairvalueofanynoncontrollinginterest,and(3)fairvalueoftheacquirer’spreviouslyheldinterestintheacquiree,ifany,lesstheacquisition-datefairvalueofthenetassetsacquired.
InaccordancewithStatement141(R),contractualcontingenciesarerecognizedatfairvalueasoftheacquisitiondate,whereasnoncontractualcontingenciesarerecognizedatfairvalueonlyif,asoftheacquisitiondate,itismorelikelythannotthatthecontingencymeetsthedefinitionofanassetorliabilityinaccordancewithConceptsStatement6.*
*OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwouldamendStatement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfairvalueasoftheacquisitiondateifsuchamountscanbereasonablydetermined.ItisexpectedthattheguidanceintheproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilitiesatfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.
ParagraphD6ofStatement141(R)states,inpart:
Acquiringassetsingroupsrequiresnotonly
ascertainingthecostoftheasset(ornetasset)groupbutalsoallocatingthatcosttotheindividualassets(orindividualassetsandliabilities)thatmakeupthegroup.ThecostofsuchagroupisdeterminedusingtheconceptsdescribedinparagraphsD4andD5.Thecostofagroupofassetsacquiredinanassetacquisitionisallocatedtotheindividualassetsacquiredorliabilitiesassumedbasedontheirrelativefairvaluesanddoesnotgiverisetogoodwill.
AcquiredcontingentassetsandassumedcontingentliabilitiesareaccountedforinaccordancewithStatement5,generallyresultingin(1)norecognitionofacquiredcontingentassetsand(2)recognitionofacontingentliabilityonlyifitisprobablethataliabilityhasbeenincurredandtheamountcanbereasonablyestimated.
1.13 Whenanentityallocatesthecostofanassetgroupnotdeterminedtobeabusiness,itcannot
recognizethedifferencebetweenthetotalcostandtheamountsassignedtotheassets(andliabilities)
asgoodwill.If,uponreviewoftheinitialmeasurementsofthetangibleandintangibleassetsacquired,
theentitydoesnoteliminatethatdifference,itmustallocateit.Ifthedifferenceisanexcessofcost,the
differenceshouldbeallocatedprorataonthebasisofrelativefairvaluestoincreasetheassetsacquired,
exceptforfinancialassets(otherthaninvestmentsaccountedforbytheequitymethod)andassets
subjecttofairvalueimpairmenttesting,suchasinventoriesandindefinite-livedintangibleassets,since
increasingthevalueofsuchassetswouldmostlikelyresultinanimpairmentasofthenexttestingdate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 27/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 28/28615
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
requiredinadditiontothesefinancialstatements.
1.15 Severalfactorsgovernwhetherfinancialstatementsfortheacquireearerequired,including
whethertheacquiredortobeacquiredassetsandliabilitiesmeettheSEC’sdefinitionofabusiness.SEC
RegulationS-X,Rule11-01(d),states:
Forpurposesofthisrule,thetermbusinessshouldbeevaluatedinlightofthefactsandcircumstances
involvedandwhetherthereissufficientcontinuityoftheacquiredentity’soperationspriortoand
afterthetransactionssothatdisclosureofpriorfinancialinformationismaterialtoanunderstanding
offutureoperations.Apresumptionexiststhataseparateentity,asubsidiary,oradivisionisa
business.However,alessercomponentofanentitymayalsoconstituteabusiness.Amongthe
factsandcircumstanceswhichshouldbeconsideredinevaluatingwhetheranacquisitionofalesser
componentofanentityconstitutesabusinessarethefollowing:
(1) Whetherthenatureoftherevenue-producingactivityofthecomponentwillremaingenerally
thesameasbeforethetransaction;or
(2) Whetheranyofthefollowingattributesremainwiththecomponentafterthetransaction:
(i) Physicalfacilities,
(ii) Employeebase,
(iii) Marketdistributionsystem,
(iv) Salesforce,
(v) Customerbase,
(vi) Operatingrights,
(vii)Productiontechniques,or
(viii)Tradenames.
1.16 BecausethedefinitionofabusinessinSECRegulationS-X,Rule11-01(d),differsfromthat
inStatement141(R),SECregistrantsmustundertakeaseparateanalysisunderRule11-01(d)when
evaluatingthereportingrequirementsofSECRegulationS-X.However,webelievethatthechangesto
thedefinitionofabusinessinStatement141(R)morecloselyaligntheFASB’sdefinitionwiththeSEC’s
thandidthepreviousguidance.
Variable Interest Entities
1.17 Statement141(R)amendstheinitialconsolidationguidanceforVIEsthatareaccountedforunder
Interpretation46(R).Inaddition,Statement141(R)amendsInterpretation46(R)tomakethedefinition
ofabusinessconsistentwiththatinStatement141(R)(see1.08).
1.18 Theprimarybeneficiaryisalwaystheacquirerwhentheacquisitionmethodofaccountingisused
(see2.02).RegardingdeterminationoftheVIE’sprimarybeneficiary,paragraph9ofStatement141(R)
states,inpart:
Thedeterminationofwhichparty,ifany,istheprimarybeneficiaryofavariableinterestentityshall
bemadeinaccordancewithFASBInterpretationNo.46(revisedDecember2003),Consolidation
ofVariableInterestEntities ,asamended,notbyapplyingeithertheguidanceinARB51orthatin
paragraphsA11–A15[ofStatement141(R)].
1.19 IfaVIEmeetsthedefinitionofabusiness(see1.08),theprimarybeneficiary’sinitialconsolidation
oftheVIEmustbeaccountedforasabusinesscombinationunderStatement141(R).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 29/28616
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
1.20 IfaVIEdoesnotmeetthedefinitionofabusiness,theprimarybeneficiary’sinitialmeasurement
oftheVIE’sassets(exceptgoodwill)andliabilitieswouldfollowthemeasurementguidanceofStatement
141(R).However,theprimarybeneficiaryisprohibitedfromrecognizinggoodwill,andwouldinstead
recognizealoss.Inaddition,paragraphs21(a)and21(b)ofInterpretation46(R),asamendedby
Statement141(R),state:
a. Theprimarybeneficiaryinitiallyshallmeasureandrecognizetheassets(exceptforgoodwill)
andliabilitiesofthevariableinterestentityinaccordancewithparagraphs12–33ofStatement
141(R).However,theprimarybeneficiaryshallinitiallymeasureassetsandliabilitiesthatithas
transferredtothatvariableinterestentityat,after,orshortlybeforethedatethattheentity
becametheprimarybeneficiaryatthesameamountsatwhichtheassetsandliabilitieswould
havebeenmeasurediftheyhadnotbeentransferred.Nogainorlossshallberecognized
becauseofsuchtransfers.
b. Theprimarybeneficiaryshallrecognizeagainorlossforthedifferencebetween(1)the
fairvalueofanyconsiderationpaid,thefairvalueofanynoncontrollinginterests,andthe
reportedamountofanypreviouslyheldinterestsand(2)thenetamountofthevariable
interestentity’sidentifiableassetsandliabilitiesrecognizedandmeasuredinaccordance
withStatement141(R).Nogoodwillshallberecognizedifthevariableinterestentityisnota
business.
1.21 ParagraphB21ofStatement141(R)explainstheFASB’srationalefortheamendmentsto
Interpretation46(R):
TheFASBconcludedthatvariableinterestentitiesthatarebusinessesshouldbeaffordedthesame
exceptionstofairvaluemeasurementandrecognitionthatareprovidedforassetsandliabilitiesof
acquiredbusinesses.TheFASBalsodecidedthatupontheinitialconsolidationofavariableinterest
entitythatisnotabusiness,theassets(otherthangoodwill),liabilities,andnoncontrollinginterests
shouldberecognizedandmeasuredinaccordancewiththerequirementsof[Statement141(R)],
ratherthanatfairvalueaspreviouslyrequiredbyInterpretation46(R).TheFASBreachedthatdecision
forthesamereasonsdescribedabove,thatis,ifthisStatementallowsanexceptiontofairvalue
measurementforaparticularassetorliability,itwouldbeinconsistenttorequirethesametypeofassetorliabilitytobemeasuredatfairvalue.Exceptforthatprovision,theFASBdidnotreconsider
therequirementsinInterpretation46(R)fortheinitialconsolidationofavariableinterestentitythatis
notabusiness.
Combinations Between Two or More Mutual Entities
1.22 BusinesscombinationsbetweentwoormoremutualentitiesarewithinthescopeofStatement
141(R).Paragraph3(m)ofStatement141(R)definesa“mutualentity”asfollows:
Amutualentity isanentityotherthananinvestor-ownedentitythatprovidesdividends,lowercosts,
orothereconomicbenefitsdirectlytoitsowners,members,orparticipants.Forexample,amutual
insurancecompany,acreditunion,andacooperativeentityareallmutualentities.
1.23 Sinceacombinationofmutualentitiesinvolvesanexchange,albeittypicallyofmembership
interests,Statement141(R)makesnoconcessiontoitsusualrequirementsregardingapplyingthe
acquisitionmethodofaccounting.Consequently,anacquirermustbeidentifiedinanycombinationof
mutualentitiesusingtheStatement141(R)criteria(seeSection 2).
1.24 MutualentitiesdidnotfollowtheguidanceinStatement141becauseitseffectivedatewas
deferreduntilinterpretiveguidancewasissuedfortransactionsinvolvingsuchentities.Seeadditional
Statement141(R)transitionguidanceformutualentitiesin14.39–14.45.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 30/28617
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Leveraged Buyout Transactions
1.25 Statement141(R)nullifiesIssue88-16,whichpreviouslyprovidedguidancetoentitiesthat
participatedinleveragebuyout(LBO)transactions.Issue88-16describedLBOtransactionsasfollows:
[T]heLBOshouldbeeffectedinasinglehighlyleveragedtransactionoraseriesofrelatedand
anticipatedhighlyleveragedtransactionsthatresultintheacquisitionbyNEWCOofallpreviouslyoutstandingcommonstockofOLDCO;thatis,therecanbenoremainingminorityinterest.[footnote
2omitted]ThisIssueexcludesLBOtransactionsinwhichexistingmajoritystockholdersutilizea
holdingcompanytoacquireallofthesharesofOLDCOnotpreviouslyowned.Stepacquisition
accountingcontinuestobeappropriateinsuchtransactions.
UpontheiradoptionofStatement141(R),entitiesmustnowconsidertheprovisionsofStatement141(R)
fortransactionsthatwouldhavebeenpreviouslyaccountedforunderIssue88-16.NotethatStatement
141(R)doesnotprovideguidanceoramendtheaccountingforrecapitalizationtransactions,including
leveragedrecapitalizations(see1.37).
Additional Scope Considerations
1.26 Businesscombinationscanbeachievedinavarietyofways.Itmaynotalwaysbeclearwhether
aspecifictransactionformiswithinthescopeofStatement141(R),isotherwiseaddressedinStatement
141(R),orisaddressedinotherauthoritativeliterature.Transactionsdiscussedelsewhereinthis
Roadmapareasfollows:
• Controlobtainedbutlessthan100percentofthebusinessisacquired(see1.27).
• Businesscombinationsachievedinstages(see1.28–1.30).
• Acquisitionofanoncontrollinginterestofasubsidiary(see1.31).
• Roll-uporput-togethertransactions(see1.32–1.33).
• Formationofajointventure(see1.34–1.36).• Recapitalizations(see1.37).
• Transactionsbetweenentitiesundercommoncontrol(see1.38–1.44).
• Combinationsbetweenentitieswithcommonownership(see1.45–1.46).
• Combinationsinvolvingnot-for-profitorganizations(see1.47–1.49).
Control Obtained but Less Than 100 Percent of the Business Is Acquired (i.e., PartialAcquisitions)
1.27 Statement141(R)appliestotransactionsoreventsinwhichanentityobtainscontrolofone
ormorebusinesses(see1.01).Inatransactionoreventinvolvingequityinterests,controlisgenerallyindicatedbyownershipbyoneentity,directlyorindirectly,ofover50percentoftheoutstandingvoting
sharesofanotherentity(see1.02–1.07).Accordingly,abusinesscombinationmayoccurwhenan
entityacquiresenough,butlessthan100percentof,votingsharestoobtaincontrol.Insuchcases,the
acquirerrecognizesinitsconsolidatedfinancialstatementstheassetsacquired,liabilitiesassumed,and
thenoncontrollinginterestat100percentoftheiracquisition-datefairvalues(withcertainexceptions
specifiedinStatement141(R)),regardlessofitslevelofcontrollinginterest.TheFASBhasindicatedthat
onceanacquirerobtainscontrolofanentity,itcontrols100percentofitsassets,notjustaportionof
them.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 31/28618
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 1-2
Control Obtained but Less Than 100 Percent of the Business Is Acquired
CompanyA,withnopriorownershipinterestinCompanyB,acquired80percentoftheequityinterestinCompanyBinabusinesscombinationfor$1,600.Thefairvalueofthenoncontrollinginterestis$400(assumingnocontrolpremium).ThefairvalueofallidentifiablenetassetsofCompanyBasoftheacquisitiondatewas$1,500.
Initsconsolidatedfinancialstatements,CompanyAwillreflecttheacquisitionoftheequityinterestinCompanyBasfollows:
Identifiablenetassets
Goodwill
Noncontrollinginterest(aseparatecomponentofshareholders’equity)
CompanyA’sinvestmentinB
$ 1,500
500
(400)
$ 1,600
FullfairvalueofCompanyB’snetassets
Calculatedas([$1,600+$400]–$1,500)
Fairvalue
Business Combinations Achieved in Stages
1.28 Abusinesscombinationachievedinstagesoccurswhencontrolofabusinessisobtainedafter
theacquireralreadyownsanoncontrollinginterestintheacquiree’sequity.Suchacquisitionsarecommonlycalledstepacquisitions.UnderStatement141(R),theacquirerappliesStatement141(R)’s
acquisitionmethodaccountingonthedatecontrolisobtained.Inaddition,theacquirer’spreexisting
interestintheacquireeisremeasuredtoitsfairvalue,witharesultinggainorlossrecordedinearnings
uponconsummationofthebusinesscombination.Inpriorperiods,thepreviouslyheldinterestmayhave
beenremeasuredtofairvaluewithchangesrecognizedinothercomprehensiveincome(e.g.,ifitwas
classifiedasavailableforsale).Insuchcases,theamountofothercomprehensiveincomerelatedtothe
previouslyheldinterestshouldbereclassifiedandincludedinthegainorloss.
1.29 ParagraphB384ofStatement141(R)explainstheFASB’srationalefortheaccountingtreatment:
TheBoardsconcludedthatachangefromholdinganoncontrollinginvestmentinanentityto
obtainingcontrolofthatentityisasignificantchangeinthenatureofandeconomiccircumstances
surroundingthatinvestment.Thatchangewarrantsachangeintheclassificationandmeasurement
ofthatinvestment.Onceitobtainscontrol,theacquirernolongeristheownerofanoncontrolling
investmentassetintheacquiree.Asinpresentpractice,theacquirerceasesitsaccountingforan
investmentassetandbeginsreportinginitsfinancialstatementstheunderlyingassets,liabilities,
andresultsofoperationsoftheacquiree.Ineffect,theacquirerexchangesitsstatusasanownerof
aninvestmentassetinanentityforacontrollingfinancialinterestinalloftheunderlyingassetsand
liabilitiesofthatentity(acquiree)andtherighttodirecthowtheacquireeanditsmanagementuse
thoseassetsinitsoperations.
1.30 See7.20–7.23regardingadditionalacquisitionsofnoncontrollinginterestsinasubsidiaryafter
controlisobtained.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 32/28619
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 1-3
Business Combination Achieved in Stages
ACpurchasesa35percentinterestinTargetCompany(TC)for$2,000onJanuary1,20X8(exampleignoresdeferredtaxaccountingimplications).ACusestheequitymethodtoaccountforits35percentinterestinTC.OnDecember31,20X9:
• ACpurchasesanadditional40percentofTCfor$4,000.
• ThefairvalueofTC’sidentifiablenetassetsis$8,000.
• Thefairvalueofthe25percentnoncontrollinginterestis$1,800.
• ThefairvalueofAC’s35percentofTCis$3,500.Thebookvalueofthatinterestis$2,500.
• TCconstitutesabusiness.
Theacquisitionofthe40percentinterestresultsinAC’sobtainingcontrolofTC.Therefore,thattransactionisaccountedforasabusinesscombination.
AC’sexisting35percentinterestinTCisremeasuredto$3,500,resultinginagainof$1,000($3,500lessthe$2,500bookvalue)intheincomestatement.
ACrecognizesTC’sidentifiablenetassetsatthefullamountoftheirfairvalues($8,000).ACalsorecognizesgoodwillof$1,300([$4,000+$1,800+$3,500]–$8,000)(see5.38–5.41).
IfACpurchases(ordisposesof)additionalinterestsinTCinthefuture(providedthatcontrolisretained),thoseinterests
wouldbeaccountedforasequitytransactions—noassetsorliabilitieswouldberemeasuredatfairvalue,andnogainsorlosseswouldberecognized(see7.20–7.23).
Acquisition of a Noncontrolling Interest of a Subsidiary
1.31 Onceanentityhascontrolofasubsidiary,itsacquisitionsofsomeorallofthenoncontrolling
interestsinthatsubsidiaryareaccountedforasequitytransactionsunderStatement160(see 7.20–
7.23).SuchtransactionsarenotconsideredbusinesscombinationswithinthescopeofStatement
141(R).
Roll-Up or Put-Together Transactions
1.32 Insometransactions,morethantwoentitiesagreetocombinetheirbusinessesbutnoneofthe
ownersofthecombiningentitiesindividuallyorasagroupretainorreceiveamajorityofthevoting
rightsofthecombinedentity.Suchtransactions,oftenreferredtoas“roll-up”or“put-together”
transactions,arewithinthescopeofStatement141(R).
1.33 TheFASB’sviewonroll-uporput-togethertransactionsisdiscussedinparagraphB27of
Statement141(R):
TheBoardsconcludedthatmostbusinesscombinations,bothtwo-partytransactionsandthose
involvingthreeormoreentities(multipartycombinations)areacquisitions.TheBoardsacknowledged
thatsomemultipartycombinations(inparticular,thosethatarecommonlyreferredtoasroll-up
orput-togethertransactions)mightnotbeacquisitions;however,theynotedthattheacquisitionmethodhasgenerallybeenusedtoaccountforthem.TheBoardsdecidednottochangethatpractice
atthistime.Consequently,thisStatementrequirestheacquisitionmethodtobeusedtoaccountfor
allbusinesscombinations,includingthosethatsomemightnotconsideracquisitions.
Formation of a Joint Venture
1.34 Paragraph2(a)ofStatement141(R)statesthattheformationofajointventureisnotwithinthe
Statement’sscope.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 33/28620
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
1.35 Paragraph3(d)ofOpinion18defines“corporatejointventure,”whichisalsoconsideredtobe
applicabletootherformsofjointventures(e.g.,partnerships),asfollows:
“Corporatejointventure”referstoacorporationownedandoperatedbyasmallgroupofbusinesses
(the“jointventurers”)asaseparateandspecificbusinessorprojectforthemutualbenefitof
themembersofthegroup.Agovernmentmayalsobeamemberofthegroup.Thepurposeof
acorporatejointventurefrequentlyistosharerisksandrewardsindevelopinganewmarket,productortechnology;tocombinecomplementarytechnologicalknowledge;ortopoolresources
indevelopingproductionorotherfacilities.Acorporatejointventurealsousuallyprovidesan
arrangementunderwhicheachjointventurermayparticipate,directlyorindirectly,intheoverall
managementofthejointventure.Jointventurersthushaveaninterestorrelationshipotherthanas
passiveinvestors.Anentitywhichisasubsidiaryofoneofthe“jointventurers”isnotacorporate
jointventure.Theownershipofacorporatejointventureseldomchanges,anditsstockisusuallynot
tradedpublicly.Aminoritypublicownership,however,doesnotprecludeacorporationfrombeinga
corporatejointventure.
1.36 EITFIssue98-4states:
TheSECObserverindicatedthattheSECstaffwouldobjecttoaconclusionthatdidnotresultinthe
applicationofOpinion16[Statement141(R)]totransactionsinwhichbusinessesarecontributedto
anewlyformed,jointlycontrolledentityifthatentityisnotajointventure.TheSECstaffalsowould
objecttoaconclusionthatjointcontrolistheonlydefiningcharacteristicofajointventure.
Recapitalizations
1.37 Inarecapitalizationtransaction,aseriesofstepsisgenerallyundertakeninvolvingtheequity
ofanentity,whichmayresultintheestablishmentofanewcontrollingshareholder.Inaleveraged
recapitalization,newdebtisissuedwiththeproceedsusedtoredeemsharesfromexistingshareholders
aspartofaseriesofstepsthatalsomayresultintheestablishmentofanewcontrollingshareholder.
Questionsareoftenraisedaboutwhether,inrecapitalizationtransactionsthatresultinanewcontrolling
shareholderoftherecapitalizedentity,theaccountingbasisofthenetassetsoftherecapitalizedentityshouldbeadjusted.Statement141(R)doesnotprovidespecificguidanceinthisarea.Consultationwith
specialistsisrecommendedwhenthepotentialaccountingeffectsofrecapitalizationtransactionsare
evaluated.
Transactions Between Entities Under Common Control
1.38 Paragraph2(c)ofStatement141(R)statesthatacombinationbetweenentitiesorbusinesses
undercommoncontrolisnotwithinitsscope.ParagraphD8ofStatement141(R)providesthefollowing
examplesofthosetypesoftransactions:
a. Anentitychartersanewlyformedentityandthentransferssomeorallofitsnetassetstothat
newlycharteredentity.
b. Aparenttransfersthenetassetsofawhollyownedsubsidiaryintotheparentandliquidates
thesubsidiary.Thattransactionisachangeinlegalorganizationbutnochangeinthe
reportingentity.
c. Aparenttransfersitscontrollinginterestinseveralpartiallyownedsubsidiariestoanew
whollyownedsubsidiary.Thatalsoisachangeinlegalorganizationbutnottothereporting
entity.
d. Aparentexchangesitsownershipinterestsorthenetassetsofawhollyownedsubsidiaryfor
additionalsharesissuedbytheparent’sless-than-whollyownedsubsidiary,therebyincreasing
theparent’spercentageofownershipintheless-than-wholly-ownedsubsidiarybutleavingall
oftheexistingnoncontrollinginterestoutstanding.(FAS141,¶D11)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 34/28621
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
e. Aparent’sless-than-wholly-ownedsubsidiaryissuesitssharesinexchangeforsharesof
anothersubsidiarypreviouslyownedbythesameparent,andthenoncontrollingshareholders
arenotpartytotheexchange.Thatisnotabusinesscombinationfromtheperspectiveofthe
parent.(FTB85-5,¶7)
f. Alimitedliabilitycompanyisformedbycombiningentitiesundercommoncontrol.(Practice
Bulletin14,¶.05)
1.39 Statement141(R),however,doesnotdefine“commoncontrol.”InIssue02-5,theTaskForce
discussedhowtodefinecommoncontrol,butdidnotreachaconsensus.However,theSECobserver
statedthatcommoncontrolexistsbetween(oramong)separateentitiesinthefollowingsituations:
a. Anindividualorenterpriseholdsmorethan50percentofthevotingownershipinterestof
eachentity.
b. Immediatefamilymembersholdmorethan50percentofthevotingownershipinterestof
eachentity(withnoevidencethatthosefamilymemberswillvotetheirsharesinanyway
otherthaninconcert).
(1) Immediatefamilymembersincludeamarriedcoupleandtheirchildren,butnotthe
marriedcouple’sgrandchildren.(2) Entitiesmightbeownedinvaryingcombinationsamonglivingsiblingsandtheir
children.Thosesituationswouldrequirecarefulconsiderationregardingthesubstance
oftheownershipandvotingrelationships.
c. Agroupofshareholdersholdsmorethan50percentofthevotingownershipinterestofeach
entity,andcontemporaneouswrittenevidenceofanagreementtovoteamajorityofthe
entities’sharesinconcertexists.
1.40 Becauseofalackofguidance,theSEC’scommentsarewidelyappliedbypublicandprivate
companies.However,theremaybeothercircumstancesinwhichcommoncontrolexists.Therefore,
professionaljudgmentshouldbeused.
1.41 WhilenotspecificallywithinthescopeofStatement141(R),themeasurementofassetsand
liabilitiestransferredinacombinationbetweenentitiesundercommoncontrolisdiscussedinparagraph
D9ofStatement141(R):
Whenaccountingforatransferofassetsorexchangeofsharesbetweenentitiesundercommon
control,theentitythatreceivesthenetassetsortheequityinterestsshouldinitiallyrecognizethe
assetsandliabilitiestransferredattheircarrying amounts intheaccountsofthetransferringentity
atthedateoftransfer.(FAS141,¶D12)Ifthecarryingamountsoftheassetsandliabilitiestransferred
differfromthehistoricalcostoftheparentoftheentitiesundercommoncontrol,forexample,
becausepush-downaccountinghadnotbeenapplied,thenthefinancialstatementsofthereceiving
entityshouldreflectthetransferredassetsandliabilitiesatthehistoricalcostoftheparentofthe
entitiesundercommoncontrol.[Emphasisadded]
1.42 SeeparagraphsD10–D14ofStatement141(R)foradditionalproceduralguidanceoncommon
controltransactions.
1.43 Transactionsbetweenentitiesundercommoncontrolareaccountedforinamannersimilar
tothepooling-of-interestmethod.However,paragraphD13ofStatement141(R)statesthatin
thedeterminationoftheperiodforwhichcombinedfinancialinformationshouldbepresented,
“comparativeinformationinprioryearsshouldonlybeadjustedforperiodsduringwhichtheentities
wereundercommoncontrol.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 35/28622
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
1.44 Regardingpreparationofthefinancialstatementsofthethen-combinedentitiesforperiods
beforecommoncontrol,weunderstandthattheSECstafffurtherbelievesthattheentitytobe
presentedasthehistorical(predecessor)entityisgenerallythecombiningentityfirstownedbythe
controllingshareholder,regardlessofthelegalformofthecommoncontrolcombination.Presentation
ofthehistorical(predecessor)entityforperiodsbeforecommoncontrolasotherthanthefirstentity
ownedbythecontrollingshareholderisexpectedtobeinfrequent,suchaswhenthefirstentityownedbythecontrollingshareholderisanonoperatingshellcorporation.
Example 1-4
Transaction Between Entities Under Common Control
InvestorAowns100percentofCompanyBandCompanyC.InvestorAacquiredCompanyBonJanuary1,20X9,andCompanyConJanuary1,20X4.InvestorAappliedpush-downaccountingtoCompanyBandCompanyCatthetimeoftheiracquisition.OnJanuary1,20Y0,InvestorAelectstocombineCompanyBandCompanyC.ThisisaccomplishedbyCompanyBissuingadditionalsharesinexchangefortheoutstandingsharesofCompanyC.BothCompanyBandCompanyCareoperatingbusinesses.
CompanyCispresentedasthehistoricalreportingentityuptothedateofcommoncontrolbyInvestorA(January1,20X9)whenpreparingthefinancialstatementsforthecombinedCompanyB/CompanyCentity.Despitethelegalformof
thecombination,CompanyCispresentedasthehistoricalreportingentitybecauseitwasthefirstentityofthecombiningentitiescontrolledbyInvestorA.AfterJanuary1,20X9,combinedfinancialinformationispresented.
Combinations Between Entities With Common Ownership
1.45 Insomeinstances,acombinationmayoccurbetweentwoormoreentitieswithahighdegree
ofcommonownership,butthecombiningentitiesarenotundercommoncontrol.Foratransaction
betweenentitieswithahighdegreeofcommonownershiptobeaccountedforinamannerconsistent
withacommoncontroltransaction(see1.41–1.44),identicalownersoftheentitiesbeforethe
transactionwithownershipinverysimilarpercentageswouldmostlikelyberequiredtodemonstrate
thatthetransactionlackssubstance.Suchfactpatternsareexpectedtoberare.
1.46 Theconclusionin1.45hashistoricallybeensupportedbytheSEC’sanalogytoparagraph6of
TechnicalBulletin85-5.WhileTechnicalBulletin85-5wasnullifiedbyStatement141(R),webelievethat
analogizingtothisguidanceremainsappropriate.Paragraph6ofTechnicalBulletin85-5states,inpart:
[I]ftheexchangelackssubstance,itisnotapurchaseeventandshouldbeaccountedforbasedon
existingcarryingamounts.Thatis,iftheminorityinterestdoesnotchangeandifinsubstancethe
onlyassetsofthecombinedentityaftertheexchangearethoseofthepartiallyownedsubsidiaryprior
totheexchange,achangeinownershiphasnottakenplace,andtheexchangeshouldbeaccounted
forbasedonthecarryingamountsofthepartiallyownedsubsidiary’sassetsandliabilities.
Example 1-5
Transaction Between Two Entities With Common Ownership
Beforebeingcombined,CompanyBandCompanyCwereownedasfollows:
Company B Company C
Owner1 80% 5%
Owner2 10 10
Owner3 5 20
Owner4 5 65
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 36/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 37/28624
Section 2 — Identifying the Acquirer
2.01 Paragraph8ofStatement141(R)states,“Foreachbusinesscombination,oneofthecombining
entitiesshallbeidentifiedastheacquirer.”
2.02 Paragraph3(b)ofStatement141(R)definesthe“acquirer”asfollows:
Theacquirer istheentitythatobtainscontroloftheacquiree.However,inabusinesscombinationin
whichavariableinterestentityisacquired,theprimarybeneficiaryofthatentityalwaysistheacquirer.
2.03 ARB51,asamendedbyStatement160,indicatesthatoneentitycontrolsanotherifitholds
a“controllingfinancialinterest”anditprescribescriteriafordeterminingwhichentityhasobtained
control.If,uponevaluatingthesecriteria,thecombiningentitiesareunabletodeterminewhichentity
hasobtainedcontrol,theymayconsidertheadditionalfactorsinparagraphsA11–A15ofStatement
141(R).Eachofthesefactorsisdescribedinmoredetailbelow(see2.06–2.22).
2.04 InadditiontoevaluatingthecriteriainARB51,asamendedbyStatement160,anacquirermust
determinewhethertheacquireeisavariableinterestentity(VIE)inaccordancewithInterpretation46(R).
NotethatnotallVIEswouldmeetStatement141(R)’sdefinitionofabusiness.Therefore,theinitial
consolidationofcertainVIEsisoutsidethescopeofStatement141(R).(See1.17–1.21foradditional
scopeconsiderationsregardingVIEs.)
2.05 Theacquirerisdeterminedasoftheacquisitiondate.Anentitythatmadeaninitialassessment
oftheacquirerbeforetheacquisitiondatemustconsiderallpertinentfactsandcircumstancesasof
theacquisitiondatewhenmakingthefinaldetermination.Changesinfactsandcircumstancesafterthe
acquisitiondatedonotaffectthedeterminationoftheacquirer.
Business Combinations Effected Primarily by Transferring Cash or Other Assets orby Incurring Liabilities
2.06 ParagraphA11ofStatement141(R)states,“Inabusinesscombinationeffectedprimarilyby
transferringcashorotherassetsorbyincurringliabilities,theacquirerusuallyistheentitythattransfers
thecashorotherassetsorincurstheliabilities.”
Business Combinations Effected Primarily by Exchanging Equity Interests
2.07 ParagraphA12ofStatement141(R)states,inpart:
Inabusinesscombinationeffectedprimarilybyexchangingequityinterests,theacquirerusuallyis
theentitythatissuesitsequityinterests.However,insomebusinesscombinations,commonlycalled
reverseacquisitions ,theissuingentityistheacquiree.[See2.23.]
2.08 ParagraphA12ofStatement141(R)furtherindicates:
Otherpertinentfactsandcircumstancesalsoshallbeconsideredinidentifyingtheacquirerina
businesscombinationeffectedbyexchangingequityinterests,including:
a. Therelativevotingrightsinthecombinedentityafterthebusinesscombination....[See
2.10–2.11.]
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 38/28625
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
b. Theexistenceofalargeminorityvotinginterestinthecombinedentityifnootherowneror
organizedgroupofownershasasignificantvotinginterest....[See2.12.]
c. Thecompositionofthegoverningbodyofthecombinedentity....[See2.13–2.15.]
d. Thecompositionoftheseniormanagementofthecombinedentity....[See2.16–2.17.]
e. Thetermsoftheexchangeofequityinterests....[See2.18.]
2.09 Statement141(R)providesnohierarchicalguidanceondeterminingtheacquirerinabusiness
combinationeffectedthroughanexchangeofequityinterests.Allpertinentfactsandcircumstances
shouldbeconsidered,particularlythoseinparagraphsA12(a)–A12(e).(See2.10–2.18.)Additionalfacts
andcircumstancesthatmaybepertinentincludewhichofthecombiningentitiesinitiatedthebusiness
combinationaswellastherelativesizeofthecombiningentities.(See2.19.)
Consideration of the Relative Voting Rights in the Combined Entity After theBusiness Combination
2.10 ParagraphA12(a)ofStatement141(R)states,inpart:
Theacquirerusuallyisthecombiningentitywhoseownersasagroupretainorreceivethelargest
portionofthevotingrightsinthecombinedentity.Indeterminingwhichgroupofownersretainsor
receivesthelargestportionofthevotingrights,anentityshallconsidertheexistenceofanyunusual
orspecialvotingarrangementsandoptions,warrants,orconvertiblesecurities.
2.11 Therelativevotingrightsinthecombinedentityshouldbeconsideredasoftheacquisition
dateonthebasisofallsecuritieswithvotingrights,notjustvotingcommonstock.Anyunusualor
specialvotingarrangementsinplaceasoftheacquisitiondatemustalsobeconsidered,becausesuch
arrangementsmayservetoaltertheoutstandingvotingrightsoftheholdersofvotingsecurities.In
addition,whilesomeoptions,warrants,orconvertiblesecuritiesofthelegalacquireemaybeexchanged
forvotingsecuritiesasoftheacquisitiondate,otheroptions,warrants,orconvertiblesecuritiesofthe
legalacquiree,aswellassimilarsecuritiesofthelegalacquirer,mayremainoutstandingasof
theacquisitiondate.Totheextentthatoptions,warrants,orconvertiblesecuritiesoutstandingasofthe
acquisitiondatecouldresultinthesubsequentissuanceofvotingsecuritiesinthecombinedentity,the
specificfactsandcircumstancesassociatedwithsuchoptions,warrants,orconvertiblesecuritiesmustbe
considered.
Example 2-1
Relative Voting Rights of the Combined Entity
Anonvotingsecuritythatisheldbyalargeminorityowner,thatisoutstandingasoftheacquisitiondate,andthatcanbeimmediatelyconvertedintoavotingsecuritymaybedeterminedtobeapertinentfactorcircumstance.However,optionswithvaryingtermsthatareheldbyemployeesofbothcombiningentitiesandthatwillremainoutstandinginthe
combinedentitymaynotbeapertinentfactorcircumstance.
Consideration of the Existence of a Large Minority Voting Interest in the CombinedEntity If No Other Owner or Organized Group of Owners Has a Significant VotingInterest
2.12 ParagraphA12(b)ofStatement141(R)states,inpart:
Theacquirerusuallyisthecombiningentitywhosesingleownerororganizedgroupofownersholds
thelargestminorityvotinginterestinthecombinedentity.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 39/28626
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Consideration of the Composition of the Governing Body of the Combined Entity
2.13 ParagraphA12(c)ofStatement141(R)states,inpart:
Theacquirerusuallyisthecombiningentitywhoseownershavetheabilitytoelectorappointorto
removeamajorityofthemembersofthegoverningbodyofthecombinedentity.
2.14 Considerationshouldbegivento(1)theinitialcompositionofthegoverningbodyofthe
combinedentityand(2)theprocessinplaceasoftheacquisitiondategoverninghowsubsequent
membersofthegoverningbodyaretobeelectedorappointedandwhenthenextelectionor
appointmentmayoccur.Aplan,asoftheacquisitiondate,toaltertheinitialcompositionofthe
governingbodyoraprocessinplaceasoftheacquisitiondatethatcouldresultinanalterationofthe
governingbodyshouldbeevaluatedtodeterminewhethersuchaplanorprocessisapertinentfactor
circumstance.
2.15 Atthe2007AICPANationalConferenceonCurrentSECandPCAOBDevelopments,anSECstaff
member(EricC.West),inpreparedremarks,addressedthestaff’sviewonevaluatingtemporarycontrol
ofthecombinedentity’sgoverningbody.Mr.Weststated,inpart:
Thegoalistodeterminewhethercontroloftheboardbyanyshareholdergroupistemporaryand,
therefore,controlmaynotbesubstantive.Thisisparticularlyimportantinsituationswherethe
boardofdirectorsofthecombinedentityisdominatedbymembersthatrepresenttheminority
shareholders’interests.Inthissituationmanyhaveassertedthatthe[SEC]staffemploysabrightline.
Somebelievethatwewon’tacceptaconclusionthattheminorityshareholdercontrolstheboardif
itsmemberscontrolforaperiodoflessthantwoyears,threeyearsandsometimesevenfiveyears.
I’dliketotellyouwehavenobrightlineandsimplybelievethatcontroloftheboardshouldbe
substantive.I’dalsoliketoemphasizethatweunderstandthatjudgmentmayberequiredinapplying
paragraph17c[supersededbyparagraphA12(c)ofStatement141(R)].
Consideration of the Composition of the Senior Management of the CombinedEntity
2.16 ParagraphA12(d)ofStatement141(R)states,inpart:
Theacquirerusuallyisthecombiningentitywhoseformermanagementdominatesthemanagement
ofthecombinedentity.
2.17 Seniormanagementwouldgenerallyinclude,butnotbelimitedto,thechiefexecutiveofficer,
thechieffinancialofficer,andthechiefoperatingofficer.Considerationshouldbegivento(1)theinitial
compositionoftheseniormanagementofthecombinedentityand(2)anyplanorintentionasofthe
acquisitiondatetomakesubsequentchangesintheinitialcompositionoftheseniormanagementafter
theacquisitiondate.Aplanorintentionasoftheacquisitiondatetoaltertheinitialcompositionof
seniormanagement,suchasaplannedretirementwithadeterminedsuccessor,shouldbeevaluated
todeterminewhethersuchaplanorintentionisapertinentfactorcircumstance.Thepertinenceof
aplannedorintendedchangetotheinitialcompositionoftheseniormanagementofthecombined
entitywillmostlikelybeinfluencedbyboththespecificseniormanagementposition(s)affectedandthe
expectedtimingofthechange(s).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 40/28627
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Consideration of the Terms of the Exchange of Equity Securities
2.18 ParagraphA12(e)ofStatement141(R)states,inpart:
Theacquirerusuallyisthecombiningentitythatpaysapremiumovertheprecombinationfairvalueof
theequityinterestsoftheothercombiningentityorentities.
Consideration of the Relative Size of the Combining Entities
2.19 ParagraphA13ofStatement141(R)states,inpart:
Theacquirerusuallyisthecombiningentitywhoserelativesize(measuredin,forexample,assets,
revenues,orearnings),issignificantlylargerthanthatoftheothercombiningentityorentities.
Business Combinations Involving More Than Two Entities
2.20 ParagraphA14ofStatement141(R)states,inpart:
Inabusinesscombinationinvolvingmorethantwoentities,determiningtheacquirershallincludea
considerationof,amongotherthings,whichofthecombiningentitiesinitiatedthecombination,as
wellastherelativesizeofthecombiningentities(paragraphA13).[See2.19.]
Use of a New Entity to Effect a Business Combination
2.21 ParagraphA15ofStatement141(R)states,inpart:
Anewentityformedtoeffectabusinesscombinationisnotnecessarilytheacquirer.Ifanewentityis
formedtoissueequityintereststoeffectabusinesscombination,oneofthecombiningentitiesthat
existedbeforethebusinesscombinationshallbeidentifiedastheacquirerbyapplyingtheguidancein
paragraphsA10–A14.[See2.03–2.20.]Incontrast,anewentitythattransferscashorotherassetsor
incursliabilitiesasconsiderationmaybetheacquirer.
Example 2-2
NewCo Issues Equity Interests to Combining Entities
CompanyAandCompanyBagreetocombineinatransactiontobeaccountedforasabusinesscombination.Toeffectthetransaction,anewentity(“NewCo”)willbeformedtoissueequityintereststotheshareholdersofbothAandB.Inthistransaction,eitherAorBwillbedeterminedtobetheacquiringentityonthebasisoftheavailableevidence.TheguidanceinparagraphsA12–A15ofStatement141(R)(see 2.07–2.20)shouldbeusedinidentifyingtheacquirer.
2.22 Paragraph19ofStatement141prohibitedanewentity(oftenreferredtoasa“NewCo”)from
beingidentifiedasanacquirerinabusinesscombination.However,incertainsituations,theSECstaff
mayhaverequiredaNewCotobedeemedtheacquirer.InanAugust16,2001,correspondencetothe
FASBstaff,thenSECChiefAccountantLynnE.Turnerdiscussesonesuchsituation:
Thestaffcontinuestobelievehowever,thatwhenaNewcohasanyprecombinationactivitiesthatare
deemedtobesignificant,theNewcocannotbeviewedasanewcorporationsolelyformedtoissue
stocktoeffectabusinesscombinationandthereforecouldbedeemedtheaccountingacquirer.
UnderStatement141(R),aNewCocanbeconsideredtheacquiringentityincertainsituations.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 41/28628
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 2-3
NewCo as the Acquirer
CompanyC,aninvestmentcompany,andseveralunrelatedinvestorsformanewentity(“NewCo”)bycontributingcashinexchangeforequityinterestsofNewCo.NewCosubsequentlysecuresdebtfinancingfromathird-partybank.Usingthecashcontributionsanddebtfinancing,NewConegotiatesandacquiresacontrollinginterestinanunrelatedcompany,CompanyD.NewCosurvivestheacquisitionandbecomesthenewparenttoD.Onthebasisoftheavailableevidence,thepartiestothetransactionmightdeterminethatNewCoisasubstantivecompanyratherthananewcorporationformedsolelytoissueequityinterests.Ifso,NewCowouldbedeemedtheacquirer.
Reverse Acquisitions
2.23 UnderStatement141(R),areverseacquisitionisabusinesscombinationinwhichtheentitythat
issuesitsstockorgivesotherconsiderationtoeffectthetransactionisdeterminedtobetheaccounting
acquiree(alsocalledthelegalacquirerorlegalparent),whiletheentityreceivingthestockorother
considerationistheaccountingacquirer(alsocalledthelegalacquireeorlegalsubsidiary).Statement
141(R)’sguidanceonreverseacquisitionsappliesonlywhentheaccountingacquireemeetsthe
definitionofabusiness.(See1.08.)Otherwise,thetransactionisnotconsideredabusinesscombination
andwouldbeaccountedforaseitheranassetacquisitionoracapitaltransaction.
Example 2-4
Reverse Acquisition
CompanyA,apublicentitywithaDecember31year-end,has1millioncommonsharesoutstandingasofJune30,20X9.CompanyAhassubstantiveoperationsandisnotconsideredanonoperatingpublicshellcorporation.(See 2.32.)OnJuly1,20X9,inatransactionaccountedforasabusinesscombination,Aissues4millionofitsnewlyregisteredcommonsharestoCompanyB,aprivateentity,inexchangeforallofB’s2millionoutstandingcommonshares(anexchangerateof2:1).Afterthetransaction,BcontrolsthevotingrightsofAthroughits80percentownershipinterest(4millioncommonsharesheld÷5milliontotalcommonsharesoutstanding)aswellasitsabilitytoelectamajorityoftheboardmembersofthecombinedentity.AlthoughAissuedcommonsharestoeffectthebusinesscombination,Bwouldbeconsideredtheaccountingacquirer(legalacquiree)underStatement141(R),providedthattherearenootherexistingpertinentfacts
andcircumstancestothecontraryafterconsiderationofthefactorsinparagraphsA12–A14ofStatement141(R).(See2.07–2.20.)
Calculating Consideration Transferred
2.24 Inareverseacquisition,theaccountingacquirer(legalacquiree)usuallyissuesnoconsideration
fortheacquiree.However,toapplyacquisitionmethodaccounting,theaccountingacquirermuststill
calculateahypotheticalamountofconsiderationitwouldhavetransferredtoacquiretheaccounting
acquiree(legalacquirer)toobtainthesamepercentageofownershipinterestinthecombinedentity
thatresultsfromthetransaction.ParagraphA109ofStatement141(R)states,inpart:
Accordingly,theacquisition-datefairvalueoftheconsiderationtransferredbytheaccounting
acquirerforitsinterestintheaccountingacquireeisbasedonthenumberofequityintereststhe
legalsubsidiary[legalacquiree]wouldhavehadtoissuetogivetheownersofthelegalparent[legal
acquirer]thesamepercentageequityinterestinthecombinedentitythatresultsfromthereverse
acquisition....Thefairvalueofthenumberofequityinterestscalculatedinthatwaycanbeusedas
thefairvalueofconsiderationtransferredinexchangefortheacquiree.
2.25 Insomereverseacquisitions,theaccountingacquireemayissuecashorotherconsideration,as
wellasstock,toacquirethesharesoftheaccountingacquirer.Thepaymentofcashtotheshareholders
oftheaccountingacquirershouldbeconsideredadistributionofcapitaland,accordingly,areductionof
shareholders’equityoftheaccountingacquirer.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 42/28629
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Measuring Goodwill
2.26 ParagraphA121ofStatement141(R)indicatesthatgoodwillinareverseacquisitionismeasured
astheexcessofthefairvalueoftheconsiderationeffectivelytransferredbytheaccountingacquirerover
thefairvalueoftheaccountingacquiree’sidentifiablenetassets.
Noncontrolling Interests2.27 Insomereverseacquisitions,certainshareholdersoftheaccountingacquirer(legalacquiree)may
notexchangetheirinterestsforinterestsintheaccountingacquiree(legalacquirer),therebycreating
noncontrollinginterestsinthecombinedentity.(Forinformationaboutaccountingfornoncontrolling
interestsinareverseacquisition,see7.10.)
Measurement Basis of the Combined Entity’s Financial Statements
2.28 ParagraphA110ofStatement141(R)states:
Consolidatedfinancialstatementspreparedfollowingareverseacquisitionareissuedunderthename
ofthelegalparent(accountingacquiree)butdescribedinthenotesasacontinuationofthefinancial
statementsofthelegalsubsidiary(accountingacquirer),withoneadjustment,whichistoretroactivelyadjusttheaccountingacquirer’slegalcapitaltoreflectthelegalcapitaloftheaccountingacquiree.
Thatadjustmentisrequiredtoreflectthecapitalofthelegalparent(theaccountingacquiree).
Comparativeinformationpresentedinthoseconsolidatedfinancialstatementsalsoisretroactively
adjustedtoreflectthelegalcapitalofthelegalparent(accountingacquiree).
2.29 Thefollowingtablesummarizesthemeasurementbasisforthecombinedentity’sfinancial
statementsafterareverseacquisition:
Statement of Financial Position Balance(s) Measurement Basis
Assetsandliabilities Sumof(1)theaccountingacquiree’sassetsandliabilities,measuredbyusingtheacquisitionmethodunderStatement
141(R),and(2)theaccountingacquirer’sassetsandliabilities,measuredbyusingtheprecombinationcarryingvalues.
Retainedearningsandotherequitybalances Theaccountingacquirer’sprecombinationcarryingamount,proportionatelyreducedforanynoncontrollinginterests.
Issuedequity Sumof(1)theaccountingacquirer’sissuedequityimmediatelybeforethebusinesscombination,proportionatelyreducedforanynoncontrollinginterests,and(2)thefairvalueoftheaccountingacquiree(i.e.,thehypotheticalconsiderationtransferred).Theequitystructure(i.e.,thenumberandtypeofequityinterestsissued)reflectstheequitystructureoftheaccountingacquiree.
Noncontrollinginterest Thenoncontrollinginterest’sproportionateshareoftheaccountingacquirer’sprecombinationretainedearnings,issuedequity,andotherequitybalances.(See7.10.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 43/28630
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Earnings per Share
2.30 ParagraphA115ofStatement141(R)statesthattheweighted-averagenumberofcommon
sharesoutstanding,usedwhencalculatingearningspershareduringtheperiodinwhichthereverse
acquisitionoccurs,shouldbecalculatedasthesumofthefollowingtwoitems:
a. Thenumberofcommonsharesoutstandingfromthebeginningofthatperiodtotheacquisitiondateshallbecomputedonthebasisoftheweighted-averagenumberofcommon
sharesofthelegalacquiree(accountingacquirer)outstandingduringtheperiodmultipliedby
theexchangeratioestablishedinthemergeragreement.
b. Thenumberofcommonsharesoutstandingfromtheacquisitiondatetotheendofthat
periodshallbetheactualnumberofcommonsharesofthelegalacquirer(theaccounting
acquiree)outstandingduringthatperiod.
2.31 Forpriorperiods,paragraphA116ofStatement141(R)requiresthatcomparativeearnings-per-
shareamountsbecalculatedbydividing:
a. Theincomeofthelegalacquireeattributabletocommonshareholdersineachofthose
periods,byb. Thelegalacquiree’shistoricalweightedaveragenumberofcommonsharesoutstanding
multipliedbytheexchangeratioestablishedintheacquisitionagreement.
Mergers of a Private Operating Company Into a Nonoperating Public ShellCorporation
2.32 Inareverseacquisition(see2.23),thelegalacquirergenerallycontinuesinexistenceasthe
legalentitywhosesharesrepresenttheoutstandingcommonstockofthecombinedcompany.Insome
instances,thelegalacquirerisapubliccompanywhosesharesarelistedonanexchange.Byeffecting
areverseacquisition,theaccountingacquirer(ifaprivateentity)cangainaccesstothepublicmarket
withoutgoingthroughaninitialpublicoffering.TheSEC’sDivisionofCorporationFinance,FrequentlyRequestedAccountingandFinancialReportingInterpretationsandGuidance,datedMarch31,2001,
states:
Themergerofaprivateoperatingcompanyintoanon-operatingpublicshellcorporationwith
nominalnetassetstypicallyresultsintheownersandmanagementoftheprivatecompany
havingactualoreffectiveoperatingcontrolofthecombinedcompanyafterthetransaction,with
shareholdersoftheformerpublicshellcontinuingonlyaspassiveinvestors.Thesetransactionsare
consideredbythestafftobecapitaltransactionsinsubstance,ratherthanbusinesscombinations.
Thatis,thetransactionisequivalenttotheissuanceofstockbytheprivatecompanyforthenet
monetaryassetsoftheshellcorporation,accompaniedbyarecapitalization.Theaccountingis
identicaltothatresultingfromareverseacquisition,exceptthatnogoodwillorotherintangible
shouldberecorded.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 44/28631
Section 3 — Recognizing and MeasuringAssets Acquired and Liabilities Assumed —General
Date of Acquisition
3.01 Transferofcontrolistheconceptusedtodeterminetheacquisitiondate.Controlisgenerally
obtainedonthedateonwhichanacquirerlegallytransfersconsiderationtoasellerandacquires
theassetsandassumestheliabilitiesoftheacquiree(i.e.,theclosingdate).However,entitiesshould
considerallrelevantdetailsassociatedwithabusinesscombinationtodeterminewhencontrolhasbeen
obtained.Suchconsiderationsmayincludethefollowing:
• Regulatoryorshareholderapproval—Certainbusinesscombinationsrequireregulatory
orshareholderapproval(shareholderapprovalmaybesoughtbyeithertheacquirerorthe
acquiree).Itisgenerallypresumedthateffectivecontrolcannotpasstotheacquireruntilsuch
requiredapprovalisobtained.
• Acquisitiondatedifferentfromtheclosingdate—Anacquirermayobtaincontroloveran
acquireeonadatethateitherprecedesorfollowstheclosingdate.Thismayoccurwhen
controltransfersviaawrittenagreementthatmaynotcorrespondtotheclosingdate.Although
suchsituationsareexpectedtooccurrarely,allrelevantdetailsabouthowtheacquisitiondate
wasdeterminedmustbeconsidered.
3.02 Determiningtheacquisitiondateisimportant,becauseonthisdate:
• Allformsofconsiderationaremeasured,includingcontingentconsiderationandtheacquirer’s
equitysecuritiesissuedtotheseller.(SeeSection 6.)
• Theassetsacquired,liabilitiesassumed,andanynoncontrollinginterestsaremeasured.
• Theacquirerbeginsconsolidatingtheacquiredentity.
3.03 Statement141(R)eliminatesthe“convenience”exceptioninparagraph48ofStatement141.
Thatexceptionallowedanacquirer,incertaincircumstances,todesignateaneffectivedatethatwas
otherthantheacquisitiondateofthebusinesscombination(e.g.,theendofanaccountingperiod
betweenthedatesabusinesscombinationisinitiatedandconsummated).
Recognition and Measurement Principles
Recognition Principle3.04 Paragraph12ofStatement141(R)specifiesanoverallrecognitionprincipleandstatesthat“[a]s
oftheacquisitiondate,theacquirershallrecognize,separatelyfromgoodwill,theidentifiableassets
acquired,theliabilitiesassumed,andanynoncontrollinginterestintheacquiree.”
3.05 TheguidanceinStatement141(R)emphasizestwofundamentalprinciplesabouttherecognition
ofassetsacquired,liabilitiesassumed,andnoncontrollinginterestsoftheacquiree:
1. Theymust“meetthedefinitionofanassetoraliabilityinFASBConceptsStatementNo.6”as
oftheacquisitiondate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 45/28632
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
2. Theymustbe“[p]artofthebusinesscombination[andnot]theresultofaseparate
transaction.”
3.06 Paragraphs25and35ofConceptsStatement6,respectively,defineassetsandliabilitiesas
follows:
• Assetsareprobable[footnote18]futureeconomicbenefitsobtainedorcontrolledbya
particularentityasaresultofpasttransactionsorevents.[Emphasisadded]
• Liabilitiesareprobable[footnote21]futuresacrificesofeconomicbenefitsarisingfrom
presentobligations[footnoteomitted]ofaparticularentitytotransferassetsorprovide
servicestootherentitiesinthefutureasaresultofpasttransactionsorevents.[Emphasis
added]
Footnotes18and21inConceptsStatement6bothstate:
Probable isusedwithitsusualgeneralmeaning,ratherthaninaspecificaccountingortechnical
sense(suchasthatinFASBStatementNo.5,AccountingforContingencies ,par.3),andreferstothat
whichcanreasonablybeexpectedorbelievedonthebasisofavailableevidenceorlogicbutisneither
certainnorproved...).Itsinclusioninthedefinitionisintendedtoacknowledgethatbusiness
andothereconomicactivitiesoccurinanenvironmentcharacterizedbyuncertaintyinwhichfew
outcomesarecertain(pars.44–48).
3.07 Statement141(R)mayresultinanacquirerrecognizingsomeassetsandliabilitiesthatwere
notpreviouslyrecognizedintheacquiree’sfinancialstatements.Forexample,Statement142generally
requiresthatcostsassociatedwithinternallygeneratedintangibleassetsbeexpensedasincurred.
Therefore,anentitymayhaveincurredasignificantamountofcostsindevelopingitstradename;
however,itwouldgenerallyhaveexpensedsuchcostsasincurred,ratherthanrecognizingthemas
anasset.If,however,thatentitywasacquiredinabusinesscombination,underStatement141(R)the
acquirerwouldgenerallyrecognizethefairvalueofthattradenameasanintangibleassetapartfrom
goodwill.
3.08 Transactionsthataretobeaccountedforseparatelyfromabusinesscombinationarediscussed
in3.28–3.39and6.37–6.38.
3.09 TherearelimitedexceptionstoStatement141(R)’srequirementthatanacquirerrecognizeevery
identifiableassetandliability.Forexample,assetsandliabilitiesarisingfromcontingenciesarenot
recognizedunlesstheymeetcertaincriteria.Exceptionstothegeneralrecognitionandmeasurement
principlesaresummarizedin3.15 anddiscussedfurtherinSections 4 and 5.
Classification or Designation on the Acquisition Date for Subsequent Accounting
3.10 Afterassetsacquiredorliabilitiesassumedarerecognized,Statement141(R)requiresthatthe
acquirerclassifyordesignatethemontheacquisitiondate.Specifically,paragraph17ofStatement
141(R)states:
Attheacquisitiondate,theacquirershallclassifyordesignatetheidentifiableassetsacquired
andliabilitiesassumedasnecessarytosubsequentlyapplyotherGAAP.Theacquirershallmake
thoseclassificationsordesignationsonthebasisofthecontractualterms,economicconditions,its
operatingoraccountingpolicies,andotherpertinentconditionsastheyexistattheacquisitiondate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 46/28633
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
3.11 Paragraph18ofStatement141(R)providessomeexamplesofclassificationsordesignations
thattheacquirermayberequiredtomakeontheacquisitiondateinaccordancewiththeguidancein
paragraph17:
a. Classificationofparticularinvestmentsinsecuritiesastrading,availableforsale,orheldto
maturityinaccordancewithFASBStatementNo.115,AccountingforCertainInvestmentsin
DebtandEquitySecurities
b. DesignationofaderivativeinstrumentasahedginginstrumentinaccordancewithFASB
StatementNo.133,AccountingforDerivativeInstrumentsandHedgingActivities
c. Assessmentofwhetheranembeddedderivativeshouldbeseparatedfromthehostcontract
inaccordancewithStatement133(whichisamatterofclassification asthisStatementuses
thatterm).
3.12 Anacquirerisrequiredtodesignateorclassifyassetsorliabilitiesasoftheacquisitiondate
becausethesubsequentaccountingcanvaryaccordingtotheirclassification.Forexample,anacquirer’s
subsequentaccountingforasecuritydiffersdependingonwhethertheacquirerclassifiesthesecurity
astrading,availableforsale,orheldtomaturity.However,paragraph19ofStatement141(R)provides
someexceptionstotheclassificationordesignationrequirement:
a. Classificationofaleasecontractaseitheranoperatingleaseoracapitalleaseinaccordance
withFASBStatementNo.13,AccountingforLeases,asinterpretedbyFASBInterpretationNo.
21,AccountingforLeasesinaBusinessCombination
b. ClassificationofacontractwrittenbyanentitythatisinthescopeofFASBStatementNo.
60,AccountingandReportingbyInsuranceEnterprises ,asamendedbythisStatement,asan
insuranceorreinsurancecontractoradepositcontract.
Theacquirershallclassifythosecontractsonthebasisofthecontractualtermsandotherfactorsat
theinceptionofthecontract(or,ifthetermsofthecontracthavebeenmodifiedinamannerthat
wouldchangeitsclassification,atthedateofthatmodification,whichmightbetheacquisitiondate).
Exceptionstothegeneralclassificationanddesignationprinciplesaresummarizedin3.15anddiscussed
furtherinSections 3and4.
Measurement Principle
3.13 Paragraph20ofStatement141(R)providesanoverallmeasurementprincipleandstates
that“[t]heacquirershallmeasuretheidentifiableassetsacquired,theliabilitiesassumed,andany
noncontrollinginterestintheacquireeattheiracquisition-date fair values”(emphasisadded).Refer
to3.40–3.58 foradiscussionofgeneralfairvalueconcepts.
3.14 ThereareexceptionstoStatement141(R)’srequirementthateveryidentifiableasset,liability,
andequityinstrumentbemeasuredatfairvalue.Forexample,anacquirermustmeasureanacquiree’sdeferredtaxes,employeebenefits,share-basedpayments,andassetsheldforsaleinaccordance
withotherapplicableaccountingliterature.Exceptionstothegeneralrecognitionandmeasurement
principlesaresummarizedin3.15anddiscussedfurtherinSections 4 and5.
Summary of Exceptions to General Principles of Recognition and Measurement
3.15 AnacquirershouldapplythespecifiedaccountingguidanceofeachapplicableU.S.GAAP
standard,ratherthanthegeneralprinciplesdiscussedinStatement141(R),totheexceptionsnoted
below.Refertothesectionnumberindicatedaftertheindividualexceptionsforamoredetailed
discussion.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 47/28634
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Exceptions to General Principles of Recognition and Measurement
Recognitionexceptions • Contingencies(see4.32–4.37).
Measurementexceptions • Share-basedpaymentawards(see4.49).
• Assetsheldforsale(see4.50–4.51).
• Reacquiredrights(see5.31–5.34).
Recognitionandmeasurementexceptions • Incometaxes(see4.38–4.40).
• Employeebenefits(see4.41–4.45).
• Indemnificationassets(see4.46–4.47).
Classificationordesignationexceptions1 • LeaseswithinthescopeofStatement13(see3.12and
4.14–4.19).
• ContractswithinthescopeofStatement60(see3.12).
Measurement Period
3.16 Themeasurementperiodisthetimeafteranacquisitionduringwhichtheacquirerobtainsthe
informationneededtoidentifyandmeasuretheconsiderationtransferred,theassetsacquired,the
liabilitiesassumed,andanynoncontrollinginterests.
3.17 Thedurationofthemeasurementperiodisnotthesameforeveryacquisition,orevenforall
itemsacquiredinaspecificacquisition.Themeasurementperiodforaparticularasset,liability,orequity
instrumentendsoncetheacquirerdeterminesthattheavailableinformationhasbeenobtainedor
thattheinformationisnotavailable.Themeasurementperiodforallitemsacquiredinanacquisition,
however,islimitedtooneyearfromtheacquisitiondate.
3.18 Theacquirermustdeterminewhether,foreachitemtobemeasured,additionalinformationis
requiredorobtainableandmustdocumentanddisclose,ateachreportingperiod,theitemsrequiring
additionalinformation.Referto13.24foradiscussionofthespecificdisclosurerequirementsfor
provisionalmeasurements.
3.19 Theacquirermustconsiderallpertinentfactorsindeterminingwhetherinformationobtained
aftertheacquisitiondateshouldresultinanadjustmenttotheprovisionalamountsrecognized(see
3.20–3.23)orwhetherthatinformationresultsfromeventsthatoccurredaftertheacquisitiondate.This
determinationrequiresjudgment.Inmakingthatdetermination,theacquirershouldconsiderwhether
itcanidentifythereasonforthechangeandhowlongaftertheacquisitionthenewinformation
wasreceived.Newinformationreceivedsoonaftertheacquisitionismorelikelytoreflectfactsand
circumstancesexistingasoftheacquisitiondate.Accordingly,themeasurementperiodisnotintendedtoallowforsubsequentadjustmentsoftheamountsrecordedasapartofthebusinesscombination
thatresultfromtheuncertaintiesandrelatedrisksassumedinthecombination.Decisionsmadebythe
combinedcompany,andeconomiceventsoccurringaftertheacquisition,donotresultinanadjustment
totheprovisionalamounts.Rather,suchadjustmentsareincludedinthedeterminationofnetincome
intheperiodinwhichtheadjustmentismade.Forexample,contingentconsiderationissubject
tothesamemeasurement-periodrequirementsasallotherassetsacquiredandliabilitiesassumed.
Aftertheacquisitiondate,changesinthefairvalueofcontingentconsiderationduetotheacquiree
1 Paragraph19ofStatement141(R)states,“Theacquirershallclassifythosecontractsonthebasisofthecontractualtermsandotherfactorsattheinceptionofthecontract(or,if
thetermsofthecontracthavebeenmodifiedinamannerthatwouldchangeitsclassification,atthedateofthatmodification,whichmightbetheacquisitiondate).”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 48/28635
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
meetingcertainearningstargetsormilestonesaresubsequenteventsandshouldnotberecognizedas
measurement-periodadjustments.
Provisional Measurement of Consideration Transferred, Assets Acquired, Liabilities Assumed, andNoncontrolling Interests
3.20 Becauseofthecomplexityofcompletingcertainfairvaluemeasurementsorbecausethe
acquisitionmayoccurincloseproximitytotheacquirer’snextreportingdate,theassignmentof
amountstotheconsiderationtransferred,theassetsacquired,theliabilitiesassumed,andany
noncontrollinginterestsmaynotbecompletebytheacquirer’snextreportingdate.Therefore,the
acquirermustreportprovisionalamountsonthebasisofbestestimatesofinformationavailableasof
thereportingdate.
3.21 Ifamaterialadjustmenttotheprovisionalamountsisidentifiedduringthemeasurementperiod,
theacquirermustrecognizetheadjustmentasiftheaccountingforthebusinesscombinationhadbeen
completedasoftheacquisitiondate.Thus,theacquirermustrevisecomparativeinformationforprior
periods(i.e.,viaretrospectiveadjustment)asneeded,includingmakinganychangeindepreciation,
amortization,orotherincomeeffectsrecognizedincompletingtheinitialaccounting.
3.22 Becausemeasurement-periodadjustmentsarerecognizedretrospectively,entitiesmaywant
tocompletevaluationsasquicklyaspossible,totheextentpracticable,tolimitthenumberoftimes
previouslyreportedamountswillneedtobeadjusted.
3.23 Oncethemeasurementperiodends,anyadjustmentstotheinitialaccountingforthebusiness
combinationcanonlyberecognizedasthecorrectionofanerrorinaccordancewithStatement154.
Example 3-1
Accounting for Adjustments to Provisional Amounts Assigned to Identifiable Assets Acquired and
Liabilities AssumedThefollowingexampleisextractedfromparagraphsA74–A76ofStatement141(R)andassumesthatthebusinesscombinationwasaccountedforunderStatement141(R).Theexampledoesnotincludeanyquarterlyreportingrequirements.
ACacquiresTConSeptember30,20X7.ACseeksanindependentappraisalforanitemofproperty,plant,andequipmentacquiredinthecombination,andtheappraisalwasnotcompletebythetimeACissueditsfinancialstatementsfortheyearendingDecember31,20X7.Inits20X7annualfinancialstatements,ACrecognizedaprovisionalfairvaluefortheassetof$30,000.Attheacquisitiondate,theitemofproperty,plant,andequipmenthadaremainingusefullifeoffiveyears.Fivemonthsaftertheacquisitiondate,ACreceivedtheindependentappraisal,whichestimatedtheasset’sacquisition-datefairvalueas$40,000.
InitsfinancialstatementsfortheyearendingDecember31,20X8,ACretrospectivelyadjuststhe20X7prior-yearinformationasfollows:
a. Thecarryingamountofproperty,plant,andequipmentasofDecember31,20X7,isincreasedby$9,500.Thatadjustmentismeasuredasthefairvalueadjustmentattheacquisitiondateof$10,000lesstheadditionaldepreciationthatwouldhavebeenrecognizedhadtheasset’sfairvalueattheacquisitiondatebeenrecognizedfromthatdate($500for3months’depreciation).
b. ThecarryingamountofgoodwillasofDecember31,20X7,isdecreasedby$10,000.
c. Depreciationexpensefor20X7isincreasedby$500.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 49/28636
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 3-1 (continued)
Accounting for Adjustments to Provisional Amounts Assigned to Identifiable Assets Acquired andLiabilities Assumed
Inaccordancewithparagraph72(a),ACdiscloses:
a. Inits20X7financialstatements,thattheinitialaccountingforbusinesscombinationhasnotbeencompleted
becausetheappraisalofproperty,plant,andequipmenthasnotyetbeenreceived.b. Inits20X8financialstatements,theamountsandexplanationsoftheadjustmentstotheprovisionalvalues
recognizedduringthecurrentreportingperiod.Therefore,ACdisclosesthatthe20X7comparativeinformationisretrospectivelyadjustedtoincreasethefairvalueoftheitemofproperty,plant,andequipmentattheacquisitiondateby$9,500,offsetbyadecreasetogoodwillof$10,000andanincreaseindepreciationexpenseof$500.
Impact on SEC Registrants
3.24 SECregistrantsarenotrequiredtofileanamendmenttoretrospectivelyadjustpreviously
filedExchangeActperiodicreportsonForms10-Q/Aand10-K/Aformaterialmeasurement-period
adjustmentsbecausetheydidnotcontainerrorswhentheywereoriginallyfiled.Rather,comparative
financialinformationisrevisedinsubsequentfilingstoreflecttheeffectofthemeasurement-period
adjustment.ThisrequirementcouldaffectSECregistrantsthat(1)plantoissueanewregistration
statement(see3.25)or(2)haveexistingeffectiveregistrationstatements(see3.26)(e.g.,anexisting
FormS-3thatalreadyiseffectivebutuponwhicharegistrantwishestodrawdownorissuesecurities).
New Registration Statements
3.25 Anewregistrationorproxystatementthatisfiledaftertheregistrantdeterminesthatitmust
makeamaterialretrospectiveadjustmenttoprovisionalamounts2mustinclude(orincorporateby
reference)financialstatementsthatreflecttheretrospectiveadjustmentsforallperiodspresented.In
thiscontext,materialityisamatterofjudgment.TherevisedfinancialstatementsarefiledonForm
8-Korincludedinthenewregistrationstatement.Otheraffectedfinancialinformation(e.g.,MD&Aandselectedfinancialdata)thatwasreportedintheregistrant’sreportsonForms10-Kand10-Qalso
mustbeupdatedtoreflecttheretrospectiveadjustments.Tobepreparedforapotentialregistration
statement,aregistrantispermittedtofileupdatedfinancialstatementsandotheraffectedfinancial
informationthatreflecttheretrospectiveadjustmentinaForm8-Konceithasdeterminedthatit
hasamaterialadjustmenttoprovisionalamounts.However,thereisnorequirementtodosountil
immediatelybeforearegistrationstatementisfiled.
Effective Registration Statements
3.26 Aregistrantisundernospecificobligationtoupdateanexisting,effectiveregistrationstatement
unlessafundamentalchangeoccursasstipulatedbySecuritiesActRule10(a)(3)regardingtheage
ofinformationintheprospectus.Theterm“fundamentalchange”isnotdefined.Management,inconsultationwithlegalcounsel,shoulddeterminewhetheraretrospectiveadjustmentconstitutesa
fundamentalchange.Generally,suchadeterminationshouldbebasedonwhethertheadditional
informationisnecessaryforaninvestortomakeaninformedinvestmentdecision(refertoSEC
RegulationS-K,Item512(a)).Iftheregistrantanditslegalcounseldeterminethattheretrospective
adjustmentisafundamentalchange,updatedfinancialstatementsandotheraffectedfinancial
information,suchasMD&Aandselectedfinancialdata,shouldbefiledonForm8-Korincludedinthe
2 Thisrequirementapplieswhenaregistrantdeterminesthatitmustmakeamaterialretrospectiveadjustmenttoprovisionalamounts.Incontrast,forcertainotherretrospective
changes,aregistrantmayfileupdatedfinancialstatementsonlyafterithasfileda10-Qthatfirstreportsthenewaccountingtreatment(e.g.,segmentchangesunderStatement
131anddiscontinuedoperationsunderStatement144andtheretrospectiveadoptionofanewaccountingpronouncement).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 50/28637
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
registrationstatement,asdescribedabove.Allpost-effectiveamendmentsthatadjusttheprospectusare
considered“newfilings”andwouldbetreatedpursuanttotheguidancein3.25.
Form S-8
3.27 TheHighlightsoftheJuly8,2008,SECRegulationsCommitteeMeetingindicatethefollowing:
Thestaffunderstandsthattherehasbeenconfusionregardingtheneedtoproviderestatedfinancial
statementsinaFormS-8forcertaineventsoccurringafterthefilingofaForm10-Kthatresultin
differencesbetweenthefinancialpresentationintheForm10-KandsubsequentForm10-Qsthatare
incorporatedbyreferenceintotheS-8....ItistheresponsibilityoftheCompanyandtheircounselto
determineiftherehasbeenamaterialchangethatisrequiredtobedisclosedinaFormS-8.Likewise,
itistheresponsibilityoftheauditortodetermineiftheywillissueaconsenttotheuseoftheirreport
iftherehasbeenachangeinthefinancialstatementsthatisreflectedinthe10-Qbuttheannual
accountshavenotbeenretroactivelyrestated.
Example 3-2
SEC Registrant’s Accounting for Adjustments to Provisional Amounts Assigned to IdentifiableAssets Acquired and Liabilities Assumed
AssumethesamefactsasinExample3-1aboveexceptthatACisanSECregistrantthatisalargeacceleratedfiler.OnFebruary15,20X8,ACfileditsForm10-KfortheyearendedDecember31,20X7,anddisclosedaprovisionalamountrelatedtoanitemofproperty,plant,andequipmentacquiredthroughabusinesscombination.OnFebruary28,20X8,ACreceivedtheindependentappraisalanddeterminedthatitmustmakeamaterialretrospectiveadjustmenttotheprovisionalamountrelatedtotheitemofproperty,plant,andequipment.ACplanstoissueanewregistrationstatementonApril5,20X8.
Asaresultofthenewregistrationstatement,ACmustincludeinitsnewregistrationstatement(orincorporatebyreferenceonaForm8-K)adjustedannualfinancialstatementsfortheyearendedDecember31,20X7,reflectingtheretrospectiveadjustmentsfortherevisedamountofgoodwill,property,plant,andequipmentandrelateddepreciation.TheForm8-KwouldalsoincluderevisionstothefinancialinformationoutsideofthefinancialstatementssuchastheselectedfinancialdatasectionandMD&Atotheextentapplicable.
Determining What Is Part of the Business Combination Transaction
3.28 Sometimesanacquirermaysettleapreexistingrelationshiporotherarrangementsimultaneously
withthebusinesscombination.Theacquirermustaccountforsucharrangementsasatransaction
separatefromthebusinesscombination.Paragraph57ofStatement141(R)providesthefollowing
guidancefortheaccountingforpreexistingrelationshipsorotherarrangementsbetweenanacquirer
andanacquireethatarepresentbeforethebusinesscombination:
Theacquirerandtheacquireemayhaveapreexistingrelationshiporotherarrangementbefore
negotiationsforthebusinesscombinationbegan,ortheymayenterintoanarrangementduring
thenegotiationsthatisseparatefromthebusinesscombination.Ineithersituation,theacquirer
shallidentifyanyamountsthatarenotpartofwhattheacquirerandtheacquiree(oritsformer
owners)exchangedinthebusinesscombination,thatis,amountsthatarenotpartoftheexchange
fortheacquiree.Theacquirershallrecognizeaspartofapplyingtheacquisitionmethodonlythe
considerationtransferredfortheacquiree.Separate transactions shall be accounted for in
accordance with the relevant GAAP.[Emphasisadded]
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 51/28638
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
3.29 Astrongindicatorofapreexistingrelationshipthatwouldqualifyforaccountingapartfromthe
businesscombinationisatransactionthatisenteredintobyoronbehalfoftheacquirerorprimarily
forthebenefitoftheacquirerortheanticipatedcombinedentity.Paragraph58ofStatement141(R)
specifiesexamplesofsuchtransactions:
• “Atransactionthatineffectsettlespreexistingrelationshipsbetweentheacquirerand
acquiree.”
• “Atransactionthatcompensatesemployeesorformerownersoftheacquireeforfuture
services”(i.e.,compensationarrangements);see6.39.
• “Atransactionthatreimbursestheacquireeoritsformerownersforpayingtheacquirer’s
acquisition-relatedcosts;”see3.36.
3.30 Determiningwhatisorisnotpartofabusinesscombinationrequiresjudgment.Paragraph
A77ofStatement141(R)specifiesthreefactorsthat“areneithermutuallyexclusivenorindividually
conclusive”thatshouldbeconsideredinmakingthisdetermination:
a. Thereasonsforthetransaction —Understandingthereasonswhythepartiestothe
combination(theacquirer,theacquiree,andtheirowners,directors,managers,andtheir
agents)enteredintoaparticulartransactionorarrangementmayprovideinsightintowhether
itispartoftheconsiderationtransferredandtheassetsacquiredorliabilitiesassumed.For
example,ifatransactionisarrangedprimarilyforthebenefitoftheacquirerorthecombined
entityratherthanprimarilyforthebenefitoftheacquireeoritsformerownersbeforethe
combination,thatportionofthetransactionpricepaid(andanyrelatedassetsorliabilities)
islesslikelytobepartoftheexchangefortheacquiree.Accordingly,theacquirerwould
accountforthatportionseparatelyfromthebusinesscombination.
b. Whoinitiatedthetransaction —Understandingwhoinitiatedthetransactionmayalso
provideinsightintowhetheritispartoftheexchangefortheacquiree.Forexample,a
transactionorothereventthatisinitiatedbytheacquirermaybeenteredintoforthepurpose
ofprovidingfutureeconomicbenefitstotheacquirerorcombinedentitywithlittleorno
benefitreceivedbytheacquireeoritsformerownersbeforethecombination.Ontheotherhand,atransactionorarrangementinitiatedbytheacquireeoritsformerownersislesslikely
tobeforthebenefitoftheacquirerorthecombinedentityandmorelikelytobepartofthe
businesscombinationtransaction.
c. Thetimingofthetransaction —Thetimingofthetransactionmayalsoprovideinsightinto
whetheritispartoftheexchangefortheacquiree.Forexample,atransactionbetweenthe
acquirerandtheacquireethattakesplaceduringthenegotiationsofthetermsofabusiness
combinationmayhavebeenenteredintoincontemplationofthebusinesscombinationto
providefutureeconomicbenefitstotheacquirerorthecombinedentity.Ifso,theacquiree
oritsformerownersbeforethebusinesscombinationarelikelytoreceivelittleornobenefit
fromthetransactionexceptforbenefitstheyreceiveaspartofthecombinedentity.
3.31 Acontractinapreexistingrelationshipmayrepresentareacquiredrightoftheacquirer,asdiscussedin5.31–5.34.Ifthecontractcontainsfavorableorunfavorabletermsregardingpricingfor
currentmarkettransactions,thenasettlementgainorlosswouldberecognizedapartfromthebusiness
combinationandmeasuredinaccordancewith3.32.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 52/28639
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
3.32 Ifabusinesscombinationeffectivelyresultsinthesettlementofapreexistingrelationship
betweenanacquirerandanacquiree,theacquirerwouldrecognizeagainorloss.ParagraphA79
indicateshowsuchgainorlossshouldbemeasured:
a. Forapreexistingnoncontractualrelationship(suchasalawsuit),fairvalue
b. Forapreexistingcontractualrelationship,thelesserof:
(1) Theamountbywhichthecontractisfavorableorunfavorablefromtheperspectiveof
theacquirerwhencomparedwithpricingforcurrentmarkettransactionsforthesame
orsimilaritems.(Anunfavorablecontractisacontractthatisunfavorableinterms
ofcurrentmarketterms.Itisnotnecessarilyalosscontractinwhichtheunavoidable
costsofmeetingtheobligationsunderthecontractexceedtheeconomicbenefits
expectedtobereceivedunderit.)
(2) Theamountofanystatedsettlementprovisionsinthecontractavailabletothe
counterpartytowhomthecontractisunfavorable.
If(2)islessthan(1),thedifferenceisincludedaspartofthebusinesscombinationaccounting.
3.33 Theacquirer’srecognitionofanassetorliabilityrelatedtothepreexistingrelationshipbeforethe
businesscombinationwillaffectthecalculationofthesettlement(seeExample3-4below).
Example 3-3
Effective Settlement of a Supply Contract as a Result of a Business Combination
ThefollowingexampleisextractedfromparagraphsA82–A84ofStatement141(R):
ACpurchaseselectroniccomponentsfromTCunderafive-yearsupplycontractatfixedrates.Currently,thefixedratesarehigherthanratesatwhichACcouldpurchasesimilarelectroniccomponentsfromanothersupplier.ThesupplycontractallowsACtoterminatethecontractbeforetheendoftheinitial5-yeartermonlybypayinga$6millionpenalty.With3yearsremainingunderthesupplycontract,ACpays$50milliontoacquireTC,whichisthefairvalueofTCbasedonwhatothermarketparticipantswouldbewillingtopay.
IncludedinthetotalfairvalueofTCis$8millionrelatedtothefairvalueofthesupplycontractwithAC.The
$8millionrepresentsa$3millioncomponentthatis“at-market”becausethepricingiscomparabletopricingforcurrentmarkettransactionsforthesameorsimilaritems(sellingeffort,customerrelationships,andsoforth)anda$5millioncomponentforpricingthatisunfavorabletoACbecauseitexceedsthepriceofcurrentmarkettransactionsforsimilaritems.TChasnootheridentifiableassetsorliabilitiesrelatedtothesupplycontract,andAChasnotrecognizedanyassetsorliabilitiesrelatedtothesupplycontractbeforethebusinesscombination.
Inthisexample,ACrecognizesalossof$5million(thelesserofthe$6millionstatedsettlementamountandtheamountbywhichthecontractisunfavorabletotheacquirer)separatelyfromthebusinesscombination.The$3millionat-marketcomponentofthecontractispartofgoodwill.
Example 3-4
Effective Settlement of a Contract Between the Acquirer and Acquiree in Which the Acquirer HadRecognized a Liability Before the Business Combination
ParagraphA85ofStatement141(R)states:
WhetherAChadpreviouslyrecognizedanamountinitsfinancialstatementsrelatedtoapreexistingrelationshipwillaffecttheamountrecognizedasagainorlossfortheeffectivesettlementoftherelationship.InExample4[Example 3-3],GAAPmighthaverequiredACtorecognizea$6millionliabilityforthesupplycontractbeforethebusinesscombination.Inthatsituation,ACrecognizesa$1millionsettlementgainonthecontractinearningsattheacquisitiondate(the$5millionmeasuredlossonthecontractlessthe$6millionlosspreviouslyrecognized).Inotherwords,AChasineffectsettledarecognizedliabilityof$6millionfor$5million,resultinginagainof$1million.
3.34 See13.13fordiscussionofdisclosuresrequiredforbusinesscombinationsbetweenpartieswitha
preexistingrelationship.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 53/28640
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Types of Transactions to Be Assessed
EmployeeCompensationArrangements
3.35 Replacementawardsorothercompensationarrangementsforpastservicesorfutureservices
maybegiventoemployeesoftheacquiree.Theacquirermustdeterminewhatportionofthe
arrangement,ifany,shouldbeconsideredpartofthebusinesscombination.Amountsnotrelatedtothe
businesscombinationareaccountedforundertheapplicableotherstandards(e.g.,Statement123(R)).See6.05–6.19forfurtherdiscussionofcompensationarrangements.
ReimbursementforPayingtheAcquirer’sAcquisitionCosts
3.36 Acquisitioncostscannotbepartoftheconsiderationtransferredinabusinesscombination.That
is,iftheacquirerandacquireeenterintoanarrangementinwhichtheacquireepaystheacquisition-
relatedcostsandtheacquireragreestoreimbursetheacquiree,suchcostsmustbeaccountedfor
separatelyfromthebusinesscombinationandnotaspartoftheconsiderationtransferred.Statement
141(R)generallyrequiressuchtransactioncoststobeexpensedasincurred.See6.31–6.36forfurther
discussionoftheaccountingtreatmentforacquisitioncosts.
SettlementofDisputesWiththeFormerOwnersofaBusinessCombination
3.37 Afterabusinesscombination,disputesmayoccurbetweentheacquirerandtheformerowners
oftheacquiree,sometimesresultinginamountsbeingtransferredbetweenthepartiesafterthe
acquisitiondate.Questionsmayariseaboutwhether,inaccountingforsuchsubsequentpayments,
theacquiringentityshouldreflecttheamountpaidorreceivedasanadjustmenttotheconsideration
transferred(formerlyreferredtoas“purchaseprice”underStatement141)fortheacquiredentity
orinthepostacquisitionincomestatement.Atthe2003AICPANationalConferenceonCurrentSEC
Developments,SECstaffmemberRandolphP.GreenindicatedinpreparedremarksthattheSEChas
“generallyconcludedthatlegalclaimsbetweenanacquirerandtheformerownersofanacquired
businessshouldbereflectedintheincomestatementwhensettled.”Thisviewisbasedonthegeneral
beliefthatsuchcontingenciesrelatedtolitigationaboutthebusinesscombinationitselfarenotpreacquisitioncontingencies.Mr.Greenofferedthattreatmentofsuchpaymentsbytheacquirerasan
adjustmenttotheconsiderationtransferredfortheacquisitionmaybewarrantedwhenthereisa“clear
anddirectlinktothepurchaseprice.”Mr.Greengavethefollowingexample:
[A]ssumeapurchaseagreementexplicitlysetsforththeunderstandingthateach“acquired
customer”isworth$1,000,thatnotlessthanonethousandcustomerswillbetransferredasof
theconsummationdate,andsubsequentlitigationdeterminesthattheactualnumberofacquired
customerswasonlyninehundred.Theeffectsofthelitigationshouldproperlybereflectedaspart
ofthepurchaseprice.Incontrast,ifthepurchaseagreementobligatesthesellertoaffectitsbest
effortstoretaincustomersthroughtheconsummationdateandlitigationsubsequentlydetermines
thatthesellerfailedtodoso,theeffectsarenotclearlyanddirectlylinkedtothepurchasepriceand,
accordingly,shouldbereflectedintheincomestatement.
Note: WhilenotstatedbyMr.Green,ifthebuyerhadincurredlegalcoststosettlethedisputeorif
thesettlementamounthadincludedreimbursementtothesellersforlegalcostsorotherdamages,
thoseamountsarenotclearlyanddirectlylinkedtotheconsiderationtransferred.Thus,theyshouldbe
reflectedintheincomestatement.
3.38 Asanalternativetotheexamplein3.37,Mr.Greenalsonotedthat“claimsthatassertoneparty
misledtheotherorthataprovisionoftheagreementisuncleararenotuniquetobusinesscombination
agreements.”Therefore,theywouldnotgenerallyestablishaclearanddirectlinktotheconsideration
transferredandshouldbereflectedintheincomestatement.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 54/28641
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SettlementDisputesWiththeShareholdersoftheAcquiringEntityOveraBusinessCombination
3.39 Inconnectionwithabusinesscombination,theacquiringentity’sshareholdersmaybringa
claimagainsttheacquiringentityforvariousreasons,suchasthattheacquiringentityoverpaidfor
theacquisition.Theacquiringentityshouldrecognizecostsincurredforsuchdisputes,includingany
settlementamountifpaid,intheincomestatementandnotaspartoftheconsiderationtransferredfor
theacquiredentity.ThisviewisconsistentwithanadditionalstatementbySECstaffmemberRandolphGreen(see3.37and3.38).Referringtosettlementsoflitigationoverconsiderationtransferred,Mr.
Greenstatedthat“thecostoflitigationbroughtbytheacquirer’sshareholdersshouldalwaysbe
reflectedintheincomestatement.”
Fair Value Measurements in Business Combinations
3.40 Statement141(R)requiresmostidentifiableassetsacquired,liabilitiesassumedorincurred,
andnoncontrollingintereststobemeasuredatfairvalue.Statement157providestheguidance
formeasuringfairvalue.Paragraph5ofStatement157definesfairvalueas“thepricethatwould
bereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarket
participants[see3.45]atthemeasurementdate.”
3.41 ThesummarysectionofStatement157discussesthedefinitionoffairvalue:
Thedefinitionoffairvalueretainstheexchangepricenotioninearlierdefinitionsoffairvalue.This
Statementclarifiesthattheexchangepriceisthepriceinanorderlytransactionbetween market
participants to sell the asset or transfer the liability in the market in which the reporting
entity would transact fortheassetorliability,thatis,theprincipalormostadvantageousmarket
fortheassetorliability.Thetransactiontoselltheassetortransfertheliabilityisahypothetical
transactionatthemeasurementdate,consideredfromtheperspectiveofamarketparticipantthat
holdstheassetorowestheliability.Therefore,the definition focuses on the price that would
be received to sell the asset or paid to transfer the liability (an exit price), not the price
that would be paid to acquire the asset or received to assume the liability (an entry price).
[Emphasisadded]
3.42 Thereareconceptualdifferencesbetweenan“entryprice”andan“exitprice.”Assetsare
typicallynotsoldandliabilitiesaretypicallynotsettledforthesamepricepaidtoobtainthem.However,
paragraph17ofStatement157acknowledgesthatuponinitialrecognition,theentryandexitpricemay
bethesameintheabsenceofcertainfactors(e.g.,relatedpartytransactions,forcedtransactions,the
unitofvaluation,ordifferingmarkets).
3.43 Statement157furtheremphasizesthat“fairvalueisamarket-basedmeasurement,notan
entity-specificmeasurement.Therefore,afairvaluemeasurementshouldbedeterminedbasedonthe
assumptionsthatmarketparticipantswoulduseinpricingtheassetorliability.”
3.44 ParagraphA2ofStatement157statesthatbecausefairvalueisanexitpriceforassetsand
liabilities,thefollowingneedtobedeterminedforanentitytocalculatethefairvaluemeasurement:
a. Theparticularassetorliabilitythatisthesubjectofthemeasurement(consistentwithitsunit
ofaccount)
b. Foranasset,thevaluationpremiseappropriateforthemeasurement(consistentwithits
highestandbestuse)[See3.50–3.53.]
c. Theprincipal(ormostadvantageous)marketfortheassetorliability(foranasset,consistent
withitshighestandbestuse)[See3.54–3.55.]
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 55/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 56/28643
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
participantsthatwouldmaximizethevalueoftheassetorthegroupofassetswithinwhichthe
assetwouldbeused.Highestandbestuseisdeterminedbasedontheuseoftheassetbymarket
participants,eveniftheintendeduseoftheassetbythereportingentityisdifferent.
3.51 Thehighestandbestuseofanassetestablishesthevaluationpremise.Thevaluationpremise
isusedtomeasurethefairvalueofanasset.Paragraph13ofStatement157statesthatthevaluation
premiseofanassetiseitherofthefollowing:
a. In-use .Thehighestandbestuseoftheassetisin-useiftheassetwouldprovidemaximum
valuetomarketparticipantsprincipallythroughitsuseincombinationwithotherassetsasa
group(asinstalledorotherwiseconfiguredforuse).Forexample,thatmightbethecasefor
certainnonfinancialassets.Ifthehighestandbestuseoftheassetisin-use,thefairvalueof
theassetshallbemeasuredusinganin-usevaluationpremise.Whenusinganin-usevaluation
premise,thefairvalueoftheassetisdeterminedbasedonthepricethatwouldbereceived
inacurrenttransactiontoselltheassetassumingthattheassetwouldbeusedwithother
assetsasagroupandthatthoseassetswouldbeavailabletomarketparticipants.Generally,
assumptionsaboutthehighestandbestuseoftheassetshouldbeconsistentforallofthe
assetsofthegroupwithinwhichitwouldbeused.
b. In-exchange.Thehighestandbestuseoftheassetisin-exchangeiftheassetwouldprovidemaximumvaluetomarketparticipantsprincipallyonastandalonebasis.Forexample,that
mightbethecaseforafinancialasset.Ifthehighestandbestuseoftheassetisin-exchange,
thefairvalueoftheassetshallbemeasuredusinganin-exchangevaluationpremise.When
usinganin-exchangevaluationpremise,thefairvalueoftheassetisdeterminedbasedonthe
pricethatwouldbereceivedinacurrenttransactiontoselltheassetstandalone.
3.52 Paragraph14ofStatement157statesthat“[b]ecausethehighestandbestuseoftheasset
isdeterminedbasedonitsusebymarketparticipants,thefairvaluemeasurementconsidersthe
assumptionsthatmarketparticipantswoulduseinpricingtheasset,whetherusinganin-useoranin-
exchangevaluationpremise.”Althoughthediscussioninparagraphs12–14ofStatement157appears
undertheheading“ApplicationtoAssets,”thein-use(incombination)valuationpremisemayalsobe
appropriateforliabilities(e.g.,aportfolioofsimilarwrittenlifeinsurancepolicies)orforacombination
ofassetsandliabilities(e.g.,aportfolioofsimilarderivatives).
Example 3-5
Highest and Best Use of an Asset Group
ThefollowingexampleisextractedfromparagraphsA7–A9ofStatement157:
Thereportingentity,astrategicbuyer,acquiresagroupofassets(AssetsA,B,andC)inabusinesscombination.AssetCisbillingsoftwaredevelopedbytheacquiredentityforitsownuseinconjunctionwithAssetsAandB(relatedassets).Thereportingentitymeasuresthefairvalueofeachoftheassetsindividually,consistentwiththespecifiedunitofaccountfortheassets.Thereportingentitydeterminesthateachassetwouldprovidemaximumvaluetomarketparticipantsprincipallythroughitsuseincombinationwithotherassetsasagroup(highestand
bestuseisin-use).Inthisinstance,themarketinwhichthereportingentitywouldselltheassetsisthemarketinwhichitinitiallyacquiredtheassets(thatis,the“entry”and“exit”marketsfromtheperspectiveofthereportingentityarethesame).Marketparticipantbuyerswithwhomthereportingentitywouldtransactinthatmarkethavecharacteristicsthataregenerallyrepresentativeofbothfinancialbuyersandstrategicbuyersandincludethosebuyersthatinitiallybidfortheassets.[Footnote13]Asdiscussedbelow,differencesbetweentheindicatedfairvaluesoftheindividualassetsrelateprincipallytotheuseoftheassetsbythosemarketparticipantswithindifferentassetgroups:
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 57/28644
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 3-5 (continued)
Highest and Best Use of an Asset Group
a. Strategicbuyerassetgroup.Thereportingentity,astrategicbuyer,determinesthatstrategicbuyershaverelatedassetsthatwouldenhancethevalueofthegroupwithinwhichtheassetswouldbeused(marketparticipantsynergies).ThoseassetsincludeasubstituteassetforAssetC(thebillingsoftware),whichwouldbeusedforonlyalimitedtransitionperiodandcouldnotbesoldstandaloneattheendofthatperiod.Becausestrategicbuyershavesubstituteassets,AssetCwouldnotbeusedforitsfullremainingeconomiclife.TheindicatedfairvaluesofAssetsA,B,andCwithinthestrategicbuyerassetgroup(reflectingthesynergiesresultingfromtheuseoftheassetswithinthatgroup)are$360,$260,and$30,respectively.Theindicatedfairvalueoftheassetsasagroupwithinthestrategicbuyerassetgroupis$650.
b. Financialbuyerassetgroup .Thereportingentitydeterminesthatfinancialbuyersdonothaverelatedorsubstituteassetsthatwouldenhancethevalueofthegroupwithinwhichtheassetswouldbeused.Becausefinancialbuyersdonothavesubstituteassets,AssetC(thebillingsoftware)wouldbeusedforitsfullremainingeconomiclife.TheindicatedfairvaluesofAssetsA,B,andCwithinthefinancialbuyerassetgroupare$300,$200,and$100,respectively.Theindicatedfairvalueoftheassetsasagroupwithinthefinancialbuyerassetgroupis$600.
ThefairvaluesofAssetsA,B,andCwouldbedeterminedbasedontheuseoftheassetsasagroupwithinthestrategicbuyergroup($360,$260,and$30).Althoughtheuseoftheassetswithinthestrategicbuyergroupdoesnotmaximizethefairvalueofeachoftheassetsindividually,itmaximizesthefairvalueoftheassetsasagroup($650).
Footnote13states,“Whilemarketparticipantbuyersmightbebroadlyclassifiedasstrategicand/orfinancialbuyers,thereoftenwillbedifferencesamongthemarketparticipantbuyerswithineachofthosegroups,reflecting,forexample,differentusesforanassetanddifferentoperatingstrategies.”
3.53 Example3-6belowillustratesthedifferencebetweenanin-use valuation premise (i.e.,
maximumvaluetomarketparticipantsisprincipallyderivedthroughtheuseoftheassetincombination
withotherassetsasagroup)andanin-exchange valuation premise(i.e.,theassetprovides
maximumvaluetomarketparticipantsprincipallyonastand-alonebasis).Withanin-usevaluation
premise,assumptionsmadebytheentitytodeterminethehighestandbestuseoftheassetshouldbe
consistentforalloftheassetsinthegroupinwhichtheassetwouldbeused.Incontrast,withanin-
exchangevaluationpremise,thefairvalueoftheassetisbasedtheassumptionthattheassetwould
besoldonastand-alonebasis.Whenentitiesmeasurethefairvalueofagroupofassets,theyshould
followthesamevaluationpremiseforeachassetinthegroup.Forexample,ifthehighestandbestuse
ofamanufacturingplantisassumedtobeinuse,thevalueassignedtothelandshouldnotbebasedon
theassumptionthathigh-risecondominiumswouldbebuiltontheproperty(“in-exchange”).
Example 3-6
Highest and Best Use of Land
ThefollowingexampleisextractedfromparagraphsA10andA11ofStatement157:
Thereportingentityacquireslandinabusinesscombination.Thelandiscurrentlydevelopedforindustrialuseasasiteforamanufacturingfacility.Thecurrentuseoflandoftenispresumedtobeitshighestandbestuse.However,nearbysiteshaverecentlybeendevelopedforresidentialuseassitesforhigh-risecondominiums.Basedonthatdevelopmentandrecentzoningandotherchangestofacilitatethatdevelopment,thereportingentitydeterminesthatthelandcurrentlyusedasasiteforamanufacturingfacilitycouldbedevelopedasasiteforresidentialuse(forhigh-risecondominiums).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 58/28645
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 3-6 (continued)
Highest and Best Use of Land
Inthisinstance,thehighestandbestuseofthelandwouldbedeterminedbycomparing(a)thefairvalueofthemanufacturingoperation,whichpresumesthatthelandwouldcontinuetobeusedascurrentlydevelopedforindustrialuse(in-use)and(b)thevalueofthelandasavacantsiteforresidentialuse,consideringthedemolitionandothercostsnecessarytoconvertthelandtoavacantsite(in-exchange).Thehighestandbestuseofthelandwouldbedeterminedbasedonthehigherofthosevalues.[Footnote14]
Footnote14states,“Insituationsinvolvingrealestateappraisal,thedeterminationofhighestandbestuseinthemannerdescribedabovealsomightconsiderotherfactorsrelatingtothemanufacturingoperation,includingitsassetsandliabilities.”
Determining the Market
3.54 Accordingtoparagraph8ofStatement157,a“fairvaluemeasurementassumesthatthe
transactiontoselltheassetortransfertheliabilityoccursintheprincipalmarketfortheassetorliability
or,intheabsenceofaprincipalmarket,themostadvantageousmarketfortheassetorliability.”The
determinationoftheprincipal(ormostadvantageous)marketisfromtheperspectiveofthereporting
entity.Thisallowsfordifferencesinfairvalueamongreportingentitiesdependingonthemarketormarketsinwhichtheytransact.
3.55 Theprincipalmarketisthemarketinwhichthereportingentitywouldselltheassetortransfer
theliabilitywiththegreatestvolumeorlevelofactivity.Oftenanentity’sprincipalmarketwillbeitsmost
advantageousmarketbecausemostentitiesattempttomaximizeprofits.Therefore,itwilltransactin
themostadvantageousmarketwiththegreatestvolumeorlevelofactivity.Ifanentitydoesnothave
aprincipalmarket,inaccordancewiththehighestandbestuseconcept,itshouldusethepriceinthe
marketthatmaximizesthefairvalueofanassetorminimizesthefairvalueofaliability(i.e.,themost
advantageousmarket).
Example 3-7 Determination of the Market
ParagraphA23ofStatement157statesthefollowing:
Afinancialassetistradedontwodifferentexchangeswithdifferentprices.Thereportingentitytransactsinbothmarketsandhastheabilitytoaccessthepriceinthosemarketsfortheassetatthemeasurementdate.InMarketA,thepricethatwouldbereceivedis$26,andtransactioncostsinthatmarketare$3(thenetamountthatwouldbereceivedis$23).InMarketB,thepricethatwouldbereceivedis$25,andtransactioncostsinthatmarketare$1(thenetamountthatwouldbereceivedinMarketBis$24).
a. IfMarketAistheprincipalmarketfortheasset(themarketinwhichthereportingentitywouldselltheassetwiththegreatestvolumeandlevelofactivityfortheasset),thefairvalueoftheassetwouldbemeasuredusingthepricethatwouldbereceivedinthatmarket($26).
b. Ifneithermarketistheprincipalmarketfortheasset,thefairvalueoftheassetwouldbemeasuredusingthepriceinthemostadvantageousmarket.Themostadvantageousmarketisthemarketinwhichthereportingentitywouldselltheassetwiththepricethatmaximizestheamountthatwouldbereceivedfortheasset,consideringtransactioncostsintherespectivemarkets(thatis,thenetamountthatwouldbereceivedintherespectivemarkets).BecausethepriceinMarketBadjustedfortransactioncostswouldmaximizethenetamountthatwouldbereceivedfortheasset($24),thefairvalueoftheassetwouldbemeasuredusingthepriceinthatmarket($25).Althoughtransactioncostsareconsideredindeterminingthemostadvantageousmarket,thepriceinthatmarketusedtomeasurethefairvalueoftheassetisnotadjustedforthosecosts.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 59/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 60/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 61/28648
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
liability.Undereitherapproach,thenetresultofallocatingthepurchasepriceisthesame.TheBoard
concludedthattheamountsassignedtoassetsandliabilitiesinapurchasebusinesscombination
shouldnotbenetofanyrelateddeferredtaxliabilityorasset.
3.60 Theappropriatetreatmentoftaxamortizationbenefitsinthemeasurementoffairvalueofan
assetwasaddressedatthe2006AICPANationalConferenceonCurrentSECandPCAOBDevelopments
bySECstaffmemberCherylTjon-Hing,whosepreparedremarksstated:
Taxamortizationbenefits(TAB)represents,asitsnameimplies,thecashflowgeneratedtoanowner
ofanassetasaresultofbeingabletowrite-offthefullfairvalueofthatassetfortaxpurposes
—generally,thisbenefitmayimpactafairvalueconclusion,derivedusinganincomeapproach,by
asmuchas20%to30%.Now,itseemslogicalthatthefairvalueofanassetshouldnotchangejust
becauseofthewayatransactionisstructured.SoTABsshouldbetakenintoaccount,indetermining
assetfairvalues,nomatterwhatthetaxattributesofatransactionare.Butforthoserequiring
morespecificguidance,FAS109,paragraphA129[footnoteomitted]implicitlystatesthatTABs
shouldbefactoredintoanasset’sfairvalue.Totheextentthataportionofthestep-upvalueisnot
deductiblefortaxpurposes,thatiswhatdeferredtaxliabilitiesarefor.Infact,preparersoffairvalue
measurementsshouldbeawarethatifaTABisnotfactoredintothefairvalueofanasset,there
maybeamismatchifanyassociateddeferredtaxliabilityisrecorded,foraccountingpurposes,inan
acquisitiontransaction.Now,despitetheaforementionedaccountingguidance,weoftenseethat
TABsareexcludedfromassetfairvaluesmeasuredforbusinesscombinationseffectedthrougha
purchaseofshares—usually,thisisbecausepreparersarguethatanystep-upinfairvalueovertax
valueisnotdeductiblefortaxpurposes.
3.61 Sections5.3.97–.108oftheAICPAPracticeAid,AssetsAcquiredinaBusinessCombination
toBeUsedinResearchandDevelopmentActivities:AFocusonSoftware,ElectronicDevices,and
PharmaceuticalIndustries,illustratetherequirementsofparagraphsA127–A129ofStatement109(see
3.59)inthecontextofapplyingthemultiperiodexcessearningsmethodinestimatingthefairvalueof
intangibleassetsacquiredforuseinresearchanddevelopment(R&D)activities,includingspecificin-
processR&Dprojects,forbusinesscombinations.
Use of a Third-Party Specialist to Assist in the Measurement of Fair Value
3.62 Manyentitiesengagethird-partyspecialiststoperformvaluations.Whetherafairvalue
measurementispreparedentirelybytheentityorwiththeassistanceofathird-partyspecialist,the
levelofevidenceneededtosupportameasurementisexpectedtobesimilar.Further,theentityshould
documentitsanalysisofthequalificationsoftheindividualsperformingthefairvaluemeasurements.
3.63 TheSECstaffhasoftencommentedaboutregistrants’useofvaluationexpertstoassignvalues
toassetsandliabilitiesinbusinesscombinations.Specifically,theSECstaffhasremindedregistrants
thattheirfilingsneednotrefertoathird-partyvaluationfirm.However,ifregistrantsdonotreferto
thevaluationfirm,theymustprovidedisclosuresthatexplainthemethodandassumptionstheyusedinthevaluation.Iftheyrefertothevaluationfirm,registrantsmustdisclosethefirm’snameanda
consentfromthevaluationfirmasrequiredbyItem601(a)(23)ofRegulationS-K.TheSECstaffhas
alsocautionedregistrantsthatiftheywanttoincorporatetheirfinancialstatementsintoaregistration
statement,thefinancialstatementsmustbeamendedtonametheexpertandtoincludeaconsentfrom
themifthestatementsdonotalreadydoso.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 62/28649
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
OnNovember26,2008,theSEC’sDivisionofCorporationFinanceissuedrevisedComplianceand
DisclosureInterpretations(C&DIs)ofSecuritiesActsectionsrelatedtotheuseofthird-partyspecialists.
Question141.02states:
Question:Aregistranthasengagedathirdpartyexperttoassistindeterminingthefairvaluesof
certainassetsorliabilitiesdisclosedintheregistrant’sSecuritiesActregistrationstatement.Mustthe
registrantdiscloseintheregistrationstatementthatitusedathirdpartyexpertforthispurpose?Inwhatcircumstancesmusttheregistrantdisclosethenameofthethirdpartyexpertinitsregistration
statementandobtainthethirdparty’sconsenttobenamed?
Answer:Theregistranthasnorequirementtomakereferencetoathirdpartyexpertsimply
becausetheregistrantusedorreliedonthethirdpartyexpert’sreportorvaluationoropinionin
connectionwiththepreparationofaSecuritiesActregistrationstatement.Theconsentrequirement
inSecuritiesActSection7(a)appliesonlywhenareport,valuationoropinionofanexpertisincluded
orsummarizedintheregistrationstatementandattributedtothethirdpartyandthusbecomes
“expertised”disclosureforpurposesofSecuritiesActSection11(a),withresultantSection11liability
fortheexpertandareductionintheduediligencedefenseburdenofproofforotherSection11
defendantswithrespecttosuchdisclosure,asprovidedinSecuritiesActSection11(b).
Iftheregistrantdeterminestomakereferencetoathirdpartyexpert,thedisclosureshouldmakeclear
whetheranyrelatedstatementincludedorincorporatedinaregistrationstatementisastatement
ofthethirdpartyexpertorastatementoftheregistrant.Ifthedisclosureattributesastatementtoa
thirdpartyexpert,theregistrantmustcomplywiththerequirementsofSecuritiesActRule436with
respecttosuchstatement.Forexample,ifaregistrantdisclosespurchasepriceallocationfiguresin
thenotestoitsfinancialstatementsanddisclosesthatthesefiguresweretakenfromorprepared
basedonthereportofathirdpartyexpert,orprovidessimilardisclosurethatattributesthepurchase
priceallocationfigurestothethirdpartyexpertandnottheregistrant,thentheregistrantshould
complywithRule436withrespecttothepurchasepriceallocationfigures.Ontheotherhand,ifthe
disclosurestatesthatmanagementortheboardpreparedthepurchasepriceallocationsandindoing
soconsideredorreliedinpartuponareportofathirdpartyexpert,orprovidessimilardisclosurethat
attributesthepurchasepriceallocationfigurestotheregistrantandnotthethirdpartyexpert,then
therewouldbenorequirementtocomplywithRule436withrespecttothepurchasepriceallocation
figuresasthepurchasepriceallocationfiguresareattributedtotheregistrant.
IndependentofSection7(a)considerations,aregistrantthatusesorreliesonathirdpartyexpert
report,valuationoropinionshouldconsiderwhethertheinclusionorsummaryofthatreport,
valuationoropinionisrequiredintheregistrationstatementtocomplywithspecificdisclosure
requirements,suchasItem1015ofRegulationM-A,Item601(b)ofRegulationS-Korthegeneral
disclosurerequirementofSecuritiesActRule408.
Election Date for the Fair Value Option
3.64 Statement159allowsanentitytomakeanirrevocableelectiononspecifieddatestomeasure
certainfinancialassetsandliabilitiesatfairvalue,bothinitiallyandinsubsequentperiods(referredtoas
the“fairvalueoption”).Thescopeofeligiblefinancialassetsandliabilitiesisdescribedinparagraphs
7and8ofStatement159.Thefollowingexcerpts(emphasisadded)fromparagraphs9and10ofStatement159,asamended,describetheelectiondatesapplicabletobusinesscombinations:
9.Anentitymaydecidewhethertoelectthefairvalueoptionforeacheligibleitemonitselection
date.Alternatively,anentitymayelectthefairvalueoptionaccordingtoapreexistingpolicyfor
specifiedtypesofeligibleitems.Anentitymaychoosetoelectthefairvalueoptionforaneligible
itemonlyonthedatethatoneofthefollowingoccurs...
e.An event that requires an eligible item to be measured at fair value at the time
of the event butdoesnotrequirefairvaluemeasurementateachreportingdateafterthat,
excludingtherecognitionofimpairmentunderlower-of-cost-or-marketaccountingorother-
than-temporaryimpairment.(Seeparagraph10.)[Emphasisadded]
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 63/28650
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
10.Some of the events that require remeasurement of eligible items at fair value,initial
recognitionofeligibleitems,orboth,andtherebycreateanelectiondateforthefairvalueoptionas
discussedinparagraph9(e)are:
a.Business combinations,asdefinedinFASBStatementNo.141(revised2007),Business
Combinations[Emphasisadded]
3.65 Statement159statesthatthedecisiontoelectthefairvalueoption(FVO)shouldbemadeasoftheelectiondateforeacheligibleitem.ItalsoallowsanentitytoautomaticallyelecttheFVOin
accordancewithapreexistingpolicyforspecifiedtypesofeligibleitems.Forexample,anentitymay
documentinawrittenpolicythatitwillelecttheFVOforalleligibleassetsitacquiresandliabilitiesit
assumesthroughbusinesscombinations.
3.66 UnlikeStatement133,Statement159provideslittleguidanceonthedocumentationrequiredto
supportanentity’sdecisiontoelecttheFVO.ParagraphA22ofStatement159notesthatcompliance
withthedocumentationrequirementsoftheStatementisamatterofinternalcontrol.Although
Statement159leavesroomfordiscretionaboutdocumentation,ifanentitydoesnothaveawell-
developedpreexistingpolicyforelection,itshoulddocumentevidenceoftheelectionconcurrentlywith
therecognitionorremeasurementofeligibleitems.
Use of the Residual Method to Value Acquired Intangible Assets Other ThanGoodwill
3.67 Certainentities,particularlyinthetelecommunications,broadcasting,andcableindustries,
havehistoricallyadopteda“residualmethod”forassigningfairvaluetocertainintangibleassetsthat
werebelievedcouldnotbeseparatelyanddirectlyvalued.Therefore,theresidualmethodwasusedto
allocatefairvaluetoan“indistinguishable”intangibleassetwitheitherzerogoodwillortorecognize
goodwillinamanneroutsideoftheguidanceinStatement141(R).Inresponsetothispractice,theEITF
issuedTopicD-108,whichstates:
TheSECstaffisawareofinstancesinwhichregistrantshaveassertedthatcertainintangibleassets
thatarisefromlegalorcontractualrightscannotbeseparatelyanddirectlyvalued(hereinafter
referredtoasa“directvaluemethod”)becausethenatureoftheparticularassetmakesit
fundamentallyindistinguishablefromgoodwillinabusinesscombination(forexample,cellular/
spectrumlicenses,cablefranchiseagreements,andsoforth).
3.68 TopicD-108alsoindicates:
TheSECstaffnotesthatafundamentaldistinctionbetweenotherrecognizedintangibleassetsand
goodwillisthatgoodwillisbothdefinedandmeasuredasanexcessorresidualasset,whileother
recognizedintangibleassetsarerequiredtobemeasuredatfairvalue.TheSECstaffdoesnotbelieve
thattheapplicationoftheresidualmethodtothevaluationofintangibleassetscanbeassumedto
produceamountsrepresentingthefairvaluesofthoseassets....Furthermore,theSECstaffnotes
thatthesametypesofassetsbeingvaluedusingtheresidualmethodbysomeentitiesarebeing
valuedusingadirectvaluemethodbyotherentities.Accordingly,theSECstaffbelievestheresidual
methodshouldnolongerbeusedtovalueintangibleassetsotherthangoodwill.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 64/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 65/28652
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Inventory
4.06 Inventoryacquiredinabusinesscombinationmustbemeasuredatfairvalueasoftheacquisition
date.NeitherStatement141(R)norStatement157providesdetailedguidanceformeasuringinventory
atfairvalue.Somehavequestionedwhether,underStatement157’sexitpricenotionandhighest-and-
best-useconcept,anacquiringentityispermittedtorecognizeanyprofitonfinishedgoodsinventory
acquiredinabusinesscombination.Whenaskedtodiscusstheissue,theFASB’sValuationResource
Group(VRG)1indicatedthatthefairvalueofinventoryisprobablyclosetoitsnetrealizablevalue,which
allowsanacquiringentitytorealizeaprofitonthesellingeffort.TheVRGindicatedthatthisviewis
supportedbyparagraphA24(f)ofStatement157,whichprovidesthefollowingguidanceonvaluing
finishedgoodsinventoryataretailoutlet:
Forfinishedgoodsinventorythatisacquiredinabusinesscombination,aLevel2inputwouldinclude
eitherapricetocustomersinaretailmarketorawholesalepricetoretailersinawholesalemarket,
adjustedfordifferencesbetweentheconditionandlocationoftheinventoryitemandthecomparable
(similar)inventoryitemssothatthefairvaluemeasurementreflectsthepricethatwouldbereceived
inatransactiontoselltheinventorytoanotherretailerthatwouldcompletetherequisiteselling
efforts.Conceptually,thefairvaluemeasurementshouldbethesame,whetheradjustmentsaremadetoaretailprice(downward)ortoawholesaleprice(upward).Generally,thepricethatrequiresthe
leastamountofsubjectiveadjustmentsshouldbeusedforthefairvaluemeasurement.
4.07 OnthebasisoftheVRG’scommentsandtheguidanceinStatement157,themeasurement
offinishedgoodsinventoryatfairvalueunderStatement141(R)isunlikelytodiffersignificantlyfrom
thatunderStatement141(i.e.,estimatedsellingpricelessthesumof(a)costsofdisposaland(b)a
reasonableprofitallowanceonthesellingeffort).
LIFO Inventory
4.08 Inventoriesshouldbemeasuredatfairvalueasoftheacquisitiondateeveniftheacquiree
previouslyusedthelast-in,first-out(LIFO)methodofaccounting.Themethodofaccountingthattheacquiringentitywillfolloworthattheacquireewasfollowingisnotrelevant.Carryoverofthebook
basisoftheacquiredentity’sLIFOinventoriesisnotpermitted.
4.09 SABTopic5.L(SAB58)statesthatregistrantsshouldrefertotheAICPAIssuePaper,
“IdentificationandDiscussionofCertainFinancialAccountingandReportingIssuesConcerningLIFO
Inventories,”forguidanceondeterminingwhatconstitutesacceptableLIFOaccountingpractice.The
IssuePaperstatesthatifacquiredinventoryisaddedtoanexistingLIFOpool,itshouldbeconsidered
partofcurrent-yearpurchases.Paragraph2-15oftheIssuePapernotesthattheorder-of-acquisition
approach(firstpurchaseprice)topricingcurrentpurchasesisthemostcompatiblewiththeLIFO
objective;however,anyofthethreeapproachesnotedinparagraph2-10maybeused:“(a)theorderof
acquisitionprice(firstpurchaseprice),(b)themostrecentacquisitionprice(latestpurchaseprice),or(c)theaveragepurchaseprice.”
Property, Plant, and Equipment
4.10 Property,plant,andequipmentacquiredinabusinesscombinationthatwillbeusedbythe
acquiringentityshouldbemeasuredatfairvalue.Theestimatedusefullifeofthepropertyisbased
ontheexpectedremainingusefullifetotheacquiringentity.Accordingly,neithertheacquiree’s
accumulateddepreciationnortheacquiree’sestimatedusefullifeforthepropertycarryovertothe
acquiringentity.
1 TheFASBestablishedtheVRGtoprovidetheFASBstaffwithinformationonexistingimplementationissuesaboutfairvaluemeasurementsusedforfinancialstatementreporting
andthealternativeviewpointsassociatedwiththoseimplementationissues.TheVRG’sdiscussionsarenotauthoritative.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 66/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 67/28654
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
CapitalLeases
4.17 Assetssubjecttoacapitalleaseandcapitalleaseobligationsmustbeseparatelyrecognizedat
fairvalueasoftheacquisitiondate.
Lessor Accounting
OperatingLeases 4.18 Ifanacquireeisalessorinanoperatinglease,theassetssubjecttothatleasearemeasured
atfairvaluewithoutconsiderationofthein-placeleases.Thatis,theassetshavethesamefairvalue
regardlessofwhethertheyaresubjecttoanoperatinglease.Anintangibleassetorliabilitymustbe
recognizediftheleasetermsarefavorableorunfavorablerelativetothemarkettermsofsimilarleases.
Inaddition,insomecircumstancesanintangibleassetmayberecognizedasoftheacquisitiondatefor
thevalueassociatedwithin-placeleasesandforanycustomerrelationshipwiththelessee.See 5.37for
furtherdiscussion.
DirectFinanceorSalesTypeLeases
4.19 Ifanacquireeisalessorinadirectfinanceorsalestypelease,theacquirerrecognizesand
measuresatfairvaluethereceivablethatrepresentsitsremaininginvestmentinthelease.
Guarantees
4.20 Liabilitiesforguaranteesmadebytheacquireethatareassumedbytheacquiringentitymust
bemeasuredatfairvalueasoftheacquisitiondate.Interpretation45’stransitionwastobeapplied
prospectivelytoguaranteesissuedormodifiedafterDecember31,2002.Therefore,anacquireemay
nothaverecognizedaliabilityforaguaranteeinitsfinancialstatementsifitwasissuedormodified
beforeDecember31,2002.Nevertheless,anacquiringentitymustrecognizeallliabilitiesforguarantees,
eveniftheacquireehadnotpreviouslyrecognizedthem.Allassumedguaranteearrangementsare
considerednewarrangementsfortheacquiringentity.Therefore,theexemptioninInterpretation45
doesnotapplytoacquisitionsoccurringafterDecember31,2002.
4.21 Afterinitialrecognitioninabusinesscombination,theaccountingforassetsandliabilitiesis
generallyprovidedbyotherGAAP.However,Interpretation45doesnotprovidedetailedguidanceon
howtheguarantor’sliabilityforitsobligationsundertheguaranteewouldbemeasuredafteritsinitial
recognition.Theliabilitythatanacquiringentityinitiallyrecognizesasoftheacquisitiondatewould
typicallybereduced(byacredittoearnings)asitisreleasedfromriskundertheguarantee.Insome
instances,thereleasefromtheriskundertheguaranteewillnotoccuruntilexpirationofsettlementof
theguarantee.FSPFIN45-2states:
Aguarantorshouldnotusefairvalueinsubsequentlyaccountingfortheliabilityforitsobligations
underapreviouslyissuedguaranteeunlesstheuseofthatmethodcanbejustifiedundergenerally
acceptedaccountingprinciples,asisthecase,forexample,forguaranteesaccountedforas
derivativesunderFASBStatementNo.133,AccountingforDerivativeInstrumentsandHedging
Activities.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 68/28655
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
4.22 Atthe2003NationalAICPAConferenceonCurrentSECDevelopments,anSECstaffmember
statedthefollowing:
Sowhatdowebelievetheappropriate“daytwo”accountingfortheobligationtostandready
wouldbe?...Itwouldseemasystematicandrationalamortizationmethodwouldmostlikelybe
theappropriateaccounting....Weunderstandthatsomebelievethatafairvaluemodelforthese
guaranteeliabilitiesandrecourseobligationsistherightaccounting.Howeverwefinditdifficulttosupportsuchanapproachinthecurrentliterature.
4.23 Interpretation45doesnotapplytoguaranteesbetweenparentsandtheirsubsidiaries.Ifan
acquiringentityandanacquireehadpreviouslyenteredintoaguaranteearrangement,suchguarantee
wouldnotberecognizedaspartofthebusinesscombination;however,theacquiringentitymust
determinewhetherthetransactionrepresentsthesettlementofapreexistingrelationship(see 3.32–
3.33).TheacquiringentitywouldbesubjecttothedisclosurerequirementsinInterpretation45.
Loss Contracts and Unfavorable Contracts
4.24 ParagraphA79(b)(1)ofStatement141(R)definesalosscontractasa“contractinwhich
theunavoidablecostsofmeetingtheobligationsunderthecontractexceedtheeconomicbenefits
expectedtobereceivedunderit.”Thisparagraphdefinesanunfavorablecontractas“acontractthatis
unfavorableintermsofcurrentmarketterms.Itisnotnecessarilyalosscontract.”Theacquiringentity
mustrecognizealiabilityeitherforalosscontractoranunfavorablecontractatfairvalueasofthe
acquisitiondate.
4.25 Anacquiringentitymustrecognizeanintangibleassetforafavorableoperatingleasewhenthe
acquireeisthelessee.See5.35forfurtherdiscussion.
Amounts Due to Employees of the Acquiree Upon a Change in Control
4.26 Anacquireemayhavepreexistingarrangementswithitsemployeesthatprovideforpayments
tothemuponachangeincontrol.Thearrangementsmaytakemanyforms,includingpaymentsto
someorallemployeesasoftheacquisitiondateandpaymentstoanemployeeaftertheacquisition
dateifthatemployeevoluntarilyleavesemploymentofthecombinedentitywithinapredetermined
period.Thesearetypicallynotrecognizedasliabilitiesonthebooksoftheacquiree,sincepayments
arecontingentuponachangeincontrol.Sucharrangementsmayneverthelessrepresentanassumed
liabilitytotheacquiringentitythatshouldberecognizedaspartofthebusinesscombination.The
followingexampleisadaptedfromparagraphsA88–A90ofStatement141(R):
Example 4-1
Amounts Due to Employees of the Acquiree Upon a Change in ControlTargetCompany(TC)hiredacandidateasitsnewCEOundera10-yearcontract.ThecontractrequiredTCtopaythecandidate$5millionifTCisacquiredbeforethecontractexpired.ACacquiresTCeightyearslater.TheCEOisstillemployedattheacquisitiondateandwillreceivetheadditionalpaymentundertheexistingcontract.
TCenteredintotheemploymentagreementbeforethenegotiationsofthecombinationbegan,andthepurposeoftheagreementwastoobtaintheservicesoftheCEO.Thus,thereisnoevidencethattheagreementwasarrangedprimarilytoprovidebenefitstoACorthecombinedentity.Thereforetheliabilitytopay$5millionisincludedintheapplicationoftheacquisitionmethod.
Inothercircumstances,TCmightenterintoasimilaragreementwithCEOatthesuggestionofACduringthenegotiationsforthebusinesscombination.Ifso,theprimarypurposeoftheagreementmightbetoprovideseverancepaytoCEO,andtheagreementmayprimarilybenefitACofthecombinedentityratherthanTCoritsformerowners.Inthatsituation,ACaccountsfortheliabilitytopayCEOinitspostcombinationfinancialstatementsseparatelyfromtheapplicationoftheacquisitionmethod.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 69/28656
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
4.27 Eacharrangementmustbeevaluatedtodeterminewhetherit(1)iscompensationexpenserather
thanapaymentforpastservicesand(2)meetsthecriteriaforbeingpartofthebusinesscombination
transaction.
Liabilities for Exiting an Activity of an Acquired Entity, Involuntary Termination
Benefits, and Relocation Costs4.28 Coststhatanacquiringentityexpectstoincurinthefuturerelatedtoitsplanstoexitanactivity,
involuntarilyterminateemployees,orrelocateemployeesofanacquiree(commonlycalledrestructuring
costs)generallywillnotqualifyasliabilitiesassumedinthebusinesscombination.Toqualifyasliabilities
assumed,suchrestructuringcostsneedtomeettherecognitioncriteriainStatement146asofthe
acquisitiondate.Paragraph4ofStatement146states:
Aliabilityforacostassociatedwithanexitordisposalactivityisincurredwhenthedefinitionofa
liabilityismet.Paragraph35ofFASBConceptsStatementNo.6,ElementsofFinancialStatements,
definesliabilitiesasfollows:
Liabilitiesareprobable[footnoteomitted]futuresacrificesofeconomicbenefitsarisingfrom
presentobligations[footnoteomitted]ofaparticularentitytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents.
Onlypresentobligationstoothersareliabilitiesunderthedefinition.Anobligationbecomesapresent
obligationwhenatransactionoreventoccursthatleavesanentitylittleornodiscretiontoavoid
thefuturetransferoruseofassetstosettletheliability.Anexitordisposalplan,byitself,doesnot
createapresentobligationtoothersforcostsexpectedtobeincurredundertheplan;thus,anentity’s
commitmenttoanexitordisposalplan,byitself,isnottherequisitepasttransactionoreventfor
recognitionofaliability.
4.29 Therefore,ifanacquiringentityexpectstorestructuretheacquiree’soperationsbutitisnot
obligatedtodosoasoftheacquisitiondate,aliabilityfortherestructuringcannotberecognized
aspartofthebusinesscombination.Theacquiringentitywouldaccountfortherestructuringinits
postcombinationfinancialstatements.Itisunlikelythatanacquiringentitywillbeabletomeetthe
recognitioncriteriainStatement146asoftheacquisitiondateunlesstheacquireehadpreviously
recognizedarestructuringliabilityinaccordancewithStatement146initspreacquisitionfinancial
statementsandtheacquirerassumesthatobligation.Anarrangemententeredintobytheacquiree,
oncenegotiationsforthebusinesscombinationhavestarted,shouldbecarefullyexaminedtodetermine
whetheritmeetsthecriteriatoberecognizedaspartofthebusinesscombination.
4.30 TheaccountingforrestructuringcostsunderStatement141(R)representsasignificantchange
frompreviousU.S.GAAP.Previously,Issue95-3allowedanacquiringentitytorecognizeliabilitiesfor
restructuringcostsbasedoncertaincriteriathatwerelessrestrictivethantheStatement146criteria.
Recognition of Liabilities for Contractual Termination Benefits or Changing BenefitPlan Assumptions in Anticipation of a Business Combination
4.31 Issue96-5addressestheaccountingforcontractualterminationbenefitsandcurtailment
lossesinanacquiree’spreacquisitionfinancialstatements.Itstatesthat“aliabilityforthecontractual
terminationbenefitsandcurtailmentlossesunderemployeebenefitplansthatwillbetriggered”bythe
businesscombinationshouldberecognizedwhenthebusinesscombinationisconsummatedrather
thanwhen“itisprobablethatthebusinesscombinationwillbeconsummated.”ThisIssue’sguidance
continuestoberelevantunderStatement141(R).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 70/28657
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Exceptions to the Recognition and Measurement Principles
Assets and Liabilities Arising From Contingencies
4.32 Assetsandliabilitiesarisingfromcontingencies(oftenreferredtoas“preacquisition
contingencies”)areanexceptiontotherecognitionprinciple.Paragraph24ofStatement141(R)
providesthefollowingguidanceonaccountingforassetsandliabilitiesarisingfromcontingencies:
TheguidanceinStatement5does not applyindeterminingwhichassetsorliabilitiesarisingfrom
contingenciestorecognizeasoftheacquisitiondate.Instead:
a. Theacquirershallrecognizeasoftheacquisitiondatealloftheassetsacquiredandliabilities
assumedthatarisefromcontingenciesrelatedtocontracts(referredtoascontractual
contingencies ),measuredattheiracquisition-datefairvalues.
b. Forallothercontingencies(referredtoasnoncontractualcontingencies ),theacquirershall
assesswhetheritismore likely than notasoftheacquisitiondatethatthecontingency
givesrisetoanassetoraliabilityasdefinedinConceptsStatement6.Ifthatcriterionismet
asoftheacquisitiondate,theassetorliabilityarisingfromanoncontractualcontingencyshall
berecognizedatthatdate,measuredatitsacquisition-datefairvalue.Ifthatcriterionisnot
metasoftheacquisitiondate,theacquirershallnotrecognizeanassetoraliabilityatthat
date.Theacquirershallinsteadaccountforanoncontractualcontingencythatdoesnotmeet
themore-likely-than-notcriterionasoftheacquisitiondateinaccordancewithotherGAAP,
includingStatement5,asappropriate.
4.33 Fornoncontractualcontingencies,themore-likely-than-notrecognitionthresholdisgenerally
understoodtomeanalikelihoodofmorethan50percent.Inaddition,intheassessmentofwhetheran
arrangementiscontractualornoncontractual,paragraph25ofStatement141(R)acknowledgesthat
“[i]nsomesituations,determiningwhetheracontingencyiscontractualornoncontractualmayrequire
theexerciseofjudgmentbasedonthefactsandcircumstancesofthespecificsituation.”Generally,
litigationatatargetentitywouldbeconsideredanoncontractualcontingency.
Example 4-2
Assets and Liabilities Arising From Contingencies
Case A
OnJune30,20X9,CompanyAacquiresCompanyB.Beforetheacquisition,Bwasservedwithaclassactionlawsuitregardingthesafetyofoneofitsproductsthatsoughtdamagesof$5billion.Thefairvalueofthecontingencyis$2billion.Asoftheacquisitiondate,CompanyAbelievesthatthereisonlya30percentchancethatitisliable.Thelawsuitisanoncontractualcontingency.However,becausethemore-likely-than-notrecognitionthresholdisnotmet,Awouldnotrecognizethecontingentliabilityasoftheacquisitiondate.TheentitywouldaccountforthecontingentliabilityinaccordancewithStatement5inpostcombinationperiods.
Case B
AssumethesamefactsasinCaseAexceptthatasoftheacquisitiondateAbelievesthatthereisa55percentchancethatitisliable.Inthiscase,becausethemore-likely-than-notrecognitionthresholdismet,Amustrecordthefairvalueofthecontingentliability($2billion)asoftheacquisitiondate.
Subsequent Measurement of Acquired Contingencies
4.34 Ifnewinformationisobtainedaboutthepossibleoutcomeofacontingentliabilityrecognized
asoftheacquisitiondate,itissubsequentlymeasured(withanychangesrecordedinearnings)atthe
higherofeitherofthefollowing:
• Theacquisition-datefairvalue.
• TheamountthatwouldberecognizedunderStatement5.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 71/28658
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
4.35 Ifnewinformationisobtainedaboutthepossibleoutcomeofacontingentassetrecognizedas
oftheacquisitiondate,itissubsequentlymeasured(withanychangesrecordedinearnings)atthelower
ofeitherofthefollowing:
• Theacquisitiondatefairvalue.
• Thebestestimateofitsfuturesettlementamount.
4.36 Acontingencymeasuredatfairvalueisdiscounted,whereasacontingencymeasuredin
accordancewithStatement5(i.e.,bestestimateofitsfuturesettlementamount)isgenerallynot.That
alonecouldleadtoanacquiringentityrecognizingaloss(orgain)aftertheacquisition,becausethe
amountforacontingentliabilityrecognizedunderStatement5wouldgenerallybehigherthanitsfair
value.Topreventimmediatelosses,orgainsinthecaseofcontingentassets,theFASBdecidedthata
contingencyshouldnotberemeasureduntilnewinformationisobtainedaboutitspossibleoutcome.
4.37 Anacquiringentitydoesnotderecognizethecontingentassetorliabilityifitsubsequentlyfalls
belowthemore-likely-than-notthreshold.Rather,acontingentassetwouldbederecognizedwhenitis
collectedorsoldorwhentherightsarelost,whereasacontingentliabilitywouldbederecognizedwhenitissettledortheobligationtosettleiscanceledorhasexpired.
Example 4-3
Assets and Liabilities Arising From Contingencies
Case C
AssumethesamefactsasinCaseBofExample4-2exceptthatoneyearhaspassedsincetheacquisitiondate.Asaresultofanunfavorablecourtrulingagainstoneofitscompetitors,Anowbelievesthereisa95percentchancethatitwillbefoundliable.Itsbestestimateoftheamountofexposureis$3billion.InaccordancewithStatement141(R),Amustincreasethecontingentliabilityrecordedby$1billion,to$3billion(sincethisrepresentsA’sbestestimateofthepayment),becausetheamountrequiredtoberecordedunderStatement5exceedstheacquisition-datefairvalueof$2billion.
Editor’s Note: OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwould
amendStatement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfair
valueasoftheacquisitiondateifsuchamountscanbereasonablydetermined.Itisexpectedthatthe
guidanceintheproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilities
atfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)
guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.
Income Taxes
4.38 Theacquirerrecognizesandmeasuresthedeferredtaxassets,liabilities,andvaluationallowances
ofanacquiredentityinabusinesscombinationthatrelatetotemporarydifferences,taxcarryforwards,
anduncertaintaxpositionsinaccordancewithotherapplicableGAAP,suchasStatement109and
Interpretation48.
4.39 Anyadjustmentstoanacquired entity’s deferredtaxassets,liabilities,valuationallowances,
orliabilitiesrelatedtouncertaintaxpositionsoftheacquireethatoccuroutsideofthemeasurement
period(orwithinthemeasurementperiodifitrelatestonewinformationthatdidnotexistasofthe
acquisitiondate)aregenerallyrecordedasacomponentofincometaxexpense.Inaddition,adjustments
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 72/28659
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
toanacquirer’sdeferredtaxassets,liabilities,andvaluationallowancesthatresultdirectlyfromthe
businesscombinationaregenerallyrecordedasacomponentofincometaxexpenseanddonotaffect
thebusinesscombinationaccounting.
4.40 See Section 8forfurtherdiscussionregardingincometaxes.
Employee Benefits
4.41 Paragraph28ofStatement141(R)requirestheacquirerto“recognizeandmeasurealiability(or
asset,ifany)relatedtotheacquiree’semployeebenefitarrangementsinaccordancewithotherGAAP,
asamendedby[Statement141(R)].”Theparagraphalsonotesthefollowingstandardsthatprovide
recognitionandmeasurementguidanceonemployeebenefits:
a. APBOpinionNo.12,OmnibusOpinion—1967 (deferredcompensationcontracts)
b. FASBStatementNo.43,AccountingforCompensatedAbsences
c. FASBStatementNo.87,Employers’AccountingforPensions [see4.43–4.44]
d. FASBStatementNo.88,Employers’AccountingforSettlementsandCurtailmentsofDefinedBenefitPensionPlansandforTerminationBenefits
e. FASBStatementNo.106,Employers’AccountingforPostretirementBenefitsOtherThan
Pensions[see4.43–4.44]
f. FASBStatementNo.112,Employers’AccountingforPostemploymentBenefits [see4.45]
g. FASBStatementNo.146,AccountingforCostsAssociatedWithExitorDisposalActivities
(one-timeterminationbenefits)
h. FASBStatementNo.158,Employer’sAccountingforDefinedBenefitPensionandOther
PostretirementPlans.
4.42 Statement141(R)providesabroadexceptiontorecognitionandmeasurementforallemployee
benefitobligations.TheFASBdecidednottorequirerecognitionandfairvaluemeasurementforallemployeebenefitsbecausethatwouldrequireacomprehensivereconsiderationoftherequirementsin
thesestandards,whichwasoutsidethescopeofthebusinesscombinationsproject.
Pensions and Other Postretirement Benefits
4.43 Statement141(R)amendsStatements87and106toexcludetheeffectsofanyplanned,but
notexecuted,amendments,terminations,orcurtailmentsinmeasuringthefundedstatusofpension
andotherpostretirementplans.Plannedoranticipatedamendments,terminations,orcurtailments
arenotpartoftheliabilityassumedasoftheacquisitiondate.Suchactionsarerecognizedinthe
postcombinationfinancialstatementsinaccordancewithStatement88.However,whenmeasuring
theprojectedbenefitobligationoraccumulatedpostretirementbenefitobligationofacquiredpension
orpostretirementplans,theacquiringentityshouldbaseitassumptionsonitsassessmentofrelevant
futureevents.See4.31regardingcurtailmentsthataretriggeredasoftheacquisitiondate.
MultiemployerPlans
4.44 Statement141(R)amendsStatements87and106toclarifythatanacquiringentityrecognizes
awithdrawalliabilityasoftheacquisitiondateinaccordancewithStatement5ifitisprobablethat,as
ofthatdate,theacquiringentitywillwithdrawfromamultiemployerplan.Therefore,theprovisions
formultiemployerplansandsingleemployerplansarenotthesame.TheFASBconsideredamending
Statements87and106torequirerecognitionofwithdrawalliabilitiesintheperiodthatthewithdrawal
fromthemultiemployerplanoccurs.However,theFASBobservedthateventhoughtheprovisions
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 73/28660
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
forwithdrawalofliabilitiesfrommultiemployerplansandsingleemployerplansseeminconsistent,
theresultsareactuallysomewhatcomparable.Thatisbecausetheliabilitythatisrecognized
uponwithdrawalfromamultiemployerplanrelatestothepreviouslyunrecognizedportionofthe
accumulatedbenefitobligation,whichisrecognizedinasingleemployerplan.
Postemployment Benefits
4.45 Statement112appliestoalltypesofpostemploymentbenefitsotherthanpensions,
postretirementbenefits,deferredcompensationarrangements,orterminationbenefits,whichare
addressedinotherstandards.Itrequiresthataliabilityforpostemploymentbenefitsbeaccountedforin
accordancewithStatement5.However,theBasisforConclusionsinStatement112alsostatesthatan
entitymayrefertotheguidanceinStatements87and106formeasuringaliabilityforpostemployment
benefitobligations.Thus,theamendmentstoStatements87and106wouldapplytoexcludethe
effectsofanyplannedamendments,terminations,orcurtailmentsinmeasuringtheassumedobligation
inabusinesscombination.
Indemnification Assets
4.46 Inabusinesscombination,theformerownersofanacquireemaycontractuallyagreeto
indemnifytheacquiringentityforuncertaintiesrelatedtospecificassetsorliabilities.Commonexamples
relatetolawsuitsanduncertaintaxpositions.Suchanindemnificationrepresentsanassetacquiredin
thebusinesscombination.
4.47 Therecognitionandmeasurementoftheindemnificationassetisbasedonwhetherthe
indemnifieditemisrecognizedandhowitismeasured.Incertainsituations,theindemnificationasset
mayrelatetoanassetorliabilitythatisanexceptiontotherecognitionormeasurementprinciples
(seesummaryin3.15).Paragraph30ofStatement141(R)requiresthatinsuchsituations,the
indemnificationassetberecognizedonlyiftherelatedassetorliabilitysubjecttoindemnificationis
recognizedinthebusinesscombination.Ifrecognized,theindemnificationassetismeasuredonthesamemeasurementbasisastheindemnifieditem,subjecttomanagement’sassessmentofcollectibility
andanycontractuallimitations.Thus,indemnificationassetsmaybeanexceptiontoeitherorbothof
therecognitionandmeasurementprinciplesofStatement141(R).
Example 4-4
Indemnification Assets
OnJune15,20X9,CompanyAacquired100percentofCompanyB.Beforetheacquisition,Bhada$100liabilityrelatedtoB’suncertaintaxpositionthatwasrecognizedinaccordancewithInterpretation48.Inapplyingtheacquisitionmethodofaccounting,AmustfollowInterpretation48and,therefore,recognizea$100liabilityrelatedtoB’suncertaintaxposition.(Thatis,AagreedwithB’sanalysisoftheuncertaintaxposition.)Aspartoftheacquisition,theformerownersof
BagreedtoindemnifyAforanylossesrelatedtothetaxposition(includingthe$100liabilityrecognizedbyA).Statement141(R)requiresthatArecognizeanindemnificationassetatthesameamountastheliability,$100(assumingthatcollectibilityisnotindoubt),eventhoughthisamountmostlikelydoesnotrepresentitsfairvalue(i.e.,themeasurementrequirementsofInterpretation48arenotfairvalue).
Subsequent Accounting for Indemnification Assets
4.48 Paragraph64ofStatement141(R)requiresthataftertheacquisition,anindemnificationasset
continuestobemeasuredonthebasisoftheindemnifieditem,subjecttomanagement’sassessmentof
collectibilityandanycontractuallimitations.Anacquiringentityonlyderecognizestheindemnification
asset“whenitcollectstheasset,sellsit,orotherwiselosestherighttoit.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 74/28661
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Share-Based Payment Awards
4.49 Thefairvalueofallshare-basedpaymentawardsinabusinesscombinationiscalculatedin
accordancewithStatement123(R).ThemeasurementguidanceinStatement123(R)isfair-value-
based,notfairvalue.Afair-value-basedmeasureexcludessomeassumptions(e.g.,thegrant-date
estimatedfairvaluedoesnottakeintoaccounttheeffectonfairvalueofthevestingconditionsand
otherrestrictionsthatapplyonlyduringtherequisiteserviceperiod)thatwouldbeincludedinafair
valuemeasurement.Thus,share-basedpaymentawardsareanexceptiontothefairvaluemeasurement
principle.See6.05–6.19formoredetailsaboutthereplacementofanacquiree’sshare-basedpayments
awards.
Assets Held for Sale
4.50 Paragraph33ofStatement141(R)requiresthat“anacquiredlong-livedasset(ordisposal
group)thatisclassifiedasheldforsaleattheacquisitiondate[bemeasured]atfairvaluelesscoststo
sell.”Thelong-livedassetordisposalgroupmustmeetthecriteriainparagraph30ofStatement144
tobeclassifiedasheldforsale,exceptforthe“one-year”criterioninparagraph30(d).Foranewly
acquiredlong-livedassetordisposalgroup,anacquiringentityisallowed“ashortperiodfollowingthe
acquisition(usuallywithinthreemonths)”tomeetallofthecriteria.Ifthelong-livedassetordisposal
groupcannotbeclassifiedasheldforsale,itwouldbemeasuredinaccordancewiththerequirementsin
Statement141(R),whichwouldgenerallybefairvalue.
4.51 TheBasisforConclusionsinStatement141(R)describestheexceptionforassetsheldforsaleas
a“temporaryexception.”TheFASBhadconsideredamendingStatement144torequirethatassetsheld
forsalebemeasuredatfairvalueratherthanatfairvaluelesscoststosell.However,theFASBhassince
takenthatprojectoffitsagenda.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 75/28662
Section 5 — Recognizing and MeasuringAcquired Intangible Assets and Goodwill
Intangible Assets
5.01 Paragraph3ofStatement141(R)definesanintangibleassetasanasset(otherthanafinancialasset)thatlacksphysicalsubstance(excludinggoodwill).Suchanassetisidentifiableifiteither:
(1) Isseparable,thatis,capableofbeingseparatedordividedfromtheentityandsold,
transferred,licensed,rented,orexchanged,eitherindividuallyortogetherwitharelated
contract,identifiableasset,orliability,regardlessofwhethertheentityintendstodoso;or
(2) Arisesfromcontractualorotherlegalrights,regardlessofwhetherthoserightsare
transferableorseparablefromtheentityorfromotherrightsandobligations.
Examples of Intangible Assets That Are Identifiable
5.02 Becausetheacquireegenerallyexpensesinternallydevelopedintangiblesasincurred,not
allidentifiableintangibleassetswillberecordedintheacquiree’sbalancesheet.Thefollowinglist
(notall-inclusive)ofexamplesofidentifiableintangibleassetsrecognizedinabusinesscombination
isextractedfromparagraphsA30,A31,A36,A44,A46,andA51ofStatement141(R)(paragraph
referencesareinbracketsbelow).NotethattheFASBhascautionedthatsomeoftheseexamplesmay
havecharacteristicsofassetsotherthanintangibleassetsandthattheacquirershouldaccountforsuch
assetsonthebasisoftheasset’ssubstance.SeeparagraphsA29–A56ofStatement141(R)foradditional
discussionregardingtheseexamples.
Intangibleassetsdesignatedwiththesymbol#arethosethatarisefromcontractualorotherlegal
rights.Thosedesignatedwiththesymbol*donotarisefromcontractualorotherlegalrightsbutare
separable.Intangibleassetsdesignatedwiththesymbol#mightalsobeseparable,butseparabilityis
notanecessaryconditionforanassettomeetthecontractual-legalcriterion.[A30]
Marketing-RelatedIntangibleAssets
a. Trademarks,tradenames,servicemarks,collectivemarks,certificationmarks#
b. Tradedress(uniquecolor,shape,packagedesign)#
c. Newspapermastheads#
d. Internetdomainnames#
e. Noncompetitionagreements.#[A31]
Customer-RelatedIntangibleAssets
a.Customerlists*[See5.12–5.14.]
b.Orderorproductionbacklog#[See5.15]
c.Customercontractsandrelatedcustomerrelationships#[See5.16–5.18.]
d.Noncontractualcustomerrelationships.*[A36;see5.22–5.23.]
Artistic-RelatedIntangibleAssets
a.Plays,operas,ballets#
b.Books,magazines,newspapers,otherliteraryworks#
c.Musicalworkssuchascompositions,songlyrics,advertisingjingles#
d.Pictures,photographs#
e.Videoandaudiovisualmaterial,includingmotionpicturesorfilms,musicvideos,television
programs.#[A44]
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 76/28663
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Contract-BasedIntangibleAssets
a.Licensing,royalty,standstillagreements#
b.Advertising,construction,management,serviceorsupplycontracts#
c.Leaseagreements(whethertheacquireeisthelesseeorthelessor)#
d.Constructionpermits#
e.Franchiseagreements#
f.Operatingandbroadcastrights#
g.Servicingcontractssuchasmortgageservicingcontracts#
h.Employmentcontracts#
i.Userightssuchasdrilling,water,air,timbercutting,androuteauthorities.#[A46]
Technology-BasedIntangibleAssets
a.Patentedtechnology#
b.Computersoftwareandmaskworks#
c.Unpatentedtechnology*
d.Databases,includingtitleplants*
e.Tradesecrets,suchassecretformulas,processes,recipes.#[A51]
5.03 IncorrespondencetotheFASBstaffdatedAugust16,2001,thenSECChiefAccountantLynnE.
Turnernotedthefollowing:
AppendixAofSFASNo.141indicatesthatthelistofidentifiableintangibleassetsisillustrative.The
SECstaffbelievesthereisarebuttablepresumptionthatanyintangibleassetidentifiedinthelisting
willbevaluedinapurchasebusinesscombination.Initsreviewoffilings,thestaffmaylooktosuch
documentationasthesalesagreement,memorandums,presentationsbythetargettothebuyer,
minutesoftheBoardofDirectorsMeetings,etc.fordiscussionsandevidenceofassets,including
intangibles,beingpurchased.
WhiletheSECstaff’scommentsreferredtoStatement141,thelistofintangibleassetsitdescribeswas
carriedforwardtoStatement141(R),andthereforetheviewsexpressedremainapplicable.
5.04 Inadditiontothedocumentationlistedabove,considerationofthefollowingshouldbeincluded
inasearchforthepresenceofacquiredintangibleassets:
• Otheracquisitionsbytheacquirerinthesamelineofbusiness.
• Otheracquisitionsinthesameindustry.
• Historicalfinancialstatementsanddisclosuresoftheacquiredentityfordisclosure,discussion,
orboth,ofanypreviouslyrecognizedorunrecognizedintangibles.
5.05 Companiesthathaverecordedsignificantamountsofgoodwillinabusinesscombinationare
frequentlyaskedbytheSECstaffwhythegoodwillwasnotattributedtoparticularintangibleassets.
DuringsuchinquiriestheSECstaffoftenrequestsadditionalinformationfromcompanies,including
itemssuchas(1)themergeragreement(includinganydisclosurestatement),(2)memorandums
preparedinconnectionwiththemerger,(3)marketingmaterialspreparedbythetarget(including
presentations),and(4)minutesoftheboardofdirectorsofthebuyeraboutthemerger.TheseSEC
inquiriesoftenresultincompanieshavingtodiscloseadditionalfactorsthatcontributedtoalarge
goodwillbalanceand,insomeinstances,therecognitionofadditionalintangibleassets.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 77/28664
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Intangible Assets That Are Not Identifiable
5.06 Statement141containedexamples(listedbelow)ofintangibleassetsthatdonotmeetthe
criteriaforrecognitionapartfromgoodwill.WhileStatement141(R)didnotcarryforwardthese
examples,theyarestillconsideredrelevant:
• Customerbase—agroupofcustomersthatarenotknownoridentifiabletotheentity(e.g.,
customersofafast-foodfranchise).
• Customerservicecapability.
• Presenceingeographicmarketsorlocations.
• Nonunionstatusorstronglaborrelations.
• Ongoingtrainingorrecruitingprograms.
• Outstandingcreditratingsandaccesstocapitalmarkets.
• Favorablegovernmentrelations.
• Potentialcontractscurrentlybeingnegotiated.• Assembledworkforce(see5.07).
Assembled Workforce
5.07 ParagraphA25ofStatement141(R)describesanassembledworkforceas“[a]nexistingcollection
ofemployeesthatpermitstheacquirertocontinuetooperateanacquiredbusinessfromtheacquisition
date.”ParagraphB178ofStatement141(R)explainswhyanassembledworkforceisnotanidentifiable
intangibleassettoberecognizedseparatelyfromgoodwillinabusinesscombination:
Becauseanassembledworkforceisacollectionofemployeesratherthananindividualemployee,
itdoesnotarisefromcontractualorlegalrights.Althoughindividualemployeesmighthave
employmentcontractswiththeemployer,thecollectionofemployees,asawhole,doesnothave
suchacontract.Inaddition,anassembledworkforceisnotseparable,eitherasindividualemployees
ortogetherwitharelatedcontract,identifiableasset,orliability.Anassembledworkforcecannot
besold,transferred,licensed,rented,orotherwiseexchangedwithoutcausingdisruptiontothe
acquirer’sbusiness.Incontrast,anentitycouldcontinuetooperateaftertransferringanidentifiable
asset.
5.08 ForacquisitionsofnetassetsoutsideofthescopeofStatement141(R)(i.e.,netassetsthatare
determinednottobeabusiness),itisnecessarytoassesswhetheranassembledworkforceintangible
assetispresent;ifpresent,suchanassetwouldberecognized(see1.13).
Intangible Assets the Acquirer Intends Not to Use or to Use in a Way Other ThanTheir Highest and Best Use
5.09 Inabusinesscombinationoranassetacquisition,anentitymayacquireanintangibleassetthat
itdoesnotintendtoputtoitshighestandbestuse.Forexample,anentitymayacquireacompetitor,
includingitstradename,inbusinesscombination.Insuchsituations,theacquirermaydecidenottouse
theacquiredentity’stradenamebecauseitdirectlycompeteswithitsowntradename.Iftheacquirer
intendstopreventothersfromusingtheacquiredtradename,theassethasvaluebecauseitenhances
thevalueoftheacquirer’sowntradename(suchassetsarecommonlyreferredtoas“defensivevalue
assets”).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 78/28665
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
5.10 ParagraphA59ofStatement141(R)requirestheacquiringentitytorecognizeatfairvalue
anintangibleassetthatitdoesnotintendtoputtoitshighestandbestuse.Aftertheissuanceof
Statement141(R),questionsaroserelatedtotheinitialandsubsequentaccountingforsuchassets.
Whilenotaddressingmeasurementissues,theEITFprovidedclarifyingguidanceoncertainaspectsof
theinitialandsubsequentaccountingfordefensivevalueassetsinIssue08-7.Specifically,theTaskForce
noted:
Adefensiveintangibleassetcouldincludeanassetthattheacquirerwillneveractivelyuse,aswellas
anassetthatwillbeusedbytheacquirerduringatransitionperiodwhentheintentionoftheacquirer
istodiscontinuetheuseofthatasset.
Thedeterminationofwhetheranintangibleassetisadefensiveintangibleassetisbasedonthe
intentionsofthereportingentityandthatdeterminationmaychangeasthereportingentity’s
intentionschange(forexample,anintangibleassetthatwasaccountedforasadefensiveintangible
assetonthedateofacquisitionwillceasetobeadefensiveassetifanacquirersubsequentlydecides
toactivelyusetheasset)....
Adefensiveintangibleassetshouldbeaccountedforasaseparateunitofaccounting.Itshouldnot
beincludedaspartofthecostoftheacquirer’sexistingintangibleasset(s)becausethedefensive
intangibleassetisseparatelyidentifiable.
Inaddition,theTaskForceprovidedthefollowingexamples(notall-inclusive)ofdefensivevalueassets
thatfallwithinthescopeofIssue08-7:
Example 1
CompanyA,aconsumerproductsmanufacturer,acquiresanentitythatsellsaproductthat
competeswithoneofCompanyA’sexistingproducts.CompanyAplanstodiscontinuethesaleof
thecompetingproductwithinthenextsixmonths,butwillmaintaintherightstothetradename,at
minimalexpectedcost,topreventacompetitorfromusingthetradename.Asaresult,CompanyA’s
existingproductwillexperienceanincreaseinmarketshare.CompanyAdoesnothaveanycurrent
planstoreintroducetheacquiredtradenameinthefuture.
Analysis:BecauseCompanyAdoesnotintendtoactivelyusetheacquiredtradename,butintendsto
holdtherightstothetradenametopreventitscompetitorsfromusingit,thetradenamemeetsthe
definitionofadefensiveintangibleasset.
Example 2
CompanyAacquiresagroupofassets,oneofwhichisbillingsoftwaredevelopedbytheselling
entityforitsownuse.Afterasixmonthtransitionperiod,CompanyAplanstodiscontinueuseofthe
internallydevelopedbillingsoftware.Invaluingthebillingsoftwareinconnectionwiththeacquisition,
CompanyAdeterminesthatamarketparticipantwouldusethebillingsoftware,alongwithother
assetsintheassetgroup,foritsfullremainingeconomiclife(thatis,CompanyAdoesnotintend
tousetheassetinawaythatisatitshighestandbestuse).Duetothespecializednatureofthe
software,CompanyAdoesnotbelievethesoftwarecouldbesoldtoathirdpartywithouttheother
assetsacquired.Analysis:AlthoughCompanyAdoesnotintendtoactivelyusetheinternallydevelopedbilling
softwareafterasixmonthtransitionperiod,CompanyAisnotholdingtheinternallydeveloped
softwaretopreventitscompetitorsfromusingit.Therefore,theinternallydevelopedsoftwareasset
doesnotmeetthedefinitionofadefensiveintangibleasset.
Example 3
CompanyAacquiresaresearchanddevelopmentintangibleassetinabusinesscombination.The
reportingentitydoesnotintendtocompletetheacquiredresearchanddevelopmentprojectbecause
iftheprojectwascompleted,thetechnologydevelopedwouldcompetewithoneofCompanyA’s
existingproducts.Instead,CompanyAintendstoholdtheprojecttopreventitscompetitorsfrom
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 79/28666
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
obtainingaccesstothetechnology.CompanyAbelievesthatholdingtheprojectwilldelaythe
developmentofacompetingproduct,allowingCompanyAtokeepitscurrentmarketsharefora
longerperiodthanitwouldifthecompetingprojectwascompleted.
Analysis:BecauseCompanyAdoesnotintendtoactivelyusetheresearchanddevelopment
intangibleasset,butintendstoholdtherightstotheassettopreventitscompetitorsfromusingit,
theintangibleresearchanddevelopmentassetmeetsthedefinitionofadefensiveintangibleasset.
Example 4
CompanyAacquiresaresearchanddevelopmentintangibleassetinabusinesscombination.The
projectunderdevelopmentissimilartoanexistingprojectofCompanyAandCompanyAdoesnot
intendtoimmediatelypursuetheacquiredproject.However,ifCompanyA’sexistingprojectisnot
successfulinthenextsixmonths,CompanyAintendstoresumeworkontheacquiredproject.If
CompanyA’sexistingprojectissuccessful,theacquiredprojectwillbeabandonedandCompanyA
wouldnotbeconcernedifathirdpartygainedaccesstothatproject.
Analysis:CompanyAisnotholdingtheintangibleresearchanddevelopmentassettopreventits
competitorsfromusingit.Instead,CompanyAisholdingtheassetasanalternativetoitsexisting
researchanddevelopmentproject.Therefore,theresearchanddevelopmentintangibleassetdoesnot
meetthedefinitionofadefensiveintangibleasset.
See10.28–10.29forsubsequentaccountingconsiderationsregardingacquiredintangibleassetsthatare
recognizedasoftheacquisitiondateandwillnotbeputtotheirhighestandbestuse.
Grouping Complementary Assets
5.11 Statement141(R)offersthefollowingthreeexamplesofacquiredassetsgroupedforfinancial
reporting:
• Abrandorbrandnameconsistingofa“trademark(orservicemark)anditsrelatedtradename,
formulas,recipes,andtechnologicalexpertise.”SeeparagraphA34ofStatement141(R).
• Alicensetoownandoperateanuclearpowerplant.SeeparagraphA20(b)ofStatement141(R).
• Anartistic-relatedcopyright“andanyrelatedassignmentsorlicenseagreements.”See
paragraphA45ofStatement141(R).
Ineachexample,afactorcitedinsupportofgroupingtheassetsforfinancialreportingwasthatthe
individualassetshavesimilarusefullives.Inaddition,whetherthegroupingofassetsisappropriate
dependsonwhethertheassetshavesimilarmethodsofamortization,sincethiswouldensureasimilar
effectonfinancialreporting.
Customer Lists
5.12 ParagraphA37ofStatement141(R)states:
Acustomerlistconsistsofinformationaboutcustomers,suchastheirnamesandcontactinformation.
Acustomerlistalsomaybeintheformofadatabasethatincludesotherinformationaboutthe
customers,suchastheirorderhistoriesanddemographicinformation.Acustomerlistgenerally
doesnotarisefromcontractualorotherlegalrights.However,customerlistsarefrequentlyleased
orexchanged.Therefore,acustomerlistacquiredinabusinesscombinationnormallymeetsthe
separabilitycriterion.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 80/28667
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
5.13 Whilemostentitiespossesssomeinformationabouttheircustomers,whichwouldestablishthe
existenceofacustomer-listintangibleasset,thespecificinformationpossessedandtheresultingvalue
ofthisassetwillvary.Inaddition,insomeinstances,restrictionsonthesaleortransferofcustomerlists
couldpreventtheseparabilitycriterionfrombeingmetaltogether.
5.14 Thefollowingdecisiontreeassiststheacquiringentityindeterminingwhetheranintangibleasset
existsrelatedtoacustomerlist:
Order or Production Backlog
5.15 Typically,acquiredentitiespossessorderorproductionbacklogs(e.g.,purchaseandsalesorders).
ParagraphA38ofStatement141(R)providesthat“[a]norderorproductionbacklogacquiredina
businesscombinationmeetsthecontractual-legalcriterionevenifthepurchaseorsalesordersare
cancelable.”(Seefurtherdiscussionin5.17.)
Customer Contracts and Related Customer Relationships
5.16 ParagraphA39ofStatement141(R)states:
Ifanentityestablishesrelationshipswithitscustomersthroughcontracts,thosecustomerrelationships
arisefromcontractualrights.Therefore,customercontractsandtherelatedcustomerrelationships
acquiredinabusinesscombinationmeetthecontractual-legalcriterion,evenifconfidentialityor
othercontractualtermsprohibitthesaleortransferofacontractseparatelyfromtheacquiree.
5.17 Anentityisnotrequiredtohaveanexistingcontractwithacustomerasoftheacquisitiondate
foranintangibleassettoberecognized.Rather,iftheacquiredentityroutinelysignscontractswithits
customers(e.g.,salesandpurchaseorders),theacquiringentitywouldrecognizeseparateintangible
assetsforthefollowing:
• Customercontractsexistingasoftheacquisitiondate.
• Customerrelationships,regardlessofwhetheracontractexistsasoftheacquisitiondate.
AlthoughStatement141(R)doesnotdefinetheterm“contractual,”itstatesthatbothoftheabove
itemswouldsatisfythecontractual-legalcriterion.Therefore,theabsenceofenforceablerightsby
thepartiestoaparticularagreementwouldnotappeartoprecluderecognition.TheSECstaffhas
historicallyagreedwiththisview.
Iscustomerinformation,suchasnameandcontactnumber,known?
No Nofurtheranalysisrequired.Nointangibleassetexistsrelatedtoacustomerlist.
Yes
Dotermsofconfidentialityorotheragreementsprohibitanentityfromselling,leasing,orotherwiseexchanginginformationaboutsomeorallofitscustomers?
Yes Nofurtheranalysisrequired.Criteriaforrecognitionapartfromgoodwillnotmet.
No
Forcustomersthatdonotprohibitselling,leasing,orotherwiseexchanginginformation,customerlistintangiblemeetscriteriaforrecognitionapartfromgoodwill.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 81/28668
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
5.18 Statement141(R)nullifiedIssue02-17butcarriedforwardtheEITF’spriordecisionsabout
customercontractsandrelatedcustomerrelationships.Issue02-17offeredthefollowingillustration,
whichisstillconsideredrelevantundertheguidanceinStatement141(R):
CompanyXacquiresCompanyYinabusinesscombinationonDecember31,20X2.CompanyY
doesbusinesswithitscustomerssolelythroughpurchaseandsalesorders.AtDecember31,20X2,
CompanyYhasabacklogofcustomerpurchaseordersin-housefrom60percentofitscustomers,allofwhomarerecurringcustomers.Theother40percentofCompanyY’scustomersarealsorecurring
customers;however,asofDecember31,20X2,CompanyYdoesnothaveanyopenpurchaseorders,
orothercontracts,withthosecustomers.
Evaluation: Thepurchaseordersfrom60percentofCompanyY’scustomers(whethercancelable
ornot)meetthecontractual-legalcriterionand,therefore,mustberecordedatfairvalueapart
fromgoodwill.Additionally,sinceCompanyYhasestablisheditsrelationshipwith60percentofits
customersthroughacontract,thosecustomerrelationshipsmeetthecontractual-legalcriterionand
mustalsoberecordedatfairvalueapartfromgoodwill.
BecauseCompanyYhasapracticeofestablishingcontractswiththeremaining40percentofits
customers,thosecustomerrelationshipsalsoarisethroughcontractualrightsand,therefore,meetthe
contractual-legalcriterion.CompanyXmustrecordthecustomerrelationshipfortheremaining40
percentofCompanyY’scustomersatfairvalueapartfromgoodwill,eventhoughCompanyYdoes
nothavecontractswiththosecustomersatDecember31,20X2.
Customer Loyalty Programs
5.19 Customerloyaltyprogramsgenerallyallowcustomerstoearncurrentorfuturediscounts,free
productsorservices,orotherbenefitsonthebasisofcumulativepurchasesfromtheoperatorofthe
program.Manyairlines,casinos,hotels,andretailersoffersuchprograms.Theprogram’senrollment
processisoftendesignedtobeeasytocomplete,withtheparticipantgenerallyagreeingtotheterms
andconditionsoftheprogramatthetimeofenrollment.Participantsinsuchprogramsgenerallyhave
noobligationtocompletefuturepurchasesofproductsorservices,andoperatorsofsuchprograms
generallyreservetherighttomodifyorcanceltheprogramatanytime.Despitetheabsenceofenforceablerightsbetweenthepartiesastofuturepurchasesorfulfillmentofaccruedbenefits,such
arrangementsaredeemed“contractual”asthattermisusedinStatement141(R),becausetheparties
haveagreedtocertaintermsandconditions,havehadapreviouscontractualrelationship(see5.17–
5.18),orboth.Anyliabilityaccruals,orrevenuedeferrals,bytheoperatorarealsoevidencethatthe
arrangementis“contractual”asthattermisusedinStatement141(R).
5.20 Notethatanacquiringentity,inadditiontoevaluatingtherecognitionandmeasurementofan
acquiredcustomer-relatedintangibleasset,mustseparatelyevaluatetherecognitionandmeasurement
ofassumedliabilitiesrelatedtoacustomerloyaltyprogramoftheacquiredentityasoftheacquisition
date.
Overlapping Customers
5.21 Inabusinesscombination,itisnotuncommonthatcertaincustomersoftheacquiringentity
arealsocustomersoftheacquiredentity(“overlappingcustomers”).Thisraisesanissueregardingthe
recognitionandmeasurementofanacquiredcustomercontractandarelatedcustomer-relationship
intangibleasset.Whileanacquiredentity’scustomercontractswouldbeinstrumentaltotheacquiring
entity,somehaveassertedthattherelatedcustomerrelationshipisnotinstrumentaltotheacquiring
entityandthushasnovaluetotheacquiringentity.Atthe2005AICPANationalConferenceonCurrent
SECandPCAOBDevelopments,anSECstaffmember(PamelaR.Schlosser),inpreparedremarks,
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 82/28669
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
offeredthefollowingexamplethattookexceptiontotheviewthatnovaluetotheacquiringentitywas
presentuponacquisitioninsuchasituation:
CompanyA,whichsellsapparelproductstoretailcustomers,acquiresCompanyB,whichsellstoy
productstothosesameretailcustomers.Thequestionis:atwhatamountthecustomerrelationships
ofCompanyBshouldberecognized,consideringthefactthatCompanyAalreadyhadrelationships
withthoseverysamecustomers,albeitfordifferentproductsales?
Somehavearguedthatinthissituation,novalueshouldbeattributedtotheseintangibleassetssince
CompanyAalreadysolditsapparelproductstoCompanyB’scustomerbase,andthusalreadyhad
pre-establishedrelationshipswiththem.However,wehavefoundthisargumentdifficulttoaccept.
Becauseoftheacquisition,CompanyAnowhastheabilitytosellnewproducts(thatis,toyproducts)
toitsretailcustomersthatitwasunabletosellpriortotheacquisitionofCompanyB.Andevenif
thetwocompaniessoldcompetingproductstothesameretailcustomers,forinstancebothsoldtoy
products,thefactthatCompanyAhasincreasedits“shelfspace”ateachofitscustomers’retail
locationswouldbeindicativeofvaluetothoserelationships.
Noncontractual Customer Relationships
5.22 Theacquiredentitymaynothavecontractualrelationshipswithitscustomers(see5.16).Nevertheless,theacquiringentitymayberequiredtorecognizeanintangibleassetrelatedtoacquired
customerrelationshipsiftheseparabilitycriterionissatisfied.ParagraphA41ofStatement141(R)
providesthefollowingthreecriteriathatcanindicatearelationshipbetweenanentityanditscustomer:
• Theacquiredentitymaintainscurrentcustomerinformation.
• Theacquiredentitycontactsitscustomersregularly.
• Customerscandirectlycontacttheacquiredentity.
5.23 ParagraphA42ofStatement141(R)states:
Acustomerrelationshipacquiredinabusinesscombinationthatdoesnotarisefromacontractmay
neverthelessbeidentifiablebecausetherelationshipisseparable.Exchangetransactionsforthesame
assetorasimilarassetthatindicatethatotherentitieshavesoldorotherwisetransferredaparticular
typeofnoncontractualcustomerrelationshipwouldprovideevidencethatthenoncontractual
customerrelationshipisseparable.Forexample,relationshipswithdepositorsarefrequently
exchangedwiththerelateddepositsandthereforemeetthecriteriaforrecognitionasanintangible
assetseparatelyfromgoodwill.
Considerations Regarding Valuation Techniques and Assumptions to Be Used inMeasuring Fair Value of Customer-Relationship Intangible Assets
5.24 Paragraph18ofStatement157providesthat“[v]aluationtechniquesconsistentwiththemarket
approach,incomeapproach,and/orcostapproachshallbeusedtomeasurefairvalue.”(See3.56–3.58.)Inthemeasurementofthefairvalueofacustomer-relationshipintangibleasset,theuseofamarket
approachisgenerallynotpossiblebecauseoftheabsenceofmarkettransactionsinvolvingidentical
orcomparableassets.Regardinguseofthecostapproachwhenmeasuringcustomer-relationship
intangibleassets,thepreparedremarksofanSECstaffmember(ChadA.Kokenge)atthe2003AICPA
NationalConferenceonCurrentSECDevelopmentsindicated:
[T]he[cost]approachonlyfocusesontheentity’sspecificcoststhatarenecessaryto“establish”
therelationship.Suchanapproachwouldnotbesensitivetothevolumeofbusinessthatmightbe
generatedbythecustomer,otherrelationshipaspects,suchasreferralcapability,orotherfactors
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 83/28670
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
thatmaybeimportanttohowamarketplaceparticipantmightassesstheasset.Ifthesefactors
aresignificant,webelievetheuseofsuchanapproachwouldgenerallybeinconsistentwiththe
Statement142definitionoffairvalue[supersededbyparagraph5ofStatement157].
5.25 Atthe2006AICPANationalConferenceonCurrentSECandPCAOBDevelopments,the
preparedremarksofanSECstaffmember(JosephB.Ucuzoglu)furtheraddressedthetopicofvaluing
customer-relationshipintangibleassetsinabusinesscombination:
Thefactthattheacquiredentityhasacontractualrelationshipwiththecustomermayalsogiveriseto
avaluablecustomerrelationshipwhichmustbeconsideredinthepurchasepriceallocationpursuant
toStatement141[supersededbyStatement141(R)].[Footnote2]Thisprovidesanicesegueinto
mynexttopic.Theissueofvaluingcustomerrelationshipintangibleassetsseemstohavebecomean
annualtopicattheSECconference.
SomehavesuggestedthattheSECstaffalwaysrequirestheuseofanincomeapproachtovalue
customerrelationshipintangibleassets.Thestaffhasevenheardsomesuggestthat,aslongasa
registrantcharacterizesitsvaluationmethodasanincomeapproach,thespecificassumptionsused
orresultsobtainedwillnotbechallengedbythestaff,becauseonehascompliedwithaperceived
brightlinerequirementtouseanincomeapproach.Letmeassureyou,thesestatementsaresimply
false.Whileanincomeapproachoftenprovidesthemostappropriatevaluationofacquiredcustomerrelationshipintangibleassets,circumstancesmaycertainlyindicatethatadifferentmethodprovides
abetterestimateoffairvalue.Ontheflipside,evenwhenaregistrantconcludesthatanincome
approachisthemostappropriatevaluationmethodology,thestaffmayneverthelessquestionthe
resultobtainedwhentheunderlyingassumptions,suchascontributoryassetcharges,donotappear
reasonableinlightofthecircumstances.
Whendeterminingtheappropriatevaluationofacustomerrelationshipintangibleasset,Ibelieve
thatthefirststepintheprocessshouldbetoobtainathoroughunderstandingofthevaluedrivers
intheacquiredentity.Thatis,whyisitthatcustomerscontinuallyreturntopurchaseproductsor
servicesfromtheacquiredentity?Insomecases,thenatureoftherelationshipmaybesuchthat
customersarenaturally“sticky,”andtendtostaywiththesamevendorovertimewithoutfrequently
reconsideringtheirpurchasingdecisions.Inthatcircumstance,itwouldappearthatasignificant
portionoftheongoingcashflowsthattheacquiredentitywillgeneratecanbeattributedtothestrengthofitscustomerrelationships.
Attheotherendofthespectrum,relationshipsmaybealesssignificantvaluedriverinan
environmentwherecustomersfrequentlyreassesstheirpurchasingdecisionsandcaneasilyswitchto
anothervendorwithalowerpriceorasuperiorproduct.Inthatenvironment,ifcustomerscontinually
returntobuyproductsfromtheacquiredentity,perhapstheydosoinlargepartduetofactorsother
thantherelationship,suchasawell-know[n]tradename,strongbrands,andproprietarytechnologies.
Asaresult,thevalueofthecustomerrelationshipintangibleassetmaybelessthanwouldbethe
caseinacircumstancewheretherelationshipisstronger.However,thestaffwouldgenerallyexpect
thattheamountattributedtootherintangibleassetswouldbecommensuratelyhigher,reflectingthe
increasinglyimportantroleofthoseassetsingeneratingcashflows.
Footnote2referstoparagraphA14(b)ofStatement141,whichwassupersededbyparagraphA36ofStatement141(R).
In-Process Research and Development Assets
5.26 Priortoabusinesscombination,anacquiredentitymayincurresearchanddevelopment(R&D)
expendituresthatcouldresultinthedevelopmentofcertainintangibleassetsbytheacquiredentitythat
wouldbeexpensedasincurredinaccordancewithStatement2(unlesstheyhadanalternativefuture
use).Inotherwords,anacquiredentitywouldprobablynotrecordanyassetsonitsbooksbeforethe
consummationofabusinesscombinationrelatedtoR&D.Totheextentthattheacquiredentitywas
using,orwasplanningtouse,theseunrecognizedassetsforR&Dactivities,theassetswouldrepresent
acquiredin-processresearchanddevelopment(IPR&D)totheacquirer.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 84/28671
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
5.27 UnderStatement141(R)andStatement142(asamendedbyStatement141(R)),theacquiring
entityrecognizesIPR&Datfairvalueasoftheacquisitiondate,andsubsequentlyaccountsforitasan
indefinite-livedintangibleassetuntilcompletionorabandonmentoftheassociatedR&Defforts.See
10.39–10.40foradditionalguidancerelatedtothesubsequentaccountingforIPR&Dintangibleassets.
5.28 IfanentityacquiresIPR&Dinabusinesscombinationthatitdoesnotintendtousetoitshighest
andbestuse(e.g.,ithasplanstodiscontinuetheR&Dprojectaftertheacquisitioneventhough
amarketplaceparticipantwouldcontinuetheR&Defforts),itwouldberequiredtorecognizean
intangibleassetatfairvalueinitsacquisitionmethodaccounting(see5.09–5.10).
5.29 Statement141(R)doesnotaffecttheaccountingforR&Dexpendituresincurredoutsideofa
businesscombination.Therefore,theacquiringentitywouldgenerallyexpenseresearchand
developmentcostsincurredaftertheacquisitiondatethatrelatetoanacquiredIPR&Dprojectin
accordancewithStatement2.
Example 5-1
Acquired IPR&DOnJune30,20X9,CompanyA,acalendaryear-endcompany,acquiresCompanyBinatransactionaccountedforasabusinesscombination.Beforetheacquisition,CompanyBhadincurredsignificantcostsrelatedtotheR&Dofanewlineofproducts,allofwhichitexpensedasincurredunderStatement2.CompanyAplanstocontinuetheseR&Deffortsinhopesofreleasingthenewlineofproductsintothemarketinthefuture.
Aspartoftheacquisitionmethodaccounting,andinamannerconsistentwiththefairvaluemeasurementguidanceinStatement157,CompanyAcalculatesthefairvalueoftheacquiredIPR&Dassetsas$10million.Therefore,asoftheacquisitiondate,CompanyAwouldrecordanindefinite-livedintangibleassetfor$10million.
Subsequenttotheacquisitiondate,CompanyAwouldaccountforalladditionalcostsitincursrelatedtothisprojectunderStatement2(i.e.,suchcostswouldgenerallybeexpensedasincurred).
5.30 Historically,theSEChasexpressedconcernsoverthesignificanceofacquiredIPR&D.In2001,the
AICPArespondedbypublishingaPracticeAid,AssetsAcquiredinaBusinessCombinationtoBeUsed
inResearchandDevelopmentActivities:AFocusonSoftware,ElectronicDevices,andPharmaceutical
Industries .Itstates:
ThisPracticeAididentifieswhatthetaskforcemembersperceiveasbestpracticesrelatedtodefining
andaccountingfor,disclosing,valuing,andauditingassetsacquiredtobeusedinR&Dactivities,
includingspecificIPR&Dprojects.
AlthoughthePracticeAidisavaluableresourceforunderstandingandapplyingvaluationtechniquesfor
intangibleassets,entitiesshouldusecautionwhenreferringtoitbecauseithasnotyetbeenupdatedto
reflectcertainchangesinfairvalueguidanceresultingfromtheissuanceofStatement157.ThePractice
AidshouldonlybeusedwhenitdoesnotconflictwithStatement157orotherauthoritativeGAAP,asithasnotbeenapproved,disapproved,orotherwiseacteduponbyanyseniortechnicalcommitteeofthe
AICPAortheFASBandthushasnoofficialorauthoritativestatus.TheAICPArecentlyindicatedthatit
intendstorevisittheguidanceinthePracticeAidsoon.
DifferencesbetweenStatement157andthePracticeAidincludethefollowing(notall-inclusive):
• UnderStatement157,anestimateoffairvaluewouldconsiderallpotentialmarketparticipants
(i.e.,strategicbuyersandfinancialbuyers).ThePracticeAidindicatesthatonlystrategicbuyers
arerelevant.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 85/28672
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
• UnderStatement157,anassetisvaluedusingeitherthe“in-use”orthe“in-exchange”
valuationpremise.ThePracticeAidindicatesthatthesevaluationpremisesshouldnotbeused
inthedeterminationoffairvalueinabusinesscombinationbecausetheyarenotrepresentative
offairvalueforfinancialreporting.
• UnderStatement157,anintangibleassetmayhaveafairvalue,underamarketparticipant
approach,eveniftheacquiringentityintendstoretiretheintangibleasset(e.g.,adefensivevalueasset).Incontrast,thePracticeAidindicatesthataretiredintangibleassetwouldhaveno
valuesinceitdoesnotprovidetheacquiringentitywithafutureeconomicbenefit.
Reacquired Rights
5.31 Inabusinesscombination,theacquirermayreacquirearightthatitpreviouslygrantedtothe
acquiree(e.g.,alicenseorfranchise).Paragraph31ofStatement141(R)stipulatesthatreacquiredrights
areintangibleassetsthattheacquirermustrecognizeapartfromgoodwill.Theacquirermeasuresthe
valueofthereacquiredrightinaccordancewithStatement157,butwithoneexception:thevalueof
theintangibleassetislimitedtoitsremainingcontractualterm(i.e.,thecontractualtermthatremains
untilthenextrenewaldate),regardlessofwhethermarketparticipantswouldassumerenewalorextensionoftheexistingtermsofthearrangement.Therefore,reacquiredrightsarenotconsideredtrue
“fairvalue”measurementsinaccordancewithStatement157.
5.32 Inamannerconsistentwiththeirinitialmeasurementofreacquiredrights,entitiesmust
subsequentlyamortizeintangibleassetsrelatedtoreacquiredrightsonthebasisoftheirremaining
contractualterms.
Example 5-2
Reacquired Rights
Case A
CompanyBsellsproductsinEuropeunderalicenseagreementwithCompanyA.CompanyAacquiresCompanyBinatransactionaccountedforasabusinesscombination.Asoftheacquisitiondate,thelicenseagreementhasaremainingcontractualtermofthreeyears,andcanberenewedattheendofthecurrenttermandindefinitelyeveryfiveyearsthereafter.Thepricingofthelicenseagreementisat-market,andtheagreementdoesnothaveexplicitsettlementprovisions.CompanyAhascalculatedthefollowingvaluesforthelicenseagreement:
• $75—valuefortherighttousethetechnologyfortheremainingthree-yearcontractualterm.
• $200—fairvaluefortherighttousethetechnology,calculatedusingtheprinciplesofStatement157,whichconsidersfuturerenewalsbymarketparticipants.
Inthisexample,CompanyAwouldrecognizeanintangibleassetfor$75,anditwouldamortizethisamountovertheremainingthree-yearcontractualterm.
5.33 Ifthetermsofthecontractgiverisetoareacquiredrightthatisfavorableorunfavorable
relativetosimilarmarkettransactionsforsimilarrights,theacquirerrecognizesasettlementgainor
loss.ParagraphA79ofStatement141(R)providesguidanceforcalculatingthesettlementgainorloss,
statingthatitshouldberecordedasthelesserof:
(1) Theamountbywhichthecontractisfavorableorunfavorablefromtheperspectiveofthe
acquirerwhencomparedwithpricingforcurrentmarkettransactionsforthesameorsimilar
items[,or]
(2) Theamountofanystatedsettlementprovisionsinthecontractavailabletothecounterparty
towhomthecontractisunfavorable.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 86/28673
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 5-3
Reacquired Rights
Case B
AssumethesamefactsasinExample5-2,exceptthatunderthetermsofthelicenseagreement,CompanyBpaysalicensefeethatisbelow-marketrelativetothatofitscompetitorswithsimilarlicensingagreements.Inaddition,Company
Anowmeasuresthevalueofthelicense,fortheremainingthree-yearcontractualterm,at$100.(Notethatthisamountisgreaterthanthe$75valuecalculatedinExample5-2foranat-marketcontract.)
CompanyAwouldrecordanintangibleassetof$75forthereacquiredlicense(theat-marketvalueforsimilaragreements)andrecognizeasettlementlossintheincomestatementfor$25.Ineffect,thesettlementlossrepresentsadditionalconsiderationCompanyAwouldberequiredtogiveCompanyBtoterminatetheexistingagreement,whichwasunfavorabletoCompanyA.(See3.28.)
5.34 Anacquirermaysubsequentlysellareacquiredrighttoathirdparty.Thecarryingamountofthe
recognizedintangibleasset(i.e.,reacquiredright)wouldthusbeincludedinthegainorlossonsale.
Favorable or Unfavorable Operating Leases When the Acquiree Is the Lessee
5.35 Theacquirercannotrecognizeassetsandliabilitiesrelatedtoanacquiredoperatingleaseinwhichtheacquireeisthelesseeexceptwhen(1)theleaseisfavorableorunfavorablerelativetocurrent
marketratesor(2)marketparticipantswouldplacevalueonanat-the-moneycontract.
ParagraphA17ofStatement141(R)describesthefirstexceptionasfollows:
Regardlessofwhethertheacquireeisthelesseeorthelessor,theacquirershalldeterminewhether
thetermsofeachofanacquiree’soperatingleasesarefavorableorunfavorablecomparedwith
themarkettermsofleasesofthesameorsimilaritemsattheacquisitiondate.Theacquirershall
recognizeanintangibleassetifthetermsofanoperatingleasearefavorablerelativetomarketterms
andaliabilityifthetermsareunfavorablerelativetomarketterms.
Foradiscussionrelatedtothesecondexception,see5.36below.
Valuing “At-the-Money” Contracts
5.36 ParagraphA18ofStatement141(R)states,inpart:
Anidentifiableintangibleassetmaybeassociatedwithanoperatinglease,whichmaybeevidenced
bymarketparticipants’willingnesstopayapricefortheleaseevenifitisatmarketterms.For
example,aleaseofgatesatanairportorofretailspaceinaprimeshoppingareamightprovide
entryintoamarketorotherfutureeconomicbenefitsthatqualifyasidentifiableintangibleassets,
forexample,asacustomerrelationship.Inthatsituation,theacquirershallrecognizetheassociated
identifiableintangibleasset(s).
Althoughtheaboveexamplereferstooperatingleases,byanalogyanacquirercanapplythisguidance
tocertainothertypesofcontracts(e.g.,at-marketcontractswithcustomers).
Intangible Assets Associated With Income-Producing Real Estate
5.37 Income-producingrealestate,suchasanofficeorapartmentbuildingthatisoccupiedbytenants
onthedateofacquisition,representstotheacquireracollectionoftangibleandintangibleassetsand,
incertaininstances,liabilities.Whencalculatingthefairvalueofsuchincome-producingrealestate,it
isnecessarytoseparatelyidentifyandmeasurethetangibleandintangibleassetsandliabilitiespresent.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 87/28674
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Thefollowingtableidentifiesexamplesoftangibleandintangibleassetsandliabilitiesthatmaybe
presentintheacquisitionofincome-producingrealestate,alongwithmeasurementconsiderations.
Measurement Considerations
Land,Buildings,andOtherTangibleAssets(e.g.,
Equipment)
RecognizedatfairvalueunderStatement157.Acquiring
entitymustdeterminethehighestandbestuseoftheassetorgroupofassets(i.e.,in-useorin-exchange)fromthepointofviewofamarketparticipant.Buildingsaretobevalued“asifvacant”toavoidincludingmeasurementvaluethatmaybeattributabletootherassetsandliabilitiesdiscussedbelow.
FavorableorUnfavorableIn-PlaceLeases In-placeleasesmaybefavorableorunfavorableattheacquisitiondaterelativetocurrentmarketrates.Favorableleasesfromtheperspectiveoftheacquiringentityrepresentassets,whileunfavorableleasesfromtheperspectiveoftheacquiringentityrepresentliabilities(orbalancesheetcredits).Separateclassificationofassetsandliabilities(orbalancesheetcredits)isrequired.
In-PlaceLeases—IntangibleAsset In-placeleasesprovidevaluetotheacquiringentityinthatcashoutflowsnecessarytooriginateleases(suchasmarketing,salescommissions,legalcosts,andleaseincentives)areavoided.Also,in-placeleasesenabletheacquiringentitytoavoidlostcashflowsduringanotherwiserequiredlease-upperiod.Measurementofin-placeleasesshouldthereforereflectboththebenefitstotheacquiringentityofavoidedcashoutflowsotherwisenecessarytooriginatesuchleasesaswellascashinflows(netofservicecoststotenantssuchassecurityandmaintenance)resultingfromnothavingtoincuranotherwiserequiredlease-upperiod.
CustomerContractsandRelatedCustomerRelationships
—IntangibleAsset
Existingtenantsmayalsoprovidevaluetotheacquiring
entitythroughrenewalsofexistingleasesorotherbenefits(suchaspurchasesofadditionalservicesorrentalsofadditionalspace).
Thelistofexamplesisnotall-inclusive.Forexample,otherintangibleassetsmaybepresentina
particularacquisitionofincome-producingrealestatesuchasacustomerlist,managementcontract,or
tradename.
Goodwill
Measurement of Goodwill
5.38 Goodwillisanunidentifiableasset(i.e.,notcontractualorseparable)and,assuch,canonlybe
measuredasaresidual.Paragraph34ofStatement141(R)states:
Theacquirershallrecognizegoodwillasoftheacquisitiondate,measuredastheexcessof(a)over(b)
below:
a. Theaggregateof:
(1) TheconsiderationtransferredmeasuredinaccordancewiththisStatement,which
generallyrequiresacquisition-datefairvalue(paragraph39)[seeSection 6]
(2) Thefairvalueofanynoncontrollinginterestintheacquiree[see7.07–7.09]
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 88/28675
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
(3) Inabusinesscombinationachievedinstages,theacquisition-datefairvalueofthe
acquirer’spreviouslyheldequityinterestintheacquiree[see5.41]
b. Thenetoftheacquisition-dateamountsoftheidentifiableassetsacquiredandtheliabilities
assumedmeasuredinaccordancewiththisStatement.
5.39 AnunderlyingpremiseofStatement141(R)isthatanentity’sacquisitionofcontrolofabusiness
makestheacquiringentityaccountableandresponsibleforalloftheacquiree’sassetsandliabilities,
regardlessofitsownershippercentage.Becausegoodwillisanasset,itisrecognizedlikeanyother
assetorliability.Therefore,thetotalamountofgoodwillconsistsnotonlyoftheportionrelatingto
theacquiringentity,butalsotheportionrelatingtoanynoncontrollinginterest(referredtoasthe“full
goodwill”approach).Eventhoughgoodwillrelatestoboththeacquiringentityandanynoncontrolling
interest,goodwillispresentedonthebalancesheetasasingleline-item.
Example 5-4
Calculation of Goodwill
OnJune15,20X9,CompanyXpurchasesanadditional55percentofCompanyYfor$700incash(whichincludesa
controlpremium).Immediatelybeforetheacquisition,Xhelda25percentinterestinY,whichhadcarryingvalueof$200andafairvalueof$225.CompanyXagreestopaythesellingshareholders$80ifcertainperformancetargetsaremetbyDecember31,20Y0.Thefairvalueofsucharrangementasoftheacquisitiondateis$50.Thefairvalueofthe20percentnoncontrollinginterestis$180.Thefairvalueof100percentofY’sidentifiableassetsacquired,netofliabilitiesassumed,is$800.
Thecalculationofgoodwillisasfollows:
CashtransferredbyX
Fairvalueofcontingentconsiderationarrangement
TotalconsiderationtransferredbyX
Fairvalueofthenoncontrollinginterest
FairvalueofX’spreviouslyheldinterestinY
SubtotalFairvalueofthenetassetsacquired
Goodwill
$ 700
50
750
180*
225**
1,155 (800)
$ 355
* Thefairvalueofthe20percentnoncontrollinginterestincludesaminoritydiscountforlackofcontrol.
** CompanyXwouldrecognizea$25gain($225fairvalue–$200carryingvalue)relatedtotheremeasurementtofairvalueofitspreviouslyheldinterestinCompanyY.
5.40 Generally,goodwillismeasuredonthebasisofconsiderationtransferred.However,insome
acquisitions,eithernoconsiderationistransferredortheconsiderationtransferredislessreliably
measurablethanadirectmeasurementofthebusinessacquired(e.g.,businesscombinationsresulting
fromtheexchangeofequityinterests).Paragraph35ofStatement141(R)statesthatwhenonlyequityinterestsareexchanged,goodwillshouldbecalculatedbyusingthefairvalueoftheacquiree’sequity
interestsiftheyaremorereliablymeasurablethanthefairvalueoftheacquirer’sequityinterests.In
acquisitionsinwhichnoconsiderationistransferred,theacquiringentityusesthefairvalueofthe
acquirer’sinterestintheacquiree,whichisdeterminedbyusingappropriatevaluationtechniquesinstead
ofthefairvalueoftheconsiderationtransferred.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 89/28676
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
5.41 Forbusinesscombinationsachievedinstages,paragraph48ofStatement141(R)states:
Inabusinesscombinationachievedinstages,theacquirershallremeasureitspreviouslyheldequity
interestintheacquireeatitsacquisition-datefairvalueandrecognizetheresultinggainorloss,ifany,
inearnings.Inpriorreportingperiods,theacquirermayhaverecognizedchangesinthevalueofits
equityinterestintheacquireeinothercomprehensiveincome(forexample,becausetheinvestment
wasclassifiedasavailableforsale).Ifso,theamountthatwasrecognizedinothercomprehensiveincomeshallbereclassifiedandincludedinthecalculationofgainorlossasoftheacquisitiondate.
Notethataftertheacquirerobtainscontrolofabusinesssubsequentincreasesordecreasesinits
ownershipinterest,aslongascontrolisretained,areaccountedforasequitytransactions(see7.20–
7.23).
Bargain Purchases
5.42 Thoughuncommon,abargainpurchasecouldoccurwhentheaggregatefairvalueof(1)the
considerationtransferred,(2)anynoncontrollinginterestsintheacquiree,and(3)anypreviouslyheld
equityinterestintheacquireeislessthanthefairvalueofthenetassetsacquired.
5.43 Statement141(R)requirestheacquiringentitytodouble-checkitscalculationsbeforeconcluding
thatabargainpurchaseexists.Ifthesameresultisreached,anyfurtherexcessisrecognizedasagainin
earningsasoftheacquisitiondate.Paragraph38ofStatement141(R)statesthefollowing:
Beforerecognizingagainonabargainpurchase,theacquirershallreassesswhetherithascorrectly
identifiedalloftheassetsacquiredandalloftheliabilitiesassumedandshallrecognizeanyadditional
assetsorliabilitiesthatareidentifiedinthatreview.Theacquirershallthenreviewtheprocedures
usedtomeasuretheamountsthisStatementrequirestoberecognizedattheacquisitiondateforall
ofthefollowing:
a. Theidentifiableassetsacquiredandliabilitiesassumed
b. Thenoncontrollinginterestintheacquiree,ifany
c. Forabusinesscombinationachievedinstages,theacquirer’spreviouslyheldequityinterestin
theacquiree
d. Theconsiderationtransferred.
Theobjectiveofthereviewistoensurethatthemeasurementsappropriatelyreflectconsiderationof
allavailableinformationasoftheacquisitiondate.
5.44 Bargainpurchasesmayoccurbecauseofunderpaymentsforthebusinessacquired(e.g.,ina
forcedliquidationordistresssale).Theymayalsooccurbecausenotallassetsacquiredorliabilities
assumedarerecognizedormeasuredatfairvalue.Forexample,acontingentliabilitymaynotbe
recognizedifitdoesnotmeettherecognitioncriteriainStatement141(R)(see4.32).However,the
riskrelatedtothatliabilitymaybereflectedinwhattheacquiringentitypaidfortheacquiree.That
mismatchcouldleadtoabargainpurchase.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 90/28677
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 5-5
Accounting for a Bargain Purchase
CompanyAacquires100percentofCompanyBfor$150millionincash.CompanyAcalculatesthefairvalueofthenetassetsacquiredasfollows:
Investments
Building
Trademark
Less:liabilities
FairvalueofB’snetassets
$ 90million
50million
50million
(10million)
$ 180million
Afterexaminingthe$180millionfairvalueestimateagain,Aconcludesthatitsmeasurementsappropriatelyreflectconsiderationofallavailableinformationasoftheacquisitiondate.Therefore,underStatement141(R),Awouldrecorda$30milliongain($180million–$150million)inearningsasoftheacquisitiondate.
5.45 Statement141(R)specifiesthatbeforeanentityrecognizesagainrelatedtoabargainpurchase,
theentitymustreassesswhetheralloftheassetsacquiredandliabilitiesassumedinthebusiness
combinationhavebeenappropriatelyrecognizedandmeasured.Statement141(R)alsorequiresretrospectiveapplicationofanyadjustmentsmadeduringthemeasurementperiodtotheprovisional
amountsrecognized(see3.16–3.23).Ifabargainpurchaseoccurs,afterreassessingtherecognitionand
measurementoftheassetsacquiredandliabilitiesassumed,anentitywouldrecognizeagainasofthe
acquisitiondate.Subsequentmeasurementperiodadjustmentswouldresultinadjustment,orpossibly
reversal,ofthegain.Appropriatedisclosuremustbeprovidedindicatingthattheinitialaccountingisstill
provisionalandthereforethegainrecognizedmaybesubjecttofutureadjustments.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 91/28678
Section 6 — Recognizing and Measuringthe Consideration Transferred in aBusiness Combination
6.01 Determiningtheamountofconsiderationtransferredinabusinesscombinationisimportant
becausetheamountdirectlyaffectsthemeasurementofgoodwillor,inmorelimitedinstances,the
amountofthebargainpurchase(seesection5.42–5.45).Theparagraphsbelowdiscusshowanentity
makesthisdetermination.
Consideration Transferred by the Acquiring Entity to the Former Owners of theAcquiree
6.02 ThefairvaluemeasurementandrecognitionprinciplesofStatement141(R)requirethat,with
theexceptionofshare-basedpaymentawards(see6.05–6.19),anacquirermeasureandrecognize
thefairvalueoftheconsiderationtransferredinabusinesscombinationasoftheacquisitiondate.
Acquirerscalculateshare-basedpaymentawardsbyusingafairvalue-basedmeasureinaccordancewith
Statement123(R).Considerationtransferredbytheacquiringentitytotheformerownerscaninclude
assets,liabilitiesincurredbytheacquiringentitytotheformerownersoftheacquiree,andequity
interests.Considerationcantakemanyforms,includingcash,othertangibleorintangibleassets,a
businessorsubsidiaryoftheacquirer,contingentconsideration,andequityinstrumentssuchascommon
orpreferredshares,options,warrants,andshare-basedpaymentawards.
6.03 Sometimestheamountpaidtotheformerownersincludesamountsthatarenotinexchangefor
thebusiness,suchaspaymentstocompensateforservices,useofproperty,orprofitsharing.Payments
thatdonotrepresentconsiderationtransferredfortheacquiredbusinessshouldbeaccountedfor
separatelyfromthebusinesscombinationandexpensedintheappropriateperiods.
Equity Securities Issued as Consideration
6.04 Ifequitysecuritiesareissuedasconsiderationinabusinesscombination,theacquiringentity
measuresthematfairvalueasoftheacquisitiondate .TheaccountingunderStatement141(R)is
significantlydifferentfromtheaccountingunderStatement141andIssue99-12.Issue99-12required
theacquiringentitytomeasurethefairvalueofitsmarketableequitysecuritiesonthebasisoftheir
quotedmarketprice“overareasonableperiodoftimebeforeandafterthetermsoftheacquisitionare
agreedtoandannounced.”A“reasonableperiodoftime”wasgenerallyconsideredtobeafewdays.
Statement141(R)nullifiedIssue99-12.
Share-Based Payment Awards
6.05 Anacquiringentitymayissueshare-basedpaymentawards(referredtoas“replacementawards”
inStatement141(R))totheemployeesoftheacquireetoreplacetheirexistingshare-basedpayment
awardsthatareatleast,inpart,tiedtotheacquiree’scommonstock(e.g.,stockoptions).Exchangesof
share-basedpaymentawardsinabusinesscombinationareconsideredmodifications inaccordancewith
Statement123(R).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 92/28679
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
6.06 Replacementawardsareoftenissuedbytheacquirertoensurethatemployeesoftheacquiree
areinasimilareconomicpositionimmediatelybeforeandaftertheconsummationofthebusiness
combination.Incontrast,anacquirermayissuereplacementawardsthatalsoincludeanadditional
requirementforemployeestoremainwiththecompanyaftertheacquisition.Therefore,theissuanceof
share-basedpaymentawardsmayrepresentconsiderationtransferredinthebusinesscombination(i.e.,
theawardrelatestopastservicesperformedbytheemployeefortheacquireebeforetheacquisitiondate),compensationforfutureservices(i.e.,postcombination)byanemployee,orboth.
6.07 Thestepsanentityshouldfollowindeterminingtheamounttorecognizeasconsideration
transferredinabusinesscombinationandaspostcombinationcompensationexpensearesummarizedin
thechartbelow.
Allocating Share-Based Payments Between Past Service and Future Service
Istheacquirerobligatedtoreplacetheacquiree’semployee’sawards?(See6.08.)
Yes No
Includealloraportionofthefair-value-basedmeasureoftheacquirer’sreplacementawardsintheconsiderationtransferred.
Ifreplacementawardsareissued,generallyaccountfortheentireawardascompensationexpenseinthepostcombinationfinancialstatements.(See6.09.)
Calculatethefair-value-basedmeasureoftheacquirer’sreplacementawardsandtheacquireeawardsbeingreplaced(replacedawards)asoftheacquisitiondate.(See6.10.)
Ifthefair-value-basedmeasureofthereplacementawardsisgreaterthanthefair-value-basedmeasureofthereplacedawards,expensethedifferenceinpostcombinationearningsinaccordancewithStatement123(R).(See6.10.)
Calculatetheportionofthereplacementawardthatshouldbeattributedtopastservice(i.e.,
considerationtransferred)andtheportionthatshouldbeattributedtopostcombinationservice.(See6.12–6.18.)
6.08 Statement141(R)providesguidanceforcalculatingtheportionofareplacementawardthatis
attributableto(1)pastserviceandincludedintheconsiderationtransferredand(2)futureserviceand
includedinpostcombinationcompensationexpense.Theentitymustfirstanalyzethearrangementto
determinewhethertheacquirerisobligated toreplacetheacquiree’semployees’awards.Iftheacquirer
isobligated toreplacetheawards,thenalloraportionofthefair-value-basedmeasureoftheacquirer’s
replacementawardsisincludedinthemeasurementoftheconsiderationtransferredinthebusiness
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 93/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 94/28681
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Determining the Postcombination Service Period for Replacement Awards With Equal or GreaterService Requirements
6.14 Foracquireeawardsthatwerefullyvestedbeforetheacquisitiondate,andwerereplacedbynew
awardsthatrequireanadditionalfutureserviceperiod,thedeterminationofthetotalserviceperiod
wouldnotincludetheperiodfromthevestingdateoftheacquireeawardstotheacquisitiondate.
Example 6-1
Determining the Total Service Period of the Replacement Award When the Replaced Award isFully Vested
AssumeEmployeehas100stockoptionsofCompanyB’scommonstockthatarefullyvestedonJune30,20X8.Theseawardsoriginallyhadathree-yearserviceperiodassociatedwiththem,buthavenotbeenexercisedyet.OnJanuary1,20X9,CompanyAacquiresCompanyBinatransactionaccountedforasabusinesscombinationandisobligatedtoreplaceEmployee’sawards.Aspartoftheacquisition,AwasobligatedtoreplaceB’sfullyvestedawardswithA’snewawardsthatrequireanadditionalthreeyearsofservice.
ThetotalserviceperiodofA’snewawardsissixyears,whichisthesumoftheserviceperiodforB’soldawardsplustheserviceperiodforA’snewawards.Inotherwords,thetotalserviceperioddoesnotincludetheperiodfromtheoriginalvestingdate(i.e.,June30,20X8)totheacquisitiondate(i.e.,January1,20X9).
Example 6-2
Determining the Total Service Period of the Replacement Award When the Service Period Is theSame as the Replaced Award
CompanyBgrants100stockoptionstoEmployeeonJanuary1,20X7,thatcliff-vestafterfouryears(i.e.,onJanuary1,20Y1).OnJanuary1,20X9,CompanyAacquiresBandwasobligatedtograntEmployee100replacementoptionsthathavethesameservicetermsastheoriginalaward(i.e.,thereplacementawardswillvestattheendoftwoadditionalyears).
Thetotalserviceperiodofthereplacementawardsisfouryears,whichisequaltotheserviceperiodoftheoriginalawards.Inthecalculationoftheportionattributabletoprecombinationservices,theprecombinationserviceperiodwouldequaltwoyears(January1,20X7,toJanuary1,20X9).
6.15 Theportionofthereplacementawardattributabletofutureservicesiscalculatedasfollows:
Acquisitiondatefair-value-basedmeasureoftheacquirer replacement awards
– Amountattributabletoprecombinationservice(see6.12)
= Postcombinationcompensationexpense
Example 6-3
Allocation of Compensation Expense
TargetCompany(TC)issues100stockoptionstoEmployeeonJanuary1,20X8,thatcliff-vestafterthreeyears(i.e.,onJanuary1,20Y1).
OnJanuary1,20X9,ParentCompany(PC)acquiresTCandreplacesthe100optionsonTC’sstockwith100optionsonitsownstock(assumePCisobligatedtoreplaceEmployee’sawards).Thefair-value-basedmeasureofboththePCoptionsandtheTCoptionsonJanuary1,20X9,is$10peroption.ThereplacementoptionsretaintheoriginalvestingconditionsofTCoptions(i.e.,theyvestonJanuary1,20Y1).
Thetotalfair-value-basedmeasureofthereplacementoptionsasoftheacquisitiondateis$1,000,ofwhich$333(oneofthreeyears)isattributabletoprecombinationservicesand$667(twoofthreeyears)isattributabletofutureservices.The$333isincludedintheconsiderationtransferred,andthe$667isrecognizedascompensationcostbyPCastheservicesareperformedbyEmployee(i.e.,fromJanuary1,20X9,toJanuary1,20Y1).Notethatthegrant-datefairvalueassignedtotheoptionsissuedbyTCisnotrelevantasoftheacquisitiondate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 95/28682
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Determining the Postcombination Service Period for Replacement Awards With Reduced ServiceRequirements
6.16 Anacquirer’sdecisiontoimmediatelyvestorreducethefutureserviceperiodofshare-based
paymentawardsheldbyemployeesoftheacquireeaffectsthetimingofwhenthepostcombination
compensationexpenseisrecognized.However,ifshare-basedpaymentawardsoftheacquireebecome
immediatelyvestedonthedateofthebusinesscombinationbecauseofachange-in-controlprovision,theoriginalserviceperiodshouldbeconsideredcompleted.
Example 6-4
Allocation of Compensation Expense
AssumethesamefactsasinExample6-3exceptthatPCdecidestoimmediatelyvestalloutstandingTCoptionsonthedateofthebusinesscombination(January1,20X9).
Insteadofrecognizingthe$667allocatedtothefutureservicesovertheperiodfromJanuary1,20X9,toJanuary1,20Y1,PCwouldimmediatelyexpensethisamountonthedateofthebusinesscombination.
Replacement Awards With Graded Vesting
6.17 ParagraphA95ofStatement141(R)states,“Ifthereplacementawardhasagradedvestingschedule,theacquirershallrecognizetherelatedcompensationcostinaccordancewithitspolicy
electionforotherawardswithgradedvestinginaccordancewithparagraph42ofStatement123(R).”
6.18 Paragraph42ofStatement123(R)states:
Anentityshallmakeapolicydecisionaboutwhethertorecognizecompensationcostforanaward
withonlyserviceconditionsthathasagradedvestingschedule(a)onastraight-linebasisoverthe
requisiteserviceperiodforeachseparatelyvestingportionoftheawardasiftheawardwas,in-
substance,multipleawardsor(b)onastraight-linebasisovertherequisiteserviceperiodfortheentire
award(thatis,overtherequisiteserviceperiodofthelastseparatelyvestingportionoftheaward).
However,theamountofcompensationcostrecognizedatanydatemustatleastequaltheportionof
thegrant-datevalueoftheawardthatisvestedatthatdate.
Impact of Modifications, Changes in Forfeiture Estimates and Other Events Occurring After theAcquisition Date
6.19 Generally,anyeventsthatoccuraftertheacquisitiondatethataffecttheestimatesof
forfeitureorcausemodificationstothereplacementawardswouldbeaccountedforinaccordance
withStatement123(R).Therefore,sucheventswouldaffectpostcombinationcompensationexpense
andwouldnotaffecttheamountofconsiderationtransferredinthebusinesscombination.Theonly
exceptionwouldbeforadjustmentsthataremadeduringthemeasurementperiodandpertainto
detailsthatexistedasoftheacquisitiondate.(See3.16–3.19.)ParagraphA95ofStatement141(R)
states:
Theportionofanonvestedreplacementawardattributabletoprecombinationservice,aswellasthe
portionattributabletopostcombinationservice,shallreflecttheacquirer’sestimateofthenumber
ofreplacementawardsforwhichtherequisiteserviceisexpectedtoberendered.Forexample,ifthe
fair-value-basedmeasureoftheportionofareplacementawardattributedtoprecombinationservice
is$100andtheacquirerexpectsthattherequisiteservicewillberenderedforonly95percentofthe
instrumentsawarded,theamountincludedinconsiderationtransferredinthebusinesscombination
is$95.Changesinthenumberofreplacementawardsforwhichtherequisiteserviceisexpectedto
berenderedarereflectedincompensationcostfortheperiodsinwhichthechangesorforfeitures
occur—notasadjustmentstotheconsiderationtransferredinthebusinesscombination.Similarly,the
effectsofotherevents,suchasmodificationsortheultimateoutcomeofawardswithperformance
conditions,thatoccuraftertheacquisitiondateareaccountedforinaccordancewithStatement
123(R)indeterminingcompensationcostfortheperiodinwhichaneventoccurs.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 96/28683
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Gains or Losses on Assets Transferred as Consideration by the Acquiring Entity
6.20 Anacquiringentitymaytransferitstangibleorintangibleassetsorliabilitiesasconsideration
whosecarryingvaluediffersfromthefairvalueoftheassetsorliabilitiesasoftheacquisitiondate.
Examplesincludeinventory,property,intangibleassets,orabusinessorsubsidiary.Ifanentityelects
tomakesuchatransfer,Statement141(R)requiresthattheacquiringentityremeasurethoseassetsor
liabilitiestotheirfairvaluesasoftheacquisitiondateandrecognizetheresultinggainsorlosses,ifany,
inearnings.
Example 6-5
Nonmonetary Asset Transferred as Consideration to the Former Owners of the Acquiree
CompanyBenteredintoanagreementwithCompanyCtoacquireSubsidiarySforconsiderationof$1millioncashandabuilding.Thebuilding’scarryingvalueinB’sfinancialstatementsis$100,000anditsfairvalueis$250,000.
TheconsiderationtransferredforSis$1,250,000,whichincludesthefairvalueofthebuilding($250,000).CompanyBrecognizesagaininearningsonthedisposalofthebuildingasoftheacquisitiondateofSof$150,000($250,000–$100,000).
6.21 Sometimestheconsiderationtransferredincludesassetsorliabilitiesthattheacquiringentity
transferstotheacquireeratherthantoitsformerowners.Iftheassetsorliabilitiesstayinthecombined
entity,theacquiringentitydoesnotlosecontrolofthem.Therefore,suchassetsaremeasuredattheir
carryingamountsimmediatelybeforetheacquisitiondate,andnogainorlossisrecognizedbecausethe
acquiringentitycontrolsthembothbeforeandafterthebusinesscombination.Thesameistrueifthe
acquisitionwereforlessthan100percentoftheequityinterestsintheacquiree.
Example 6-6
Nonmonetary Asset Transferred as Consideration Directly to the Acquiree
CompanyBenteredintoanagreementtoacquirean80percentinterestinCompanyCforconsiderationof$1million
cashandabuilding.ThebuildingwillremainwiththecombinedentityandwillnotbetransferredtotheformerownersofC.Thebuilding’scarryingvalueinB’sfinancialstatementsis$100,000anditsfairvalueis$250,000.Therefore,theconsiderationtransferredforthe80percentinterestinCis$1,100,000($1millioncashplusthe$100,000carryingvalueofthebuilding).
Asoftheacquisitiondate,Chasidentifiablenetassetswithafairvalueof$700,000.Also,thefairvalueofthe20percentnoncontrollinginterestinCasoftheacquisitiondateis$200,000.
Ontheacquisitiondate,thegoodwillrecognizedaspartoftheacquisitioniscalculatedasfollows:
Cash $ 1,000,000
Building 100,000 B’scarryingamount
Noncontrollinginterest 200,000 Acquisition-datefairvalue
1,300,000
Less:assetsacquired Building 100,000
Otheridentifiablenetassets 700,000 Acquisition-datefairvalue
800,000
Goodwill $ 500,000
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 97/28684
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Contingent Consideration
6.22 Contingentconsiderationistypicallyanobligationoftheacquirertotransferadditionalassetsor
equityinstrumentstotheformerownersoftheacquireeifspecifiedfutureeventsoccurorconditions
aremet.Insomeinstances,however,contingentconsiderationcanalsobeanassettotheacquiring
entityiftheformerownersoftheacquireeareobligatedtoreturnpartoftheconsiderationifcertain
conditionsaremet.
Initial Recognition
6.23 Contingentconsiderationispartofthetotalconsiderationtransferredfortheacquiree
andthereforemustbemeasuredandrecognizedatfairvalueasoftheacquisitiondate.Typical
contingentconsiderationarrangementsarebasedonchangesinsecurityprices,meetingearnings
targets,componentsofearnings,suchasrevenuesorearningsbeforeinterest,taxes,depreciation,
andamortization(EBITDA),andarrangementsbasedonafutureevent,suchasFDAapprovalof
apharmaceuticalproduct.See6.40foradditionalconsiderationsofwhetheranarrangementis
contingentconsiderationorcompensationexpenserelatedtothesellingshareholders’continuing
employmentwiththecombinedentity.
6.24 Oncethecontingentconsiderationisinitiallyrecognized,theacquiringentitymustclassify
itasaliability,anequityinstrument,oranasset.Theinitialclassificationwillgovernitssubsequent
accounting.Itisusuallyclearifcontingentconsiderationisanasset.However,determiningwhether
contingentconsiderationisaliabilityoranequityinstrumentcanbedifficult.Statement141(R)refers
toexistingaccountingstandardsintheclassificationofcontingentconsideration.Suchguidance
includesStatement133,Statement150,Issue00-19,andIssue07-5.Mostcontingentconsideration
arrangementswillmostlikelybeclassifiedasliabilitiesunderthisliterature.
Example 6-7
Determining the Classification of Contingent Consideration as a Liability or Equity — Issuance ofa Variable Number of Equity Securities
CompanyAacquiresCompanyBfor1millionsharesofA’scommonstockandanagreementtoissueadditionalsharesasconsiderationifthequotedmarketpriceofA’scommonstockisbelow$25ontheone-yearanniversaryoftheacquisitiondate.Thenumberofshares,ifany,issuedbyAontheone-yearanniversarydatewillbetheamountnecessarytoguaranteethepriceof$25pershare.
Ontheone-yearanniversaryoftheacquisitiondate,thequotedmarketpriceofA’scommonstockis$20.Accordingly,Aissuesanadditional250,000sharestotheseller.
Onthebasisofitsanalysisofexistingaccountingguidance,Aconcludesthatthisarrangementisaliabilitybecausethenumberofsharesisvariable.
Example 6-8 Determining the Classification of Contingent Consideration as a Liability or Equity — Payment ofAdditional Cash Consideration
CompanyAacquiresCompanyBfor1millionsharesofA’scommonstockandanagreementtopaycashconsiderationifthequotedmarketpriceofA’scommonstockisbelow$25ontheone-yearanniversaryoftheacquisitiondate.Thetotalcash,ifany,paidbyAontheone-yearanniversaryoftheacquisitiondatewillbetheamountnecessarytoguaranteethe$25pershareprice.
Ontheone-yearanniversaryoftheacquisitiondate,thequotedmarketpriceofA’scommonstockis$20.Accordingly,Apaysadditionalcashconsiderationof$5milliontotheformerownersofB.
Onthebasisofitsanalysisofexistingaccountingguidance,Aconcludesthatthisarrangementisaliabilitybecauseofthecashsettlementfeature.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 98/28685
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 6-9
Determining the Classification of Contingent Consideration as a Liability or Equity — Issuance ofa Fixed Number of Equity Securities
CompanyBacquiresCompanyCfor1millionsharesandanagreementtoissueanadditional250,000sharesiftheearningsofCequalorexceedaspecifiedtargetforthe12-monthperiodaftertheacquisition.IftheearningsofCexceedthespecifiedtarget,Bwillberequiredtoissuethefixedamountofadditionalshares.
Ontheone-yearanniversaryoftheacquisitiondate,itwasdeterminedthattheearningsofCexceededthespecifiedtarget.Accordingly,Bissuedtheadditional250,000shares.
Onthebasisofitsanalysisofexistingaccountingguidance,Aconcludesthatthisarrangementmayqualifyasanequityinstrumentinpartbecausethenumberofsharesisfixed.
Subsequent Accounting
6.25 Ifthecontingentconsiderationisclassifiedasanassetoraliability,itisremeasuredtofairvalue
eachreportingperiod.Theacquiringentityrecognizeschangesinfairvalueinearningseachperiod
unlessthearrangementisahedginginstrumentforwhichStatement133requireschangestobe
recognizedinothercomprehensiveincome.
6.26 Ifthecontingentconsiderationisclassifiedasanequityinstrument,itisnotremeasured.The
initialamountrecognizedforcontingentconsiderationclassifiedasequityisnotadjusted,evenifthefair
valueofthearrangementonthedatethecontingencyisresolvedwouldbedifferent.
6.27 Adjustmentsmadeduringthemeasurementperiodthatpertaintofactsandcircumstancesthat
existedasoftheacquisitiondate(see3.16–3.19)arerecognizedasadjustmentstogoodwill.However,
mostchangesinfairvalueaftertheacquisitiondatewillnotlikelybemeasurementperiodadjustments.
Forexample,earningstargetsthataremet,changesinshareprices,andFDAapprovalsareallchanges
thatoccuraftertheacquisitiondate.Changesinfairvalueresultingfromtheseitemsarerecognizedin
earningsandnotasadjustmentstogoodwill.
Example 6-10
Subsequent Accounting for a Contingent Consideration Arrangement Classified as a Liability
OnJanuary1,20X9,CompanyAacquiresCompanyBfromCompanyXfor$15million.CompanyAagreestopayanadditional$6milliontoXifthecumulativenetincomeofBreaches$10millionwithinthreeyearsoftheacquisitiondate.Thefairvalueofthecontingentconsiderationarrangementisclassifiedasaliabilityandhasanacquisition-datefairvalueof$4million.Attheendofeachreportingperiodaftertheacquisitiondate,thecontingentpaymentisremeasuredtoitsfairvalue,withchangesinfairvaluerecordedinearnings.Forexample,ifthelikelihoodofmeetingthetargetincreases,thefairvalueofthecontingentconsiderationwouldlikelyincrease.Ifthetargetismetandthe$6millioncontingentconsiderationispayable,$2millionwillhavebeenrecordedcumulativelyintheincomestatement(thedifferencebetweenthe$6millionpaymentandthe$4millionoriginallyrecordedinthefairvalueallocation)bythetimethe$6millionispaid.Conversely,ifthecontingencyisnotmetoritsfairvaluedeclines,anyaccruedliabilitywouldbereversedintoincome.
6.28 Whenacontingencyrelatedtocontingentconsiderationisnotmet(e.g.,theearningstargets
specifiedinthearrangementarenotachieved),theacquirershouldconsiderwhetherthisfactor
representsanindicatorthatgoodwillassociatedwiththebusinesscombinationshouldbetestedfor
impairment(see11.25–11.27).
Consideration Held in Escrow Pending Resolution of Representation and Warranty Provisions
6.29 Insomebusinesscombinations,theacquiringentityrequeststhataportionoftheconsideration
beheldinescrowpendingresolutionofrepresentationandwarrantyprovisionscontainedinthe
acquisitionagreement.Iftheconsiderationheldinanescrowaccountissharesorothersecurities,the
arrangementtypicallyprovidesthattherisksandrewardsofownershiparetransferredtothesellers.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 99/28686
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Votingrightsandanydividendsrelatedtothesharesorothersecuritiesheldinescrowarealsogenerally
conveyedtothesellersduringtheescrowperiod.Insucharrangements,theescrowedsharesorother
securitiesareameansforanacquiringentitytogainfurtherassurancethattherepresentationsand
warrantiesprovidedintheacquisitionagreementareaccurate.Iftheyarenot,itprovidesareadymeans
toobtainrestitution.Representationandwarrantyprovisionsgenerallylapsewithinashortperiodafter
theacquisitiondate.
6.30 Intheabsenceofevidencetothecontrary,representationandwarrantiesprovidedinthe
businesscombinationagreementareassumedtobeaccurate,andreleaseoftheconsiderationfrom
escrowisthereforedeterminedtobebeyondareasonabledoubt.Accordingly,inclusionofamounts
inescrowinthetotalconsiderationtransferredasoftheacquisitiondateisgenerallyconsidered
appropriate.Eachescrowarrangementmust,however,beevaluatedindividually.
Acquisition-Related Costs of the Business Combination
6.31 Acquisition-relatedcostsarecoststhattheacquirerincurstoeffectabusinesscombination.They
includefinders’fees;advisory,legal,accounting,valuation,andotherprofessionalorconsultingfees;
generaladministrativecosts,includingthecostsofmaintaininganinternalacquisitionsdepartment;
andcostsofregisteringandissuingdebtandequitysecurities.Theacquiringentityshouldaccountfor
acquisition-relatedcostsasexpensesintheperiodsinwhichthecostsareincurredandtheservicesare
received.However,thecoststoissuedebtorequitysecuritiesaspartofabusinesscombinationare
recognizedinaccordancewithotherapplicableGAAP.(See6.34–6.36.)
6.32 TheFASBdecidednottochangecurrentpracticerelatedtothecoststoissuedebtorequity
securitiesanditisconsideringthisissueaspartofitscurrentprojectonliabilitiesandequity.The
accountingforcoststoissuedebtorequitysecuritiesmaychangependingtheoutcomeofthisproject.
6.33 Referalsotothefollowingadditionalguidanceonacquisition-relatedcosts:
• See6.41forguidanceonreimbursementsoftheacquirer’sacquisition-relatedcostspaidtothe
formerownersoftheacquiree.
• See13.13–13.14forthedisclosurerequirementsforacquisitioncostsincurredinabusiness
combination.
• See14.18–14.23forguidanceonacquisitioncostsincurredbeforetheeffectivedateof
Statement141(R).
Costs of Registering and Issuing Equity Securities
6.34 SABTopic5.Aprovidesguidanceonaccountingforthecostsofissuingequitysecurities.Itstates
that“[s]pecificincrementalcostsdirectlyattributabletoaproposedoractualofferingofsecuritiesmay
properlybedeferredandchargedagainstthegrossproceedsoftheoffering.”Therefore,thecoststo
issueequitysecuritiesaregenerallyreflectedasareductionoftheamountthatwouldhaveotherwise
beenrecordedinadditionalpaid-incapital.
6.35 SABTopic5.Agoesontostatethat“managementsalariesorothergeneralandadministrative
expensesmaynotbeallocatedascostsoftheofferinganddeferredcostsofanabortedofferingmay
notbedeferredandchargedagainstproceedsofasubsequentoffering.Ashortpostponement(upto
90days)doesnotrepresentanabortedoffering.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 100/28687
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Debt Issue Costs
6.36 SABTopic2.A.6statesthat“[f]eespaidtoaninvestmentbankerinconnectionwithabusiness
combination,whentheinvestmentbankerisalsoprovidinginterimfinancingorunderwritingservices,
mustbeallocatedbetweendirectcostsoftheacquisitionanddebtissuecosts.”SABTopic2.A.6
furtherindicatesthat“debtissuecostsareanelementoftheeffectiveinterestcostofthedebt,and
neitherthesourceofthedebtfinancingnortheuseofthedebtproceedschangesthenatureofsuchcosts.Accordingly,theyshouldnotbeconsideredadirectcostoftheacquisition.”SABTopic2.A.6
alsoaddressestheamortizationofdebtissuecostsrelatedtointerim“bridgefinancing,”statingthat
“[d]ebtissuecostsshouldbeamortizedbytheinterestmethodoverthelifeofthedebttowhichthey
relate.Debtissuecostsrelatedtothebridgefinancingshouldberecognizedasinterestcostduringthe
estimatedinterimperiodprecedingtheplacementofthepermanentfinancingwithanyunamortized
amountschargedtoexpenseifthebridgeloanisrepaidpriortotheexpirationoftheestimatedperiod.”
Separate Transactions Not Included in the Accounting for a Business Combination
6.37 Paragraph58ofStatement141(R)notesthatsomepaymentstotheformerownersoftheacquireearenotpartoftheconsiderationtransferredfortheacquiree.Theyrepresenttransactionstobe
accountedforseparatelyfromthebusinesscombination(see3.28–3.39).
6.38 Forexample,amountspaidorreceivedtosettlepreexistingrelationshipsbetweenpartiestothe
businesscombinationarenotpartoftheconsiderationtransferred(see3.28–3.34).Suchrelationships
maybeeithercontractual(suchasfranchiseorlicenseagreements,supplyagreements(whetherfixedor
executory))ornoncontractual(suchaslawsuitsorotherdisputes).
Compensation to Employees or Former Owners of the Acquiree for FutureProducts or Services
6.39 Insometransactions,theacquiringentitymayagreetoprovideproductsorservicestothe
sellerinthefuture.Thismayoccur,forexample,whentheacquiredentityisasubsidiaryoftheseller
andthatsubsidiaryprovidedproductsorservicestoitsparentthattheparentwishestocontinueto
receiveafterthesale.Anagreementforfutureproductsorservicestobeexchangedbetweenthe
acquiringentityandthesellermustbeevaluatedtodeterminewhethersuchanagreementrepresents
considerationtransferred.Ananalysisofsuchagreementwouldincludeadeterminationof(1)whether
thearrangementisbasedoncurrentmarketterms,(2)whoinitiatedthearrangement,and(3)whenthe
arrangementwasenteredinto.
Example 6-11
Agreement to Provide Products or Services to a Seller After the AcquisitionCompanyBentersintoanagreementwithCompanyCtoacquireSubsidiaryS.SubsidiarySsuppliesaspecificrawmaterialtoCthatthecompanywantstocontinuetoreceiveafterthesale.CompanyBagreestopay$3millionandprovideapredeterminedamountofrawmaterialstoCforafixedtermatafixedprice($10perpound).AnevaluationoftherawmaterialssupplyagreementindicatesthattheagreementisunfavorabletoBby$750,000.
Indeterminingtheconsiderationtransferredinthebusinesscombination,Bshouldincludethe$750,000relatedtotheunfavorablerawmaterialssupplyagreement.Thatis,thetotalconsiderationtransferredwouldbe$3,750,000($3million+$750,000).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 101/28688
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Factors to Consider in Assessing Whether Contingent Payment Is Part of theConsideration Transferred
6.40 Itisoftendifficulttodeterminewhetheranarrangementforpaymentstosellingshareholders
oremployeesrepresentscontingentconsiderationorcompensationexpense.Contingentconsideration
isaccountedforaspartoftheconsiderationtransferred,whereascompensationarrangementsare
accountedforseparatelyasexpenses.ParagraphA87providesthefollowingfactorstoconsiderin
makingthatdetermination:
a. Continuingemployment —Thetermsofcontinuingemploymentbythesellingshareholders
whobecomekeyemployeesmaybeanindicatorofthesubstanceofacontingent
considerationarrangement.Therelevanttermsofcontinuingemploymentmaybeincluded
inanemploymentagreement,acquisitionagreement,orsomeotherdocument.Acontingent
considerationarrangementinwhichthepaymentsareautomaticallyforfeitedifemployment
terminatesiscompensationforpostcombinationservices.Arrangementsinwhichthe
contingentpaymentsarenotaffectedbyemploymentterminationmayindicatethatthe
contingentpaymentsareadditionalconsiderationratherthancompensation.
b. Durationofcontinuingemployment —Iftheperiodofrequiredemploymentcoincideswith
orislongerthanthecontingentpaymentperiod,thatfactmayindicatethatthecontingent
paymentsare,insubstance,compensation.
c. Levelofcompensation —Situationsinwhichemployeecompensationotherthanthe
contingentpaymentsisatareasonablelevelincomparisontothatofotherkeyemployeesin
thecombinedentitymayindicatethatthecontingentpaymentsareadditionalconsideration
ratherthancompensation.
d. Incrementalpaymentstoemployees —Ifsellingshareholderswhodonotbecomeemployees
receivelowercontingentpaymentsonaper-sharebasisthanthesellingshareholderswho
becomeemployeesofthecombinedentity,thatfactmayindicatethattheincremental
amountofcontingentpaymentstothesellingshareholderswhobecomeemployeesis
compensation.
e. Numberofsharesowned —Therelativenumberofsharesownedbythesellingshareholderswhoremainaskeyemployeesmaybeanindicatorofthesubstanceofthecontingent
considerationarrangement.Forexample,ifthesellingshareholderswhoownedsubstantially
allofthesharesintheacquireecontinueaskeyemployees,thatfactmayindicatethatthe
arrangementis,insubstance,aprofit-sharingarrangementintendedtoprovidecompensation
forpostcombinationservices.Alternatively,ifsellingshareholderswhocontinueaskey
employeesownedonlyasmallnumberofsharesoftheacquireeandallsellingshareholders
receivethesameamountofcontingentconsiderationonaper-sharebasis,thatfactmay
indicatethatthecontingentpaymentsareadditionalconsideration.Thepreacquisition
ownershipinterestsheldbypartiesrelatedtosellingshareholderswhocontinueaskey
employees,suchasfamilymembers,alsoshouldbeconsidered.
f. Linkagetothevaluation —Iftheinitialconsiderationtransferredattheacquisitiondate
isbasedonthelowendofarangeestablishedinthevaluationoftheacquireeandthe
contingentformularelatestothatvaluationapproach,thatfactmaysuggestthatthe
contingentpaymentsareadditionalconsideration.Alternatively,ifthecontingentpayment
formulaisconsistentwithpriorprofit-sharingarrangements,thatfactmaysuggestthatthe
substanceofthearrangementistoprovidecompensation.
g. Formulafordeterminingconsideration —Theformulausedtodeterminethecontingent
paymentmaybehelpfulinassessingthesubstanceofthearrangement.Forexample,if
acontingentpaymentisdeterminedonthebasisofamultipleofearnings,thatmight
suggestthattheobligationiscontingentconsiderationinthebusinesscombinationand
thattheformulaisintendedtoestablishorverifythefairvalueoftheacquiree.Incontrast,
acontingentpaymentthatisaspecifiedpercentageofearningsmightsuggestthatthe
obligationtoemployeesisaprofit-sharingarrangementtocompensateemployeesforservices
rendered.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 102/28689
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
h. Otheragreementsandissues —Thetermsofotherarrangementswithsellingshareholders
(suchasnoncompeteagreements,executorycontracts,consultingcontracts,andproperty
leaseagreements)andtheincometaxtreatmentofcontingentpaymentsmayindicatethat
contingentpaymentsareattributabletosomethingotherthanconsiderationfortheacquiree.
Forexample,inconnectionwiththeacquisition,theacquirermightenterintoaproperty
leasearrangementwithasignificantsellingshareholder.Iftheleasepaymentsspecifiedin
theleasecontractaresignificantlybelowmarket,someorallofthecontingentpayments
tothelessor(thesellingshareholder)requiredbyaseparatearrangementforcontingent
paymentsmightbe,insubstance,paymentsfortheuseoftheleasedpropertythatthe
acquirershouldrecognizeseparatelyinitspostcombinationfinancialstatements.Incontrast,
iftheleasecontractspecifiesleasepaymentsthatareconsistentwithmarkettermsforthe
leasedproperty,thearrangementforcontingentpaymentstothesellingshareholdermaybe
contingentconsiderationinthebusinesscombination.
Reimbursement Made to the Acquiree for the Acquirer’s Acquisition-Related Costs
6.41 Statement141(R)generallyrequiresacquisition-relatedcoststobeexpensedintheperiodthey
areincurred(see6.31).Paymentstoreimbursetheacquireeforpayingtheacquirer’sacquisition-related
costsarenotpartoftheconsiderationtransferredandmustbeaccountedforseparatelyfromthe
businesscombination(i.e.,expensedwhenincurred).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 103/28690
Section 7 — Noncontrolling Interests
7.01 Paragraph25ofARB51,asamendedbyStatement160,statesthatanoncontrollinginterest
(formerlyknownasaminorityinterest)is“theportionofequity(netassets)inasubsidiarynot
attributable,directlyorindirectly,toaparent.”Typically,noncontrollingshareholdersownlessthan
50percentofanentity;however,anoncontrollingshareholderinavariableinterestentityunder
Interpretation46(R)mightownmorethan50percentofthevotingstockoftheentity(evenupto100
percent)becausethecontrollingentityexercisescontrolbyothermeans(see7.36).
7.02 WhileStatement160carriesforwardmuchofARB51’sguidanceonpreparingconsolidated
financialstatements,itsignificantlychangestheaccountingfor(1)noncontrollinginterests,(2)increases
anddecreasesinparentownershipinterestsinsubsidiaries,and(3)deconsolidationsofsubsidiaries(see
Appendix B).Statement160appliestoallentitiesexceptfornot-for-profitorganizations,whichwill
continuetoapplythepre-amendedversionofARB51.
Scope of Statement 160
7.03 Paragraph27ofARB51,asamendedbyStatement160,states,inpart:
Onlyafinancialinstrumentissuedbyasubsidiarythatisclassifiedasequityinthesubsidiary’s
financialstatementscanbeanoncontrollinginterestintheconsolidatedfinancialstatements.A
financialinstrumentissuedbyasubsidiarythatisclassifiedasaliabilityinthesubsidiary’sfinancial
statementsbasedontheguidanceinotherstandardsisnotanoncontrollinginterestbecauseitisnot
anownershipinterest.
7.04 Whileanoncontrollinginterestmayinitiallyresultfromabusinesscombinationaccountedfor
inaccordancewithStatement141(R),itmayalsoresultfromthedilutionofacontrollingshareholder’s
equityinterestinawhollyownedsubsidiary.
Example 7-1
Noncontrolling Interest Resulting From the Sale of Equity Interests
CompanyAhasawhollyownedsubsidiarythatitacquiredonJune30,2007.OnJuly15,2009,CompanyAsoughttoraisecapitalandissuedsharesofthesubsidiary’scommonequitytoanunrelatedthirdparty,whichdiluteditsownershipinterestfrom100percentto90percent.Uponthesaleofequitytothethirdparty,CompanyAwouldnowberequiredtoinitiallyrecognizethenoncontrollinginterest(i.e.,the10percentofthesubsidiaryitnolongerowns).
7.05 Indeterminingtheappropriateclassificationofanoncontrollinginterest,anentitymustlook
tootherrelevantGAAPtodeterminewhetherthefinancialinstrumentissuedbyasubsidiarycanbe
classifiedaspermanentequity.SuchGAAPwouldinclude,butnotbelimitedto:
• Statement133.
• Statement150.
• EITFTopicD-98.
• SECAccountingSeriesReleaseNo.268.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 104/28691
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
7.06 Morecomplexfinancialinstruments(e.g.,thosewithcertaincall,put,orredemptionfeatures)
mayberequiredtofollowthepresentationrequirementsinotherGAAPand,therefore,couldbe
classifiedineithermezzanine(ortemporary)equityorasliabilities.
Recognizing and Measuring Noncontrolling Interests as of the Acquisition Date
7.07 UnderStatement141(R),noncontrollinginterestsarerecognizedandmeasuredatfairvalueasoftheacquisitiondate.Inaddition,asdiscussedin12.11,Statement160requiresthattheconsolidated
financialstatementspresentthenoncontrollinginterestasaseparatecomponentofshareholders’
equity.Netincomeandcomprehensiveincomeareattributedtothenoncontrollinginterestafter
theacquisitiondate(see7.13).Thenoncontrollinginterestisnotremeasuredtofairvalueafterthe
acquisitiondate.
7.08 ParagraphA60ofStatement141(R)states,inpart:
Anacquirersometimeswillbeabletomeasuretheacquisition-datefairvalueofanoncontrolling
interestonthebasisofactivemarketpricesfortheequitysharesnotheldbytheacquirer.Inother
situations,however,anactivemarketpricefortheequityshareswillnotbeavailable.Inthosesituations,theacquirerwouldmeasurethefairvalueofthenoncontrollinginterestusingother
valuationtechniques.
7.09 Inmanybusinesscombinations,theacquiringentitypaysapremiumovermarkettoobtain
controloftheacquiredentity(commonlyreferredtoasacontrolpremium).Therefore,theper-share
valueoftheacquiringentity’sinterestintheacquiredentitymaybegreaterthanthenoncontrolling
shareholders’per-sharevalueinthatsameentity.
Example 7-2
Impact of Control Premium on Fair Value of the Noncontrolling Interest
CompanyAacquires60percent(600,000shares)ofCompanyBfor$6million(or$10pershare).However,asoftheacquisitiondate,theacquiredentity’ssharesaretradingat$7.50pershare.Theacquireracknowledgesthatapremiumovermarketispaidbecauseofsynergiesitbelievesitwillbeabletoderivefromtheacquiredbusiness.Therefore,aconclusionthatthefairvalueoftheentireacquiredentityis$10millionmaynotbereasonable.Thefairvalueoftheacquiredentitymightbe$9million,calculatedasthe$6millionpaidplus$3millionforthenoncontrollingshares(400,000shares×$7.50pershare).
Example 7-3
Determining the Fair Value of the Noncontrolling Interest
CompanyCannouncesitwillacquire75percent(750,000shares)ofCompanyD,aprivatelyheldentity,for$15millionincash(or$20pershare).Anindependentthird-partyvaluationfirmcalculatesthefairvalueoftheentireacquiredbusiness(i.e.,100percent)as$19millionusingvaluationtechniquesconsistentwiththeguidanceinStatement157.It
maybeappropriateforCompanyCtoderivethefairvalueofthenoncontrollinginterestas$4million(or$16pershare),calculatedasthefairvalueoftheentirebusiness($19million)lessthefairvalueoftheconsiderationtransferredbyCompanyC($15million),whichincludesacontrolpremium.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 105/28692
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Measuring Noncontrolling Interests in Reverse Acquisitions
7.10 Insomereverseacquisitions(see2.23–2.31forfurtherdiscussiononreverseacquisitions),certain
shareholdersoftheaccountingacquirer(legalacquiree)maynotexchangetheirinterestsforinterestsin
theaccountingacquiree(legalacquirer),whichwouldcreateanoncontrollinginterestinthecombined
entity.ParagraphA113ofStatement141(R)describestheaccountingforthenoncontrollinginterestina
reverseacquisitionasfollows:
[I]nareverseacquisitionthenoncontrollinginterestreflectsthenoncontrollingshareholders’
proportionateinterestintheprecombinationcarryingamountsofthelegalacquiree’snetassets
eventhoughthenoncontrollinginterestsinotheracquisitionsaremeasuredattheirfairvaluesatthe
acquisitiondate.
Example 7-4
Noncontrolling Interests in a Reverse Acquisition
CompanyA,apublicentity,andCompanyB,aprivateentity,enterintoareverseacquisitionwithinthescopeofStatement141(R).CompanyBisdeemedtobetheaccountingacquirer(legalacquiree).Beforethetransaction,CompanyBhas5millioncommonsharesoutstanding,issuedequityof$150million,andretainedearningsof$100million.In
addition,thefairvalueofCompanyAis$75million(i.e.,thehypotheticalconsiderationtransferredbyCompanyB;see2.24).
Aspartofthetransaction,CompanyAissuescommonsharesinexchangefor4millionoutstandingsharesofCompanyB.Noncontrollingshareholdersholdtheremaining1millionsharesinCompanyB,ora20percentownershipinterest.Thecombinedentitywouldcalculateitspostcombinationshareholders’equityasfollows:.
Retainedearnings
Issuedequity
Noncontrollinginterest
Totalshareholders’equity
$ 80million
195million
50million
$ 325million
$100million×80%
$75million+($150million×80%)
($100millionx20%)+($150million×20%)
Full Goodwill Approach
7.11 Asdiscussedin7.07,thenoncontrollinginterestisrecognizedandmeasuredatfairvalueasof
theacquisitiondate.Therefore,inpartialacquisitions,goodwillrepresentsamountsattributabletoboth
theacquiringentity(parent)andthenoncontrollinginterest.TheFASBdescribesStatement141(R)’s
methodforrecognizingandmeasuringgoodwillasthe“fullgoodwill”approach.
7.12 Notethattheparent’sconsolidatedstatementoffinancialpositionpresentstotalgoodwillona
singlelineitem.See11.58forguidancerelatedtoallocatinggoodwillimpairmentsbetweentheparent
andnoncontrollinginterest.
Attributing Net Income (Loss) and Comprehensive Income (Loss) to the Parent and
Noncontrolling Interest
7.13 ARB51,asamendedbyStatement160,requiresthatentitiesattributenetincomeorlossand
comprehensiveincomeorlosstoboththeparentandnoncontrollinginterest.However,neitherARB51
norStatement160providesdetailedguidanceonmakingthisattribution.InStatement160’sBasisfor
Conclusions,theFASBstated“thatentitiesweremakingattributionsbefore[Statement160]wasissued
andthatthoseattributionsgenerallywerereasonableandappropriate.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 106/28693
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
7.14 Entitiesgenerallyallocatenetincomeorlossandcomprehensiveincomeorlosstotheparent
andnoncontrollinginterestonthebasisofrelativeownershipinterests.However,thismaynotbe
appropriateinsomesituations,suchasincertaincontractualarrangements(see7.15)andpartial
acquisitionsenteredintobeforeStatement141(R)becameeffective(see7.16).
7.15 Forexample,acontractualagreementmightspecifyinvestors’allocationsofasubsidiary’sprofits
andlosses,certaincostsandexpenses,distributionsfromoperations,ordistributionsuponliquidation
thataredifferentfromrelativeownershippercentages.Theentityshouldconsiderthesubstanceofsuch
agreementswhendetermininghowanincreaseordecreaseinnetassetsofthesubsidiarywillaffect
cashpaymentstotheparentandthenoncontrollinginterestoverthelifeofthesubsidiaryanduponits
liquidation.
7.16 InabusinesscombinationconsummatedbeforetheeffectivedateofStatement141(R),and
inwhichtheacquirerobtainedlessthana100percentinterest,theacquirerwouldmeasurethe
acquiredentity’sidentifiablenetassetsatfairvalueonlyfortheportionitacquired.Forexample,ifan
acquirerobtaineda75percentinterest,itwouldmeasuretheacquiredentity’sidentifiablenetassets
as75percentfairvalueand25percentcarryovervalue.Becauseofthedisproportionateinterestintheidentifiablenetassets,allocationoftheacquiredentity’spostcombinationamortizationexpense,aswell
asitsdepreciationexpenseandimpairmentcharges,totheparentandnoncontrollinginterestmaynot
bebasedontheirrelativeownershipinterests.ParagraphB38ofStatement160providesthefollowing
example:
[I]fanentityacquired80percentoftheownershipinterestsinasubsidiaryinasingletransaction
beforeStatement141(R)waseffective,itlikelywouldhaverecordedtheintangibleassetsrecognized
intheacquisitionofthatsubsidiaryat80percentoftheirfairvalue(80percentfairvalueforthe
ownershipinterestacquiredplus20percentcarryovervaluefortheinterestsnotacquiredinthat
transaction,whichforunrecognizedintangibleassetswouldbe$0).IftheBoardwouldhave
requirednetincometobeattributedbasedonrelativeownershipinterestsin[Statement160],the
noncontrollinginterestwouldhavebeenattributed20percentoftheamortizationexpenseforthoseintangibleassetseventhoughnoamountoftheassetwasrecognizedforthenoncontrollinginterest.
Before[Statement160]wasissued,theparentgenerallywouldhavebeenattributedallofthe
amortizationexpenseofthoseintangibleassets.
7.17 See14.53–14.54regardingthecalculationofbasicanddilutedearningspersharewhena
noncontrollinginterestispresent.
Losses in Excess of the Carrying Amount of the Noncontrolling Interest
7.18 Paragraph31ofARB51,asamendedbyStatement160,statesthefollowingregardinglosses
incurredbythesubsidiary:
Lossesattributabletotheparentandthenoncontrollinginterestinasubsidiarymayexceedtheir
interestsinthesubsidiary’sequity.Theexcess,andanyfurtherlossesattributabletotheparent
andthenoncontrollinginterest,shallbeattributedtothoseinterests.Thatis,thenoncontrolling
interestshallcontinuetobeattributeditsshareoflossesevenifthatattributionresultsinadeficit
noncontrollinginterestbalance.
7.19 BeforetheadoptionofStatement160,lossesinexcessofthecarryingamountofthe
noncontrollinginterestinthesubsidiarywereallocatedtothecontrollinginterest(parent),unlessthe
noncontrollingshareholdershadanobligationtomakegoodonsuchlosses.SinceStatement160’s
accountingguidanceisentirelyprospective,allocationsofprofitsandlossesbeforetheeffectivedateof
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 107/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 108/28695
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 7-6
Acquisition of Noncontrolling Interests in a Subsidiary When There Is No Change in Control
ParentCompanyAowns80percentofitssubsidiary,whichhasanetbookvalueof$100asofDecember31,20X9.Thecarryingamountsofthecontrollingandnoncontrollinginterestsinthesubsidiaryare$80and$20,respectively.Also,thenoncontrollinginterest’scarryingamountincludes$5ofaccumulatedothercomprehensiveincome.OnJanuary1,20Y0,Apurchasestheremaining20percentofthesubsidiaryfor$30.
Whenthistransactionoccurs,thenoncontrollinginterest’scarryingamount(includedasaseparatecomponentofconsolidatedequity)isreducedby$20tozero.CompanyA’sequityisreducedfurtherbyanetof$10througha$15chargetoadditionalpaid-incapitalanda$5credittoaccumulatedothercomprehensiveincome.Theonlychangetoconsolidatedassetsorliabilitiesistherecognitionof$30ofcashpaidfortheadditionalinterest.
ParentCompanyA’sjournalentryonJanuary1,20Y0,isasfollows:
Debit Credit
Noncontrollinginterestinsubsidiary(aseparatecomponentofconsolidatedequity)
Additionalpaid-incapital(acomponentofA’sequity)**
Accumulatedothercomprehensiveincome(acomponentofA’sequity)
Cash
$ 20*
15
$ 5
30
* Amountincludes$5ofaccumulatedothercomprehensiveincomepreviouslyattributabletothenoncontrollinginterest.
**Iftheparentsubsequentlylosescontrolofanddeconsolidatesthissubsidiary,Statement160doesnotpermittheparententitytoreverseprioradjustmentsmadetoitsadditionalpaid-incapitalaccount.
Example 7-7
Sale of an Ownership Interest in a Subsidiary When There Is No Change in Control
ParentCompanyAowns80percentofitssubsidiary.Thesubsidiaryhasanetbookvalueof$100asofDecember31,20X9.Thecarryingamountsofthecontrollinginterest(A)andnoncontrollinginterest(ownedbyCompanyB)inthesubsidiaryare$80and$20,respectively.OnJanuary1,20Y0,thesubsidiaryissuesstocktoanonaffiliatedentity,
CompanyC,for6.25percentinterestandtotalproceedsof$20.Assummarizedinthetablebelow,thistransaction(1)bringsthesubsidiary’stotalbookvalueto$120,(2)dilutesA’sinterestinthesubsidiaryto75percentbutincreasesitscarryingamountby$10to$90,and(3)increasesthetotalcarryingamountofthenoncontrollinginterest(BandC)by$10to$30.
CompanyOriginal Carrying
AmountOriginal Ownership
InterestCarrying Amount
1/1/2010Ownership Interest
1/1/2010
A $ 80 80% $ 90.00 75.00%
B 20 20 22.50 18.75
C — — 7.50 6.25
Total $ 100 100% $ 120.00 100.00%
ParentCompanyA’sjournalentryonJanuary1,20Y0,isasfollows:
Debit Credit
Cashheldbythesubsidiary
Noncontrollinginterestinsubsidiary(aseparatecomponentofconsolidatedequity)
Additionalpaid-incapital(acomponentofA’sequity)*
$ 20
$ 10
10
* Iftheparentsubsequentlylosescontrolofanddeconsolidatesthissubsidiary,Statement160doesnotpermittheparententitytoreverseprioradjustmentsmadetoitsadditionalpaid-incapitalaccount.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 109/28696
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Former Parent Retains a Noncontrolling Interest of a Subsidiary After Control IsLost
7.24 Statement141(R)statesthatasignificanteconomiceventoccurswhenanacquiringentity
obtainscontrolofanacquireethatresultsinthe(1)initialrecognitionandmeasurementoftheassets
acquiredandliabilitiesassumedinthatbusinesscombinationatfairvalueand(2)remeasurementto
fairvalueofanypreexistingequityinterestsintheacquiree(e.g.,aless-than-50percentequityinterest).
Similarly,Statement160describesaparent’slossofcontroloverasubsidiaryasasignificanteconomic
event.
7.25 Paragraph35ofARB51,asamendedbyStatement160,providesthefollowingfourexamples
ofeventsthatwouldresultinalossofcontrolandwouldrequireaparentcompanytodeconsolidateits
subsidiary:
1. The“parentsellsallorpartofitsownershipinterestinitssubsidiary,andasaresult,theparent
nolongerhasacontrollingfinancialinterestinthesubsidiary.”
2. “Theexpirationofacontractualagreementthatgavecontrolofthesubsidiarytotheparent.”3. “Thesubsidiaryissuesshares,whichreducestheparent’sownershipinterestinthesubsidiaryso
thattheparentnolongerhasacontrollingfinancialinterestinthesubsidiary.”
4. “Thesubsidiarybecomessubjecttothecontrolofagovernment,court,administrator,or
regulator.”
Thedeconsolidationofasubsidiarythroughanonreciprocaltransfertoowners(e.g.,aspinoff)isnot
withinthescopeofARB51,asamended(see7.34).
7.26 Iftheparentlosescontrolofasubsidiarybutretainsanoncontrollinginterestinthatpreviously
consolidatedsubsidiary,theretainednoncontrollinginterestintheformersubsidiaryisremeasuredto
fairvalue.
7.27 Theparent’sgainorlossondeconsolidationiscalculatedinaccordancewithparagraph36of
ARB51,asamendedbyStatement160,asfollows:
Fairvalueofanyconsiderationreceived
+ Fairvalueofanyretainednoncontrollinginvestmentintheformersubsidiaryasofthedate
thesubsidiaryisdeconsolidated
+ Carryingamountofanynoncontrollinginterestintheformersubsidiary,includingAOCI
attributabletothenoncontrollinginterest,asofthedatethesubsidiaryisdeconsolidated
– Carryingamountoftheformersubsidiary’sassetsandliabilities
= Totalgainorlossondeconsolidation
7.28 Asdiscussedin7.21,theparentaccountsforchangesinitsownershipinterestofasubsidiary
thatdonotresultinachangeofcontrolasequitytransactions,whichoftenresultsinadjustments
totheparententity’sadditionalpaid-incapitalaccount.Iftheparentsubsequentlylosescontrolof
anddeconsolidatesasubsidiary,Statement160doesnotpermittheparententitytoreverseprior
adjustmentsmadetoitsadditionalpaid-incapitalaccount.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 110/28697
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 7-8
Parent Retains an Investment in Its Former Subsidiary
ParentCompanyowns80percentofasubsidiarywithabookvalueof$100and(1)thecarryingamountsofthecontrolling(ParentCompany)andnoncontrollinginterestsare$80and$20,respectively;(2)ParentCompanyreducesitsinterestintheformersubsidiaryto10percentbysellingstockfor$105;and(3)thefairvalueofthe10percentretainedinterestis$15.
Thegainonthesalewouldbecomputedasfollows:
Fairvalueofconsiderationreceived(cashproceeds)
Fairvalueofretainednoncontrollinginterestinthesubsidiary
Carryingvalueofnoncontrollinginterest
Less:subsidiary’sbookvalue
Gainonsale
$ 105
15
20
140
100
$ 40
Thejournalentrywouldbeasfollows:
Debit Credit
Cash
Investmentinformersubsidiary
Noncontrollinginterestinformersubsidiary
Netassetsofformersubsidiary
Gainonsale
$ 105
15
20
$ 100
40
7.29 Intheexampleabove,theformerparentisrequiredtodisclosetheportionofthe$40gainthat
relatestotheremeasurementofitsretained10percentinteresttofairvalue(see13.40).
7.30 Ifanentity’saccountingforasubsidiarychangesfromconsolidationtotheequitymethod,
theentitymustapplytheequitymethodofaccountingprospectivelyfromthedatecontroloverthesubsidiaryisrelinquished.Applicationoftheequitymethodofaccountingasifthelossofcontrol
occurredatthebeginningofthecurrentfiscalperiodoryearisprohibited.Inaddition,theentityshould
notreviseitspresentationofprior-yearbalances.ParagraphC2(b)ofStatement144deletedparagraph
12ofARB51,eliminatingtheoptiontopresenttheinvestmentasifthelossofcontroloccurredat
thebeginningoftheyearofthechange(e.g.,fromconsolidationtoequitymethod).Thisguidanceis
furthersupportedbyStephanieL.Hunsaker,anassociatechiefaccountantintheSEC’sOfficeofthe
ChiefAccountant,inherspeechatthe2007AICPANationalConferenceonCurrentSECandPCAOB
Developments.
Multiple Arrangements Accounted for as a Single Disposal Transaction
7.31 UnderStatement160,theparentmayberequiredtoaccountformultiplearrangementsasa
singledisposaltransaction.Therefore,theparentshouldanalyzethetermsandconditionsofmultiple
arrangements,includingtheircombinedeconomiceffect.Thepresenceofoneormoreofthefollowing
fourindicatorsfromparagraph37ofARB51,asamendedbyStatement160,mayindicatethatthe
parentshouldaccountforitsmultiplearrangementsasasingletransaction:
• The“arrangementsareenteredintoatthesametimeorincontemplationofoneanother.”
• Thearrangementsaredesignedtoachieveanoverallbusinessplan.
• Oneofthearrangementsdependsonthesuccessofoneormoreotherarrangements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 111/28698
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
• Anysinglearrangementisnoteconomicallyjustifiable;however,thisparticulararrangementis
economicallyjustifiablewhenallotherarrangementsaretakenintoaccount.
7.32 Statement160addedtheaboveguidancetopreventabusebycompaniesattemptingto
minimizeearningsimplicationswhendisposingofasubsidiary.
Example 7-9
Multiple Arrangements Accounted for as a Single Disposal Transaction
CompanyAintendstosellitswhollyownedsubsidiary,SubsidiaryB,foraloss.ThecurrentcarryingvalueofSubsidiaryBis$100.CompanyAstructuresthesaleintotwoarrangements.Inthefirstarrangement,Asellsa49percentinterestfor$40onJuly1,20X9.Inthesecondarrangement,Asellstheremaining51percentinterestfor$41onSeptember1,20X9.
ThefollowingillustratesthetotallossthatAwouldrecordinitsconsolidatedstatementofincomeifthemultiplearrangementswereaccountedfor(1)separatelyor(2)asasingletransaction.
Disposal arrangements are accounted for:
SeparatelyAs a singletransaction
Arrangement1
Arrangement2
TotallossrecognizedbyA
$ 0*
10
$ 10
$ 9
10
$ 19**
CompanyAshouldevaluateallofthefactsandcircumstances,aswellastheguidanceandindicatorsinparagraph37ofARB51,asamendedbyStatement160,todeterminewhetherthemultiplearrangementsshouldbeaccountedforasasingletransaction.
* BecausethefirstarrangementdidnotcauseAtoloseitscontroloverB,Awouldaccountforitasanequitytransactionwithnogainorlossrecordedinearnings(see 7.21).
** Becausebotharrangementsareaccountedforasasingletransaction,Awouldfollowthedeconsolidationguidanceinparagraphs35–37ofARB51,asamendedbyStatement160,andrecordtheentirelossinearnings(see 7.27).
7.33 AsnotedinparagraphB57ofStatement160,theFASBobservedthattheriskofconcealinglossesisfurtherreducedbytheimpairmentguidanceinStatements142and144.Underthisguidance,
amore-likely-than-notexpectationtosellordisposeofareportingunit,orasignificantportionofa
reportingunit,oralong-livedasset(assetgroup)wouldtriggerarequirementtoperformimpairment
testingforgoodwill(underStatement142)andintangibleandlong-livedtangibleassets(under
Statement144).
Nonreciprocal Transfers to Owners
7.34 Nonreciprocaltransferstoowners(e.g.,spinoffs)arenotwithinthescopeofARB51,as
amendedbyStatement160.Paragraph36ofARB51,asamendedbyStatement160,states:
Ifaparentdeconsolidatesasubsidiarythroughanonreciprocaltransfertoowners,suchasaspinoff,
theaccountingguidanceinAPBOpinionNo.29,AccountingforNonmonetaryTransactions ,applies.
7.35 Paragraph23ofOpinion29,whichprovidesguidancefornonreciprocaltransferstoowners,
statesthefollowing:
Accountingforthedistributionofnonmonetaryassetstoownersofanenterpriseinaspin-offor
otherformofreorganizationorliquidationorinaplanthatisinsubstancetherescissionofaprior
businesscombinationshouldbebasedontherecordedamount(afterreduction,ifappropriate,foran
indicatedimpairmentofvalue)[footnoteomitted]ofthenonmonetaryassetsdistributed.Aprorata
distributiontoownersofanenterpriseofsharesofasubsidiaryorotherinvesteecompanythathas
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 112/28699
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
beenorisbeingconsolidatedorthathasbeenorisbeingaccountedforundertheequitymethodis
tobeconsideredtobeequivalenttoaspin-off.Othernonreciprocaltransfersofnonmonetaryassets
toownersshouldbeaccountedforatfairvalueifthefairvalueofthenonmonetaryassetdistributed
isobjectivelymeasurableandwouldbeclearlyrealizabletothedistributingentityinanoutrightsale
atornearthetimeofthedistribution.
Example 7-10 Spin Off of a Business to the Parent Company
CompanyAmanufacturescomputer-relatedcommunicationapplications.CompanyAacquiredCompanyBinabusinesscombinationapproximatelytwoyearsago.CompanyBwasengagedincustomsoftwaredevelopment.AfteritsacquisitionbyA,Bdevelopedanoff-the-shelfsoftwareproductsbusiness.CompanyAispreparingafilingforaninitialpublicofferingofB;however,BwilldistributethecustomsoftwarebusinesstoAbeforetheoffering.
ThetransferofassetstoAisadistributiontotheownersintheformofanonreciprocaltransfer,asdiscussedinparagraph23ofOpinion29.Asaresult,thetransactionisrecordedatbookvalue,withnogainorlossonthetransaction.
Considerations for a Primary Beneficiary of a Variable Interest Entity
7.36 Thedefinitionofa“parent”inAppendixBofARB51,asamendedbyStatement160,includes
theprimarybeneficiaryofavariableinterestentity(VIE).Also,aVIEthatisconsolidatedbyaprimary
beneficiaryisincludedinthedefinitionofa“subsidiary”inARB51,asamended.Therefore,afterits
initialconsolidationoftheVIE,theprimarybeneficiary(parent)shouldprepareconsolidatedfinancial
statementsinaccordancewithARB51,asamendedbyStatement160,withoneexceptionrelatedto
feesorothersourcesofincomeandexpensebetweenaprimarybeneficiaryandaVIEasdescribedin
paragraph22ofInterpretation46(R),asamendedbyStatement160:
TheprinciplesofconsolidatedfinancialstatementsinARB51applytoprimarybeneficiaries’
accountingforconsolidatedvariableinterestentities.Aftertheinitialmeasurement,theassets,
liabilities,andnoncontrollinginterestsofaconsolidatedvariableinterestentityshallbeaccounted
forinconsolidatedfinancialstatementsasiftheentitywereconsolidatedbasedonvotinginterests.
Anyspecializedaccountingrequirementsapplicabletothetypeofbusinessinwhichthevariableinterestentityoperatesshallbeappliedastheywouldbeappliedtoaconsolidatedsubsidiary.The
consolidatedenterpriseshallfollowtherequirementsforeliminationofintercompanybalancesand
transactionsandothermattersdescribedinparagraphs6–39ofARB51andexistingpracticesfor
consolidatedsubsidiaries.Feesorothersourcesofincomeorexpensebetweenaprimarybeneficiary
andaconsolidatedvariableinterestentityshallbeeliminatedagainsttherelatedexpenseorincome
ofthevariableinterestentity.Theresultingeffectofthateliminationonthenetincomeorexpense
ofthevariableinterestentityshallbeattributedtotheprimarybeneficiary(andnottononcontrolling
interests)intheconsolidatedfinancialstatements.
Example 7-11
Primary Beneficiary’s Accounting for a VIE
CompanyAhasa5percentequityinterestinEntityX(aVIE).CompanyAistheprimarybeneficiaryofXand,therefore,consolidatesXinaccordancewithInterpretation46(R).TheprofitsandlossesofXareallocatedbetweentheparent(A)andthenoncontrollinginterestonthebasisoftheguidanceinARB51,asamendedbyStatement160,andparagraph22ofInterpretation46(R)(see7.13and7.14).
OnJuly1,20Y1,Aacquiresanadditional10percentequityinterestinX.Afterthistransaction,AremainstheprimarybeneficiaryofX.BecauseitretainscontrolofX,Arecordsthisasanequitytransactioninaccordancewithparagraphs32–34ofARB51,asamendedbyStatement160(see7.21).
OnSeptember1,20Y2,afterarequiredreconsiderationassessment,AisnolongerdeemedtobetheprimarybeneficiaryofX.Thatis,AnolongercontrolsX.Therefore,AdeconsolidatesXinaccordancewithparagraphs35–37ofARB51,asamendedbyStatement160,andrecognizesagainorlossondeconsolidation(see 7.27).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 113/286100
Section 8 — Income Tax Considerations
Income Taxes — General
8.01 Paragraph26ofStatement141(R)highlightsthattheaccountingforincometaxesisanexceptiontothegeneralrecognitionandmeasurementprinciplesofthatStatement.Paragraph26
states,“Theacquirershallrecognizeandmeasureadeferredtaxasset[DTA]orliability[DTL]arisingfrom
theassetsacquiredandliabilitiesassumedinabusinesscombinationinaccordancewithFASBStatement
No.109,AccountingforIncomeTaxes ,asamendedbythisStatement.”
8.02 Paragraph30ofStatement109,asamendedbyStatement141(R),establishestheprinciplesfor
taxaccountinginabusinesscombination.Paragraph30states:
Asoftheacquisitiondate,adeferredtaxliabilityorassetshallberecognizedinaccordancewiththe
requirementsofthisStatementforanacquiredentity’staxableordeductibletemporarydifferences
(excepttheportionofgoodwillforwhichamortizationisnotdeductiblefortaxpurposes,leveragedleases,andacquiredOpinion23differences[footnoteomitted])oroperatinglossortaxcredit
carryforwards.Forexample,taxableordeductibletemporarydifferencesarisefromdifferences
betweenthetaxbasesandtherecognizedvaluesofassetsacquiredandliabilitiesassumedina
businesscombination.(Refertoparagraphs259–272foradditionalguidance).Anacquirershallassess
theneedforavaluationallowanceasoftheacquisitiondateforanacquiredentity’sdeferredtax
assetinaccordancewiththisStatement.
Tax Treatment of Business Combinations
Tax Status of the Enterprise
8.03 Determiningthetaxstatusofanenterpriseisanimportantinitialstepintheaccountingfora
businesscombination,sinceitaffectstheaccountingforthetemporarydifferencesassociatedwiththe
transaction.Theenterprisecanbetaxableornontaxable.
Fortaxable enterprises,deferredtaxesmustbeprovidedonthetaxableanddeductibletemporary
differencesthatarisefromadifferencebetweenthetaxbasisofanassetoraliabilityanditsreported
amountinthefinancialstatements,unlessaspecificexceptioninStatement109existsforthetemporary
difference.
Whiletheassetsandliabilitiesofapartnership(i.e.,anontaxable enterprise)mightgiverisetotaxable
ordeductibletemporarydifferences,nodeferredtaxesarerecordedinthepartnership’sfinancial
statementsbecausethetaxconsequenceswillbebornebyitspartners.Ifthepartnersaretaxable
enterprises,theymustprovidedeferredtaxesonanytemporarydifferenceassociatedwiththe
partnershipinterest.
Taxable and Nontaxable Transactions
8.04 Therearetypicallytwotypesofbusinesscombinations—taxableandnontaxable.
Inataxable businesscombination,newtaxbasesforacquiredassetsandassumedliabilitiesare
determinedonthebasisofthefairmarketvalueoranotherremeasurementtechniquerequiredby
thetaxlaw.Inotherwords,theacquirer“stepsup”theacquiree’shistoricaltaxbasesintheassets
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 114/286101
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
acquiredandliabilitiesassumedtofairmarketvalue.NotethatundertheU.S.federalincometaxlaw,
certainstockpurchasescanbetreatedastaxablebusinesscombinationsifanelectiontotreatthestock
purchaseasataxableassetpurchaseisfiled.(SeeSection338oftheInternalRevenueCode.)
Inanontaxable businesscombination,theacquirerassumesthehistoricaltaxbasisoftheacquired
assetsandassumedliabilities.Inthiscase,theacquirerretainsthe“historic”or“carryover”taxbases
intheacquiree’sassetsandliabilities.Generally,stockacquisitionsaretreatedasnontaxablebusiness
combinations(unlessaSection338electionismade).Nontaxablebusinesscombinationsgenerally
resultinsignificantlymoretemporarydifferencesthandotaxablebusinesscombinationsbecauseofthe
carryoverofthetaxbasesoftheassetsacquiredandliabilitiesassumed.Tosubstantiatetherelevant
taxbasesoftheacquiredassetsandassumedliabilities(i.e.,inaccordancewithInterpretation48),the
acquirershouldreviewtheacquiredentity’staxfilingsandrelatedbooksandrecords.Thisinformation
shouldbeevaluatedwithintheacquisition’smeasurementperiod,asdiscussedin3.16–3.19.
Thetaxstatusoftheenterprisedoesnotaffectwhetherabusinesscombinationisconsideredtaxableor
nontaxable;rather,thesecommonlyusedtermsrefertowhethertheacquirerrecordsthetaxbasesof
assetsandliabilitiesoftheacquiredentityonthebasisoftheirhistoricaltaxbasisoratfairmarketvalueoranotherremeasurementtechniquerequiredbythetaxlaw.AsdiscussedinSection 3,mostassets
andliabilitiesaremeasuredatfairvalueasoftheacquisitiondateforfinancialreportingpurposes.
8.05 RecognitionofDTAsandDTLsforthetaxconsequencesoftemporarydifferencesand
carryforwardsacquiredinabusinesscombination,asrequiredbyStatement109,appliestoboth
taxableandnontaxablebusinesscombinations.Inbothtaxableandnontaxablebusinesscombinations,
theamountsassignedtotheindividualassetsacquiredandliabilitiesassumedforfinancialreporting
purposesareoftendifferentfromtheamountsassignedorcarriedforwardfortaxpurposes.
The Basic Model — Tax Effects of Basis Differences
The Basic Model
8.06 ThesummaryofStatement109states,inpart,“Theobjectivesofaccountingforincometaxes
aretorecognize(a)theamountoftaxespayableorrefundableforthecurrentyearand(b)deferred
taxliabilitiesandassetsforthefuturetaxconsequencesofeventsthathavebeenrecognizedinan
enterprise’sfinancialstatementsortaxreturns.”Deferredtaxesareprovidedontemporarydifferences.
8.07 Paragraph289ofStatement109definesatemporarydifferenceas:
AdifferencebetweenthetaxbasisofanassetorliabilitycomputedpursuanttoFASBInterpretation
No.48,AccountingforUncertaintyinIncomeTaxes ,anditsreportedamountinthefinancial
statementsthatwillresultintaxableordeductibleamountsinfutureyearswhenthereportedamountoftheassetorliabilityisrecoveredorsettled,respectively.
8.08 Paragraph27ofStatement141(R)states:
Theacquirershallaccountforthepotentialtaxeffectsoftemporarydifferences,carryforwards,and
anyincometaxuncertaintiesofanacquireethatexistattheacquisitiondateorthatariseasaresultof
theacquisitioninaccordancewithStatement109,asamended,andrelatedinterpretativeguidance,
includingFASBInterpretationNo.48,AccountingforUncertaintyinIncomeTaxes .
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 115/286102
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Impact of Tax Planning and Business Integration Steps
8.09 Deferredtaxesrecognizedinabusinesscombinationshouldreflectthestructureofthecombined
entityasitexistsontheacquisitiondate.Thetaxeffectsofsubsequenttransactionstepsthatmay
beconsideredacquisition-relatedintegrationstepsareaccountedforseparatelyandapartfromthe
businesscombination(i.e.,outsidethebusinesscombination).Thosetransactionsareaccountedfor
underStatement109butarenotincludedinthebusinesscombinationaccounting.Underparagraphs
57,58,andA77ofStatement141(R)(see3.28–3.30),whendeterminingwhetheranindividual
transactionstepispartoftheacquisition,theacquirershouldconsider:
• Theunderlyingrationaleforthetransactionandwhichpartybenefitsfromit(theacquirerand
combinedentityortheacquireeanditsformerowners).
• Whethertheacquireroracquiree(oritsformerowners)initiatedthetransaction.
• Thetimingofthetransaction(s).
Push-Down of Acquisition Accounting
8.10 WhileStatement141(R)andrelatedinterpretiveguidancedoesnotalwaysrequiretheacquirer
to“pushdown”theacquisitionaccountingintoeachacquiredentity(seeSection 9),paragraph17
ofStatement109requiresthat“[d]eferredtaxesshallbedeterminedseparatelyforeachtax-paying
component...ineachtaxjurisdiction.”Therefore,todeterminethetemporarydifferencesthatarise
asoftheacquisitiondateandtoapplyStatement109accurately,anenterprisemustpushdown(i.e.,
actualornotionalpush-down)theamountsassignedtotheindividualassetsacquiredandliabilities
assumedforfinancialreportingpurposestoeachtax-payingcomponent.Thenotionofpush-down
accountingforincometaxesisdifferentfromthefinancialreportingrequirements.
Process for Recording Deferred Taxes
8.11 Theprocessforrecordingdeferredtaxesfortheacquiredentity’staxableanddeductible
temporarydifferencesisessentiallythesamefortaxableandnontaxablebusinesscombinations.
Deferredtaxesarerecordedfortemporarydifferences,unlessanexceptionapplies.Atemporary
differenceexistswhenthereisataxableordeductibledifferencebetween(1)thecarryingamount
ofanassetorliabilityforfinancialreportingpurposesand(2)thetaxbasisofthatassetorliability
inaccordancewithInterpretation48.Thecarryingamountforfinancialreportingpurposesisthe
same,regardlessoftheformofthebusinesscombination.Thereisadifferenceinhowthetaxbasisis
determineddependingonwhetherthebusinesscombinationistaxableornontaxable.
8.12 Innontaxablebusinesscombinations,atleasttwoapproachesarecommonlyusedforrecording
deferredtaxes:the“denovo”approachandthe“layering-on”approach.Theobjectiveofthetwoapproachesisthesame:toaccountforallacquiredtemporarydifferencesinaccordancewithStatement
109,asamendedbyStatement141(R).
De Novo Approach
8.13 Inthedenovoapproach,allexistingdeferredtaxesareremovedfromtheacquiredentity’s
booksandnewtemporarydifferencesarecalculatedonthebasisofthedifferencesbetweenbook(i.e.,
fairvalue)andtaxbases(whichdependsonthetypeofacquisition)inacquiredassetsandassumed
liabilities.Thisisthepreferredapproachforrecordingdeferredtaxesontemporarydifferencesarisingin
abusinesscombination,becauseitismorepreciseandthuslesslikelytoresultinerrors.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 116/286103
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Layering-On Approach
8.14 Inanontaxablebusinesscombination,theacquirersometimesabbreviatesthedenovoapproach
bylimitingitsexaminationtothechangeinbookbasesfromhistoricallyreportedamounts.This
methodisoftendescribedasthelayering-onapproachbecausethenewbookbasesarerecordedasan
incrementaladjustmenttothehistoricalbookbases.Thechangefromoldtonewbookbasesisadded
to(orsubtractedfrom)thehistoricaltemporarydifferences.
8.15 Thesameamountofdeferredtaxesmustberecordedunderthelayering-onapproachasunder
thedenovoapproach.However,thelayering-onapproachcanproduceflawedresultsbecauseofthe
following:
• Thebasicassumptionthatthehistoricaldeferredtaxesarecorrectmaynotbeappropriateand
mayinappropriatelylimittheduediligenceusedinevaluatinghistoricalinformation.
• Itmaybedifficulttosubstantiatethehistoricaldeferredtaxbalances.
• Allexceptionstodeferredtaxaccountingmustbereevaluated.Forexample,Statement109
requiresthattheacquirerremoveany(1)existingDTLsresultingfrompreexistingtax-deductiblegoodwillinaccordancewithparagraph9(d)ofStatement109and(2)anyprepaidtaxaccounts
ordeferredcreditsrecordedinaccordancewithparagraph9(e)ofStatement109.
• Afocusonthechangeinthetemporarydifferencemaylimittheacquiringentity’sprocess
ofassessingacquiredDTAsforrealizabililty(i.e.,valuationallowance)becausethehistorical
deferredtaxesareassumedtobecorrect.
Editor’s Note:Deferredtaxesontemporarydifferencesresultingfromabusinesscombinationare
determinedseparatelyforeachtax-payingcomponentineachtaxjurisdiction.
Example 8-1Processes for Recording Deferred Taxes in a Business Combination
ACpays$1,000toacquireTargetCompany(TC)stockinanontaxablebusinesscombination.Thefairvalueoftheidentifiableassetsis$700($500tangible,$200intangible).TChasnoliabilitiesexceptforitsDTLs.TChadsomehistoricalgoodwillfromapriortaxablebusinesscombination.Thehistoricalbookandtaxbasesoftheacquiredassets,alongwiththehistoricalDTL,arepresentedinthetablebelow.Assumea40percenttaxrate.
A
Fair Value
B
HistoricalBook Bases
C
HistoricalTax Bases
D
ExistingDeferred Tax
Layer
E
New
Deferred TaxLayer
(A–B) × 40%
F
De NovoCalculationof Deferred
Taxes(A–C) × 40%
Assets $ 500 $ 300 $ 75 $ (90) $ (80) $ (170)
Identifiableintangibles 200 150 25 (50) (20) (70)
Goodwill 50 (20) 20* 0
DTL (160)
TotalDTLrecorded (80) (240)
Note:D+E(taxlayer)=thelayering-onapproach
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 117/286104
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-1 (cont inued)
Processes for Recording Deferred Taxes in a Business Combination
Entrytorecordthebusinesscombination:
Debit Credit
Assets $ 500
Identifiableintangibles 200
Goodwill 540**
Cash $ 1,000
DTL 240
*ThehistoricalDTLrelatedtotax-deductiblegoodwillmustberemoved.
**Representsthe$300ofgoodwill($1,000purchasepricelessthe$700assignedtothefairvalueoftangibleandintangibleassets)plusthe$240ofDTL.NoDTLisrecognizedfortheexcessoffinancialreportinggoodwillovertax-deductiblegoodwillbecausesuchrecognitionisprecludedbyStatement109.(See 8.49.)
Basis Differences
8.16 Abasisdifferenceariseswhenthereisadifferencebetweenthefinancialreportingamountof
anassetorliabilityanditstaxbasis,asdeterminedbyreferencetotherelevanttaxlawsineachtax
jurisdiction.Therearetwocategoriesofbasisdifferences:insidebasisdifferencesandoutsidebasis
differences.
Inside Basis Differences
8.17 Aninsidebasisdifferenceisatemporarydifferencebetweenthecarryingamountforfinancial
reportingpurposesofindividualassetsandliabilitiesandtheirtaxbasesthatwillgiverisetoatax
deductionortaxableincomewhentherelatedassetisrecoveredorliabilityissettled.Deferredtaxes
arealwaysrecordedontaxableanddeductibletemporarydifferencesunlessanexceptionapplies.The
determinationofwhetheranexceptionappliesismadeasoftheacquisitiondateandthereafterinaccordancewithStatement109.
Example 8-2
Processes for Recording Deferred Taxes in a Business Combination
Assumethefollowing:
• ACpurchasesTargetCompany’s(TC’s)stockfor$1,000incashinanontaxablebusinesscombination.
• TChastwosubsidiaries(S1andS2).
• AlloftheentitiesaredomesticcorporationswithrespecttoAC.
• Assumea40percenttaxrate.
• TC’sonlyassetsareitssharesofS1andS2,asillustratedinthefollowingtable:
Identifiable Assets TC’s Stock S1 S2
Fairvalue $ 1,000 $ 750 $ 250
TC’staxbasisinitsassets(i.e.,thesharesofS1andS2stock) N/A 600 200
S1’sandS2’staxbasesintheirunderlyingidentifiableassets(assumenotaxgoodwill) N/A 300 100
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 118/286105
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-2 (cont inued)
Processes for Recording Deferred Taxes in a Business Combination
Initial Acquisition Accounting Entries:
TorecordAC’sinvestmentinTC TorecordTC’sinvestmentinS1andS2
AC TCDebit Credit Debit Credit
InvestmentinTC $ 1,000 InvestmentS1 $ 750
Cash $ 1,000 InvestmentS2 250
Equity $ 1,000
TorecorddeferredtaxesonthetemporarydifferencesinsideS1andS2
S1 S2
Debit Credit Debit Credit
Assets(buildings) $ 750 $ 250
Goodwill 180* 60*
DTL $ 180** $ 60†
Equity 750 250
Note:Entrieshavebeenrecorded(pusheddown)tothesubsidiaries’booksbecause,inaccordancewithparagraph17ofStatement109,“deferredtaxes[are]determinedseparatelyforeachtax-payingcomponent...ineachtaxjurisdiction.”
* NoDTLisrecordedfortheamountofgoodwillforfinancialreporting($180or$60)inexcessofthetaxbasisofgoodwill($0).(See8.49.)
** (750–300)×0.40.
† (250–100)×0.40.
Outside Basis Difference
8.18 Thedifferencebetweenaparent’staxbasisinaninvestmentinasubsidiaryanditsfinancialreportingbasisresultsinanoutsidebasisdifference.Deferredtaxesarealwaysrecordedontaxable
anddeductibletemporarydifferencesunlessaspecificexceptionapplies.Theexceptionthatmayapply
underStatement109dependsonwhethertheoutsidebasisdifferencesresultsinaDTLoraDTA.DTLs
arerecordedonalloutsidebasisdifferencesthataretaxabletemporarydifferencesunlessoneofthe
exceptionsinparagraph31or33ofStatement109applies.Thedeterminationofwhetheroneofthese
exceptionsappliesismadeasoftheacquisitiondateandthereafterinaccordancewithStatement109.
Underparagraph34ofStatement109,noDTAsshouldberecordedonoutsidebasisdifferencesthat
aredeductibletemporarydifferencesunlessitisapparentthatthetemporarydifferencewillreversein
theforeseeablefuture(e.g.,generallywithinthenext12months).
8.19 Underparagraph33ofStatement109,outsidebasisdifferencesindomesticentities(i.e.,the
holderoftheinvestmentistaxableinthesamejurisdictionastheinvestee)wouldnotbetreatedas
taxabletemporarydifferencesif(1)thetaxlawprovidesatax-freemeanstorecoverthereported
amountoftheinvestmentand(2)theholderoftheinvestmentexpectstorecovertheinvestmentin
thatmanner.TheholderoftheinvestmentmustmeetbothcriteriatoavoidrecordingtheDTL.Outside
basisdifferencesinforeignentities(i.e.,theholderoftheinvestmentistaxableinajurisdictiondifferent
fromtheinvestee’s)aretaxabletemporarydifferences.See 8.65foradiscussionofoutsidebasis
differencesinforeignentitiesandtherelatedexceptionforpermanentlyreinvestedearnings.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 119/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 120/286107
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Contingent Environmental Liability — Taxable Business Combination
8.23 Thereareuniquetaxconsiderationsforsituationsinwhichabuyeracquirestheassetsof
anentitywithcontingentenvironmentalliabilities.Presumably,thebuyerhasfactoredanyknown
remediationrequirementsintotheamountthatitwouldpayforthepropertyorfortheproperty’s
impactonthefairvalueofthebusinessinabusinesscombination.
8.24 Intaxablebusinesscombinations,assumedcontingentliabilities(includingcoststoremediatean
environmentalliability)typicallyarenottax-deductiblewhenpaid.Forfinancialreportingpurposes,the
assetrequiringremediationisrecordedatfairvalue,assumingfullremediation,andaliabilityisrecorded
torecognizethecostsofremediation.Fortaxpurposes,theassetisrecordedatitsunremediated
value.Asaresult,theacquirerwillrecordaDTL.TreasuryRegulationSection1.338–5(b)(2)(iii)givesthe
followingexampleillustratingwhentoadjustthetaxbasisforthecontingentenvironmentalliability:
T,anaccrualbasistaxpayer,isachemicalmanufacturer.InYear1,Tisobligatedtoremediate
environmentalcontaminationatthesiteofoneofitsplants.Assumethatalltheeventshave
occurredthatestablishthefactoftheliabilityandtheamountoftheliabilitycanbedetermined
withreasonableaccuracybuteconomicperformancehasnotoccurredwithrespecttotheliabilitywithinthemeaningofsection461(h).PacquiresallofthestockofTinYear1andmakesasection
338electionforT.Assumethat,ifacorporationunrelatedtoThadactuallypurchasedT’sassets
andassumedT’sobligationtoremediatethecontamination,thecorporationwouldnotsatisfythe
economicperformancerequirementsuntilYear5....TheincurrenceoftheliabilityinYear5under
theeconomicperformancerulesisanincreaseintheamountofliabilitiesproperlytakenintoaccount
inthebasisandresultsintheredeterminationofAGUB[adjustedgrossed-upbasis].
Therefore,abuyerthathasassumedacontingentenvironmentalliabilityrecordsanincreaseinthe
goodwilltaxbasisandacorrespondingDTAwhentheliabilitybecomesfixedanddeterminableand
economicperformancewithrespecttotheliabilityoccurs.
Assets Held for Sale8.25 Asdiscussedin4.50 and4.51,paragraphs34and35ofStatement144requirethatlong-lived
assetsthatareclassifiedasheldforsaleasoftheacquisitiondateunderthatStatementbemeasured
atfairvaluelesscoststosell.Consequently,inataxablebusinesscombination,thetaxbasesofassets
heldforsale(fairvalue)shouldexceedthebookbasesofthoseassets(fairvaluelesscoststosell).ADTA
shouldbeestablishedforthistemporarydifferenceaspartofthebusinesscombination.
Preexisting Relationships Between Parties to a Business Combination and Reacquired Rights
Preexisting Relationships Between Parties to a Business Combination
8.26 Asdiscussedin3.31–3.33,preexistingrelationshipsmayexistbetweenpartiestoabusiness
combination.TheimplementationguidanceinparagraphA79ofStatement141(R)states,“Ifthe
businesscombinationineffectsettlesapreexistingrelationship,theacquirerrecognizesagainor
loss....”Thegainorlossrecognizedonthepreexistingrelationshipunderparagraph58ofStatement
141(R)isconsideredatransactionthatisseparateandapartfromthebusinesscombination(i.e.,not
tobeincludedinbusinesscombinationaccounting).Thefollowingexampleshavebeenadaptedfrom
paragraphsA82–A85ofStatement141(R)toillustratethetaxeffectsforapreexistingrelationship
betweenpartiestoabusinesscombination.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 121/286108
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-4
Effective Settlement of a Supply Contract as a Result of a Business Combination
ACacquiresTCinataxablebusinesscombination.TheacquisitionincludesasupplycontractunderwhichACpurchaseselectroniccomponentsfromTCatfixedratesoverafive-yearperiod.Currently,thefixedratesarehigherthantheratesatwhichACcouldpurchasesimilarelectroniccomponentsfromanothersupplier.ThesupplycontractallowsACtoterminatethecontractbeforetheendoftheinitialfive-yeartermonlybypayinga$60penalty.Withthreeyears
remainingunderthesupplycontract,ACpays$500toacquireTC.ThisamountisthefairvalueofTCandisbasedonwhatothermarketparticipantswouldbewillingtopayfortheenterprise(inclusiveoftheabovemarketcontract).
ThetotalfairvalueofTCincludes$80relatedtothefairvalueofthesupplycontractwithAC.The$80representsa$30componentthatis“at-market”becausethepricingiscomparabletopricingforcurrentmarkettransactionsforthesameorsimilaritems(e.g.,sellingeffort,customerrelationships)anda$50componentforpricingthatisunfavorabletoACbecauseitexceedsthepriceofcurrentmarkettransactionsforsimilaritems.TChasnootheridentifiableassetsorliabilitiesthatarerelatedtothesupplycontract,andAChasnotrecognizedanyassetsorliabilitiesrelatedtothesupplycontractbeforethebusinesscombination.Theremainingfairvalueof$420relatestomachineequipment.Thetaxrateis40percent.Assumeataxabletransactioninajurisdictionthatallowsfortax-deductiblegoodwill.
ACwillrecordthefollowingentriesontheacquisitiondate:
Debit Credit
Machineequipment $ 420
Goodwill 30
Lossonunfavorablesupplycontract 50
Cash $ 500
InapplyingparagraphA79(b)ofStatement141(R),Arecognizesalossof$50(thelesserofthe$60statedsettlementamountinthesupplycontractortheamountbywhichthecontractisunfavorabletotheacquirer)separatelyfromthebusinesscombination.The$30at-marketcomponentofthecontractispartofgoodwill.
Debit Credit
DTA $ 20
Incometaxexpense $ 20
Typically,thesupplycontractwillnotbeviewedasaseparatetransactionfortaxpurposes.Thelossonthesupplycontractforaccountingpurposeswillbeatemporarydifferencebecausetheamountexpensedforfinancialreportingwouldbe
includedintax-deductiblegoodwill.Thelossof$50istax-affectedintheincomestatement,sinceStatement141(R)clarifiesthatthesettlementisconsideredaseparatetransactionforfinancialreportingpurposes.TheresultingDTAwouldbereversedwhenthegoodwillisdeductedonthetaxreturn(aslongastherearenorealizationconcerns).
Note:Ifthistransactionwasstructuredasanontaxablebusinesscombination(ACacquiresthestockofTC),thebasisdifferencethatariseswhenthelossisexpensedwouldgenerallybeassessedbyreferencetotheoutsidebasisdifferenceguidance.(See8.18–8.20.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 122/286109
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-5
Effective Settlement of a Supply Contract Between the Acquirer and Acquiree in Which theAcquirer Recognized a Liability Before the Business Combination
AssumethesamefactsasinExample8-4(e.g.,ataxablebusinesscombinationandtax-deductiblegoodwill),exceptthatAChadrecordeda$60liabilityanda$24DTArelatedtothesupplycontractwithTCbeforethebusinesscombination.
ACwillrecordthefollowingentriesontheacquisitiondate: Debit Credit
Machineequipment $ 420
Goodwill 30
Liability 60
Cash $ 500
Gain 10
ACrecognizesa$10settlementgainonthecontractinearningsasoftheacquisitiondate(reversalofthe$60liabilityoffsetbytheactual$50loss,whichresultsinanetbookgainof$10).
Debit Credit
Incometaxexpense $ 24
DTA $ 24
Reversalofthe$24pre-acquisitionDTAisrelatedtothereversalofthe$60contractliabilityintheentryabove.
Debit Credit
DTA $ 20
Incometaxexpense $ 20
Typically,thesupplycontractwillnotbeviewedasaseparatetransactionfortaxpurposes.The$50lossonthesupplycontractforaccountingpurposeswillbeatemporarydifferencebecausetheamountexpensedforfinancialreportingwouldbeincludedintax-deductiblegoodwill.Thelossof$50istax-affectedintheincomestatement,sinceStatement141(R)clarifiesthatthesettlementisconsideredaseparatetransactionforfinancialreportingpurposes.TheresultingDTAwouldbereversedwhenthegoodwillisdeductedonthetaxreturn(aslongastherearenorealization
concerns).
Note:Ifthistransactionwasstructuredasanontaxablebusinesscombination(ACacquiresthestockofTC)thebasisdifferencethatariseswhenthe$50lossisexpensedwouldgenerallybeassessedbyreferencetotheoutsidebasisdifferenceguidance.(See8.18–8.20.)
Reacquired Rights
8.27 Asdiscussedin5.31–5.34,theacquirermayreacquirearightthatitpreviouslygrantedtothe
acquiree(e.g.,alicenseorfranchise).Paragraph31ofStatement141(R)stipulatesthatreacquired
rightsareintangibleassetsthattheacquirermustrecognizeapartfromgoodwill.Inaddition,the
intangibleassetismeasured(andsubsequentlyamortized)onthebasisoftheremainingcontractual
termonly,regardlessofwhethermarketparticipantswouldtakeintoaccountrenewalsinthefairvaluedetermination.Theinitialmeasurement(acquisition-datemeasurement)ofreacquiredrightsisoneof
thelimitedexceptionstothemeasurementprincipleinStatement141(R).Becauserenewalsarenot
takenintoconsiderationinthedeterminationofthefairvalueofreacquiredrights,theseintangible
assetsarenotmeasuredatfairvalueinaccordancewithStatement157.Therefore,thereacquired
right’staxbasisanditsfinancialreportingbasisasoftheacquisitiondatewillgenerallydifferandaDTA
shouldberecognizedforthedifferencesbetweentheassignedvalues(financialreportingamountvs.
thetaxbasis).Examples 5-2and5-3havebeenadaptedtoillustratethetaxeffectsforareacquired
rightbetweenpartiestoabusinesscombination.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 123/286110
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-6
Reacquired Rights
Case A
CompanyBsellsproductsinEuropeunderalicensingagreementwithCompanyA.CompanyAacquiresCompanyBfor$1,000inataxablebusinesscombination.Asoftheacquisitiondate,thelicensingagreementhasaremaining
contractualtermofthreeyearsandcanberenewedattheendofthecurrenttermandindefinitelyeveryfiveyearsthereafter.Assumethatthepricingofthelicenseagreementisat-marketandthattheagreementdoesnothaveexplicitsettlementprovisions.Thetaxrateis40percent.CompanyAhascalculatedthefollowingvalues:
• $75—Valueofthelicensefortheremainingthree-yearcontractualterm(financialreportingvalueinaccordancewithStatement141(R)).
• $200—Fairvalueofthelicenseagreement.
• $600—Othertangibleassets.
Thefollowingillustratesthebookandtaxbasesoftheassets:
Book Basis New Tax Basis
Othertangibleassets $ 600 $ 600
Licenseagreement 75 200
Goodwill 275 200
ThefollowingentrieswillberecordedbyCompanyAontheacquisitiondate:
Debit Credit
Othertangibleassets $ 600
Licenseagreement 75
Goodwill 325
Cash $ 1,000
CompanyArecognizesthelicenseagreementatitsremainingthree-yearcontractualvalueof$75.
Debit Credit
DTA $ 50
Goodwill $ 50
CompanyArecognizesaDTArelatedtothelicensingagreement’stax-over-bookbasisof$50[(200–75)×.40%].Inaccordancewithparagraph9(d)ofStatement109,noDTLisrecordedforthe$75book-over-tax-basisgoodwill.
Case B
AssumethesamefactsasinCaseA,exceptthatunderthelicensingagreement,Bpaysabelow-current-marketlicensefeecomparedwiththoseofitscompetitorswithsimilarlicensingagreements.Inaddition,Anowcalculatesthevalueofthelicensefeetobe$100fortheremainingthree-yearcontractualterm.Notethatthisamountisgreaterthanthe$75valuecalculatedinCaseAforanat-marketcontract.
Thefollowingillustratesthebookandtaxbasesoftheassets:
Book Basis New Tax Basis
Othertangibleassets $ 600 $ 600
Licenseagreement 75 200
Goodwill 260 200
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 124/286111
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-6 (continued)
Reacquired Rights
ThefollowingentrieswillberecordedbyCompanyAontheacquisitiondate:
Debit Credit
Othertangibleassets $ 600
Licenseagreement 75
Goodwill 300
Lossonunfavorablelicensingagreement 25
Cash $ 1,000
CompanyAwouldrecordanintangibleassetof$75forthereacquiredlicense(theat-marketvalueforthecontractualterm)andwouldrecognizea$25settlementlossintheincomestatement(paragraphA79(b)ofStatement141(R)).Ineffect,thesettlementlossrepresentsadditionalconsiderationthatAwouldberequiredtoprovidetoBtoterminatetheexistingagreement,whichwasunfavorabletoA.
Debit Credit
DTA $ 50
Goodwill $ 40
Incometaxexpense 10
CompanyArecognizesaDTArelatedtothelicenseagreement’stax-over-bookbasisof$50[(200–75)×.40%],ofwhich$40isaDTArecordedinacquisitionaccounting(asareductioningoodwill).Theremaining$10oftheDTAisassociatedwithandfollowsthe$25financialreportinglossasaseparatetransaction(i.e.,separateandapartfromtheacquisitionaccounting).Inaddition,paragraph9(d)ofStatement109prohibitstherecognitionofaDTLforthe$60book-over-tax- basisgoodwill.
Tax Rates
8.28 Paragraph17ofStatement109states,inpart:
Deferredtaxesshallbedeterminedseparatelyforeachtax-payingcomponent(anindividualentityorgroupofentitiesthatisconsolidatedfortaxpurposes)ineachtaxjurisdiction.
8.29 Inaddition,paragraph18ofStatement109states,inpart:
Theobjectiveistomeasureadeferredtaxliabilityorassetusingtheenactedtaxrate(s)expectedto
applytotaxableincomeintheperiodsinwhichthedeferredtaxliabilityorassetisexpectedtobe
settledorrealized.
Tax Holidays
8.30 Deferredtaxesarenotrecognizedfortheexpectedtaxableordeductibleamountsoftemporary
differencesthatarerecoveredorsettledduringataxholiday.Paragraph183ofStatement109states:
TheBoardconsideredwhetheradeferredtaxassetevershouldberecognizedfortheexpectedfuture
reductionintaxespayableduringataxholiday.Inmostjurisdictionsthathavetaxholidays,thetax
holidayis“generallyavailable”toanyenterprise(withinaclassofenterprises)thatchoosestoavail
itselfoftheholiday.TheBoardviewsthatsortofexemptionfromtaxationforaclassofenterprisesas
creatinganontaxablestatus(somewhatanalogoustoS-corporationstatusunderU.S.federaltaxlaw)
forwhichadeferredtaxassetshouldnotberecognized.
Therefore,deferredtaxesarerecognizedfortheexpectedtaxableordeductibleamountsoftemporary
differencesthatarerecoveredorsettledoutsideofthetaxholiday.Insomesituations,atemporary
differenceassociatedwithaparticularassetorliabilitymayreverseduringboththetaxholidayand
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 125/286112
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
periodsinwhichtheentityistaxedattheenactedrates.Accordingly,itmaybenecessarytouse
schedulingtodeterminetheappropriatedeferredtaxestorecordinconnectionwiththebusiness
combination.
State Tax Footprint
8.31 Theacquirer’sstatetaxfootprintforanentitycanchangebecauseofabusinesscombination.Forexample,anacquirerthatisoperatinginNevadawithnodeferredstatetaxesbutsubstantialtemporary
differencesacquiresatargetcompanyinCalifornia.Asaresultofthisacquisition,theacquirerisnow
requiredtofileacombinedCaliforniataxreturnwiththetargetcompany.Therefore,theacquirermust
recorddeferredtaxesforCaliforniastatetaxwhennostatetaxeswerepreviouslyrecognized.When
calculatingtheimpactofthischangeonthestatetaxfootprint,anentitymustaccountfortheincome
taxeffectsofitsassetsandliabilitiesbeforethecombinationseparatelyfromthosethatwereacquiredas
partofthebusinesscombination.
Anychangeinthemeasurementofexistingdeferredtaxitemsoftheacquirerasaresultofthis
acquisitionarerecorded“outside”ofthebusinesscombinationaccountingasacomponentofincome
taxexpenseoranotherappropriatefinancialstatementcomponent.Theinitialrecognitionofdeferred
taxitemsofthetargetcompanybytheacquirerisaccountedforaspartofthebusinesscombination.
Costs of the Business Combination
8.32 CostsofabusinesscombinationareexpensedasincurredunlesstheyaresubjecttootherU.S.
GAAPandrelatetotheissuanceofequitysecuritiesordebtinstrumentsinconnectionwiththebusiness
combination.Allothergeneralandindirectcostsrelatedtoabusinesscombinationareexpensedas
incurred.
Acquisition-Related Costs
8.33 Asdiscussedin6.31,acquisition-relatedcostsincurredasaresultofabusinesscombination
(e.g.,dealfeesforattorneys,accountants,investmentbankers,andvaluationexperts)mustbe
expensedasincurredunderparagraph59ofStatement141(R).ThisisunlikepreviousGAAP,inwhich
theseacquisition-relatedcostswereincludedintheconsiderationpaidforanacquiredentity.ForU.S.
taxpurposes,acquisition-relatedcostsmayormaynotbedeductible.Atemporarydifferenceexists
ifacquisition-relatedcostsaredeductiblefortaxpurposesandifthatdeductionoccursinaperiod
differentfromthatinwhichtheyareexpensedforfinancialreportingpurposes.Becauseacquisition-
relatedcostsarenotconsideredpartoftheacquisitionandareexpensedasincurredforfinancial
reportingpurposes,therelateddeferredtaxes(ifany)willberecordedasacomponentofincometax
expense(i.e.,outsidethebusinesscombination).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 126/286113
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-7
Taxable Business Combination Acquisition-Related Costs
ACacquiresTargetCompanyinataxablebusinesscombinationfor$1,000andincurs$200ofcostsrelatedtotheacquisition.Theidentifiableassetshaveafairvalueof$700.Forfinancialreportingpurposes,ACexpensesthe$200acquisition-relatedcosts.Fortaxpurposes,ACaddsthe$200acquisition-relatedcoststothetotalamountthatisallocatedtoassets,resultingintax-deductiblegoodwillof$500.Assumea40percenttaxrate.
ACwouldrecordthefollowingentriesontheacquisitiondate:
Debit Credit
Assets $ 700
Goodwill 300
Cash $ 1,000
Acquisitionexpenses $ 200
Cash $ 200
DTA $ 80*
Incometaxexpense $ 80
Note:Becausethetax-deductiblegoodwillinthisexamplerelatessolelytotheacquisitioncoststhatareexpensedforfinancialreportingpurposes,thesimultaneousequationdiscussedinparagraphs262and263ofStatement109,asamendedbyStatement141(R),isnotrequiredbecausethetaximpactofacquisitioncostsisreflectedintheincomestatement.
*$200(acquisition-relatedcoststhatarecapitalizedfortaxpurposes)×40%.
Example 8-8
Nontaxable Business Combination Acquisition-Related Costs
ACacquiresTargetCompany(TC)inanontaxablebusinesscombinationfor$1,000andincurs$200ofcostsrelatedtotheacquisition.Theidentifiableassetshaveafairvalueof$700andataxbasisof$250.Forfinancialreportingpurposes,
ACexpensesthe$200acquisition-relatedcosts.Fortaxpurposes,ACaddsthe$200acquisition-relatedcoststothebasisoftheTCstock.Assumea40percenttaxrate.
ACwouldrecordthefollowingentriesontheacquisitiondate:
Debit Credit
Assets $ 700
Goodwill 480
DTL $ 180*
Cash 1,000
Acquisitionexpenses $ 200
Cash $ 200
IncontrasttoExample8-7,theacquisitionexpensesmaynotbetax-affectedinanontaxablebusinesscombination.Theacquisition-relatedcostsareincludedintheoutsidetaxbasisofAC’sinvestmentinTC.Therefore,theDTAwouldhavetobeassessedinaccordancewithparagraph34ofStatement109.Providedthattheinvestmentisessentiallypermanentindurationanditisnotapparentthatthetemporarydifferencewillreverseintheforeseeablefuture,noDTAisrecorded.
*($700fairvalue–$250taxbasis)×40%.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 127/286114
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquisition-Related Costs Incurred in a Period Before the Business Combination
8.34 Whenacquisitioncostsareincurredinaperiodbeforetheacquisitiondateofabusiness
combinationandthosecostsarenotimmediatelydeductiblefortaxpurposes,theacquirerwillneedto
assesswhetherthatdifferenceisatemporarydifferencethatwillresultintherecognitionofaDTA.To
determinetheexpectedtaxconsequencesoftheacquisition-relatedcosts,theacquirermayuseeitherof
thefollowingtwoapproaches:
1. Iftheacquisition-relatedcostswouldresultinafuturetaxdeductionifthebusinesscombination
didnotoccur,thenitisadeductibletemporarydifferenceandaDTAshouldberecordedwhen
theexpenseisrecognizedforfinancialreportingpurposes.Uponconsummationofthebusiness
combination,theacquirerwillneedtoreassesstheDTAtodeterminewhetheritcontinuesto
beappropriate(i.e.,whetheritisataxableornontaxablebusinesscombination).Ifnolonger
appropriate,theDTAshouldbereversedtotheincomestatement.
2. TheacquirercanrecordaDTAif,onthebasisoftheexpectedtaxstructureofthebusiness
combination,theacquisition-relatedexpenseswouldresultintherecordingoftheDTA.
Thisapproachisbasedonthetaxstructureofthebusinesscombination.Examples 8-7and8-8illustratehowthisviewwouldbeapplied.Example 8-7assumesataxablebusiness
combinationthatwouldgenerallyresultintherecordingoftheDTA.Example 8-8assumesa
nontaxablebusinesscombinationthatwouldnotresultintherecordingoftheDTAbecauseof
theexceptioninparagraph34ofStatement109.Thisapproachrequirestheacquirertomake
assumptionsabouthowthetransactionwouldbestructuredfromataxperspectiveandabout
theprobabilitythatthebusinesscombinationwillbeconsummatedtodeterminewhetherto
recordalloraportionofDTAfortheacquisitionexpenses.Asaresultofthisapproach,the
entitywouldconformitsfinancialreportingtoits“expectation”asofeachreportingdate(i.e.,
theDTAmayberecognizedandsubsequentlyderecognizedifexpectationschangefromone
reportingperiodtothenext).
Aswithallaccountingpolicyelections,onceselectedthepolicyshouldbeappliedconsistently.
Debt Issue Costs
8.35 Asdiscussedin6.36,debtissuancecostsshouldbeexcludedfrombusinesscombination
accounting.Generally,entitiesshouldcapitalizeandamortizedebtissuancecostsbyusingtheeffective
interestmethodoverthetermoftherelateddebt(unlessStatement159applies).Deferredtaxesshould
berecordedifthereisadifferencebetweenthebookandtaxapproachestorecognizingdebtissue
costsandthedifferencegivesrisetoataxableoradeductibletemporarydifference.
Costs of Registering and Issuing Equity Securities
8.36 Likedebtissuancecosts,andasdiscussedin6.34–6.35,costsofregisteringandissuingequity
securitiesareexcludedfromtheconsiderationtransferredinabusinesscombinationandarenotpart
ofbusinesscombinationaccounting.Forexample,whenequitysecuritiesareissuedtoconsummatea
businesscombination,therelatedout-of-pocketregistrationandissuancecostsaregenerallytreatedas
areductioninadditionalpaid-incapitalinaccordancewithSABTopic5.A.Iftheregistrationcostshave
notbeenpaidbytheacquisitiondate,thecostsshouldbeaccruedasaliability,withacorresponding
reductioninadditionalpaid-incapital(APIC).ForU.S.taxpurposes,thecostsofregisteringandissuing
equitysecuritiesaregenerallyneitherdeductiblenoramortizable.Accordingly,notemporarydifferences
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 128/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 129/286116
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-10
Acquirer Replacement Awards That Require Postcombination Services Exchanged for AcquireeAwards for Which Employees Have Rendered the Requisite Service as of the Acquisition Date
ACexchangesreplacementawardsthatrequireoneyearofpostcombinationserviceforshare-basedpaymentawardsofTargetCompany(TC)forwhichemployeeshadcompletedtherequisiteserviceperiodbeforethebusinesscombination.Thefair-value-basedmeasureofbothawardsis$100ontheacquisitiondate.Whenoriginallygranted,TC’sawardshada
requisiteserviceperiodoffouryears.Asoftheacquisitiondate,TC’semployeesholdingunexercisedawardshadrenderedatotalofsevenyearsofservicesincethegrantdate.EventhoughTC’semployeeshadalreadyrenderedalloftherequisiteservice,ACattributesaportionofthereplacementawardtopostcombinationcompensationcostinaccordancewithparagraph46ofStatement141(R)becausethereplacementawardsrequireoneyearofpostcombinationservice.Thetotalserviceperiodisfiveyears—therequisiteserviceperiodfortheoriginalacquireeawardcompletedbeforetheacquisitiondate(fouryears)plustherequisiteserviceperiodforthereplacementaward(oneyear).
Theportionattributabletoprecombinationservicesequalsthefair-value-basedmeasureoftheacquireeaward($100)multipliedbytheratiooftheprecombinationserviceperiod(fouryears)tothetotalserviceperiod(fiveyears).Thus,$80($100×4÷5years)isattributedtotheprecombinationserviceperiodandthereforeisincludedintheconsiderationtransferredinthebusinesscombination.Theremaining$20isattributedtothepostcombinationserviceperiodandthereforeisrecognizedascompensationcostinAC’spostcombinationfinancialstatementsinaccordancewithStatement123(R).Assumea40percenttaxrate.
Journalentriesontheacquisitiondateareasfollows:
Debit Credit
Goodwill $ 80
APIC $ 80
DTA $ 32
Goodwill $ 32
Journalentriesintheyearimmediatelyfollowingtheacquisitiondateare:
Debit Credit
Compensationexpense $ 20
APIC $ 20
DTA $ 8
Incometaxexpense $ 8
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 130/286117
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-11
Acquirer Replacement Awards That Require Postcombination Services Exchanged for AcquireeAwards for Which Employees Have Not Rendered All of the Requisite Service as of theAcquisition Date
ACexchangesreplacementawardsthatrequireoneyearofpostcombinationserviceforshare-basedpaymentawardsofTargetCompany(TC)forwhichemployeeshadnotyetrenderedalloftherequiredservicesasoftheacquisitiondate.
Thefair-value-basedmeasureofbothawardsis$100ontheacquisitiondate.Whenoriginallygranted,TC’sawardshadarequisiteserviceperiodoffouryears.Asoftheacquisitiondate,TC’semployeeshadrenderedtwoyearsofservice,andtheywouldhavebeenrequiredtorendertwoadditionalyearsofserviceaftertheacquisitiondatefortheirawardstovest.Accordingly,onlyaportionoftheTCawardsisattributabletoprecombinationservice.
Thereplacementawardsrequireonlyoneyearofpostcombinationservice.Becauseemployeeshavealreadyrenderedtwoyearsofservice,thetotalrequisiteserviceperiodisthreeyears.Theportionattributabletoprecombinationservicesequalsthefair-value-basedmeasureoftheacquireeaward($100)multipliedbytheratiooftheprecombinationserviceperiod(twoyears)tothegreaterofthetotalserviceperiod(threeyears)ortheoriginalserviceperiodofTC’saward(fouryears).Thus,$50($100×2÷4years)isattributabletoprecombinationserviceandthereforeisincludedintheconsiderationtransferredfortheacquiree.Theremaining$50isattributabletopostcombinationserviceandthereforeisrecognizedascompensationcostinAC’spostcombinationfinancialstatements.Assumea40percenttaxrate.
Journalentriesontheacquisitiondateareasfollows:
Debit CreditGoodwill $ 50
APIC $ 50
DTA $ 20
Goodwill $ 20
Journalentriesintheyearimmediatelyfollowingtheacquisitiondateare:
Debit Credit
Compensationexpense $ 50
APIC $ 50
DTA $ 20
Incometaxexpense $ 20
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 131/286118
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-12
Acquirer Replacement Awards for Which No Postcombination Services Are Required Exchangedfor Acquiree Awards for Which Employees Have Not Rendered All of the Requisite Service as ofthe Acquisition Date
Assumethesamefactsasin Example8-11above,exceptthatACexchangesreplacementawardsthatrequirenopostcombinationserviceforshare-basedpaymentawardsofTCforwhichemployeeshadnotyetrenderedallofthe
requisiteserviceasoftheacquisitiondate.ThetermsofthereplacedTCawardsdidnoteliminateanyremainingrequisiteserviceperioduponachangeincontrol.(IftheTCawardshadincludedaprovisionthateliminatedanyremainingrequisiteserviceperioduponachangeincontrol,theguidanceinExample8-9wouldapply.)Thefair-value-basedmeasureofbothawardsis$100.Becauseemployeeshavealreadyrenderedtwoyearsofserviceandthereplacementawardsdonotrequireanypostcombinationservice,thetotalserviceperiodistwoyears.
Theportionofthefair-value-basedmeasureofthereplacementawardsattributabletoprecombinationservicesequalsthefair-value-basedmeasureoftheacquireeaward($100)multipliedbytheratiooftheprecombinationserviceperiod(twoyears)tothegreaterofthetotalserviceperiod(twoyears)ortheoriginalserviceperiodofTC’saward(fouryears).Thus,$50($100×2÷4years)isattributabletoprecombinationserviceandthereforeisincludedintheconsiderationtransferredfortheacquiree.Theremaining$50isattributabletopostcombinationservice.Becausenopostcombinationserviceisrequiredtovestinthereplacementaward,ACrecognizestheentire$50immediatelyascompensationcostinthepostcombinationfinancialstatements.
Journalentriesontheacquisitiondateareasfollows:
Debit Credit
Goodwill $ 50
Compensationexpense 50
APIC $ 100
DTA $ 40
Goodwill $ 20
Incometaxexpense 20
Contingent Consideration
8.38 Asdiscussedin6.22–6.24,forfinancialreportingpurposes,theacquirerisrequiredtorecognize
contingentconsiderationaspartoftheconsiderationtransferredinabusinesscombination.The
obligationisrecordedatitsacquisition-datefairvalueandclassifiedasaliabilityorasequitydepending
onthenatureoftheconsideration.
• Contingentconsiderationclassifiedasequity(e.g.,contingentpaymentofafixednumberof
shares)isnotremeasured.Alldeferredtaxconsequencesresultingfromtheresolutionofthe
contingencyarechargedorcrediteddirectlytoequity.
• Contingentconsiderationclassifiedasaliability(e.g.,fixedamountthatispayableina
variableamountofsharesorcash)isremeasuredtofairvalueoneachreportingdate.Allpost-
measurement-periodadjustmentsarerecordedthroughearnings.
Editor’s Note: Ifthecontingentconsiderationisconsideredahedginginstrumentforwhich
Statement133applies,thenthechangesinfairvalueareinitiallyrecognizedinothercomprehensive
income(seeparagraph65(d)ofStatement141(R)).
Fortaxpurposes,theacquirerisprecludedfromrecognizingcontingentconsiderationaspartofthe
considerationuntilthecontingencyissettledortheamounthasbecomefixedanddeterminablewith
reasonableaccuracy.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 132/286119
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Initial Measurement of Deferred Taxes as of the Acquisition Date
8.39 Ontheacquisitiondate,theacquirershoulddeterminetheexpectedtaxconsequencesof
settlingthecontingentconsiderationatitsinitialreportedamountinthefinancialstatements.Thetax
consequenceswillinpartdependonhowthebusinesscombinationisstructuredfortaxpurposes(i.e.,
ataxableornontaxablebusinesscombination).Deferredtaxesshouldberecognizedaspartofthe
businesscombination,providedthattheamountrecognizedforcontingentconsiderationwillbepaid.
Thetaxstructurewilldeterminetheexpectedtaxconsequences.
• Inanontaxablebusinesscombination,theexpectedtaxconsequencesareincreasedtaxbases
inthestockoftheacquiredcompany.Ontheacquisitiondate,thereisgenerallynodifference
betweentheparent’sinvestmentintheoutsidebasisoftheacquiredcompany’sstockandits
taxbasisafterthecontingentconsiderationistakenintoaccount.
• Inataxablebusinesscombination,theexpectedtaxconsequencesareincludedinthetaxbases
intheacquiredcompany’sassets(e.g.,goodwill)suchthattherewilltypicallybenodifference
betweenthefinancialreportingandtaxbasisingoodwillafterthecontingentconsiderationis
takenintoaccount.
Accounting for Deferred Taxes After the Acquisition Date
8.40 Contingentconsiderationclassifiedasaliabilityisremeasuredoneachsubsequentreporting
date,withthechangesinfairvaluerecognizedinearnings(i.e.,outsidethebusinesscombination).
Theacquirershoulddeterminethetaxconsequencesexpectedtoresultfromthechangeinfairvalue
ofthecontingentconsiderationand,inaccordancewithfinancialreportingrequirements,recognize
thedeferredtaxconsequencesofsuchchangesthatareclassifiedasaliabilityoutsideofthebusiness
combination(i.e.,asacomponentofincometaxexpense).
• Inanontaxablebusinesscombination,anincreaseoradecreaseinthecontingentconsideration
liabilitywouldresultinanadjustmentoftheexpectedtaxbasisoftheacquiredcompany’s
stock.Inmanycases,anexceptiontorecordingdeferredtaxesonoutsidebasisdifferences
willapply(e.g.,seeparagraphs31(a)and33ofStatement109forDTLsandparagraph34for
DTAs).
• Inataxablebusinesscombination,anincreaseoradecreaseinthecontingentconsideration
liabilitywouldcauseanadjustmenttothetaxbasesoftheacquiredassets.ADTAorDTLwould
berecordedthroughthetaxprovisionfortheexpectedtaxconsequences.Ifthesettlement
amountexceedstheamountrecordedasaliabilityonthebooks,aDTAwillberecordedin
connectionwithexpectedadditionaltax-deductiblegoodwill.Forfinancialreportingpurposes,
thisgoodwillistreatedasunrelatedtotheacquisition(attributedtoexpense);therefore,aDTA
resultsinaprovisionbenefitratherthanareductioningoodwill.Ifthecontingencyissettledforanamountlessthantheliabilityrecordedonthebooks,thereisafavorableadjustmentto
pretaxbookincome.Thispretaxbookincomeiseliminatedfromtaxableincome(e.g.,byan
M-1adjustmentforU.S.federaltax).Thistaxdeductionistreatedasadeductiontocomponent
1amortizablegoodwill.Inthiscase,aDTLisrecognizedandtherelatedincometaxexpenseis
recorded.(SeeExample 8-13below.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 133/286120
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-13
Contingent Consideration
OnJune1,20X9,ACpurchasestheassetsofTargetCompany(TC)for$450andacontingentpayment(classifiedasaliability)withafairvalueof$50inataxablebusinesscombination.Theidentifiableassetshaveafairvalueof$450andaninitialtaxbasisof$450.OnSeptember30,20X9,subsequentfactsandcircumstancesindicatethatthecontingentconsiderationhasafairvalueof$30.OnDecember31,20X9,ACsettlesthecontingentconsiderationfor$110(fair
value).Assumea40percenttaxrate.
June 1, 20X9:
Debit Credit
AC:
InvestmentinTC $ 500
Cash $ 450
Contingentconsiderationliability 50
Target (assuming push-down accounting is applied):
Identifiableassets $ 450
Goodwill 50Equity $ 500
ACdeterminesthattheexpectedtaxconsequencesofsettlingthe$50contingentconsiderationliabilitywouldbetoincreasethebasisofitsidentifiableassetsandgoodwilltoequalthebookamounts.Therearenodifferencesbetweenthebookbasesandtheexpectedtaxbasesintheacquiredassets,sonodeferredtaxesarerecordedontheacquisitiondate.
September 30, 20X9:
Debit Credit
AC:
Contingentconsiderationliability $ 20
Remeasurementincome $ 20
Incometaxexpense $ 8
DTL $ 8
OnSeptember30,20X9,thefairvalueofthecontingentconsiderationdecreasesto$30.The$20decreasewouldreducetheexpectedtax-deductiblecomponent1goodwill(see 8.47)by$20.Accordingly,an$8DTLisrecognized,withanoffsettingentrytoincometaxexpense.
December 31, 20X9,settlement—fairvalueofcontingentconsiderationis$110:
Debit Credit
AC:
Remeasurementexpense $ 80
Contingentconsiderationliability 30
Cash $ 110
DTA $ 32
Incometaxexpense $ 32
Atsettlement,thefairvalueofthecontingentconsiderationincreasesto$110.The$80increasegivesrisetoanequalamountoftax-deductiblegoodwillthatcorrespondstothe$80pretaxbookexpense.Accordingly,a$32DTAis
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 134/286121
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquirer’s Valuation Allowance
Change in an Acquirer’s Valuation Allowance as a Result of a BusinessCombination
8.41 Paragraph266ofStatement109(beforebeingamendedbyStatement141(R))onacquirers’
valuationallowances(VAs)statedthatinsomecircumstances,reversalsofanacquirer’sVAthatresultedfromthebusinesscombinationwouldbeincludedinthebusinesscombinationaccounting.Statement
141(R)amendsparagraph266andclarifiesthatreversalsofacquirers’VAsarenotpartofthebusiness
combinationaccounting.Accordingly,alladjustmentstoanacquirer’sVAaftertheeffectivedateof
Statement141(R)willberecordedtoincometaxexpenseandarenotincludedinbusinesscombination
accounting,regardlessofwhenthebusinesscombinationwasconsummated.Statement141(R)
amendedparagraph266ofStatement109tostate:
Thetaxlawinsometaxjurisdictionsmaypermitthefutureuseofeitherofthecombiningenterprises’
deductibletemporarydifferencesorcarryforwardstoreducetaxableincomeortaxespayable
attributabletotheotherenterprisesubsequenttothebusinesscombination.Ifthecombined
enterpriseexpectstofileaconsolidatedreturn,anacquirermaydeterminethatasaresultofthebusinesscombinationitsvaluationforitsdeferredtaxassetsshouldbechanged.Forexample,the
acquirermaybeabletoutilizethebenefitofitstaxoperatinglosscarryforwardsagainstthefuture
taxableprofitoftheacquiree.Insuchcases,theacquirerreducesitsVAbasedontheweightof
availableevidence.However,thatreductiondoesnotenterintotheaccountingforthebusiness
combinationbutisrecognizedasanincometaxbenefit(orcrediteddirectlytocontributedcapital
(refertoparagraph26)).
Acquired Uncertain Tax Position Measurement and Recognition
8.42 Paragraph27ofStatement141(R)states:
Theacquirershallaccountforthepotentialtaxeffectsoftemporarydifferences,carryforwards,and
anyincometaxuncertaintiesofanacquireethatexistattheacquisitiondateorthatariseasaresultoftheacquisitioninaccordancewithStatement109,asamendedandrelatedinterpretativeguidance,
includingFASBInterpretationNo.48,AccountingforUncertaintiesinIncomeTaxes .
8.43 Uncertaintaxpositionsareanexceptiontotherecognitionandmeasurementguidancein
Statement141(R).Therefore,incometaxuncertaintiesoftheacquiredentityrecognizedbytheacquirer
asoftheacquisitiondateshouldbebasedonthe measurement and recognition provisions of
Interpretation 48, not on the acquisition-date fair value.Thatis,asoftheacquisitiondate,
uncertaintaxpositionsarerecognizediftheymeetthemore-likely-than-notrecognitionthresholdand
aremeasuredatthelargestamountofbenefitthatisgreaterthan50percentlikelytoberealizedupon
settlementwithataxingauthoritythathasfullknowledgeofallrelevantinformation.
Editor’s Note: IncometaxesareoneexceptiontotheprospectiveapplicationofStatement141(R)’s
transitionprovisions.Uponanentity’sadoptionofStatement141(R),anysubsequentchangesto
theentity’sacquireduncertaintaxpositionsoccurringafterthemeasurementperiodwillnolonger
beappliedtogoodwill,regardlessoftheacquisitiondateoftheassociatedbusinesscombination.
Rather,suchchangeswilltypicallyberecognizedasanadjustmenttoincometaxexpense.Formore
discussionaboutStatement141(R)’sincometaxtransitionprovisions,see8.66–8.73.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 135/286122
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Uncertain Tax Positions — Seller Indemnification
8.44 Thesellerinabusinesscombinationmaycontractuallyindemnifythebuyeragainstlossesfor
certainincometaxuncertainties.Paragraph29ofStatement141(R)requiresanacquirertorecordan
indemnificationassetwhenitrecognizestheindemnifieditem,inthiscasetheuncertaintaxposition
(see4.46).Theindemnificationassetmustbemeasured on the same basis as the indemnified
item,subjecttoanycontractuallimitationsorreserverequiredforamountsconsidereduncollectible.
SinceincometaxuncertaintiesarerecognizedandmeasuredinaccordancewithInterpretation48,the
indemnificationassetisrecognizedandmeasuredonthesamebasisastheuncertaintaxposition(the
indemnifieditem),asstatedinparagraph30ofStatement141(R):
Insomecircumstances,theindemnificationmayrelatetoanassetoraliabilitythatisanexception
totherecognitionormeasurementprinciples.Forexample,anindemnificationmayrelatetoa
noncontractualcontingencythatisnotrecognizedattheacquisitiondatebecauseitdoesnotsatisfy
themore-likely-than-notcriterionatthatdate.Alternatively,anindemnificationmayrelatetoan
assetorliability,forexample,onethatrelatesfromanuncertaintaxpositionthatismeasuredon
abasisotherthanacquisition-datefairvalue(paragraphs26and27).Inthosecircumstances,the
indemnificationassetshallberecognizedandmeasuredusingassumptionsconsistentwiththose
usedtomeasuretheindemnifieditem,subjecttomanagement’sassessmentofthecollectibilityof
theindemnificationassetandanycontractuallimitationsontheindemnifiedamount.Paragraph64
providesguidanceonthesubsequentaccountingforanindemnificationasset.
Goodwill
Goodwill Components
8.45 Paragraph3ofStatement141(R)states,“Goodwillisanassetrepresentingthefutureeconomic
benefitsarisingfromotherassetsacquiredinabusinesscombinationthatarenotindividuallyidentified
andseparatelyrecognized.”Forfinancialreportingpurposesandinaccordancewithparagraph28
ofStatement142,goodwillisnotamortizedbutistestedforimpairmentatleastannually,orearlier
ifcertaineventsarise.Differencesintaxlawsandfinancialreportingrulesusuallyresultindifferent
goodwillamountsbeingrecordedfortaxandbookpurposes.
Editor’s Note: Section197oftheInternalRevenueCodeidentifiesitemsthatshouldbeclassified
asintangiblesfortaxpurposesinataxableacquisitionandassignsa15-yearamortizationperiodto
them.Incertaincases,itemsconsideredtobeseparateintangiblesfortaxpurposes,suchasworkforce
inplace,areincludedaspartofgoodwillforbookpurposes.Toensurethatthegoodwillcomponents
anddeferredtaxesarecalculatedappropriately,entitiesshouldreviewvaluationstodetermine
whethertaxallocationsbetweenSection197intangiblesandgoodwillareappropriate.
8.46 Inataxableacquisition,goodwilliseithertax-deductibleornondeductible.Paragraph30ofStatement109notesthatdeferredtaxesondifferencesbetweenthebookcarryingamountandthetax
basisofgoodwilldependonwhetherthegoodwillisdeductibleunderthetaxlaw.Intaxjurisdictions
inwhichamortizationofgoodwillisdeductible,goodwillforfinancialreportingpurposesandtax-
deductiblegoodwillmustbeseparatedintotwocomponentsasoftheacquisitiondate,inaccordance
withparagraph262ofStatement109.Thisallocationisnecessarytocalculatetheappropriateamount
ofdeferredtaxes.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 136/286123
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
8.47 Thefirstcomponentofgoodwill(component1goodwill)equalsthelesserof(1)goodwill
forfinancialreportingpurposesor(2)tax-deductiblegoodwill.Thesecondcomponentofgoodwill
(component2goodwill)equals(1)thegreateroffinancialreportinggoodwillortax-deductiblegoodwill
less(2)theamountcalculatedascomponent1goodwill.
Editor’s Note: Thiscalculationmustbedonebyentity,byjurisdiction.
8.48 Thefollowingchartpresentstheconceptofcomponent1andcomponent2goodwill:
Book Greater Than Tax Tax Greater Than Book
Component2 Component2
Component1 Component1
Book Tax Book Tax
Goodwill Goodwill Goodwill Goodwill
Inanontaxableacquisition,theacquiredentitymightstillhavesometaxbasisingoodwillonaccountof
havingataxabletransactioninitshistoryforwhichthereisremainingunamortizedtax-basisgoodwill.
Inthiscase,theacquirerwouldincludethishistoricaltaxbasisingoodwillinitsanalysis,resultingina
reductionincomponent2goodwillandtherecognitionofcomponent1goodwill.
Book Basis Exceeds Tax Basis
8.49 Insometransactions,thevalueassignedtogoodwillforfinancialreportingexceedstax-
deductiblegoodwill.Forexample,forbookpurposesthevalueassociatedwiththein-placeworkforceis
includedaspartofgoodwill,whichisnotamortized.Fortaxpurposes,insomejurisdictions,thisasset
isconsideredanintangibleandisamortizedover15years.Whentheamountassignedtogoodwillfor
financialreportingpurposesexceedsthetaxbasis,nodeferredtaxliabilityisrecordedforthisexcess
bookbasis.Intheory,thedifferencebetweenthebookandthetaxbasisofgoodwillisatemporary
differenceanddeferredtaxesshouldberecorded;however,Statement109prohibitstherecognition
ofadeferredtaxliabilityforsuchdifferences.Statement109containsdifferentguidanceonbasis
differencesthatresultinaDTA(excesstax-deductiblegoodwill)oraDTL(excessbookgoodwill).In
accordancewithparagraph9(d)ofStatement109,enterprisesareprohibitedfromestablishinga
deferredtaxliabilitywhengoodwillrecordedforfinancialreportingisnottax-deductibleorinexcessof
tax-deductiblegoodwill.PartoftherationaleforthisexceptioninStatement109isthatthecalculationwouldbeiterative.Recordingthisdeferredtaxliabilitywouldincreasethegoodwill,whichwouldthen
requireanotheradjustmenttotheDTL,etc.Recordingthisiterativeadjustmentwouldresultinagross-
uponthebalancesheet.Inparagraph131ofStatement109,theFASBconcludedthiswouldnotbe
meaningfulorrelevanttoreadersofthefinancialstatements.
Tax Basis Exceeds Book Basis
8.50 Recognitionofdeferredtaxesondifferencesbetweenthebookandtaxbasisofgoodwill
dependsonwhethergoodwillisdeductibleunderthetaxlaw(paragraph30ofStatement109).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 137/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 138/286125
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-14 (continued)
Tax Basis Exceeds Book Basis — Tax-Deductible Goodwill
On Acquisition Date:
(1) Preliminarycalculationofgoodwillcomponents:
Book Tax
Component1goodwill $ 800 $ 800
Component2goodwill — 200
Totalgoodwill $ 800 $ 1,000
(2) CalculationoftheDTA:
DTA=(0.40÷(1–0.40))×$200
DTA=$133
(3) EntrytorecordtheDTA:
Debit Credit
Deferredtaxassets $ 133
Goodwill $ 133
(Note:“final”financialreportinggoodwillis$667.)
Accounting in Years 1 through 3:
(1) Calculationoftaxespayable:
Year 1 Year 2 Year 3
Bookincome(pretax) $ 10,000 $ 11,000 $ 12,000
Taxamortization 500 500 0
Taxableincome $ 9,500 $ 10,500 $ 12,000
Taxespayable(40%) $ 3,800 $ 4,200 $ 4,800
(2) Calculationofdeferredtaxes:
Goodwillisnotamortizedforfinancialreportingpurposes.Eachyear,aDTLmustbecalculatedandrecognizedforthedifferencebetweenthecomponent1financialreportinggoodwillandthecomponent1taxgoodwill.ThisDTLwillreversewhenthecompanyimpairs,sells,ordisposesoftherelatedassets.
January 1, End of End of End of 20X9 Year 1 Year 2 Year 3
Financialreportingbasis—goodwill $ 667 $ 667 $ 667 $ 667
Taxbasis—component1goodwill 667 334 0 0
Taxbasis—component2goodwill 333 166 0 0
Totaltaxbasisingoodwill $ 1,000 $ 500 $ 0 $ 0
Temporarydifference— component1goodwill $ 0 $ 333 $ 667 $ 667
Temporarydifference— component2goodwill $ 333 $ 167 $ 0 $ 0
DTL—component1goodwill $ 0 $ 133 $ 267 $ 267
DTA—component2goodwill $ 133 $ 67 $ 0 $ 0
Deferredincometaxexpense $ 200 $ 200 $ 0
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 139/286126
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-14 (continued)
Tax Basis Exceeds Book Basis — Tax-Deductible Goodwill
(3) Realizationofthetaxbenefit:
Ataxbenefitwillberealizedforthetaxdeductionassociatedwithgoodwill.
Entries Years 1 and 2:
Debit Credit
Incometaxexpense $ 200
DTL $ 133
DTA 67*
(4) Profitandlosssnapshot:
Year 1 Year 2 Year 3
Bookincome(pretax) $ 10,000 $ 11,000 $ 12,000
Incometaxexpense:
Current 3,800 4,200 4,800
Deferred 200 200 0 Totalincometaxexpense 4,000 4,400 4,800
Netincome $ 6,000 $ 6,600 $ 7,200
*Representsdeferredtaxesassociatedwiththecomponent2goodwilltemporarydifferenceamortizedovertwoyears([$333÷2]×40%).
Bargain Purchases
8.56 Asdiscussedin5.42–5.45,abargainpurchaseoccurswhenthenetofthefairvalueofthe
identifiableassetsacquiredandtheliabilitiesassumed,includingthedeferredtaxconsequencesarising
inthebusinesscombination,exceedsthesumof:
1. Theacquisition-datefairvalueoftheconsiderationtransferred,includingthefairvalueofthe
acquirer’spreviouslyheldinterest(ifany)intheacquiree(i.e.,abusinesscombinationachieved
instages),and
2. Thefairvalueofanynoncontrollinginterestintheacquiree.
8.57 Theacquirerrecognizestheexcess(i.e.,thebargainpurchaseelement)asagainonthe
acquisitiondate.Thecalculationofthegainonthebargainpurchaseismadeafterthe“inside”deferred
taxesarerecordedontheacquiredentity’sassetsandliabilities.Thisrecognizedgainincreasesthe
acquirer’sinvestmentintheacquiredentityandcausesacorrespondingincreaseintheacquiredentity’s
equity.Ifdeferredtaxesarerecordedontheoutsidebasisdifferencecausedbythebargainpurchase
gain,thetaxeffectswouldberecordedoutsidethebusinesscombinationasacomponentofincometax
expense.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 140/286127
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
8.58 Thefollowingexampleillustratesthetaxeffectsofatypicalbargainpurchasebusiness
combination:
Example 8-15
Taxable Business Combination — Bargain Purchase
ACpays$800toacquiretheassetsofTargetCompany(TC)inataxablebusinesscombination.Thefairvalueoftheidentifiableassetsis$1,000.ACrecognizes$120ofgainasaresultofthebargainpurchase.Assumea40percenttaxrate.
Insidebasisdifference:ADTLof$80isrecordedonthedifferencebetweenthebookbasis($1,000)andtaxbasis($800)oftheacquiredassets.
Entriestorecordtheacquisition,gainonbargainpurchase,andresultingdeferredtaxes:
Debit Credit
TC’s entry:
Assets $ 1,000
Equity $ 920*
DTL 80
AC’s entry:
InvestmentinTC $ 920
Cash $ 800
Gainonbargainpurchase 120
Outsidebasisdifference:Asaresultoftherecognitionof$120ofgain,AC’sinvestmentinTCwillincreaseby$120,withacorrespondingincreaseinTC’sequity.
AC’sinvestmentinTC:
Book Basis Tax Basis
TCstock $ 800 $ 800
Gainonbargainpurchase 120 0
Total $ 920 $ 800
Inaccordancewithparagraph33ofStatement109,ACcoulddeterminethattheoutsidebasisdifferenceinTCstockisnotataxabletemporarydifferencebecausethetaxbasisintheTCstockisequaltothenettaxbasisinTC’sassets,aslongasthetaxlawprovidesameansbywhichthereportedamountofthatinvestmentcanberecoveredtax-freeandtheacquirerexpectsitwillultimatelyusethatmeans.
*$800considerationplus$120gain.
8.59 Thefollowingexampleillustratesthatnobargainpurchasegainisrecognizedasaresultofthe
recordingofaDTLinthebusinesscombination:
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 141/286128
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-16
Nontaxable Business Combination — No Bargain Purchase Gain Recognized as a Result of the DTL
ACpays$800toacquirethestockofTargetCompany(TC)inanontaxablebusinesscombination.Thefairvalueoftheidentifiableassetsis$1,000.Assumethatthetaxbasesoftheidentifiableassetsare$400.Assumea40percenttaxrate.
Torecordtheacquisitionandresultingdeferredtaxes:
Debit Credit
TC’s entry:
Assets $ 1,000
Goodwill 40
Equity $ 800
DTL 240
AC’s entry:
InvestmentinTC $ 800
Cash $ 800
Thecalculationofgainonthebargainpurchaseismadeafterdeferredtaxesarerecorded.ACrecognizesnogainonthebargainpurchasebecausethefairvalueoftheidentifiableassetsacquiredandliabilitiesassumed(net$760)doesnotexceedtheconsiderationtransferred.ThereisnobargainpurchaseaftertheDTLisrecordedforthedifferencebetweenthebookbasisof$1,000andtaxbasisof$400fortheassetsacquired.
Example 8-17
Nontaxable Business Combination — Bargain Purchase
AssumethesamefactsasinExample 8-16,exceptthatthetaxbasesoftheidentifiableassetsare$700ratherthan$400.
ADTLof$120isrecordedonthedifferencebetweenthebookbasisof$1,000andtaxbasisof$700fortheassetsacquired.Entriestorecordtheacquisitiongainonbargainpurchaseandresultingdeferredtaxes:
Debit Credit
TC’s entry:
Assets $ 1,000
Equity $ 880
DTL 120
AC’s entry:
InvestmentinTC $ 880
Cash $ 800
Gainonbargainpurchase 80
ACrecognizes$80gainasaresultofthebargainpurchase.
Asaresultoftherecognitionofan$80gain,AC’sinvestmentinTCwillincreaseby$80,withacorrespondingincreaseinTC’sequity.Thiscreatesanoutsidebasisdifferencebetweenthebookbasisof$880andtaxbasisof$800forTC’sstock.ACdeterminesthattheoutsidebasisdifferenceinTC’sstockisataxabletemporarydifferenceandrecordsaDTL.
Debit Credit
AC’s entry:
Deferredtaxexpense $ 32
DTL $ 32
TheDTLrepresentsan$80basisdifferenceatataxrateof40percent.Goodwillisnotaffectedbecausetheoutsidebasisdifferenceisrelatedtothegainrecognizedandthereforeisunrelatedtothebusinesscombinationaccounting.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 142/286129
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Business Combinations Achieved in Stages
8.60 Asdiscussedin1.28–1.30,abusinesscombinationachievedinstagesoccurswhenanacquirer
holdsanoncontrollinginvestmentintheacquiredcompany(the“originalinvestment”)beforeobtaining
controloftheacquiredcompany.Whentheacquirerobtainscontroloftheacquiredcompany,it
remeasurestheoriginalinvestmentatitsacquisition-datefairvalue.Theresultinggainorlossisreported
inearnings.Anyamountsrecordedinothercomprehensiveincomefortheoriginalinvestmentare
reclassifiedandincludedinthecalculationofgainorloss.
8.61 Theacquisition-datefairvalueoftheoriginalinvestmentisaddedtothetotalamountof
considerationtransferredinthebusinesscombination(andthefairvalueofanynoncontrollinginterest)
forpurposesofdeterminingthetarget’sopeningequity(whichinturndrivesthemeasurementof
goodwill).
8.62 Theremeasurementoftheoriginalinvestmentisrecordedoutsideofthebusinesscombination
accountingaseitheragainorlossintheincomestatement.Similarly,inaccordancewithparagraphs
31–34ofStatement109,thedeferredtaxeffectsoftheremeasurementarerecordedoutsideofthebusinesscombinationasacomponentofincometaxexpense,unlessanexceptionapplies.
Example 8-18
Business Combination Achieved in Stages
Case A
ACpurchased20percentofTargetCompany(TC)inyear1.AChasa$200bookbasisand$100taxbasisinitsequitymethodinvestmentandhasrecordedaDTLof$40ontheoutsidebasisdifference.Assumea40percenttaxrate.
Debit Credit
AC’s entries:
Year1
InvestmentinTC $ 100
Cash $ 100
Year2
InvestmentinTC $ 100
Equityearnings $ 100
Deferredtaxexpense $ 40
DTL $ 40
Inanontaxablebusinesscombination,ACpurchasestheremaining80percentofTCfor$2,000.Thefairvalueofalltheidentifiableassetsis$2,000andtheirtaxbasisis$500.
ACremeasuresits20percentinvestmentinTCto$500andrecognizes$300ofgain(ignoringanycontrolpremium).
Remeasuremententries—torecordtheremeasurementoftheoriginalinvestment:
Debit Credit
AC’s entries:
InvestmentinTC $ 300
Gainonremeasurement $ 300
Deferredtaxexpense $ 120
DTL $ 120
ACrecordsaDTLontheremeasurementgainbecauseitdeterminesthattheoutsidebasisdifferenceisataxabletemporarydifference(i.e.,noexceptionsapply).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 143/286130
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-18 (continued)
Business Combination Achieved in Stages
Torecordtheacquisitionandresultingdeferredtaxes:
Debit Credit
AC’s entry:
InvestmentinTC $ 2,000
Cash $ 2,000
TC’s entry:
Assets $ 2,000
Goodwill 1,100
DTL $ 600
Equity 2,500
ADTLof$600isrecordedonthebook-greater-than-taxbasis($2,000–$500)intheidentifiableassets.NoDTLisrecordedonthebook-greater-than-taxbasis($1,100–$0)ingoodwill,inaccordancewithparagraph9(d)ofStatement109.
Case B
AssumethesamefactsasinCaseA,exceptthatinapplyingparagraphs31–33ofStatement109,ACdeterminesthatitsoutsidebasisdifferenceintheacquiredentityisnotatemporarydifference,sonodeferredtaxesarerecorded.
Remeasuremententries—torecordtheremeasurementoftheoriginalinvestment:
Debit Credit
AC’s entries:
InvestmentinTC $ 300
Gainonremeasurement $ 300
DTL $ 40
Deferredtaxbenefit $ 40
ACreleasesaDTLontheremeasurementgainbecauseitdeterminesthattheoutsidebasisdifferenceisanotatemporarydifference.
Editor’s Note:Fortheacquisitionofaforeignentity,paragraph288(f)ofStatement109requirestheacquiringentitytocontinuetorecordthetemporarydifferenceforitsshareoftheundistributedearningsoftheacquireebeforethedateitbecameasubsidiarytotheextentthatdividendsfromthesubsidiarydonotexceedtheacquirer’sshareofthesubsidiary’searningafterthedateitbecameasubsidiary.IfTCwasaforeignsubsidiaryinthisexample,thisguidancemaybeapplicable.
Torecordtheacquisitionandresultingdeferredtaxes:
Debit Credit
AC’s entry:
InvestmentinTC $ 2,000
Cash $ 2,000
TC’s entry:
Assets $ 2,000
Goodwill 1,100
DTL $ 600
Equity 2,500
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 144/286131
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
International Tax Considerations
Inside Basis Differences in a Foreign Acquired Entity
8.63 Statement141(R)doesnotexplicitlyrequiretheacquirerto“pushdown”theacquisition
accountingtoeachacquiredentity.Paragraph17ofStatement109makesitclear,however,that
temporarydifferenceshavetobedeterminedattheentitylevel.Paragraph17states,“Deferredtaxesaredeterminedseparatelyforeachtax-payingcomponentineachtaxjurisdiction.”Therefore,
theamountsassignedtotheindividualassetsacquiredandliabilitiesassumedforfinancialreporting
purposesandtherelatedvaluationsofassetsmustbe“pusheddown”(actualornotionalpush-down)
toeachtax-payingcomponentintherelevantfunctionalcurrencytocorrectlyapplyStatement109.
8.64 Deferredtaxesareprovidedfordifferencesbetween(1)theamountsassignedtotheindividual
assetsacquiredandliabilitiesassumedforfinancialreportingpurposes(the“foreigncurrencyfinancial
reportingamount”)and(2)thelocaltaxbasis(the“foreigncurrencytaxbasis”).Thetemporary
differenceismultipliedbytheforeigntaxrateandthentranslatedintothereportingcurrency(e.g.,U.S.
dollars)atthespotrateontheacquisitiondate.
Outside Basis Differences in a Foreign Acquired Entity
8.65 Paragraph31(a)ofStatement109providesanexceptiontorecordingDTLsoninvestmentsin
foreignsubsidiaries.Thisexceptionmustbeevaluatedforeachforeignentityacquiredinthebusiness
combination.Ifthepermanentreinvestmentassertionisnotappropriateforaparticularacquiredforeign
entity,DTLsshouldberecordedonthatinvestmentaspartofthebusinesscombination.
Transition Provisions
8.66 IncometaxesareanexceptiontotheprospectiveapplicationofStatement141(R)’stransition
provisions.Uponanentity’sadoptionofstatement141(R),anysubsequentchangestotheentity’sacquireduncertaintaxpositionsandVAsassociatedwithacquiredDTAswillnolongerbeapplied
togoodwill,regardlessoftheacquisitiondateoftheassociatedbusinesscombination.Rather,such
changeswilltypicallyberecognizedasanadjustmenttoincometaxexpense.
8.67 BeforeStatement141(R),anychangesinanacquiredentity’suncertaintaxpositionsandreversals
ofVAsassociatedwithacquiredDTAsgenerallywouldbeappliedtogoodwill,regardlessofwhether
suchchangesoccurredduringtheallocationperiodorafterit.Incontrast,Statement141(R)requires
anyadjustmentstoanacquiredentity’suncertaintaxpositions,orVAsassociatedwithacquiredDTAs
thatoccurafterthemeasurementperiod(andadjustmentsduringthemeasurementperiodthatrelate
tofactsandcircumstancesthatdidnotexistasoftheacquisitiondate),toberecordedpursuantto
Interpretation48andStatement109.Accordingly,anychangesafterthemeasurementperiodwillgenerallybereflectedinincometaxexpense.ThetransitionprovisionsofStatement141(R)clarify
thatthisnewrequirementappliestoalltaxuncertaintiesandVAsrecognizedasaresultofabusiness
combination,includingthosethataroseinbusinesscombinationsconsummatedbeforeStatement
141(R)’seffectivedate.(See A15–A16.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 145/286132
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquired Uncertain Tax Positions
8.68 Historically,underIssue93-7,anychangesinanacquiredentity’suncertaintaxpositionbalances
weregenerallyrecognizedasadjustmentstogoodwill.Statement141(R)nullifiedIssue93-7andstates
thatincometaxuncertaintiesacquiredinabusinesscombinationshouldbeaccountedforinaccordance
withInterpretation48.Statement141(R)alsoamendedInterpretation48toaddparagraph12B,which
states:
Theeffectofachangetoanacquiredtaxposition,orthosethatariseasaresultoftheacquisition,
shallberecognizedasfollows:
a. Changeswithinthemeasurementperiodthatresultfromnewinformationaboutfacts
andcircumstancesthatexistedasoftheacquisitiondateshallberecognizedthrougha
correspondingadjustmenttogoodwill.However,oncegoodwillisreducedtozero,the
remainingportionofthatadjustmentshallberecognizedasagainonabargainpurchasein
accordancewithparagraphs36–38ofStatement141(R).
b. Allotherchangesinacquiredincometaxpositionsshallbeaccountedforinaccordancewith
thisInterpretation.
Therefore,ifanacquiredentity’sunrecognizedtaxbenefitforataxpositionisadjustedduringthe
measurementperiodbecauseofnewinformationaboutfactsandcircumstancesthatexistedasof
theacquisitiondate,goodwillshouldbeadjusted.However,evenduringthemeasurementperiod,if
theadjustmenttotheacquiredentity’sunrecognizedtaxbenefitistheresultofanidentifiableevent
thatoccurredafterthebusinesscombination’sacquisitiondate,theadjustmentisgenerallyrecorded
toincometaxexpense.NotethatInterpretation48statesthatjudgmentsmaybechangedonlyafter
theevaluationofnewinformation—notonthebasisofanewevaluationornewinterpretationof
informationthatwasavailableinpreviousfinancialreportingperiods.Afterthemeasurementperiod,
allchangesintheacquiredentity’sunrecognizedtaxbenefitwillberecordedinaccordancewith
Interpretation48.
8.69 Paragraph12BofInterpretation48iseffectiveforallbusinesscombinations(regardlessofwhen
thebusinesscombinationwasconsummated)onoraftertheeffectivedateofStatement141(R).
Example 8-19
Acquired Uncertain Tax Positions
Case A
OnJanuary15,2005,CompanyXacquired100percentofCompanyY.Aspartofthepurchaseaccounting,Xrecognizedaliabilityassociatedwithanunrecognizedtaxbenefit.OnDecember31,2006,Xincreasedtheliabilityasaresultofnewinformationtoreflectachangeinitsbestestimateoftheultimatesettlementwiththetaxingauthority.InaccordancewithIssue93-7,Xrecordedthisadjustmentasanincreasetogoodwill.AfteritadoptsStatement141(R),Xwillbe
requiredtorecordanyadditionaladjustmentstotheliability(relatedtonewinformation)asacomponentofincometaxexpense.
Case B
CompanyXpurchases100percentofCompanyYonJuly15,2008,andthetransactionisaccountedforunderStatement141.CompanyXhasrecordedanunrecognizedtaxbenefitof$100relatedtoY’sstatetaxnexusissues.CompanyXhasacalendaryear-endandwilladoptStatement141(R)onJanuary1,2009.OnMarch15,2009,Xconcludes,onthebasisofnewinformationrelatedtothefactsandcircumstancesaftertheacquisitiondate,thatY’s$100unrecognizedtaxbenefitisnolongerneeded.FollowingthetransitionalprovisionsofStatement141(R),Xwillreversetheliabilityfortheunrecognizedtaxbenefitandcreditincometaxexpense.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 146/286133
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquired Deferred Tax Asset Valuation Allowances
8.70 Underparagraph30ofStatement109,anacquiredentity’sDTAs,oroperatinglosscarryforwards
thatwerenotinitiallyrealizableasoftheacquisitiondate(partialorfullVAagainsttheacquiredentity’s
DTAs)butthatareconsideredrealizableaftertheacquisitiondate,weregenerallyappliedtogoodwill.
Statement141(R)amendedStatement109toaddparagraph30A,whichstates:
Theeffectofachangeinavaluationallowanceforanacquiredentity’sdeferredtaxassetshallbe
recognizedasfollows:
a. Changeswithinthemeasurementperiod[footnote8a]thatresultfromnewinformation
aboutfactsandcircumstancesthatexistedattheacquisitiondateshallberecognizedthrough
acorrespondingadjustmenttogoodwill.However,oncegoodwillisreducedtozero,an
acquirershallrecognizeanyadditionaldecreaseinthevaluationallowanceasabargain
purchaseinaccordancewithparagraphs36–38ofStatement141(R).
b. Allotherchangesshallbereportedasareductionorincreasetoincometaxexpense(ora
directadjustmenttocontributedcapitalasrequiredbyparagraph26).
[Footnote8astatesthat]themeasurementperiodinthecontextofabusinesscombinationis
describedinparagraphs51–56ofStatement141(R).
Therefore,subsequentchangesinanacquiredentity’sDTAVAthatwasestablishedasofthe
businesscombination’sacquisitiondatewouldgenerallyberecordedtoincometaxexpenseunless
suchadjustmentsoccurredinthemeasurementperiodandrelatedtoinformationaboutfacts
andcircumstancesthatexistedasoftheacquisitiondate.Iftheadjustmentoccurredduringthe
measurementperiodandrelatestonewinformationaboutfactsandcircumstancesthatexistedasof
theacquisitiondate,theadjustmentwouldberecordedtogoodwill.
WhenanentityadoptsStatement141(R),paragraph30Aiseffectiveforallbusinesscombinations
regardlessofwhentheywereconsummated.
Example 8-20
Acquired Deferred Tax Asset Valuation Allowances
OnJuly15,2006,CompanyXacquired100percentofCompanyY.Aspartofthepurchaseaccounting,XestablishedafullvaluationallowanceonY’sDTAfornetoperatinglosses(NOLs)of$100.OnSeptember30,2007,Xdeterminedthat$40ofY’sNOLswillberealizableandreverseditsVA,withacorrespondingentrytogoodwillinaccordancewithparagraph30ofStatement109.CompanyXhasacalendaryear-endandwilladoptStatement141(R)onJanuary1,2009.OnJune15,2009,XconcludesthatunderStatement109,Y’sremaining$60NOLDTAisrealizableandtheVAisnolongernecessary.FollowingthetransitionalprovisionsofStatement141(R),Xwillreverseitsremaining$60VAandrecordacorrespondingcredittoincometaxexpense.
Deferred Tax Asset for Deductible Tax Goodwill in Excess of Financial Reporting
Goodwill
8.71 Statement141(R)alsoamendsStatement109concerningtherecognitionofaDTAforthe
excessoftax-deductiblegoodwillovergoodwillforfinancialreporting.UnderStatement141(R),the
recognitionofaDTAfortax-deductiblegoodwillinexcessoffinancialreportinggoodwillisnolonger
prohibited.Thatis,allDTAsfortax-deductiblegoodwillfrombusinesscombinationsaftertheadoption
ofStatement141(R)willberecordedasoftheacquisitiondate.Paragraph262ofStatement109,as
amendedbyStatement141(R),states,inpart:
Ifthatsecondcomponentisanexcessoftax-deductiblegoodwilloverthereportedamountof
goodwill,thetaxbenefitforthatexcessisatemporarydifferenceforwhicha[DTA]isrecognized
basedontherequirementsofthisStatement(refertoparagraph263).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 147/286134
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SeeExample 8-14foranillustrationofhowtheDTAfordeductibletaxgoodwillinexcessoffinancial
reportinggoodwilliscalculatedforallbusinesscombinationsaccountedforunderStatement141(R).
8.72 Forexcesstax-deductiblegoodwillfrombusinesscombinationsaccountedforunderStatement
141,paragraphs262and263ofStatement109(beforebeingamendedbyStatement141(R))stillapply
aftertheeffectivedateofStatement141(R).Thatis,forbusinesscombinationsconsummatedbeforethe
effectivedateofStatement141(R),goodwillwillcontinuetobeadjustedasthetax-deductiblegoodwill
(“secondcomponent”)isrealizedonthetaxreturn.
8.73 Thefollowingexamplefromparagraph263ofStatement109(beforebeingamendedby
Statement141(R))hasbeenadaptedtoillustratetheaccountingthatstillapplies(evenaftertheeffective
dateofStatement141(R))forexcesstax-deductiblegoodwillfrombusinesscombinationsconsummated
underStatement141.
Example 8-21
Excess Tax-Deductible Goodwill Accounting for Business Combinations Consummated Under
Statement 141Theassumptionsareasfollows:
• AsoftheacquisitiondateonJanuary1,2008,thereportedamountandtaxbasisofgoodwillare$600and$800,respectively.
• Fortaxpurposes,amortizationofgoodwillwillresultintaxdeductionsof$400ineachofyears1and2.Thosedeductionsresultincurrenttaxbenefitsinyears2008and2009.
• Forsimplicity,theconsequencesofothertemporarydifferencesareignoredforyears2008–2011.
• Theentityhasacalendaryear-endandwilladoptStatement141(R)onJanuary1,2009.
• Incomebeforeincometaxesis$1,000ineachyearfrom2008–2011.
• Thetaxrateis40percentforallyears.
Incometaxespayableforyears2008–2011are: 2008 2009 2010 2011
Incomebeforeamortizationofgoodwill $ 1,000 $ 1,000 $ 1,000 $ 1,000
Taxamortizationofgoodwill 400 400 0 0
Taxableincome $ 600 $ 600 $ 1,000 $ 1,000
Incometaxpayable $ 240 $ 240 $ 400 $ 400
Atthecombinationdate,goodwillisseparatedintotwocomponentsasfollows:
Reported Amount Tax Basis
Firstcomponent $ 600 $ 600
Secondcomponent — 200
Totalgoodwill $ 600 $ 800
ADTLisrecognizedforthetaxamortizationofgoodwillforyears2008and2009fortheexcessofthefinancialreportingamountoverthetaxbasisofthefirstcomponentofgoodwill.Whenthesecondcomponentofgoodwillisrealizedonthetaxreturnforyears2008and2009,thetaxbenefitisallocatedtoreducefinancialreportinggoodwill.
Note: ThisexampleisonlyapplicableforbusinesscombinationsthatwereoriginallyaccountedforunderStatement141andnotthoseaccountedforunderStatement141(R).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 148/286135
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 8-21 (continued)
Excess Tax Deductible Goodwill Accounting for Business Combinations Consummated UnderStatement 141
Thesecondcomponentofgoodwillisdeductibleat$100peryearinyears2008and2009.Thosetaxdeductionsprovide$40($100at40percent)oftaxbenefitsthatarerealizedinyears2008and2009.Therealizedbenefitsreducethefirstcomponentofgoodwillandproduceadeferredtaxbenefitbyreducingthetaxabletemporarydifferencerelatedtothat
componentofgoodwill.Thus,thetotaltaxbenefitallocatedtoreducethefirstcomponentofgoodwillinyear2008and2009isthesumof(1)the$40realizedtaxbenefitallocatedtoreducegoodwilland(2)thedeferredtaxbenefitfromreducingtheDTLrelatedtogoodwill.Thattotaltaxbenefit(TTB)isdeterminedasfollows:
TTB=realizedtaxbenefitplus(taxratetimesTTB)
TTB=$40+(0.40×TTB)
TTB=$67
Goodwillforfinancialreportingforyears2008–2011is:
2008 2009 2010 2011
Balanceatbeginningofyear $ 600 $ 533 $ 466 $ 466
Totaltaxbenefitallocatedtoreducegoodwill 67 67 0 0
Balanceatendofyear $ 533 $ 466 $ 466 $ 466
TheDTLforthefirstcomponentofgoodwillandtherelatedamountofdeferredtaxexpense(benefit)foryears2008–2011are:
2008 2009 2010 2011
Reportedamountofgoodwillatendofyear $ 533 $ 466 $ 466 $ 466
Taxbasisofgoodwill(firstcomponent) 300 0 0 0
Taxabletemporarydifference $ 233 $ 466 $ 466 $ 466
Deferredtaxliability:
Atendofyear(40percent) $ 93 $ 186 $ 186 $ 186
Atbeginningofyear 0 93 186 186
Deferredtaxexpensefortheyear $ 93 $ 93 $ 0 $ 0
Incomeforfinancialreportingforyears2008–2011is:
2008 2009 2010 2011
Incomebeforeincometax $ 1,000 $ 1,000 $ 1,000 $ 1,000
Incometaxexpense:
Current 240 240 400 400
Deferred 93 93 0 0
Benefitappliedtoreducegoodwill 67 67 0 0
Incometaxexpense 400 400 400 400
Netincome $ 600 $ 600 $ 600 $ 600
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 149/286136
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Income Tax Disclosures for Business Combinations
8.74 Statement141(R)amendedsomeofthefinancialstatementdisclosuresinStatement109and
Interpretation48.Forexample,paragraph45ofStatement109,asamendedbyStatement141(R),
states:
Thesignificantcomponentsofincometaxexpenseattributabletocontinuingoperationsforyearpresentedshallbedisclosedinthefinancialstatementsornotesthereto.Thosecomponentswould
include,forexample:
a. Currenttaxexpenseorbenefit
b. Deferredtaxexpenseofbenefit(exclusiveoftheeffectsofothercomponentslistedbelow
c. Investmenttaxcredits
d. Governmentgrants(totheextentrecognizedasareductionofincometaxexpense)
e. Thebenefitsofoperatinglosscarryforwards
f. Taxexpensethatresultsfromallocatingcertaintaxbenefitseitherdirectlytocontributed
capitalortoreducegoodwillorothernoncurrentintangibleassetsofanacquiredentity
g. Adjustmentsofadeferredtaxliabilityorassetforenactedchangesintaxlawsorratesora
changeinthetaxstatusoftheenterprise
h. Adjustmentsofthebeginning-of-the-yearbalanceofavaluationallowancebecauseofa
changeincircumstancesthatcauseschangeinjudgmentabouttherealizabilityoftherelated
deferredtaxassetinfutureyears.Forexample,anyacquisition-dateincometaxbenefitsor
expensesrecognizedfromchangesintheacquirer’svaluationallowanceforitspreviously
existingdeferredtaxassetsasaresultofabusinesscombination(paragraph266).
8.75 Paragraph48ofStatement109,asamendedbyStatement141(R),states:
Anenterpriseshalldisclose(a)theamountsandexpirationdatesofoperatinglossandtaxcredit
carryforwardsfortaxpurposesand(b)anyportionofvaluationallowancefordeferredtaxassetsfor
whichsubsequentlyrecognizedtaxbenefitswillbeallocatedtoreducegoodwillorothernoncurrentintangibleassetsofanacquiredentityorcrediteddirectlytocontributedcapital(paragraphs30and
36).
8.76 Subsequentbusinesscombinationadjustmentstoincometaxaccountscouldhaveaneffecton
Interpretation48disclosurerequirements.Paragraph21(a)ofInterpretation48states:
Anenterpriseshalldisclosethefollowingattheendofeachannualreportingperiodpresented:
a. Atabularreconciliationofthetotalamountsofunrecognizedtaxbenefitsatthebeginning
andendofperiod,whichshallincludeataminimum:
(1) Thegrossamountsofincreasesanddecreasesinunrecognizedtaxbenefitsasaresult
oftaxpositionstakenduringtheperiod(2) Thegrossamountofincreasesanddecreasesinunrecognizedtaxbenefitsasaresult
oftaxpositionstakeninthecurrentyear
(3) Theamountsofdecreasesintheunrecognizedtaxbenefitsrelatingtosettlementswith
taxingauthorities
(4) Reductionstounrecognizedtaxbenefitsasaresultofalapseofapplicablestatuteof
limitations
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 150/286137
Section 9 — Push-Down Basis of Accounting
9.01 FortransactionswithinthescopeofStatement141(R),anewbasisisestablishedwithinthe
consolidatedfinancialstatementsoftheacquiringentityfortheassetsacquiredandliabilitiesassumed,
regardlessofwhethertheacquiredentitywillremainasaseparatecorporateentityaftertheacquisition.
Statement141(R)doesnotaddresswhether,iftheacquiredentityistoremainseparate,theseparate
stand-alonefinancialstatementsoftheacquiredentityshouldreflectthenewbasisofaccounting
resultingfromtheacquisitionthroughwhatisreferredtoas“push-downaccounting.”Intheabsence
ofguidanceinStatement141(R),theapplicabilityofpush-downaccountingtoaspecificsetoffactsand
circumstancesshouldbebasedon:
•SABTopic5.J.1
•EITFTopicD-97.2
•SelectedspeechesandinformalcommentsonthetopicbytheSECstaff.
Evaluating the Applicability of Push-Down Accounting
9.02 Thefollowingflowchartcanbeusedtoevaluatetheapplicabilityofpush-downaccountingto
specificsituations.
1 S ee14.37regardingpossiblefutureupdatestoSECguidanceasaresultofStatement141(R).Thispublicationwillbeupdatedafteranyneworamendedguidanceisissuedby
theSEC.
2 Seefootnote1.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 151/286138
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
No
No
Yes
Yes
No
No
Yes
No
Doestheacquiredentityhavepubliclyhelddebtoutstandingthatqualifiesforthepublicdebtexception?(See9.21–9.23.)
Yes
Push-downaccountingispermittedbutisnotrequired.
Istheoutstandingpubliclyhelddebtdeterminedtobesignificant?(See9.21–9.23.)
Doestheacquiredentityhavepreferredstockoutstandingthatissuitableforthepreferredstockexception?(See9.24.)
Ispercentageoftheentityacquiredbetween80percentand95percent?(See9.17–9.20.)
Yes
Istheoutstandingpreferredstock
determinedtobesignificant?(See9.24.)
Push-downaccountingispermittedbutnotrequired.
Push-downaccountingisrequired.
No
Yes
No
NoWilltheacquiredentityremainasaseparatecorporateentityafterthedateofacquisition?(See9.03—Question1.)
Push-downaccountingconsiderationsarenotnecessary.
Willtheacquiredentityremainingasa
separatecorporateentityafterthedateofacquisitionbeanSECregistrant?(See9.03–9.06.)
Push-downaccounting
considerationsarenotrequired.Doestheacquiringentity,however,wishtoevaluatetheelectiveapplicationofpush-downaccounting?
Areanyneworpreexisting(orrollover)investorsconsideredpartofacollaborativegrouppursuanttoTopicD-97?(See9.07–9.16.)
Evaluateandaggregateneworpreexisting(orrollover)investors,ifnecessary,underTopicD-97.(See9.07–9.16.)
Ispercentageoftheentityacquiredlessthan80percent?(See9.17–9.20.)
Push-downaccountingisnotrequired.
Yes
No
Yes
Yes
Yes
No
Push-downaccountingisprohibited.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 152/286139
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SEC Staff Accounting Bulletin Topic 5.J — Push-Down Basis of Accounting Requiredin Certain Limited Circumstances
9.03 SABTopic5.Jprovidesthefollowingseriesoffacts,questions,andinterpretiveresponses:
Facts: CompanyA(orCompanyAandrelatedpersons)acquiredsubstantiallyallofthecommon
stockofCompanyBinoneoraseriesofpurchasetransactions.
Question 1: MustCompanyB’sfinancialstatementspresentedineitheritsownorCompanyA’s
subsequentfilingswiththeCommissionreflectthenewbasisofaccountingarisingfromCompanyA’s
acquisitionofCompanyBwhenCompanyB’sseparatecorporateentityisretained?
Interpretive Response: Yes.Thestaffbelievesthatpurchasetransactionsthatresultinanentity
becomingsubstantiallywhollyowned(asdefinedinRule1-02(aa)ofRegulationS-X)establishanew
basisofaccountingforthepurchasedassetsandliabilities.
Whentheformofownershipiswithinthecontroloftheparentthebasisofaccountingforpurchased
assetsandliabilitiesshouldbethesameregardlessofwhethertheentitycontinuestoexistoris
mergedintotheparent’soperations.Therefore,CompanyA’scostofacquiringCompanyBshould
be“pusheddown,”i.e.,usedtoestablishanewaccountingbasisinCompanyB’sseparatefinancial
statements.[Footnote5]
Question 2: Whatisthestaff’spositionifCompanyAacquiredlessthansubstantiallyallofthe
commonstockofCompanyBorCompanyBhadpubliclyhelddebtorpreferredstockatthetime
CompanyBbecamewhollyowned?
Interpretative Response: Thestaffrecognizesthattheexistenceofoutstandingpublicdebt,
preferredstockorasignificantminorityinterestinasubsidiarymightimpacttheparent’sabilityto
controltheformofownership.Althoughencouragingitsuse,thestaffgenerallydoesnotinsiston
theapplicationofpushdownaccountinginthesecircumstances.
Question 3: CompanyAborrowsfundstoacquiresubstantiallyallofthecommonstockof
CompanyB.CompanyBsubsequentlyfilesaregistrationstatementinconnectionwithapublic
offeringofitsstockordebt.[Footnote6]ShouldCompanyB’snewbasis(“pushdown”)financial
statementsincludeCompanyA’sdebtrelatedtoitspurchaseofCompanyB?
Interpretive Response: ThestaffbelievesthatCompanyA’sdebt,[footnote7]relatedinterest
expense,andallocabledebtissuecostsshouldbereflectedinCompanyB’sfinancialstatements
includedinthepublicoffering(oraninitialregistrationundertheExchangeAct)if:(1)CompanyBis
toassumethedebtofCompanyA,eitherpresentlyorinaplannedtransactioninthefuture;(2)the
proceedsofadebtorequityofferingofCompanyBwillbeusedtoretireallorapartofCompanyA’s
debt;or(3)CompanyBguaranteesorpledgesitsassetsascollateralforCompanyA’sdebt.
OtherrelationshipsmayexistbetweenCompanyAandCompanyB,suchasthepledgeofCompany
B’sstockascollateralforCompanyA’sdebt.[Footnote8]Whileinthislattersituation,itmaybeclear
thatCompanyB’scashflowswillserviceallorpartofCompanyA’sdebt,thestaffdoesnotinsist
thatthedebtbereflectedinCompanyB’sfinancialstatementsprovidingthereisfullandprominent
disclosureoftherelationshipbetweenCompaniesAandBandtheactualorpotentialcashflow
commitment.Inthisregard,thestaffbelievesthatStatements5and57aswellasInterpretation45
requiresufficientdisclosuretoallowusersofCompanyB’sfinancialstatementstofullyunderstandthe
impactoftherelationshiponCompanyB’spresentandfuturecashflows.Rule4-08(e)ofRegulation
S-Xalsorequiresdisclosureofrestrictionswhichlimitthepaymentofdividends.Therefore,thestaff
believesthattheequitysectionofCompanyB’sbalancesheetandanyproformafinancialinformation
andcapitalizationtablesshouldclearlydisclosethatthisarrangementexists.[Footnote9]
RegardlessofwhetherthedebtisreflectedinCompanyB’sfinancialstatements,thenotesto
CompanyB’sfinancialstatementsshouldgenerallydisclose,ataminimum:(1)therelationship
betweenCompanyAandCompanyB;(2)adescriptionofanyarrangementsthatresultinCompany
B’sguarantee,pledgeofassets[footnote10]orstock,etc.thatprovidessecurityforCompanyA’s
debt;(3)theextent(intheaggregateandforeachofthefiveyearssubsequenttothedateofthe
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 153/286140
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
latestbalancesheetpresented)towhichCompanyAisdependentonCompanyB’scashflowsto
serviceitsdebtandthemethodbywhichthiswilloccur;and(4)theimpactofsuchcashflowson
CompanyB’sabilitytopaydividendsorotheramountstoholdersofitssecurities.
Additionally,thestaffbelievesCompanyB’sManagement’sDiscussionandAnalysisofFinancial
ConditionandResultsofOperationsshoulddiscussanymaterialimpactofitsservicingofCompany
A’sdebtonitsownliquiditypursuanttoItem303(a)(1)ofRegulationS-K.
Footnote5states,“TheTaskForceonConsolidationProblems,AccountingStandardsDivisionofthe
AmericanInstituteofCertifiedPublicAccountantsissuedapaperentitled‘PushDown’Accounting,
October30,1979.Thispaperaddressestheissuesrelatingto‘pushdown’accounting,cites
authoritativeliteratureandindicatesthatasubstantialchangeinownershipjustifiesanewbasisof
accounting.”
Footnote6states,“TheguidanceinthisSABshouldalsobeconsideredforCompanyB’sseparate
financialstatementsincludedinitspublicofferingfollowingCompanyB’sspin-offorcarve-outfrom
CompanyA.”
Footnote7states,“TheguidanceinthisSABshouldalsobeconsideredwhereCompanyAhasfinanced
theacquisitionofCompanyBthroughtheissuanceofmandatoryredeemablepreferredstock.”
Footnote8states,“ThestaffdoesnotbelieveCompanyB’sfinancialstatementsmustreflectthedebtin
thissituationbecauseintheeventofdefaultonthedebtbyCompanyA,thedebtholder(s)wouldonly
beentitledtoB’sstockheldbyCompanyA.OtherequityordebtholdersofCompanyBwouldretain
theirprioritywithrespecttothenetassetsofCompanyB.”
Footnote9states,“Forexample,thestaffhasnotedthatcertainregistrantshaveindicatedontheface
ofsuchfinancialstatements(aspartofthestockholder’sequitysection)theactualorpotentialfinancing
arrangementandtheregistrant’sintenttopaydividendstosatisfyitsparent’sdebtservicerequirements.
Thestaffbelievessuchdisclosuresareusefultohighlighttheexistenceofarrangementsthatcouldresult
intheuseofCompanyB’scashtoserviceCompanyA’sdebt.”
Footnote10states,inpart,“Amaterialassetpledgeshouldbeclearlyindicatedonthefaceofthe
balancesheet.Forexample,ifallorsubstantiallyalloftheassetsarepledged,the‘assets’and‘total
assets’captionsshouldincludeparenthetically:‘pledgedforparentcompanydebt—SeeNoteX.’”
Additional SEC Staff Views — Applicability of EITF Topic D-97 to CertainTransactions
9.04 Atthe2005AICPANationalConferenceonCurrentSECandPCAOBDevelopments,Professional
AccountingFellowPamelaSchlosserpresentedherviewsondeterminingtheappropriateaccounting
modelforcertain“newbasis”questions.Inherpreparedremarks,Ms.Schlosserreferredtoasituation
encounteredbytheSECstaffandofferedinsightontheapproachthestaffmayapplywhenanalyzing
push-downaccountingquestions:
InMs.Schlosser’sexample,CompanyA(OLDCO)wasacquiredforcashbyCompanyB
(NEWCO),anewentitythatwasformedtoeffectuatethetransaction.Shestatedthat
“NEWCOwasconsidered[tobe]theaccountingacquirersinceitwasdeemedsubstantive;
itacquiredasingleoperatingcompanyforcash;andtheentireownershipof[OLDCO]had
changed.”Thetransactionresultedin100%step-upofOLDCO’sbasis.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 154/286141
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Ms.Schlosserclarifiedthatinsituationssuchastheonedescribedabove,therequirement
toapplypush-downaccountingmustbeassessedattheOLDCOlevel.Sincetheentire
ownershipofOLDCOhadchangedaspartofthetransaction,push-downaccounting
wouldberequired.Therefore,assessingwhetherthenewinvestorsofNEWCOrepresent
acollaborativegroupinaccordancewithTopicD-97(see9.07–9.16)isnotrelevantin
determiningwhetherpush-downaccountingshouldbeappliedatOLDCO.
Applicability of Push-Down Accounting to Companies That Are Not SEC Registrants
9.05 InIssue86-9,theEITFreachedaconsensusthat“push-downaccountingisnotrequiredfor
companiesthatarenotSECregistrants.”Push-downaccountingforcompaniesthatarenotSEC
registrantsisnotaddressedinIssue86-9,butisacceptableundercurrentpracticewhenthesame
acquisitionthresholdsareusedasthoseappliedbytheSECstaff.(See9.17–9.20fordiscussionofthe
thresholdstousewhendeterminingwhetheracompanyhasbecomesubstantiallywhollyowned.)
9.06 ForcompaniesthatbecomeSECregistrants,theSECstaffrequirespush-downaccountingto
beappliedretrospectivelytotheextentthatitwouldhavebeenrequiredunderTopicD-97andSAB
Topic5.J.
Collaborative Groups — Topic D-97
9.07 TopicD-97statesthefollowingregardingacollaborativegroup:
InapplyingSAB54[Topic5.J]tospecificfactsandcircumstances,aregistrantmustdistinguish
betweentransactionsresultinginonlyasignificantchangein(recapitalizationof)acompany’s
ownership(forexample,astheresultofaninitialpublicofferingforwhichpush-downaccountingis
notrequired)andpurchasetransactionsinwhichthecompanybecomessubstantiallywhollyowned
andforwhichpush-downaccountingisrequired.
Forpurposesofdeterminingwhetheracompanyhasbecome“substantiallywhollyowned”astheresultofasingletransactionoraseriesofrelatedandanticipatedtransactionsinwhichinvestors
acquireownershipinterests,theSECstaffbelievesthatitisappropriatetoaggregatetheholdingsof
thoseinvestorswhoboth “mutuallypromote”theacquisitionand“collaborate”onthesubsequent
controloftheinvesteecompany(thecollaborativegroup).[Footnote1]Thatis,theSECstaffbelieves
thatpush-downaccountingisrequiredifacompanybecomessubstantiallywhollyownedbya
groupofinvestorswhoacttogetheraseffectivelyoneinvestorandareabletocontroltheformof
ownershipoftheinvestee.
TheSECstaffbelievesthatundera“mutualpromotionandsubsequentcollaboration”model,a
memberofacollaborativegroupwouldbeanyinvestor[footnote2]thathelpstoconsummate
theacquisitionandworksorcooperateswiththesubsequentcontroloftheacquiredcompany.For
purposesofassessingwhetheraninvestorispartofacollaborativegroup,theSECstaffbelieves
thatarebuttablepresumptionexiststhatanyinvestorinvestingatthesametimeasorinreasonable
proximitytothetimeothersinvestintheinvesteeispartofthecollaborativegroupwiththeother
investor(s).Determinationofwhethersuchapresumptionisrebuttednecessarilywillinvolvethe
considerationofallpertinentfactsandcircumstances.AmongthefactorsconsideredbytheSECstaff
[footnote3]thatwouldbeindicativeofaninvestornot beingpartofacollaborativegroupinclude:
I. Independence
• Theinvestorissubstantive.Forexample,theinvestorisanentitywithsubstantialcapital(that
is,comparabletothatexpectedforasubstantivebusinesswithsimilarrisksandrewards)
andotheroperations.Incontrast,aninvestorthatisaspecialpurposeentitywhoseonly
substantiveassetsoroperationsareitsinvestmentintheinvesteegenerallywouldnotbe
consideredsubstantive.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 155/286142
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
• Theinvestorisindependentofandunaffiliatedwithallotherinvestors.
• Theinvestor’sinvestmentintheinvesteeisnotcontingentuponanyotherinvestormaking
investmentsintheinvestee.
• Theinvestordoesnothaveotherrelationshipswithanyotherinvestorthatarematerialto
eitherinvestor.
II. Risk of Ownership• Theinvestorisinvestingatfairvalue.
• Theinvestorinvestsfundsfromitsownresources.
• Theinvestorfullyshareswithallotherinvestorsintherisksandrewardsofownershipinthe
investeeinproportiontoitsclassandamountofinvestment.Thatis,theinvestor’sdownside
riskorupsiderewardarenotlimited,andtheinvestordoesnotreceiveanyotherdirector
indirectbenefitsfromanyotherinvestorasaresultofinvestingintheinvestee.[Footnote4]
• Thefundsinvestedbytheinvestorarenotdirectlyorindirectlyprovidedorguaranteedbyany
otherinvestor.
• Theinvestorisatriskonlyforitsowninvestmentintheinvesteeandnotanother’sinvestment
intheinvestee.Thatis,theinvestorisnotprovidingorguaranteeinganypartofanother
investor’sinvestmentintheinvestee.[Refertofootnote4.]
III. Promotion
• Theinvestordidnotsolicitotherpartiestoinvestintheinvestee.
IV. Subsequent Collaboration
• Theinvestorisfreetoexerciseitsvotingrightsinanyandallshareholdervotes.
• Theinvestordoesnothavedisproportionateorspecialrightsthatotherinvestorsdonothave,
suchasaguaranteedseat(s)ontheinvestee’sboard,requiredsupermajorityvotingrightsfor
majororsignificantcorporatedecisions,guaranteedconsentrightsovercorporateactions,
guaranteedorspecifiedreturns,andsoforth.
• Theinvestor’sabilitytosellitsinvesteesharesisnotrestricted,exceptasprovidedbythe
securitieslawsorbywhatisreasonableandcustomaryinindividuallynegotiatedinvestmenttransactionsforcloselyheldcompanies(forexample,arightoffirstrefusalheldbythe
investeeontheinvestor’ssharesintheeventofabonafideofferfromathirdparty).
TheSECstaffhasconsideredtheapplicabilityofpush-downaccountingintransactionsinwhich
financialinvestors,actingtogethereffectivelyasoneinvestor(thatis,asacollaborativegroup),
acquireownershipinterestsinacompany.Theinvesteecompanyexperiencesasignificantchangein
ownership,butnosinglefinancialinvestorobtainssubstantiallyalloftheownershipinterestinthe
company.Considerthefollowingexample:
InvestorCformulatesaplantoacquireandconsolidatecompaniesinahighlyfragmented
industryinordertoachieveeconomiesofscale.InvestorCapproachesInvestorsAandB
withtheplan,andtheyagreetoinvestwithInvestorCintheacquisitionandconsolidation
plan.InvestorsA,B,andC(theInvestors)areeachsubstantiveentities,withnooverlapof
employeesbutwithanumberofpriorjointinvestmentsandotherbusinessrelationshipsthatareindividuallymaterialtotheInvestors.Furthermore,uponcompletionofthecurrentplan,
theresultingentityisexpectedtobematerialtoeachindividualinvestor.
Shortlythereafter,CompanyDisidentifiedasanacquisitioncandidateintheindustry.The
InvestorsnegotiatealegallybindingagreementwithCompanyDtoacquire100percentof
theoutstandingcommonstockofCompanyD(tobeheld40percent,40percent,and20
percentbyInvestorsA,B,andC,respectively)forcash.Inconnectionwiththechangein
ownership,CompanyD’sbylawsareamendedtoprovidethattheInvestorseachhavethe
righttoelectanequalnumberofmembersofCompanyD’sboardofdirectors.CompanyD’s
boardofdirectorsalsoistoincludeCompanyD’schiefexecutiveofficerandtwoindependent
directors.Inaddition,thebylawsareamendedtoprovidethatnoactionrequiringboardof
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 156/286143
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
directors’approvalmaybeapprovedwithoutconsentofamajorityoftheboardaswellasa
majorityoftheInvestorAdirectors,theInvestorBdirectors,andtheInvestorCdirectors,each
votingasaseparateclass.Effectively,anysignificantcorporateactionbyCompanyDwould
requiretheapprovalofeachinvestor.
StockheldbytheInvestorsistoberestrictedastotransferforfiveyears,afterwhicheach
oftheInvestorshasarightoffirstrefusalandtag-alongrightsifsomepartofthegroupof
Investorsdecidestosellitsinterests.
Thefundsinvestedbyeachinvestorcomefromtherespectiveinvestor’sresources;however,
InvestorsAandBprovideInvestorCcertainlimitedfirst-lossguaranteesofitsinvestment.
Inthecontextofthisexample,theSECstaffconcludedthatInvestorsA,B,andCdidnotovercome
thepresumptionthattheyweremembersofacollaborativegroupofinvestors.Furthermore,sincethe
collaborativegroupofInvestorsacquired100percentoftheoutstandingcommonstockofCompany
D,theSECstaffconcludedthatpush-downaccountingwasrequiredtobeappliedinCompany
D’sfinancialstatements.ThefactorstheSECstaffconsideredinreachingitsconclusionthatthe
presumptionwasnotrebuttedincluded,amongothers,thefollowing:
• InvestorsA,B,andCactedinconcerttonegotiatetheirconcurrentinvestmentsinCompany
D,whichweremadepursuanttothesamecontract.
• TheinvestmentsbyInvestorsA,B,andCwerebeingmadeinconnectionwithabroaderstrategicinitiativethethreeinvestorswerepursuingtogether.
• TherewereanumberofpriorbusinessrelationshipsbetweentheInvestorsthatwerematerial
totheInvestors.
• InvestorCdoesnotsharefullyintherisksandrewardsofownershipduetothelimitedfirst-
lossguaranteesprovidedbyInvestorsAandB.
• NosingleInvestorcontrolledtheboardofdirectors,andduetotheamendmentstothe
bylawsregardingboardrepresentationandvoting,anyofthethreeInvestorscouldunilaterally
blockanyboardaction.Inotherwords,InvestorsA,B,andCwerecompelledtocollaborate
onthesubsequentcontrolofCompanyD.
• TherearerestrictionsoneachInvestor’sabilitytotransferitsshares.
Footnote1states,“Acollaborativegroupisnotnecessarilythesameasacontrolgroupasdefinedin
IssueNo.88-16,‘BasisinLeveragedBuyoutTransactions.’”
Footnote2states,“Preexisting,orrollover,investorsshouldbeevaluatedforinclusioninthe
collaborativegrouponthesamebasisasnewinvestors.”
Footnote3states,“Inanassessmentofwhetherthepresumptionisovercome,anysinglefactorshould
notbeconsideredinisolation.”
Footnote4states,“Putoptions,calloptions,tag-alongrights,anddrag-alongrightsshouldbecarefully
evaluated.Theymayacttolimitaninvestor’sriskandrewardsofownership,effectivevotingrights,orabilitytosellitsinvesteeshares.Atag-alongrightgrantsashareholdertheoptiontoparticipateinasale
ofsharesbythecontrollingshareholderorcollaborativegroup,generallyunderthesametermsandin
thesameproportion.Adrag-alongrightgrantsthecontrollingshareholderorcollaborativegroupthe
optiontocompelshareholderssubjecttothedrag-alongprovisiontoselltheirsharesinatransaction
inwhichthecontrollingshareholderorcollaborativegrouptransferscontrolofthecompany,generally
underthesametermsandinthesameproportion.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 157/286144
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Additional Considerations in Determining the Presence of a Collaborative GroupUnder Topic D-97
9.08 TopicD-97referstotheSECstaff’spositionthat“arebuttablepresumptionexiststhatany
investorinvestingatthesametimeasorinreasonableproximitytothetimeothersinvestinan
investeeispartofthecollaborativegroupwiththeotherinvestor(s).”Inattemptingtoovercomethis
presumption,aninvestorshouldconsiderthefactorscitedbytheSECstaffinTopicD-97aswellasall
relevantfactsandcircumstances.
9.09 Inherspeechatthe2005AICPANationalConferenceonSECandPCAOBDevelopments,
ProfessionalAccountingFellowPamelaSchlosseraddressedfactorstheSECstaffconsidersinadditionto
thoseinTopicD-97whendeterminingwhetheracollaborativegroupexists.Ms.Schlosserstated:
ThestaffhasnogoldenrulesinapplyingTopicD-97.Rather,thetotalityofallofthefactorsshouldbe
evaluatedinconcludingwhethertheinvestorsrepresentacollaborativegroup.However,thefollowing
aresomeofthequestionsthatthestaffmayaskingainingabetterunderstandingoftherelationship
amongtheinvestors,andthuswhetheracollaborativegroupexists:
• Howdidthevariousinvestorscometogethertomakethisinvestment?
• Hypothetically,ifoneoftheinvestorswouldhavebackedoutofthedeal,wouldthedealstill
havebeendone?
• Howareboardseatsdeterminedandcanthenumberofseatschangeovertime?
• Whatisthenatureofdecisionsthatrequireunanimousormajorityapprovaloftheinvestors?
• [W]hatevidencesupportsthatsalerestrictionsareconsideredreasonableandcustomary?
9.10 TheSECstaffhasindicated,bothformallyandinformally,thatentitiesshouldconsiderthe
additionalitemsbelowwhenapplyingTopicD-97.
Risk of Ownership — Tag-Along Rights, Drag-Along Rights, or Both
9.11 SECstaffcommentshavesuggestedthattag-alongordrag-alongrightsinanyformnotonly
raiserisk-of-ownershipissues,butmayalsoindicatesubsequentcollaboration.Footnote4ofTopicD-97
addressesthefactorsintheRiskofOwnershipsectionofTopicD-97andindicatesthatdrag-alongrights
andtag-alongrightsshouldbecarefullyevaluated.Inaddition,thefollowinginformationshouldbe
considered:
• Drag-AlongRights—Adrag-alongrightgrantsashareholderorgroupofshareholdersthe
optiontocompelothershareholderssubjecttothedrag-alongprovisiontoselltheirsharesin
atransactioninwhichtheholderoftherightsellsitsshares,generallyunderthesameterms
andinthesameproportion.Forexample,InvestorAandBareinvestinginEntityX.Investor
AcanrequireInvestorBtosellitsinterestinEntityXifInvestorAweretosellitsinterestonafuturedate.Thatis,InvestorAcandragInvestorBintothesaletransaction.SECstaffmembers
haveindicatedthatthepresenceofdrag-alongrightsamonginvestorsrepresentssubsequent
collaborationandwilllikelycausethoseinvestorstobeconsideredpartofthecollaborative
group.
• Tag-AlongRights—Atag-alongrightgrantsashareholdertheoptiontoparticipateinasale
ofsharesbythecontrollingshareholderorcollaborativegroup,generallyunderthesameterms
andinthesameproportion.Forexample,InvestorCandDareinvestinginEntityY.InvestorC
canparticipateinanytransactionwithInvestorDifInvestorDdecidestosellitsinterestinEntity
Yonafuturedate.Thatis,InvestorCcantagalongwithInvestorDinthesaletransaction.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 158/286145
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SECstaffmembershaveindicatedthatthepresenceoftag-alongrightsamonginvestorsmay
representsubsequentcollaborationandmaycausethoseinvestorstobeconsideredpartofthe
collaborativegroup.
Subsequent Collaboration — Disproportionate or Special Rights
9.12 SECstaffcommentshavesuggestedthatanyright,includingoneconsideredaprotectiverightunderIssue96-16,mayrepresentaspecialrightindicatingsubsequentcollaboration.SECstaff
commentshavealsoindicatedthatcontractualtermsthatprovideneworpreexistinginvestorswith
guaranteedboardseats,evenwhentheseatsareproportionatetotheequityheld,maybedeemeda
specialrightindicatingsubsequentcollaboration.
Subsequent Collaboration — Transferability Restrictions
9.13 SECstaffcommentshavesuggestedthatanytransferrestrictions,otherthanthoseprovidedby
securitieslaw,mayindicatesubsequentcollaboration.
Advisory or Management Committees
9.14 TheSECstaffhasquestionedwhetheradvisorygroupsormanagementcommitteesestablishedtoadviseentities,ortootherwisebeinvolvedwiththemafterapurchasetransactionthatresultedina
TopicD-97analysis,indicatedsubsequentcollaborationbytheinvestors.
Other Considerations
9.15 WhilethefollowingitemswerenotdiscussedwithmembersoftheSECstaff,theyshouldalsobe
consideredwhendeterminingwhichinvestorstoanalyzeunderTopicD-97:
• StubInvestors—Footnote2ofTopicD-97states,“Preexisting,orrollover,investorsshouldbe
evaluatedforinclusioninthecollaborativegrouponthesamebasisasnewinvestors.”Insome
transactions,certainparties(e.g.,managementoftheinvestee)holdsharesintheentitybefore
thetransactionandcontinuetoholdsharesintheentityafterthetransaction.Thesepartiesaresometimesreferredtoas“stub”investors.Certainstubinvestorsmaybeviewedasmutually
promotingthetransaction.Forexample,stubinvestorsthatholdmanagementpositionsin
theentitybothbeforeandafterthetransactioncouldbeperceivedashavingpromotedthe
transactionbecausetheymayhavebeenterminatediftheyhadnotactedtogetherwiththe
newinvestorstopromotethetransaction.
• LegalAgreementandContracts—Investorsmustcarefullyanalyzethelegalagreementsand
contractsthatdefinethetermsoftransactionsthatfallwithinthescopeofTopicD-97.For
example,investorsmustthoroughlyreviewshareholderagreementstoaccuratelydetermine
whetheracollaborativegroupispresent.Contractsthatshouldalsobeanalyzedincludemerger
orpurchaseandsalesagreements,monitoringormanagementagreements,registrationrights
agreements,proxyortenderofferstatements,LLCagreements,employmentagreements,and
othersrelevanttotheanalysis.IfatransactioninvolvingaTopicD-97analysisisreviewedbythe
SECstaff,thestaffmayrequestandreviewallcontractsassociatedwiththetransaction.
9.16 NotethattheSECstaffmayalsorequestatimelineindicatingwhenandhoweachinvestor
becameinvolvedinatransaction,aswellaswhenothereventsthatarerelatedtothetransaction
occurred(e.g.,whenfinancingwasobtainedandotheragreementsweresigned).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 159/286146
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Determining Whether a Company Has Become Substantially Wholly Owned
9.17 TopicD-97statesthat“[i]ndeterminingwhetheracompanyhasbecomesubstantiallywholly
owned,theSECstaffhasstatedthatpush-downaccountingwouldberequiredif95percentormore
ofthecompanyhasbeenacquired(unlessthecompanyhasoutstandingpublicdebtorpreferredstock
thatmayimpacttheacquirer’sabilitytocontroltheformofownershipofthecompany),permittedif
80percentto95percenthasbeenacquired,andprohibitediflessthan80percentofthecompanyis
acquired.”
9.18 SECRegulationS-X,Rule1-02(aa),statesthat“[t]heterm‘whollyownedsubsidiary’means
asubsidiarysubstantiallyallofwhoseoutstandingvotingsharesareownedbyitsparentsand/orthe
parent’sotherwhollyownedsubsidiaries.”Althoughtheterm“substantiallywhollyowned”isdefined
inSECregulationsinthecontextofoutstandingvotingsecurities,theSECstaffmayrequireaparent’s
investmentinasubsidiaryotherthanthroughoutstandingvotingsecurities(e.g.,throughnonvoting
securitiesorinstrumentsthatareconvertibleintovotingsecurities)tobeanalyzedinthedetermination
ofwhetherpush-downaccountingshouldbeappliedonanif-convertedbasis.
9.19 BecausetheSECstaff’sviewsonthissubjectareuncertain,consultationwithprofessionals
whofrequentlyanalyzebusinesscombinationtransactionsisencouragedforaparentthatholdsother
outstandingequityordebtsecuritiesorwhenrightstoequityordebtsecuritiesandtheconsideration
ofsuchinstrumentsmayleadtoadifferentconclusionabouttheapplicationofpush-downaccounting
onthebasisofthethresholdsnotedin9.02.Apre-filingconsultationwiththeSECstaffmayalsobe
advisable.
9.20 Ifregistrantsengageinaplannedacquisitionofvotingsharesofacompanyoveraperiodof
time,ananalysisshouldbeperformedaftereachacquisitionofvotingsharestodeterminewhetherthe
companyhasbecomesubstantiallywhollyowned.
Example 9-1
Determining When a Company Becomes Wholly Owned
RegistrantMhasanoptionwithCompanyW(alsoanSECregistrant)toacquirea20percentinterestinCompanyWeachyearforthenextfiveyears.Uponacquisitionoftheinitial20percentinterest,RegistrantMwillaccountforitsinterestinCompanyWasanequitymethodinvestment.Uponacquisitionofthesecond20percentinterest,RegistrantMwillcontinuetoaccountfortheinvestmentasanequitymethodinvestment(cumulativeinterestof40percent).Uponacquisitionofthethird20percentinterest(i.e.,thechangeincontrol),RegistrantMwillaccountforthetransactionasabusinesscombinationinaccordancewithStatement141(R)andwillbegintoconsolidateCompanyW(cumulativeinterestof60percent).InaccordancewithStatement160,therewillbenoincrementalstep-uptofairvalueofthenetassetsupontheacquisitionofthefourth20percentinterest.Further,Mhasnotyetelectedtoapplypush-downaccounting.Uponconsummationoftheremaining20percent,RegistrantMwillberequiredtoapplypush-downaccountingintheseparatefinancialstatementsofCompanyWsinceitisnowsubstantiallywhollyowned(i.e.,cumulativeinterestisequal
toorgreaterthan95percent).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 160/286147
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Evaluating the Availability of the Public Debt Exception
9.21 Thefollowinggeneralguidelinesshouldbeconsideredintheevaluationofwhetheroutstanding
publicdebtoftheacquiredentityqualifiesforconsiderationundertheexceptiondiscussedinQuestion
2ofSABTopic5.J.
• Toqualify,thepublicdebtmustbeissuedbytheacquiredentitybeforethedateofacquisition
andmustremainoutstandingafterthedateofacquisition.Publicdebtissuedincontemplation
oftheacquisition,evenifitreplacesotherpublicdebtthenoutstanding,isnotlikelytoqualify
fortheexception.
• Ifthepublicdebtqualifyingfortheexceptionissubsequentlyredeemedandnoothercondition
preventingtheapplicationofpush-downaccountingisthenpresent,push-downaccounting
mustbereflectedretrospectively.
9.22 Whenreferringtotheexistenceofoutstandingpublicdebt,SABTopic5.Jdoesnotusethe
term“significant.”Atthe1999AICPANationalConferenceonCurrentSECDevelopments,anSEC
staffmember(EricW.Casey)addressedtheapplicationofpush-downaccountingwhenpublicdebtisoutstanding.Inpreparedremarks,Mr.Caseyindicatedthat“whileSAB54[SABTopic5.J]doesnot
explicitlyrefertosignificanceofpublicdebt,thestaffbelievesthatitisreasonableandconsistent
withthegeneralprinciplesofSAB54[SABTopic5.J]toconsiderthesignificanceofpublicdebtin
assessingtheapplicabilityofpushdownaccounting.”Mr.Caseyfurthernotedthat“[i]nevaluatingthe
significanceofpublicdebt,thestaffbelievesthatitisreasonabletoconsiderboththequantitativeand
qualitativesignificanceofthepublicdebt.”Mr.Caseyofferedthefollowingillustrationofaquantitative
andqualitativeanalysisofpubliclyhelddebt,concludingthatthedebtwasneitherquantitatively
norqualitativelysignificantandthusdidnotconstituteareason,initself,nottoapplypush-down
accountingasotherwiserequired:
Quantitatively,thedebtamountedtoapproximately5percentofthesubsidiary’snetbookvalueandlessthan1percentofthesubsidiary’sfairvalue.Thedebtholders,intheaggregate,wouldhold
anapproximately1percentinterestinthesubsidiaryonanas-if-convertedbasis.Qualitatively,the
debtholdershadvirtuallynoabilitytocontrolorinfluencetheformoftheparent’sownershipof
itssubsidiary,nordidthedebtholdershaveconsentrightsregardingthebuyingoutoftheexisting
minorityinterests,issuingsubsidiaryequity,orthesubsidiarypayingdividends.
9.23 Asindicatedabove,qualitativefactorstheSECstaffhashistoricallyconsideredincludethe
percentageof(1)publicdebtinrelationtothesubsidiary’snetbookvalue,(2)publicdebtinrelationto
thesubsidiary’sfairvalue,and(3)commonownershipthatconvertiblepublicdebtorpreferredstock
wouldequatetoonan“ifconverted”basis.
Evaluating the Availability of the Preferred Stock Exception
9.24 Thesamegeneralguidelinesin 9.21shouldbefollowedwhenevaluatingwhetheroutstanding
preferredstockqualifiesforconsiderationundertheexceptiondiscussedinQuestion2ofSABTopic5.J.
Aswithoutstandingpublicdebt,referencestotheexistenceofpreferredstockinSABTopic5.Jdonot
includetheterm“significant.”ByanalogytotheSECstaff’sremarksonoutstandingpublicdebt(see
9.22),foroutstandingpreferredstocktoqualifyfortheexception,thepreferredstockmustbedeemed
significant.TheSECstaffdoesnotappeartohavecommentedonwhetherthedeterminationof
significanceshouldbebasedsolelyonaquantitativeanalysisoronbothaquantitativeandaqualitative
analysis.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 161/286148
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Subsequent Application of Push-Down Accounting
9.25 AttheApril2005AICPASECRegulationsCommitteeJointMeetingWiththeSECStaff,theSEC
staffnotedachangeinitspositionregardingwhetheraregistrantcouldapplypush-downaccounting
afteraninitialelectionnottoapplyit.Ifanentitysubsequentlyelectstoapplypush-downaccounting,
theSECstaffstatedthatapreferabilityletterwouldberequiredandthattheelectionofsuch“changein
entity”accountingwouldrequireretroactiveapplication.ThispositionwasreiteratedbyAssociateChief
AccountantLeslieOvertonoftheSEC’sDivisionofCorporationFinanceatthe2006AICPANational
ConferenceonCurrentSECandPCAOBDevelopments.
9.26 TheSECstafffurtherstatedthatifaregistrantweretoapplypush-downaccountinginaninterim
periodaftertheissuanceofannualfinancialstatements,theninfuture1933Actfilings,theregistrant
wouldberequiredtorestatethoseannualfinancialstatementsincludedorincorporatedbyreferencein
sucharegistrationstatementoraproxystatement.
Push-Down of Goodwill to a Subsidiary of an Acquired Company
9.27 Ifanacquirerchoosestoapplypush-downaccountingtotheassetsandliabilitiesofasubsidiary
ofacompany(parent)itpurchases,thenitshouldalsopushdownthegoodwillthatresultedfrom
thepurchasetotheparent’ssubsidiary.Itisinappropriatetorecordtheassetsacquiredandliabilities
assumedatfairvaluewithoutrecordingthegoodwillthatresultedfromthetransaction.Whileallofthe
goodwillfromsuchanacquisitionwouldhavetobepusheddowntothesubsidiary,itmaybeassigned
todifferentreportingunits.
Example 9-2
Push Down of Goodwill to a Subsidiary of an Acquired Company
OnJuly1,20X7,CompanyA,anSECregistrant,acquired100percentofCompanyDfor$5million.CompanyDhastwowhollyownedoperatingsubsidiaries,SubsidiaryXandSubsidiaryY.CompanyDisaholdingcompanywithnosubstantiveoperations.
AspartofthebusinesscombinationaccountingfortheacquisitionofD(andestablishmentofanewbasisofaccounting),Arecorded$1.5millionofgoodwill.WhenpreparingD’sseparatefinancialstatements,ApusheddownitscostofacquiringDtotheacquiredassetsandassumedliabilitiesofDinaccordancewithSABTopic5.J.ThiscostwasfurtherpusheddowntoXandYinthepreparationoftheirseparatefinancialstatements.Inaddition,thegoodwillwasrecognizedintheseparateGAAPfinancialstatementsofXandYbecauseAbelievesthegoodwillwasgeneratedattheXandYlevels.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 162/286149
Section 10 — Subsequent Accounting forIntangible Assets (Other Than Goodwill)
Finite Useful Life Versus Indefinite Useful Life
10.01 InAppendixFofStatement142,“intangibleassets”aredefinedas“[a]ssets(notincludingfinancialassets)thatlackphysicalsubstance.”Amongintangibleassetsrecognizedapartfromgoodwill
inabusinesscombinationoracquiredindividuallyorwithagroupofotherassets,intangibleassetsthat
aresubjecttoamortization(finite-lived)aredistinguishedunderStatement142fromthosethatarenot
subjecttoamortization(indefinite-lived)onthebasisoftheintangibleasset’sexpectedusefullifetothe
reportingentity.Theterm“intangibleassets”referstointangibleassetsotherthangoodwill.
10.02 Thefollowingtablehighlightssomedifferencesbetweenfinite-livedandindefinite-lived
intangibleassets.
Finite-Lived Intangible Assets Indefinite-Lived Intangible Assets
Characteristics Expectedusefullifetothereportingentityislimited.
Nolegal,regulatory,contractual,competitive,economic,orotherfactorslimittheusefullifetothereportingentity.
Amortization period Overtheexpectedusefullifetothereportingentity.
Notapplicable.
Amortization method Onthebasisofthepatterninwhichtheeconomicbenefitsareconsumedorotherwiseusedup.Ifthatpatterncannotbereliablydetermined,astraight-lineamortizationmethodshouldbeused.
Notapplicable.
Impairment testing TestedforimpairmentinaccordancewithStatement144.
Testingrequiredwhenevereventsorcircumstancesindicatethatthecarryingamountofalong-livedasset(assetgroup)maynotberecoverable.Impairmentlossisrecognizedifthecarryingamountoftheassetorassetgrouptestedisnotrecoverableanditscarryingamountexceedsitsfairvalue(two-steptest).
TestedforimpairmentinaccordancewithStatement142.
Testingrequiredannuallyormorefrequentlyifeventsorchangesincircumstancesindicatethattheassetmightbeimpaired.Impairmentlossisrecognizedifthecarryingamountoftheassetexceedsitsfairvalue(one-steptest).Issue02-7providesguidanceontheunitofaccountingtoapply(see10.45–10.50).
Internally Developed Intangible Assets
10.03 Generally,researchanddevelopmentcostsareexpensedasincurredforinternallydeveloped
intangibles.Paragraph10ofStatement142statesthat“[c]ostsofinternallydeveloping,maintaining,
orrestoringintangibleassets(includinggoodwill)thatarenotspecificallyidentifiable,thathave
indeterminatelives,orthatareinherentinacontinuingbusinessandrelatedtoanentityasawhole,
shallberecognizedasanexpensewhenincurred.”Seediscussionin5.26onguidancerelatedto
theaccountingforin-processresearchanddevelopmentintangibleassetsacquiredinabusiness
combination.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 163/286150
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Determining the Useful Life of an Intangible Asset
10.04 Paragraph11ofStatement142,asamendedbyFSPFAS142-3,states,inpart:
Theaccountingforarecognizedintangibleassetisbasedonitsuseful life tothereportingentity.An
intangibleassetwithafiniteusefullifeisamortized;anintangibleassetwithanindefiniteusefullifeis
notamortized.Theusefullifeofanintangibleassettoanentityistheperiodoverwhichtheassetisexpectedtocontributedirectlyorindirectlytothefuturecashflowsofthatentity.[Footnoteomitted]
Theestimateoftheusefullifeofanintangibleassettoanentityshallbebasedonananalysisofall
pertinentfactors,inparticularthefollowingfactorswithnoonefactorbeingmorepresumptivethan
theother:
a. Theexpecteduseoftheassetbytheentity[see10.07–10.08]
b. Theexpectedusefullifeofanotherassetoragroupofassetstowhichtheusefullifeofthe
intangibleassetmayrelate[see10.09]
c. Anylegal,regulatory,orcontractualprovisionsthatmaylimittheusefullife[see10.10–10.11]
d. Theentity’sownhistoricalexperienceinrenewingorextendingsimilararrangements
(consistentwiththeintendeduseoftheassetbytheentity),regardlessofwhetherthose
arrangementshaveexplicitrenewalorextensionprovisions.Intheabsenceofthatexperience,theentityshallconsidertheassumptionsthatmarketparticipantswoulduseaboutrenewalor
extension(consistentwiththehighestandbestuseofassetbymarketparticipants),adjusted
forentityspecificfactorsinthisparagraph.[see10.12–10.16]
e. Theeffectsofobsolescence,demand,competition,andothereconomicfactors(suchasthe
stabilityoftheindustry,knowntechnologicaladvances,legislativeactionthatresultsinan
uncertainorchangingregulatoryenvironment,andexpectedchangesindistributionchannels)
[see10.17–10.18]
f. Thelevelofmaintenanceexpendituresrequiredtoobtaintheexpectedfuturecashflowsfrom
theasset(forexample,amateriallevelofrequiredmaintenanceinrelationtothecarrying
amountoftheassetmaysuggestaverylimitedusefullife).[Footnoteomitted][see10.19–
10.20]
10.05 Entitiescommonlyuseanincomeapproachtomeasurethefairvalueofanintangibleasset.This
valuationtechniqueincorporatesassumptionsabouttheasset’sexpectedcashflows,whichtheentity
shouldconsiderwhendeterminingtheusefullifeofanintangibleasset,adjustedasappropriateforthe
entity-specificfactorsinparagraphs11(a)–(f)notedabove.Dependingontheintangibleasset’slegal,
regulatory,andcontractualprovisions,theanalysismaybenefitfromtheassistanceofspecialists.
10.06 Thefollowingfactorsarenot,inthemselves,sufficienttosupportauseful-lifedetermination:
• ExamplesinStatement142—TheimplementationguidanceonintangibleassetsinAppendix
AofStatement142includesexamplesthatdescribe“anacquiredintangibleassetandthe
factsandcircumstancessurroundingthedeterminationofitsusefullifeandthesubsequentaccountingbasedonthatdetermination.”Intheseexamples,anindefiniteusefullifeis
determinedforanacquiredbroadcastlicense,anacquiredairlinerouteauthority,andan
acquiredtrademark.However,paragraphA1ofAppendixAstatesthat“[t]hefactsand
circumstancesuniquetoeachacquiredintangibleassetneedtobeconsideredinmakingsimilar
determinations.”Therefore,theexamplesdonotnecessarilyapplytoothersituations.
• RelianceonIndustryorOtherPractices—Intangibleassettypesmaybecommontoentities
ingeneral(e.g.,atradename)ortoentitiesinaspecificindustry(e.g.,newspapermastheads,
operatingandbroadcastingrights).Sinceparagraph11ofStatement142statesthat“[t]he
usefullifeofanintangibleassettoanentityistheperiodoverwhichtheassetisexpectedto
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 164/286151
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
contributedirectlyorindirectlytothefuturecashflowsofthatentity,”useful-lifeassessments
madebyoneentitywouldnotnecessarilyapplytoanother.
• Useful-LifeDeterminationBasedonAnotherIntangibleAssetWithintheSameIntangible
AssetClass—AppendixFofStatement142defines“intangibleassetclass”as“[a]group
ofintangibleassetsthataresimilar,eitherbytheirnatureorbytheiruseintheoperations
ofanentity.”Intangibleassetclassescouldbe,foraspecificentity,tradenames,newspapermastheads,operatingrights,orbroadcastrights.Sincepertinentfactorsmayvary,theuseful-life
determinationforanintangibleassetinaspecificintangibleassetclassisnotdeterminativefor
anyotherintangibleassetwithinthatclass.
Analyzing the Expected Use of the Asset
10.07 Accordingtoparagraph11(a)ofStatement142,indeterminingtheusefullifeofanintangible
asset,anentitymustanalyzethe“expecteduseoftheasset.”
10.08 Example9inparagraphA1ofStatement142illustratestheimpactofachangeintheexpected
useofanassetonthedeterminationofusefullifebyanentityholdingthatasset:
A trademark for a line of automobiles that was acquired several years ago in an acquisition
of an automobile company. Thelineofautomobileshadbeenproducedbytheacquiredentityfor
35yearswithnumerousnewmodelsdevelopedunderthetrademark.Attheacquisitiondate,the
acquiringentityexpectedtocontinuetoproducethatlineofautomobiles,andananalysisofvarious
economicfactorsindicatedtherewasnolimittotheperiodoftimethetrademarkwouldcontribute
tocashflows.Becausecashflowswereexpectedtocontinueindefinitely,thetrademarkwasnot
amortized.Managementrecentlydecidedtophaseoutproductionofthatautomobilelineoverthe
nextfouryears.
Becausetheusefullifeofthatacquiredtrademarkisnolongerdeemedtobeindefinite,the
trademarkwouldbetestedforimpairmentinaccordancewithparagraph17ofthisStatement.
Thecarryingamountofthetrademarkafteradjustment,ifany,wouldthenbeamortizedoverits
remainingfour-yearusefullifefollowingthepatterninwhichtheexpectedbenefitswillbeconsumed
orotherwiseusedup.Becausethetrademarkwillbesubjecttoamortization,inthefutureitwouldbe
reviewedforimpairmentunderStatement144.
Analyzing the Relationship of the Intangible Asset to Other Assets
10.09 Accordingtoparagraph11(b)ofStatement142,determiningtheusefullifeofanintangible
assetrequiresanalysisofthe“expectedusefullifeofanotherassetoragroupofassetstowhichthe
usefullifeoftheintangibleassetmayrelate.”Therelationshipofanintangibleassettoanotherassetor
groupofassetswithashorterusefullifemaylimittheusefullifeofthatintangibleasset.
Example 10-1 Analyzing the Relationship of an Intangible Asset to Other Assets
Case A
Inrecordinganacquisition,CompanyAidentifiedanontransferablerightheldbytheacquiredentitytomanufactureaspecificproductinagivengeographicarea.Theremainingtermis10years,andAintendstousetherightforitsfullremainingterm.However,manufacturingtheproduct,whosesaleshavesteadilydeclinedinrecentyears,requiressignificantinvestmentinspecializedequipment.Theacquiredentityisusingspecializedequipmentwithanestimatedremainingusefullifeofeightyears.Becauseoftheproduct’sdecliningsalesandtheinvestmentnecessaryforreplacementequipment,Adoesnotintendtoreplacethespecializedequipmentattheendofitsestimatedusefullife.Althoughthemanufacturingrighthasaremainingcontractualtermof10years,the8-yeartermofthespecializedequipment,alongwithmanagement’sintentionregardingreplacementequipment,wouldeffectivelylimittheusefullifeoftherighttoaperiodshorterthanitsremainingcontractualterm.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 165/286152
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 10-1 (continued)
Analyzing the Relationship of an Intangible Asset to Other Assets
Case B
Inrecordinganacquisition,CompanyBidentifiedaperpetualrightheldbytheacquiredentitytoproduceelectricpowerinagivengeographicarea.Pursuanttothisright,Bwillcontinuetoproduceelectricpoweratanexistingplantafterthe
acquisition.CompanyBintendstoreplacethisplantattheendofitsremainingusefullife,whichis30years.EvidencealsoindicatesthatBwillbeabletoconstructareplacementplantwhenneeded.Therefore,althoughtheestimatedusefullifeoftheexistingplantisshorterthantheperiodgrantedbytherighttoproduceelectricpower,theestimatedusefullifeoftherighttoproduceelectricpowerwouldnotbeshortened,becausemanagementhastheintentionandabilitytoconstructareplacementplant.
Analyzing Legal, Regulatory, or Contractual Provisions That May Limit Useful Life
10.10 Accordingtoparagraph11(c)ofStatement142,determiningtheusefullifeofanintangibleasset
requiresanalysisof“[a]nylegal,regulatory,orcontractualprovisionsthatmaylimittheusefullife.”
10.11 Examples4and5inparagraphA1ofStatement142illustratetheanalysisofthispertinent
factor:
An acquired broadcast license that expires in five years.Thebroadcastlicenseisrenewable
every10yearsifthecompanyprovidesatleastanaveragelevelofservicetoitscustomersand
complieswiththeapplicableFederalCommunicationsCommission(FCC)rulesandpoliciesand
theFCCCommunicationsActof1934.Thelicensemayberenewedindefinitelyatlittlecostand
wasrenewedtwicepriortoitsrecentacquisition.Theacquiringentityintendstorenewthelicense
indefinitely,andevidencesupportsitsabilitytodoso.Historically,therehasbeennocompelling
challengetothelicenserenewal.Thetechnologyusedinbroadcastingisnotexpectedtobereplaced
byanothertechnologyanytimeintheforeseeablefuture.Therefore,thecashflowsfromthatlicense
areexpectedtocontinueindefinitely.
Thebroadcastlicensewouldbedeemedtohaveanindefiniteusefullifebecausecashflowsare
expectedtocontinueindefinitely.Therefore,thelicensewouldnotbeamortizeduntilitsusefullifeis
deemedtobenolongerindefinite.Thelicensewouldbetestedforimpairmentinaccordancewith
paragraph17ofthisStatement.
TheFCCsubsequentlydecidesthatitwillnolongerrenewbroadcastlicenses,butratherwillauction
thoselicenses.AtthetimetheFCCdecisionismade,thebroadcastlicensehasthreeyearsuntilit
expires.Thecashflowsfromthatlicenseareexpectedtocontinueuntilthelicenseexpires.
Becausethebroadcastlicensecannolongerberenewed,itsusefullifeisnolongerindefinite.
Thus,theacquiredlicensewouldbetestedforimpairmentinaccordancewithparagraph17ofthis
Statement.Thelicensewouldthenbeamortizedoveritsremainingthree-yearusefullifefollowingthe
patterninwhichtheexpectedbenefitswillbeconsumedorotherwiseusedup.Becausethelicense
willbesubjecttoamortization,inthefutureitwouldbereviewedforimpairmentunderStatement
144.
Analyzing the Entity’s Own Historical Experience With Renewing or ExtendingSimilar Arrangements
10.12 Accordingtoparagraph11(d)ofStatement142,asamendedbyFSPFAS142-3,determiningthe
usefullifeofanintangibleassetrequiresanalysisof:
Theentity’sownhistoricalexperienceinrenewingorextendingsimilararrangements(consistentwith
theintendeduseoftheassetbytheentity),regardlessofwhetherthosearrangementshaveexplicit
renewalorextensionprovisions.Intheabsenceofthatexperience,theentityshallconsiderthe
assumptionsthatmarketparticipantswoulduseabouttherenewalorextension(consistentwiththe
highestandbestuseoftheassetbymarketparticipants),adjustedforentityspecificfactorsinthis
paragraph[see10.04].
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 166/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 167/286154
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Indeterminingtheusefullife,theacquiringentitywouldconsideritsownhistoricalexperiencein
renewingorextendingsimilarcustomerrelationships.Inthiscase,theacquiringentityconcludes
thatitscustomerrelationshipsaredissimilartotheacquiredcustomerrelationshipsand,therefore,
theacquiringentitylackshistoricalexperienceinrenewingorextendingsimilararrangements.
Accordingly,theacquiringentityconsidersturnoverassumptionsthatmarketparticipantswouldmake
abouttherenewalorextensionoftheacquiredcustomerrelationshipsorsimilararrangements.
Analyzing the Effects of Obsolescence, Demand, Competition, and Other EconomicFactors
10.17 Accordingtoparagraph11(e)ofStatement142,anentityestimatestheusefullifeofan
intangibleassetbyanalyzing“[t]heeffectsofobsolescence,demand,competition,andothereconomic
factors(suchasthestabilityoftheindustry,knowntechnologicaladvances,legislativeactionthatresults
inanuncertainorchangingregulatoryenvironment,andexpectedchangesindistributionchannels).”
10.18 Example3inparagraphA1ofStatement142illustratestheanalysisofthispertinentfactor:
An acquired copyright that has a remaining legal life of 50 years.Ananalysisofconsumer
habitsandmarkettrendsprovidesevidencethatthecopyrightedmaterialwillgeneratecashflowsforapproximately30moreyears.
Thecopyrightwouldbeamortizedoverits30-yearestimatedusefullifefollowingthepatterninwhich
theexpectedbenefitswillbeconsumedorotherwiseusedupandreviewedforimpairmentunder
Statement144.
Analyzing the Level of Maintenance Expenditures
10.19 Accordingtoparagraph11(f)ofStatement142,anentityestimatestheusefullifeofan
intangibleassetbyanalyzing“[t]helevelofmaintenanceexpendituresrequiredtoobtaintheexpected
futurecashflowsfromtheasset(forexample,amateriallevelofrequiredmaintenanceinrelationtothe
carryingamountoftheassetmaysuggestaverylimitedusefullife).[Footnote10]”
10.20 Footnote10states,“Asindeterminingtheusefullifeofdepreciabletangibleassets,regular
maintenancemaybeassumedbutenhancementsmaynot.”
Determining Whether an Intangible Asset Has an Indefinite Useful Life
10.21 Paragraph11ofStatement142statesthat“[i]fnolegal,regulatory,contractual,competitive,
economic,orotherfactorslimittheusefullifeofanintangibleassettothereportingentity,theuseful
lifeoftheassetshallbeconsideredtobeindefinite.Thetermindefinite doesnotmeaninfinite.”
10.22 Incertaincasesthetermsoftheentity’suseoftheasset(e.g.,trademark)maybeindefinite,butthecontinuedabilityoftheassettogeneratecashflowsmaynotbeindefinitebecauseoftheeffects
ofpertinentfactorsnotedinparagraph11(a)–(f)ofStatement142(see10.04),suchasobsolescence,
demand,competition,andotherfactors.Foranintangibleassettobeconsideredtohaveanindefinite
usefullife,therecanbenoforeseeablelimitontheperiodoverwhichtheassetisexpectedtocontribute
tothecashflowsofthereportingentity.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 168/286155
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Intangible Assets Subject to Amortization
10.23 Paragraph12ofStatement142states:
Arecognizedintangibleassetshallbeamortizedoveritsusefullifetothereportingentityunless
thatlifeisdeterminedtobeindefinite.Ifanintangibleassethasafiniteusefullife,buttheprecise
lengthofthatlifeisnotknown,thatintangibleassetshallbeamortizedoverthebestestimateofitsusefullife.Themethodofamortizationshallreflectthepatterninwhichtheeconomicbenefitsofthe
intangibleassetareconsumedorotherwiseusedup.Ifthatpatterncannotbereliablydetermined,a
straight-lineamortizationmethodshallbeused.Anintangibleassetshallnotbewrittendownoroff
intheperiodofacquisitionunlessitbecomesimpairedduringthatperiod.[Footnote11]
Footnote11providesthat“bothStatement2andInterpretation4requireamountsassignedtoacquired
intangibleassetsthataretobeusedinaparticularresearchanddevelopmentprojectandthathaveno
alternativefutureusetobechargedtoexpenseattheacquisitiondate.”
10.24 Paragraph13ofStatement142states:
Theamountofanintangibleassettobeamortizedshallbetheamountinitiallyassignedtothatassetlessanyresidual value.Theresidualvalueofanintangibleassetshallbeassumedtobezerounless
attheendofitsusefullifetotheentitytheassetisexpectedtocontinuetohaveausefullifeto
anotherentityand(a)thereportingentityhasacommitmentfromathirdpartytopurchasetheasset
attheendofitsusefullifeor(b)theresidualvaluecanbedeterminedbyreferencetoanexchange
transactioninanexistingmarketforthatassetandthatmarketisexpectedtoexistattheendofthe
asset’susefullife.
10.25 AppendixFofStatement142defines“residualvalue”as“[t]heestimatedfairvalueofan
intangibleassetattheendofitsusefullifetoanentity,lessanydisposalcosts.”
Determining the Useful Life of an Intangible Asset Subject to Amortization Each
Reporting Period
10.26 Paragraph14ofStatement142statesthat“[a]nentityshallevaluatetheremaininguseful
lifeofanintangibleassetthatisbeingamortizedeachreportingperiodtodeterminewhetherevents
andcircumstanceswarrantarevisiontotheremainingperiodofamortization.”Accordingly,afterthe
initialdeterminationofusefullife,anentitymustidentifyandevaluateeventsorcircumstancesthat,
ifoccurringafterorchangedfromthepreviousdetermination,mayaffecttheremainingusefullife.
Someeventsorcircumstanceswillrepresentdiscreteandeasilyidentifiableeventstowhichtheentity
shouldreadilyrespond(e.g.,achangeinregulation).Othereventsorcircumstancesmaydevelopmore
graduallybutmustbemonitoredbytheentity(e.g.,obsolescence,competition,demand).
Accounting for a Change in Remaining Useful Life of an Intangible Asset Subject toAmortization
10.27 Paragraph14ofStatement142states:
Iftheestimateofanintangibleasset’sremainingusefullifeischanged,theremainingcarrying
amountoftheintangibleassetshallbeamortizedprospectivelyoverthatrevisedremainingusefullife.
Ifanintangibleassetthatisbeingamortizedissubsequentlydeterminedtohaveanindefiniteuseful
life,theassetshallbetestedforimpairmentinaccordancewithparagraph17.[Fortherequirements
fortestingofintangibleassetsnotsubjecttoamortization,see10.41.]Thatintangibleassetshallno
longerbeamortizedandshallbeaccountedforinthesamemannerasotherintangibleassetsthat
arenotsubjecttoamortization.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 169/286156
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Intangible Assets the Acquirer Intends Not to Use or to Use in a Way Other ThanTheir Highest and Best Use
10.28 Asnotedin5.09,inabusinesscombinationoranassetacquisition,anentitymayacquirean
intangibleassetthatitdoesnotintendtousetoitshighestandbestuse.ParagraphA59ofStatement
141(R)requirestheacquiringentityinabusinesscombinationtorecognizesuchassetsatfairvalue.For
example,anentitymayacquireacompetitor,includingitstradename,inabusinesscombination.In
suchsituations,theacquirermaydecidenottousetheacquiredentity’stradenamebecauseitdirectly
competeswithitsowntradename.Iftheacquirerwouldpreventothersfromusingtheacquiredtrade
name,thenthisassethasdefensivevaluebecauseitenhancesthevalueoftheacquirer’sowntrade
name(suchassetsarecommonlyreferredtoasdefensivevalueassets).
10.29 Issue08-7providesguidanceonthesubsequentaccountingfordefensivevalueassets,andit
requiresthatsuchassetsbeassignedausefullifeinaccordancewithparagraph11ofStatement142.
Webelievethatentitiesshouldaccountfortheusefullivesforacquiredassetsthattheydonotintend
toputtotheirhighestandbestuse,butwillnotactivelydefend,inasimilarmanner.TheTaskForce
providedthefollowingguidancetoassistintheusefullifedetermination:
Adefensiveintangibleassetshallbeassignedausefullifewhichreflectstheentity’sconsumption
oftheexpectedbenefitsrelatedtothatasset.Thebenefitareportingentityreceivesfromholdinga
defensiveintangibleassetisthe[directand]indirectcashflowsresultingfromtheentitypreventing
othersfromrealizinganyvaluefromtheintangibleasset(defensivelyorotherwise).Anentityshall
determineadefensiveintangibleasset’susefullife,thatis,theperiodoverwhichanentityconsumes
theexpectedbenefitsoftheasset,byestimatingtheperiodoverwhichthedefensiveintangible
assetwilldiminishinfairvalue.Theperiodoverwhichadefensiveintangibleassetdiminishesinfair
valueisaproxyfortheperiodoverwhichthereportingentityexpectsadefensiveintangibleassetto
contribute[directlyor]indirectlytothefuturecashflowsoftheentity.
Itwouldberareforadefensiveintangibleassettohaveanindefinitelifebecausethefairvalueofthe
defensiveintangibleassetwillgenerallydiminishovertimeasaresultofalackofmarketexposureoras
aresultofcompetitiveorotherfactors.Inaddition,ifanacquiredintangibleassetmeetsthedefinition
ofadefensiveintangibleasset,itcannotbeconsideredimmediatelyabandoned.
Recognition and Measurement of an Impairment Loss for Intangible Assets Subjectto Amortization
10.30 Paragraph15ofStatement142states:
Anintangibleassetthatissubjecttoamortizationshallbereviewedforimpairmentinaccordance
withFASBStatementNo.144,AccountingfortheImpairmentorDisposalofLong-LivedAssets ,
byapplyingtherecognitionandmeasurementprovisionsinparagraphs7–24ofthatStatement.InaccordancewithStatement144,animpairmentlossshallberecognizedifthecarryingamountofan
intangibleassetisnotrecoverableanditscarryingamountexceedsitsfairvalue.Afteranimpairment
lossisrecognized,theadjustedcarryingamountoftheintangibleassetshallbeitsnewaccounting
basis.Subsequentreversalofapreviouslyrecognizedimpairmentlossisprohibited.
10.31 UnderStatement144,long-livedassets(includingfinite-livedintangibleassets)aretestedfor
recoverabilityattheassetgrouplevelwhenevereventsorchangesincircumstancesindicatethattheir
carryingamountsmaynotberecoverable.Paragraph8ofStatement144includesalistoffactorsthat
mayindicatesuchachangeinfactsandcircumstances(see10.42).Atwo-steptestisusedtoassess
long-livedassetsforimpairment.Instep1,recoverabilityoftheassetgroupisdeterminedbycomparing
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 170/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 171/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 172/286159
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 10-2
In-Process Research and Development Intangible Assets Acquired in a Business Combination
Case A
OnJune30,20X9,CompanyAacquiresCompanyBinatransactionaccountedforasabusinesscombination.Beforetheacquisition,BhadincurredsignificantcostsrelatedtotheR&Dofanewproduct,allofwhichitexpensedasincurredin
accordancewithStatement2.CompanyAplanstocontinuetheseR&Deffortsinhopesofcommercializingtheproductinthefuture.
Usingtheacquisitionmethodofaccounting,andinamannerconsistentwiththefairvaluemeasurementguidanceinStatement157,AcalculatesthefairvalueoftheacquiredIPR&Dassetsas$10million.Therefore,asoftheacquisitiondate,Awouldrecordanindefinite-livedintangibleassetfor$10million.
OnJuly1,20Y2,AconcludesthatdevelopmentofthenewproductisnolongerfeasibleanddecidestoabandonitsprojectbecausethereisnoalternativefutureusefortheacquiredIPR&D.
FromJune30,20X9,toJune30,20Y2,AappropriatelytestedtheacquiredIPR&Dasset($10million)forimpairmentinaccordancewithparagraph17ofStatement142anddidnotrecordanyimpairmentlosses.
Becauseofitsplanstonowabandontheproject,andthefactthattheIPR&Dassetshavenoalternativefutureuse,AwouldexpensetheentireIPR&Dassetbalanceof$10milliononJuly1,20Y2(thedateofabandonment),intheincomestatement.
Case BAssumethesamefactsasinCaseAbutwiththefollowingexception:onJuly1,20Y2,CompanyAsuccessfullycompletesitsIPR&Dprojectandhasdevelopedacommerciallyviableproductthatitintendstosellinthemarketplace.
Pertheexampleabove,fromJune30,20X9,toJuly1,20Y2,AappropriatelytestedtheacquiredIPR&Dasset($10million)forimpairmentinaccordancewithparagraph17ofStatement142anddidnotrecordanyimpairmentlosses.
NowAisrequiredtoassesstheusefullifeoftheacquiredIPR&DassetasofJuly1,20Y2(thedatetheIPR&Dprojectissuccessfullycompleted),andamortizetheassetovertherelatedproducts’usefullives.Inotherwords,theacquiredIPR&Dasset’susefullifeisnowfiniteratherthanindefinite.Inaddition,thereclassificationtoafiniteusefullifetriggersarequiredimpairmenttestinaccordancewithparagraph16ofStatement142(see 10.38)asofJuly1,20Y2.
Recognition and Measurement of an Impairment Loss for Intangible Assets NotSubject to Amortization
10.41 Paragraph17ofStatement142statesthat:
Anintangibleassetthatisnotsubjecttoamortizationshallbetestedforimpairmentannually,ormore
frequentlyifeventsorchangesincircumstancesindicatethattheassetmightbeimpaired.(Paragraph
8ofStatement144includesexamplesofimpairmentindicators.)Theimpairmenttestshallconsistof
acomparisonofthefairvalueofanintangibleassetwithitscarryingamount.Ifthecarryingamount
ofanintangibleassetexceedsitsfairvalue,animpairmentlossshallberecognizedinanamount
equaltothatexcess.Afteranimpairmentlossisrecognized,theadjustedcarryingamountofthe
intangibleassetshallbeitsnewaccountingbasis.Subsequentreversalofapreviouslyrecognized
impairmentlossisprohibited.
10.42 Paragraph8ofStatement144liststhefollowingeventsorcircumstancesthatcanindicatethatanasset’scarryingamountmaynotberecoverable:
a. Asignificantdecreaseinthemarketpriceofalong-livedasset(assetgroup)
b. Asignificantadversechangeintheextentormannerinwhichalong-livedasset(assetgroup)
isbeingusedorinitsphysicalcondition
c. Asignificantadversechangeinlegalfactorsorinthebusinessclimatethatcouldaffectthe
valueofalong-livedasset(assetgroup),includinganadverseactionorassessmentbya
regulator
d. Anaccumulationofcostssignificantlyinexcessoftheamountoriginallyexpectedforthe
acquisitionorconstructionofalong-livedasset(assetgroup)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 173/286160
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
e. Acurrent-periodoperatingorcashflowlosscombinedwithahistoryofoperatingorcash
flowlossesoraprojectionorforecastthatdemonstratescontinuinglossesassociatedwiththe
useofalong-livedasset(assetgroup)
f. Acurrentexpectationthat,morelikelythannot ,along-livedasset(assetgroup)willbesold
orotherwisedisposedofsignificantlybeforetheendofitspreviouslyestimatedusefullife.
[Footnoteomitted]
10.43 See13.31fordisclosurerequirementsforintangibleassetimpairments.
Timing of the Annual Impairment Test
10.44 Althoughparagraph17ofStatement142doesnotexplicitlyrequireit,entitieswithintangible
assetsnotsubjecttoamortizationareexpectedtoselectarecurringdatefortestingeachindefinite-lived
intangibleassetorunitofaccountingasdeterminedunderIssue02-7.Becauseofthelackofaspecific
requirement,however,ifanentitychangesthisrecurringdate,itdoesnothavetoevaluatethechange
asanaccountingchangeasrequiredbyparagraph26ofStatement142whentheannualtestingdate
forgoodwillischanged(see11.29).
Unit of Accounting for Impairment Testing of Indefinite-Lived Intangible Assets
10.45 Paragraph2ofIssue02-7states:
Questionshavearisenonwhattheappropriateunitofaccountingiswhentestingindefinite-lived
intangibleassetsforimpairment.Someentitiesacquireintangibleassetsinseparatetransactions;
however,thoseindividualassetsarecollectivelyusedinamannerthatsuggeststheyrepresentone
asset.Forexample,anentitymightacquire,inseparatetransactions,contiguouseasementsto
supportdevelopmentofasinglegaspipeline.Infactpatternssuchasthose,thequestioniswhether
thecollectionoflegalrightsshouldbedeemedasingleunitofaccountingforimpairmenttesting
purposes(aneasementsupportingapipeline)orwhethereachindividuallyacquiredlegalright
shouldbeseparatelytestedforimpairment.Questionsalsohavebeenraisedastowhen,ifever,
differentindefinite-livedintangibleassetsshouldbecombinedintoasingle“unitofaccounting”for
impairmenttestingpurposes.Anexampleiswhetheritiseverappropriatetocombine(a)different
tradenames,(b)atradenameandadifferenttypeofindefinite-livedintangibleassetsuchasan
easement,or(c)allindefinite-livedintangibleassetsandtestthecombinedassetforimpairment.
10.46 Paragraph3ofIssue02-7statesthat“[t]heissueiswhattheunitofaccountingshouldbe
forpurposesoftestingindefinite-livedintangibleassetsforimpairmentpursuanttoparagraph17of
Statement142.”
10.47 Paragraph4ofIssue02-7states:
TheTaskForcereachedaconsensusthatseparatelyrecordedindefinite-livedintangibleassets,
whetheracquiredorinternallydeveloped,shouldbecombinedintoasingleunitofaccountingfor
purposesoftestingimpairmentiftheyareoperatedasasingleassetand,assuch,areessentially
inseparablefromoneanother.TheTaskForceagreedthatdeterminingwhetherseveralindefinite-lived
intangibleassetsareessentiallyinseparableisamatterofjudgmentthatdependsontherelevant
factsandcircumstancesandthattheindicatorssetforthbelowshouldbeconsideredinmakingthat
determination.TheTaskForceagreedthatnoneoftheindicatorsshouldbeconsideredpresumptiveor
determinative.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 174/286161
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Indicators that two or more indefinite-lived intangible assets should be combined as a single
unit of accounting for impairment testing purposes:
• Theintangibleassetswerepurchasedinordertoconstructorenhanceasingleasset(thatis,
theywillbeusedtogether).
• Hadtheintangibleassetsbeenacquiredinthesameacquisitiontheywouldhavebeen
recordedasoneasset.
• Theintangibleassetsasagrouprepresentthehighestandbestuseoftheassets(forexample,
theyyieldthehighestpriceifsoldasagroup).Thismaybeindicatedif(a)itisunlikelythat
asubstantialportionoftheassetswouldbesoldseparatelyor(b)thesaleofasubstantial
portionoftheintangibleassetsindividuallywouldresultinasignificantreductioninthefair
valueoftheremainingassetsasagroup.
• Themarketingorbrandingstrategyprovidesevidencethattheintangibleassetsare
complementary,asthattermisusedinparagraphA16ofStatement141.
Indicators that two or more indefinite-lived intangible assets should not be combined as a
single unit of accounting for impairment testing purposes:
• Eachintangibleassetgeneratescashflowsindependentofanyotherintangibleasset(as
wouldbethecaseforanintangibleassetlicensedtoanotherentityforitsexclusiveuse).
• Ifsold,eachintangibleassetwouldlikelybesoldseparately.Apastpracticeofsellingsimilar
assetsseparatelyisevidenceindicatingthatcombiningassetsasasingleunitofaccounting
maynotbeappropriate.
• Theentityhasadoptedorisconsideringaplantodisposeofoneormoreintangibleassets
separately.
• TheintangibleassetsareusedexclusivelybydifferentStatement144assetgroups.
• Theeconomicorotherfactorsthatmightlimittheusefuleconomiclifeofoneofthe
intangibleassetswouldnotsimilarlylimittheusefuleconomiclivesofotherintangibleassets
combinedintheunitofaccounting.
10.48 Paragraph5ofIssue02-7states:
TheTaskForcemadethefollowingobservationsabouttheunitofaccountingusedtotestindefinite-
livedintangibleassetsforimpairment.
a. Theunitofaccountingshouldincludeonlyindefinite-livedintangibleassets—thoseassets
cannotbetestedincombinationwithgoodwillorwithafinite-livedasset.
b. Theunitofaccountingcannotrepresentagroupofindefinite-livedintangibleassetsthat
collectivelyconstituteabusiness.
c. Aunitofaccountingmayincludeindefinite-livedintangibleassetsrecordedintheseparate
financialstatementsofconsolidatedsubsidiaries.Asaresult,animpairmentlossrecognized
intheconsolidatedfinancialstatementsmaydifferfromthesumoftheimpairmentlosses(if
any)recognizedintheseparatefinancialstatementsofthosesubsidiaries.
d. Iftheunitofaccountingusedtotestimpairmentofindefinite-livedintangibleassetsis
containedinasinglereportingunit,thesameunitofaccountingandassociatedfairvalue
shouldbeusedforpurposesofmeasuringagoodwillimpairmentlossinaccordancewith
paragraph20ofStatement142.
10.49 Furthermore,paragraph5ofIssue02-7states:
TheTaskForcereachedaconsensusthatif,basedonachangeinthewayinwhichintangibleassets
areused,acompanycombinesasaunitofaccountingforimpairmenttestingpurposesindefinite-
livedintangibleassetsthatwerepreviouslytestedforimpairmentseparately,thoseintangibleassets
shouldbeseparatelytestedforimpairmentinaccordancewithparagraph17ofStatement142prior
tobeingcombinedasaunitofaccounting.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 175/286162
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
10.50 Exhibit02-7AofIssue02-7providesthefollowingillustrations:
Example 1 — Easements
CompanyXisadistributorofnaturalgas.CompanyXhastwoself-constructedpipelines,the
NorthernpipelineandtheSouthernpipeline.Eachpipelinewasconstructedonlandforwhich
CompanyXownsperpetualeasements.TheNorthernpipelinewasconstructedon50easements
acquiredin50separatetransactions.TheSouthernpipelinewasconstructedon100separateeasementsthatwereacquiredinabusinesscombinationandwererecordedas1asset.Although
eachpipelinefunctionsindependentlyoftheother,theyarecontainedinthesamereportingunit.
Operationofeachpipelineisdirectedbyadifferentmanager.Therearediscrete,identifiablecash
flowsforeachpipeline;thus,eachpipelineanditsrelatedeasementsrepresentaseparateStatement
144assetgroup.WhileCompanyXhasnocurrentplanstosellorotherwisedisposeofanyofits
easements,CompanyXbelievesthatifeitherpipelinewassold,itwouldmostlikelyconveyallrights
undertheeasementswiththerelatedpipeline.
Evaluation:CompanyXwouldhavetwounitsofaccountingforpurposesoftestingtheeasements
forimpairment—thecollectionofeasementssupportingtheNorthernpipelineandthecollection
ofeasementssupportingtheSouthernpipeline.The50easementssupportingtheNorthernpipeline
representasingleunitofaccountingasevidencedbythefactthat(a)theyarecollectivelyused
togetherinasingleStatement144assetgroup,(b)ifacquiredinasingletransaction,theywouldhavebeenrecordedasoneasset,and(c)ifsold,theywouldlikelybesoldasagroupwiththerelated
pipeline.Forthesamereasons,theeasementssupportingtheSouthernpipelinewouldrepresent
asingleunitofaccounting.BecausethecollectivelandeasementsunderlyingtheNorthernand
Southernpipelinesgeneratecashflowsindependentofoneanotherandareusedexclusivelyby
separateStatement144assetgroups,theyshouldnotbecombinedintoasingleunitofaccounting.
Example 2 — Trade Name
CompanyYpurchasesaninternationalvacuumcleanermanufacturer,CompanyA,whichsells
vacuumsunderawell-knowntradename.TheoperationsofCompanyAareconductedthrough
separatelegalentitiesinthreecountriesandeachofthoselegalentitiesownstheregisteredtrade
nameusedinthatcountry.Whenthebusinesscombinationwasrecorded,CompanyYrecorded
threeseparateintangibletradenameassetsbecauseseparatefinancialstatementsarerequiredtobe
preparedforeachseparatelegalentity.Thereareseparateidentifiablecashflowsforeachcountry,andeachcountryrepresentsaStatement144assetgroup.Asinglebrandmanagerisresponsiblefor
theCompanyAtradename,thevalueofwhichisexpectedtoberecoveredfromtheworldwidesales
ofCompanyA’sproducts.
Evaluation:Thethreeseparatelyrecordedtradenameassetsshouldbecombinedintoasingleunit
ofaccountingforpurposesoftestingtheacquiredtradenameforimpairment.Thethreeregistered
tradenameswereacquiredinthesamebusinesscombinationand,absenttherequirementtoprepare
separatefinancialstatementsforsubsidiaries,wouldhavebeenrecordedasasingleasset.Thetrade
nameismanagedbyasinglebrandmanager.Ifsold,CompanyXwouldmostlikelysellallthree
legallyregisteredtradenamesasasingleasset.
Example 3 — Brands
CompanyZmanufacturesanddistributescerealsundertwodifferentbrands,BrandAandBrandB.Bothbrandswereacquiredinthesamebusinesscombination.CompanyZrecordedtwoseparate
intangibleassetsrepresentingBrandAandBrandB.Eachbrandrepresentsagroupofcomplementary
indefinite-livedintangibleassetsincludingthetrademark,thetradedress,andarecipe.BrandA
hastwounderlyingtradenamesforitsHoneyandCinnamoncereals.Thetradenameandrecipeof
CinnamonwereinternallygeneratedsubsequenttotheacquisitionofBrandA.SalesofHoneyhave
decreasedwhilesalesofCinnamonhaveincreasedoverthepastseveralyears.Despitethedeclinein
salesofHoney,thecombinedsalesofHoneyandCinnamonhaveincreasedatthelevelsexpectedby
management.SalesofBrandBalsohaveincreasedatexpectedlevels.Therearediscretecashflows
forHoney,Cinnamon,andBrandB,andeachrepresentsaseparateStatement144assetgroup.Both
HoneyandCinnamonaremanagedbyonebrandmanager.Aseparatebrandmanagerisresponsible
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 176/286163
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
forBrandB;however,therearesomesharedresourcesusedbythesegroups,suchasprocurement.
WhileCompanyZhasnocurrentplanstosellitsbrandsorexitthecerealbusiness,itbelievesifitever
did,itwouldexitthecerealbusinessinitsentirety.
Evaluation:CompanyZwouldhavetwounitsofaccountingforpurposesoftestingtheacquired
brandsforimpairment.BrandA’spurchasedHoneyandinternallygeneratedCinnamontrademarks
shouldbecombinedasasingleunitofaccountingforpurposesofimpairmenttesting.Theintangible
assetassociatedwiththeCinnamontrademarkissimplyavariationofthepreviouslyacquiredBrandAHoneytrademark.AlthoughtheyareassociatedwithdifferentStatement144assetgroups,they
aremanagedbyasinglebrandmanager.CompanyZwouldconsiderBrandBtobeaseparateunitof
accountingforpurposesoftestingimpairmentbecausethatbrandismanagedseparatelyfromBrand
AandisusedexclusivelybyaseparateStatement144assetgroup.
Determining the Carrying Amount of an Indefinite-Lived Intangible Asset WhenRemoving That Asset From a Unit of Accounting
10.51 Paragraph4ofIssue02-7states:
TheTaskForcereachedaconsensusthatseparatelyrecordedindefinite-livedintangibleassets,
whetheracquiredorinternallydeveloped,shouldbecombinedintoasingleunitofaccountingforpurposesoftestingimpairmentiftheyareoperatedasasingleassetand,assuch,areessentially
inseparablefromoneanother.
10.52 Anindefinite-livedintangibleassetmayneedtoberemovedfromasingleunitofaccounting
ifthatintangibleassetissoldseparatelyfromtheunitofaccounting,theunitofaccountingis
reconsidered(suchasinconnectionwithalargerreorganizationoftheentity),ortheentityconcludes
thattheindefinite-livedintangibleassetisnowfinite-lived.TheSeptember29–30,2004,EITFAgenda
CommitteeReportstatesthat“[q]uestionshavearisenabouthowtodeterminethecarryingamount
ofanintangibleassetthatpreviouslywascombinedwithotherindefinite-livedintangibleassetsfor
impairmenttestingpurposes.”Italsostatesthat“[t]heAgendaCommitteedecidednottoaddthisissue
totheEITF’sagenda.”
10.53 Intheabsenceofspecificguidance,anentityshoulddeterminethecarryingamountofan
intangibleassetthatwasremovedfromaunitofaccountingunderIssue02-7onthebasisofthat
intangibleasset’shistoricalcarryingamountwhenplacedintotheunitofaccountinglesstheintangible
asset’sallocationofanyimpairmentssubsequentlyrecognized.Combiningindefinite-livedassetsintoa
unitofaccountingisdonesolelyforimpairmenttesting;eachindividuallyrecordedintangibleassetdoes
notceasetoexistasaseparatelyrecordedassetasaresultofthecombination.Subsequentimpairments
shouldbeallocatedtotheintangibleassetswithintheunitofaccountingonaproratabasisbyusing
therelativehistoricalcarryingamountsoftheindividualintangibleassets.Thisapproachisconsistent
withparagraph14ofStatement144regardingtheallocationofimpairmentlosseswithinanasset
group.Thefollowingexamplesillustratethesegeneralprinciples.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 177/286164
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 10-3
Readily Available Historical Carrying Amount
CompanyAholdsthreeperpetualeasementsgroupedintoaunitofaccountingforimpairmenttesting.Easements1and2wereacquiredaspartofasingletransactionforconsiderationof$100(noseparateassignmentofcarryingamounttoeacheasementwasmadeatthetimeoftheacquisition).Easement3wasacquiredseparatelyforconsiderationof$150.Noimpairmentinthecarryingamountoftheunitofaccountinghasbeenrecognizedsubsequently.
Easement3wasdisposedofinconnectionwiththesaleoftheunderlyingpropertytowhichtheeasementrelates.Thecarryingamountoftheeasementdisposedof(Easement3)wouldbedeterminedonthebasisofthereadilyavailablehistoricalcarryingamountofthateasement($150).
Note:Issue02-7statesthata“pastpracticeofsellingsimilarassetsseparatelyisevidenceindicatingthatcombiningassetsasasingleunitofaccountingmaynotbeappropriate.”WhileapastpracticeisonlyoneoftheindicatorslistedinIssue02-7,entitiesthatdisposeofanassetorassetswithinaunitofaccountingmustbeabletosupporttheirunitofaccountingconclusionsbothhistoricallyandprospectivelyinaccordancewiththeotherindicatorsinIssue02-7.
Example 10-4
Historical Carrying Amount That Is Not Readily Available
CompanyAholdsthreeperpetualeasementsgroupedintoaunitofaccountingforimpairmenttesting.Easements1and2wereacquiredaspartofasingletransactionforconsiderationof$100(noseparateassignmentofacarryingamounttoeacheasementwasmadeatthetimeoftheacquisition).Easement3wasacquiredseparatelyforconsiderationof$150.Noimpairmentinthecarryingamountoftheunitofaccountinghasbeenrecognizedsubsequently.
Easement1wasdisposedofinconnectionwiththesaleoftheunderlyingpropertytowhichtheeasementrelates.Thehistoricalcarryingamountoftheeasementdisposedof(Easement1)isnotreadilyavailablesincenoseparateassignmentofacarryingamounttoeacheasementwasmadeatthetimeoftheacquisition.Intheabsenceofareadilyavailablehistoricalcarryingamount,Ashoulddevelopareasonableandsupportablemethodtodeterminethehistoricalcarryingamountonthebasisofthebestevidenceofthefactsandcircumstancesexistingatthetimeoftheeasement’sacquisition.
SeeNoteinExample 10-3.
Example 10-5
The Impact of a Subsequent Impairment of the Unit of Accounting
CompanyAholdsthreeperpetualeasementsgroupedintoaunitofaccountingforimpairmenttesting.Easements1and2wereacquiredaspartofasingletransactionforconsiderationof$100(noseparateassignmentofacarryingamounttoeacheasementwasmadeatthetimeoftheacquisition).Easement3wasacquiredseparatelyforconsiderationof$150.Aftertheacquisitionofthethreeeasements,animpairmentof$50wasmeasuredfortheunitofaccounting.
Easement3wasdisposedofinconnectionwiththesaleoftheunderlyingpropertytowhichtheeasementrelates.Thecarryingamountoftheeasementdisposedof(Easement3)wouldbedeterminedonthebasisofthereadilyavailablehistoricalcarryingamountofthateasement($150)netoftheeffectofthesubsequentimpairmentoftheunitofaccounting.Theimpairmentlossshouldbeallocatedtotheintangibleassetsoftheunitofaccountingonaproratabasisbyusingtherelativehistoricalcarryingamountofthoseassets,whichisconsistentwithparagraph14ofStatement144.TheimpairmentlossallocabletoEasement3wouldequal60percent($150dividedby$250)ofthetotalimpairmentlossof$50,or$30,resultinginahistoricalcarryingamountofEasement3equalto$120($150less$30).
SeeNoteinExample 10-3.
Carrying Forward the Fair Value Measurements of Indefinite-Lived IntangibleAssets From One Year to the Next
10.54 Paragraph27ofStatement142providesguidanceoncarryingforwardfairvaluemeasurements
ofreportingunitsfromoneyeartothenext.AlthoughStatement142doesnotcontainguidanceon
carryingforwardfairvaluemeasurementsofidentifiableintangibleassetsnotsubjecttoamortization,
suchananalogyisreasonable.Accordingly,anentitywishingtocarryforwardfromthepreviousyear
thefairvaluemeasurementofanintangibleassetwithanindefiniteusefullifemustcarefullyanalyzethe
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 178/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 179/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 180/286167
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Footnote17providesthat“[f]orpurposesofdeterminingreportingunits,anoperatingsegmentisas
definedinparagraph10ofFASBStatementNo.131,DisclosuresAboutSegmentsofanEnterpriseand
RelatedInformation .”
Footnote18statesthat“Statement141(R)includesguidanceondeterminingwhetheranassetgroup
constitutesabusiness.”(See1.08.)
Footnote19providesthat“[s]egmentmanagementconsistsofoneormoresegmentmanagers,asthat
termisdefinedinparagraph14ofStatement131.”
Footnote20statesthat“[p]aragraph17ofStatement131shallbeconsideredindeterminingifthe
componentsofanoperatingsegmenthavesimilareconomiccharacteristics.”
11.06 Paragraph30ofStatement142describeshowtoidentifyreportingunits(see11.05).Guidance
onapplyingparagraph30isspecifiedinTopicD-101,which“summarizestheFASBstaff’sunderstanding
oftheBoard’sintentwithrespecttothedeterminationofwhetheracomponentofanoperating
segmentisareportingunit.”
Thestepsentitiesshouldtakeinidentifyingreportingunitsareasfollows:
• Step 1 — Identify operating segments in accordance with Statement 131.
Paragraph10ofStatement131states,inpart:
Anoperatingsegmentisacomponentofanenterprise:
a. Thatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses
(includingrevenuesandexpensesrelatingtotransactionswithothercomponentsof
thesameenterprise),
b. Whoseoperatingresultsareregularlyreviewedbytheenterprise’schiefoperating
decisionmakertomakedecisionsaboutresourcestobeallocatedtothesegmentandassessitsperformance,and
c. Forwhichdiscretefinancialinformationisavailable.
• Step 2 — Identify the components of each operating segment (paragraph 30 of
Statement 142 defines a “component” as “one level below an operating segment”).
Determine whether each component meets the definition of a reporting unit in steps
2(a)–(c).
• Step 2(a) — Determine whether the component constitutes a business.
TopicD-101states:
Thedeterminationofwhetheracomponentconstitutesabusinessrequiresjudgmentbased
onspecificfactsandcircumstances.TheguidanceinFASBStatementNo.141(revised2007),
BusinessCombinations ,shouldbeconsideredindeterminingwhetheragroupofassets
constitutesabusiness[see1.08].
• Step 2(b) — Determine whether “discrete financial information” is available for the
component.
TopicD-101states:
Thetermdiscretefinancialinformation shouldbeappliedinthesamemannerthatitisapplied
indeterminingoperatingsegmentsinaccordancewithparagraph10ofStatement131.The
Statement131implementationguidanceindicatesthatitisnotnecessarythatassetsbe
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 181/286168
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
allocatedforacomponenttobeconsideredanoperatingsegment(thatis,nobalancesheetis
required).Thus,discretefinancialinformationcanconstituteaslittleasoperatinginformation.
Therefore,inordertotestgoodwillforimpairmentinaccordancewithStatement142,an
entitymayberequiredtoassignassetsandliabilitiestoreportingunits(consistentwiththe
guidanceinparagraphs32and33ofStatement142).
• Step 2(c) — Determine whether segment management regularly reviews the operatingresults of the component.
TopicD-101furthernotes:
Segmentmanagement,asdefinedinparagraph14ofStatement131,iseitheralevelbelow
orthesamelevelasthechiefoperatingdecisionmaker.AccordingtoStatement131,a
segmentmanageris“directlyaccountabletoandmaintainsregularcontactwiththechief
operatingdecisionmakertodiscussoperatingactivities,financialresults,forecasts,orplans
forthesegment.”TheapproachusedinStatement142todeterminereportingunitsissimilar
totheoneusedtodetermineoperatingsegmentsinStatement131;however,Statement142
focusesonhowoperatingsegmentsaremanagedratherthanhowtheentityasawholeis
managed.TheapproachinStatement142isconsistentwiththeBoard’sintentthatreporting
unitsshouldreflectthewayanentitymanagesitsoperations.
• Step 3 — Aggregate components that have similar economic characteristics.
Componentsofanoperatingsegment,whichsteps2(a)–(c)establishedasabusinessforwhich
discretefinancialinformationisavailableandsegmentmanagementregularlyreviewsthe
operatingresultsofthatcomponent,areaggregatedanddeemedasinglereportingunitifthe
componentshavesimilareconomiccharacteristics.
TopicD-101indicates:
Evaluatingwhethertwocomponentshavesimilareconomiccharacteristicsisamatterof
judgmentthatdependsonspecificfactsandcircumstances.Thatassessmentshouldbemore
qualitativethanquantitative.
Indeterminingwhetherthecomponentsofanoperatingsegmenthavesimilareconomiccharacteristics,footnote20toparagraph30ofStatement142statesthattheguidancein
paragraph17ofStatement131shouldbeconsidered.TheBoardintendedthatallofthe
factorsinparagraph17ofStatement131beconsideredinmakingthatdetermination.
However,theBoarddidnotintendthateveryfactormustbemetinorderfortwo
componentstobeconsideredeconomicallysimilar.Inaddition,theBoarddidnotintend
thatthedeterminationofwhethertwocomponentsareeconomicallysimilarbelimitedto
considerationofthefactorsdescribedinparagraph17ofStatement131.Indetermining
whethercomponentsshouldbecombinedintoonereportingunitbasedontheireconomic
similarities,factorsthatshouldbeconsideredinadditiontothoseinparagraph17includebut
arenotlimitedto:
• Themannerinwhichanentityoperatesitsbusinessandthenatureofthoseoperations
• Whethergoodwillisrecoverablefromtheseparateoperationsofeachcomponentbusinessorfromtwoormorecomponentbusinessesworkinginconcert(whichmight
bethecaseifthecomponentsareeconomicallyinterdependent)
• Theextenttowhichthecomponentbusinessesshareassetsandotherresources,as
mightbeevidencedbyextensivetransferpricingmechanisms
• Whetherthecomponentssupportandbenefitfromcommonresearchand
developmentprojects.
Thefactthatacomponentextensivelysharesassetsandotherresourceswithother
componentsoftheoperatingsegmentmaybeanindicationthatthecomponenteitherisnot
abusinessormaybeeconomicallysimilartothoseothercomponents.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 182/286169
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Componentsthatsharesimilareconomiccharacteristicsbutrelatetodifferentoperating
segmentsmaynotbecombinedintoasinglereportingunit.Forexample,anentitymight
haveorganizeditsoperatingsegmentsonageographicbasis.Ifitsthreeoperatingsegments
(Americas,Europe,andAsia)eachhavetwocomponents(AandB)thataredissimilartoeach
otherbutsimilartothecorrespondingcomponentsintheotheroperatingsegments,the
entitywouldnot bepermittedtocombinecomponentAfromeachoftheoperatingsegments
tomakereportingunitA.
Equity Method Investments as Reporting Units
11.07 Question2ofFASBStaffImplementationGuide(Statement131)statesthatequitymethod
investmentsmaybeconsideredoperatingsegmentsiftheyqualifyunderthedefinitioninparagraph10
ofStatement131.Thatdefinitiondoesnotrequireanoperatingsegmenttobeabusiness.Therefore,if
anequitymethodinvestmentisanoperatingsegment,itqualifiesasareportingunitinwhichgoodwill
couldbetestedforimpairment.However,ifanequitymethodinvestmentisonlydeterminedtobea
componentofanoperatingsegment,itcannotqualifyasaseparatereportingunitbecauseitwillnot
meetthedefinitionofabusiness(see1.08).
Disclosure Considerations Regarding Reporting Unit Determinations
11.08 See13.33foranSECstaffdiscussionofdisclosureconsiderationsrelatedtotheidentificationof
reportingunits.
Identification of Reporting Units — Examples
11.09 Thefollowingexamplesillustratethereportingunitstructurewhentheprocessforidentifying
reportingunitsisappliedtoahypotheticalandlimitedsetoffacts.Reportingunitstructureswillvary
amongentitiesdependingontheiruniquefactsandcircumstances.
Example 11-1 Identification of Reporting Units
Case A
AssumethataparentcompanyhasthreeoperatingsegmentsandtworeportablesegmentsdeterminedinaccordancewiththeprovisionsofStatement131.
Step 1 — Identify the operating segments in accordance with Statement 131.
Inthiscase,OperatingSegments1,2,and3areidentified.
Step 2 — Identify the components of each operating segment (paragraph 30 of Statement 142 defines a “component”
as “one level below an operating segment”). Determine whether each component meets the definition of a reporting
unit in steps 2(a)–2(c).
Step 2(a) — Determine whether the component constitutes a business.
Step 2(b) — Determine whether “discrete financial information” is available for the component.
Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.
AssumethatOperatingSegments1and2aredeterminedtohavenocomponentsthatmeettheconditionsinsteps2(a)–2(c),whileOperatingSegment3isdeterminedtohavethreecomponents(X,Y,andZ)thatmeettheconditionsinsteps2(a)–2(c).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 183/286170
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 11-1 (continued)
Identification of Reporting Units
Step 3 — Aggregate components that have similar economic characteristics.
AssumethatComponentsX,Y,andZhavebeendeterminedtohavesimilareconomiccharacteristics.
Conclusion—OperatingSegments1,2,and3arereportingunits.
Case B
AssumethesamefactsasCaseAexceptthatComponentsX,Y,andZhavebeendeterminednottopossesssimilareconomiccharacteristics.
Conclusion—OperatingSegment1,OperatingSegment2,ComponentX,ComponentY,andComponentZarereportingunits.
Case C
AssumethesamefactsasCaseA,exceptthattheeconomiccharacteristicsofComponentYandComponentZaredeterminedtobesimilartoeachotherbutnottothoseofComponentX.
Conclusion—OperatingSegment1,OperatingSegment2,ComponentX,andthecombinationofComponentYandComponentZarereportingunits.
ParentCompany
ReportableSegment
A
ReportableSegment
B
OperatingSegment
1
OperatingSegment
2
OperatingSegment
3
ComponentX
ComponentZ
ComponentY
ParentCompany
ReportableSegment
A
OperatingSegment
1
OperatingSegment
2
OperatingSegment
3
ComponentX
ComponentZ
ComponentY
ReportableSegment
B
ParentCompany
OperatingSegment
1
OperatingSegment
2
ComponentX ComponentY ComponentZ
ReportableSegment
A
ReportableSegment
B
OperatingSegment
3
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 184/286171
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 11-1 (continued)
Identification of Reporting Units
Case D
AssumethataparentcompanyhasthreeoperatingsegmentsandtworeportablesegmentsdeterminedinaccordancewiththeprovisionsofStatement131.
Step 1 — Identify the operating segments in accordance with Statement 131.
Inthiscase,OperatingSegments1,2,and3areidentified.
Step 2 — Identify the components of the operating segment (paragraph 30 of Statement 142 defines “component”
as “one level below an operating segment”). Determine whether each component meets the definition of a
reporting unit in steps 2(a)–2(c).
Step 2(a) — Determine whether the component constitutes a business.
Step 2(b) — Determine whether “discrete financial information” is available for the component.
Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.
AssumeOperatingSegment1hastwocomponents(ComponentWandComponentX)thatmeettheconditionsinsteps2(a)–2(c);OperatingSegment2hastwocomponents(ComponentYandComponentZ)thatmeettheconditionsinsteps2(a)–2(c);andOperatingSegment3hasnocomponentsthatmeettheconditionsinsteps2(a)–2(c).
Step 3 — Aggregate components that have similar economic characteristics.
AssumethattheeconomiccharacteristicsofComponentWofOperatingSegment1aresimilartothoseofComponentYofOperatingSegment2,butnottothoseofComponentXofOperatingSegment1.FurtherassumethattheeconomiccharacteristicsofComponentZofOperatingSegment2aresimilartothoseofComponentXofOperatingSegment1butnottothoseofComponentYofOperatingSegment2.Becausethecomponentswithsimilareconomiccharacteristics(i.e.,W/YandX/Z)arenotinthesameoperatingsegment,thecomponentsarenotaggregatedordeemedtorepresentasinglereportingunit.
Conclusion—Becausetheeconomiccharacteristicsofthecomponentswithineachoperatingsegmentarenotsimilar,ComponentW,ComponentX,ComponentY,ComponentZ,andOperatingSegment3arereportingunits.
Comparison of Conclusions Reached Under Statements 131 and 142 in Identifying
Operating Segments and Reporting Units, Respectively
11.10 TopicD-101notesthefollowingregardingthecomparisonofconclusionsreachedunder
Statement131andStatement142inidentifyingoperatingsegmentsandreportingunits,respectively:
Someconstituentshavenotedthattwooperatingsegmentsmayhavebeenaggregatedintoa
reportablesegmentbyapplyingtheaggregationcriteriainparagraph17ofStatement131,and
haveinquiredaboutwhetheroneormoreofthecomponentsofthoseoperatingsegmentscanbe
reportingunitsunderStatement142.TheFASBstaffbelievesitwouldbepossibleforoneormoreof
thosecomponentstobeeconomicallydissimilarfromtheothercomponentsandthusbeareporting
unitforpurposesoftestinggoodwillforimpairment.Inparticular,theFASBstaffbelievesthatthe
ParentCompany
ReportableSegment
A
ReportableSegment
B
OperatingSegment
1
OperatingSegment
2OperatingSegment
3
ComponentW
ComponentX
ComponentY
ComponentZ
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 185/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 186/286173
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
11.14 ParagraphB116ofStatement142states,inpart:
TheBoardconcludedthattheobjectiveoftheassignmentprocessshouldbetoensurethattheassets
andliabilitiesthatareassignedtoareportingunitarethesamenetassetsthatareconsideredin
determiningthefairvalueofthatunit—an“apples-to-apples”comparison.Therefore,totheextent
corporateitemsarereflectedinthevalueofareportingunit,theyshouldbeassignedtothereporting
unit.
Example 11-2
Assigning Corporate-Level Assets and Liabilities to Reporting Units
ThisexampleillustratestheassignmentofassetsandliabilitiesheldatthecorporateleveltoreportingunitsinaccordancewiththeguidanceinStatement142(see 11.11–11.14)onthebasisofahypotheticalandlimitedsetoffactsandcircumstances.Becausefactsandcircumstancesvarybyentity,conclusionsalsowillvary.
Company H Reporting Unit Structure CompanyHhasidentifiedthefollowingthreereportingunits:
CompanyHmaintainsacorporatefunctionthatholdsthefollowingassetsandliabilities:
Assets
Building—Net (a) $ 5,000,000
Trademark—Net (b) 40,000,000
ReceivableFromReportingUnit3 (c) 10,000,000
Liabilities
AccountsPayable (c) $10,000,000EnvironmentalLiability (d) 7,000,000
PensionObligation (e) 6,500,000
Assignment of Corporate-Level Assets and Liabilities to Reporting Units
(a) Building — Net
CompanyHownsa100,000-square-footbuildingthatservesasthemanufacturingfacilityforReportingUnit1.IfHweretosellReportingUnit1,thebuildingwouldmostlikelybeincludedintheoverallsalesagreement.Inaccordancewiththecriteriaofparagraph32ofStatement142(see 11.11),thebuildingwillbeassignedtoReportingUnit1becauseit(a)isemployedintheoperationsofReportingUnit1and(b)wouldbeconsideredinthedeterminationofthefairvalueofReportingUnit1.
(b) Trademark — Net
In1995,CompanyHacquiredatrademarkthatReportingUnit2continuestouse.Inaccordancewiththecriteriaofparagraph32ofStatement142(see11.11),thetrademarkwillbeassignedtoReportingUnit2becauseit(a)isemployedintheoperationsofReportingUnit2and(b)wouldbeconsideredinthedeterminationofthefairvalueofReportingUnit2.
(c) Receivable From Reporting Unit 3 and Related Accounts Payable
CompanyHrecentlyacquiredalargeamountofinventoryforReportingUnit3touseinproducingfinishedgoods.Theinventorypurchaseresultedin$10millionofaccountspayable.WhenReportingUnit3receivedtheinventory,CompanyHrecordedtheaccountpayableandacorrespondingreceivablefromReportingUnit3.ReportingUnit3recordedtheinventoryandacorrespondingpayabletoCompanyH.SincethereceivablefromReportingUnit3andtherelatedaccountspayablerelatetothesamereportingunitandnettozero,noamountsrequireassignment.Inotherwords,iftheaccountspayablewereassignedtoReportingUnit3,thereceivablefromReportingUnit3wouldbeeliminatedalongwiththecorrespondingpayablebyReportingUnit3toCompanyH.Thus,theassignmentwouldhavenoneteffectonReportingUnit3.
Company H
ReportingUnit1 ReportingUnit3ReportingUnit2
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 187/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 188/286175
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
assessmentifthatassessmentdoesnotcontemplateaplannedsaleorliquidationthatwillcause
reclassificationofsomeamountoftheCTA.”
11.18 Questionshaveariseninpracticeaboutwhetherthecarryingvalueofareportingunitthathasa
CTAbalanceshouldbecalculatedas(1)assetsnetofliabilitiestranslatedatappropriateexchangerates
or(2)theequityofthereportingunitlesstheeffectoftheCTA.
11.19 Paragraph3ofIssue01-5doesnotspecificallyaddressgoodwillimpairments.However,when
areportingunitincludesorisentirelyaforeignentity,analogizingtothisguidanceresultsinthe
inclusionofanyrelatedCTAbalanceinthecarryingamountofthatreportingunitinthetestingof
goodwillforimpairmentonlywhenthereisaplantosellorliquidatetheinvestmentintheforeign
entity.TheexistenceofsuchaplanwouldresultinreclassificationofsomeoralloftheCTAtonet
incomeinaccordancewithStatement52andInterpretation37.Whennosuchsaleorliquidationofthe
investmentintheforeignentityisplanned,thecarryingvalueofthereportingunitwouldcompriseits
assetsnetofliabilitiestranslatedatappropriateexchangeratesasofthedateofthetest.
Example 11-3 Assigning Accumulated Foreign Currency Translation Adjustments to a Reporting Unit
CompanyAhasReportingUnit1,whichconsistsentirelyofabusinesswhoseoperationsarebasedinaforeigncountry.ThereiscurrentlynoplannedsaleofReportingUnit1.ThebalancesheetofReportingUnit1,translatedintoU.S.dollarsinaccordancewithStatement52,isasfollows:
Cash
PP&E
Goodwill
Totalassets
LiabilitiesAdditionalpaid-incapitalandretainedearnings
Cumulativetranslationadjustment
Totalliabilitiesandequity
$ 300
1,500
200
$ 2,000
$ 200 1,900
(100)
$ 2,000
BecausethereisnoplannedsaleofReportingUnit1,itscarryingvaluewouldbe$1,800,whichiscalculatedas$2,000oftotalassetsless$200ofliabilities,bothattheirappropriatelytranslatedamountsasofthereportingdate.Inaddition,thecarryingvalueofReportingUnit1’sgoodwillis$200,whichisalsoitsappropriatelytranslatedamountasofthereportingdate.
Assigning Goodwill to Reporting Units
11.20 Paragraph34ofStatement142states:
Forthepurposeoftestinggoodwillforimpairment,allgoodwillacquiredinabusinesscombination
shallbeassignedtooneormorereportingunitsasoftheacquisitiondate.Goodwillshallbeassigned
toreportingunitsoftheacquiringentitythatareexpectedtobenefitfromthesynergiesofthe
combinationeventhoughotherassetsorliabilitiesoftheacquiredentitymaynotbeassignedtothat
reportingunit.Thetotalamountofacquiredgoodwillmaybedividedamonganumberofreporting
units.Themethodologyusedtodeterminetheamountofgoodwilltoassigntoareportingunit
shallbereasonableandsupportableandshallbeappliedinaconsistentmanner.Inaddition,that
methodologyshallbeconsistentwiththeobjectivesoftheprocessofassigninggoodwilltoreporting
unitsdescribedinparagraph35.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 189/286176
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
11.21 Paragraph35ofStatement142states:
Inconcept,theamountofgoodwillassignedtoareportingunitwouldbedeterminedinamanner
similartohowtheamountofgoodwillrecognizedinabusinesscombinationisdetermined.An
entitywoulddeterminethefairvalueoftheacquiredbusiness(orportionthereof)tobeincluded
inareportingunit—thefairvalueoftheindividualassetsacquiredandliabilitiesassumedthatare
assignedtothereportingunit[footnoteomitted].Anyexcessofthefairvalueoftheacquiredbusiness(orportionthereof)overthefairvalueoftheindividualassetsacquiredandliabilitiesassumedthatare
assignedtothereportingunitistheamountofgoodwillassignedtothatreportingunit.However,if
goodwillistobeassignedtoareportingunitthathasnotbeenassignedanyoftheassetsacquired
orliabilitiesassumedinthatacquisition,theamountofgoodwilltobeassignedtothatunitmightbe
determinedbyapplyinga“withandwithout”computation.Thatis,thedifferencebetweenthefair
valueofthatreportingunitbeforetheacquisitionanditsfairvalueaftertheacquisitionrepresentsthe
amountofgoodwilltobeassignedtothatreportingunit.
Example 11-4
Assigning Goodwill to Reporting Units
Case A
CompanyAacquiresCompanyBfor$100.IdentifiablenetassetsofCompanyBtotal$80.CompanyAhastworeportingunits(RU1andRU2).IdentifiablenetassetsofCompanyBtotaling$50willbeassignedtoRU1,andidentifiablenetassetstotaling$30willbeassignedtoRU2.Thefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU1is$60,whilethefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU2is$40.
Goodwillisassignedtoreportingunitsonthebasisofthedifferencebetweenthefairvalueofthebusiness(orportionthereof)assignedandthefairvalueoftheidentifiablenetassetsassigned.Underthisapproach,goodwillisassignedasfollows:
RU1 RU2 Total
Fairvalueofbusiness(orportionthereof)assigned $ 60 $ 40 $ 100
Fairvalueofidentifiablenetassetsassigned 50 30 80
Goodwillassigned $ 10 $ 10 $ 20
Case B
CompanyAacquiresCompanyBfor$200.IdentifiablenetassetsofCompanyBtotal$160.CompanyAhasthreereportingunits(RU1,RU2,andRU3).IdentifiablenetassetsofCompanyBtotaling$100willbeassignedtoRU1,andidentifiablenetassetstotaling$60willbeassignedtoRU2.NoidentifiablenetassetswillbeassignedtoRU3;however,RU3isexpectedtobenefitfromthesynergiesofthecombination.Thefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU1is$115,andthefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU2is$75.ThefairvalueofRU3beforetheacquisitionis$200;aftertheacquisition,itis$210.
GoodwillisassignedtoRU1andRU2onthebasisofthedifferencebetweenthefairvalueofthebusiness(orportionthereof)assignedandthefairvalueoftheidentifiablenetassetsassigned.ForRU3,goodwillisassignedonthebasisofa“withandwithout”computation.Underthisapproach,goodwillisassignedasfollows:
RU1 RU2 RU3 Total
Fairvalueofbusiness(orportionthereof)assigned $ 115 $ 75 $ 10 $ 200
Fairvalueofidentifiablenetassetsassigned 100 60 — 160
Goodwillassigned $ 15 $ 15 $ 10 $ 40
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 190/286177
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Allocation of Goodwill to Reporting Units for a Mining Enterprise
11.22 Issue04-4addresses“whetheranentityintheminingindustryshouldassigngoodwilltoa
reportingunitthatconsistsofanindividualoperatingmine.”Itstates:
Somearguethatassigninggoodwilltoanoperatingmineresultsinaday-twoimpairmentofthe
goodwill.Thatis,thefairvalueofthereportingunitonlyconsistsofthefairvalueoftheoperatingmine(primarilymineraldeposits)and,accordingly,thereisnoadditionalfairvalueinthereporting
unittosupporttherecognitionofgoodwill.Othersacknowledgethatanygoodwillassignedtoan
operatingmineultimatelywillbeimpairedbecauseanoperatingmineisawastingasset.Someargue
thatgoodwillrepresentsthepremiumfortheexplorationanddevelopmentactivitiesandrelatesto
theenterprise’soverallabilitytosustainandreplicateitselfasagoingconcernentityand,therefore,
goodwillshouldnotbeassignedtoindividualoperatingmines.
11.23 Issue04-4furthernotes:
TheTaskForcediscussedthisIssueandobservedthattheguidanceinStatement142isclear—
goodwillshouldbeallocatedtoreportingunitsandanindividualoperatingminemayconstitutea
reportingunit.Further,theTaskForceacknowledgedthattheallocationofgoodwilltoanindividual
operatingminelikelywillresultinaneventualgoodwillimpairmentduetothewastingnatureof
theprimaryassetofthereportingunitandcouldresultinaday-twogoodwillimpairment.However,
theTaskForceagreedthatbecausetheguidanceinStatements131and142isclear,theTaskForce
cannotresolvethisIssue.Accordingly,theTaskForceagreedtodiscontinuediscussionofthisIssueand
toremoveitfromtheTaskForce’sagenda.
Reorganization of Reporting Structure — Reassigning Assets, Liabilities, andGoodwill
11.24 Paragraph36ofStatement142states:
Whenanentityreorganizesitsreportingstructureinamannerthatchangesthecompositionofone
ormoreofitsreportingunits,theguidanceinparagraphs32and33shallbeusedtoreassignassets
andliabilitiestoreportingunitsaffected[see11.11–11.13].However,goodwillshallbereassignedto
thereportingunitsaffectedusingarelativefairvalueallocationapproachsimilartothatusedwhen
aportionofareportingunitistobedisposedof(refertoparagraph39)[see11.55].Forexample,if
existingreportingunitAistobeintegratedwithreportingunitsB,C,andD,goodwillinreporting
unitAwouldbeassignedtounitsB,C,andDbasedontherelativefairvaluesofthethreeportionsof
reportingunitApriortothoseportionsbeingintegratedwithreportingunitsB,C,andD.
When to Test Goodwill for Impairment
11.25 Paragraph26ofStatement142states:
Goodwillofareportingunitshallbetestedforimpairmentonanannualbasisandbetweenannualtestsincertaincircumstances(refertoparagraph28).[See11.26.]Theannualgoodwillimpairment
testmaybeperformedanytimeduringthefiscalyearprovidedthetestisperformedatthesametime
everyyear.Differentreportingunitsmaybetestedforimpairmentatdifferenttimes.
11.26 Paragraph28ofStatement142states:
Goodwillofareportingunitshallbetestedforimpairmentbetweenannualtestsifaneventoccursor
circumstanceschangethatwouldmorelikelythannotreducethefairvalueofareportingunitbelow
itscarryingamount.Examplesofsucheventsorcircumstancesinclude:
a. Asignificantadversechangeinlegalfactorsorinthebusinessclimate
b. Anadverseactionorassessmentbyaregulator
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 191/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 192/286179
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
11.30 Paragraph7ofStatement154states:
Anentityshallreportachangeinaccountingprinciplethroughretrospectiveapplicationofthenew
accountingprincipletoallpriorperiods,unlessitisimpracticabletodoso.Retrospectiveapplication
requiresthefollowing:
a. Thecumulativeeffectofthechangetothenewaccountingprincipleonperiodspriorto
thosepresentedshallbereflectedinthecarryingamountsofassetsandliabilitiesasofthebeginningofthefirstperiodpresented.
b. Anoffsettingadjustment,ifany,shallbemadetotheopeningbalanceofretainedearnings
(orotherappropriatecomponentsofequityornetassetsinthestatementoffinancial
position)forthatperiod.
c. Financialstatementsforeachindividualpriorperiodpresentedshallbeadjustedtoreflectthe
period-specificeffectsofapplyingthenewaccountingprinciple.
11.31 Entitiesshouldnotassumethatthatachangeintheirgoodwillimpairmenttestingdate,when
appliedtopriorperiods,willnotyieldadifferentfinancialstatementresult.Foranentitytocomply
withtherequirementsofStatement154,itmustdemonstratethatsuchretrospectiveapplication
ofthenewgoodwillimpairmenttestingdatewouldnotyieldadifferentfinancialstatementresultormustotherwiseshowthat,pursuanttoparagraph11ofStatement154,suchadeterminationis
impracticable.
Performing the Two-Step Goodwill Impairment Test
11.32 Paragraphs19–21ofStatement142describethefollowingtwo-stepgoodwillimpairmenttest
basedthefairvaluedeterminedforeachreportingunit(see11.37–11.49).
Step 1
Determinewhetherthefairvalueofthereportingunitislessthanitscarryingamount,including
goodwill.
Ifthefairvalueofthereportingunitisless,proceedtostep2.
Ifthefairvalueofthereportingunitisnotless,furthertestingofgoodwillforimpairmentisnot
performed.
Step 2
Determinetheimpliedfairvalueofgoodwillofthereportingunitbyassigningthefairvalueof
thereportingunitusedinstep1toalltheassetsandliabilitiesofthatreportingunit(includingany
recognizedandunrecognizedintangibleassets)asifthereportingunithadbeenacquiredinabusiness
combination.
Comparetheimpliedfairvalueofgoodwilltothecarryingamountofgoodwilltodeterminewhether
goodwillisimpaired.
Note: Paragraph21ofStatement142providesthattheassignmentprocessinstep 2 “shallbe
performedonlyforpurposesoftestinggoodwillforimpairment;anentityshallnotwriteuporwrite
downarecognizedassetorliability,norshoulditrecognizeapreviouslyunrecognizedintangibleassetas
aresultofthatallocationprocess.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 193/286180
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 11-5
Illustration of a Goodwill Impairment Test When the Fair Value of a Reporting Unit Exceeds the CarryingAmount (Step 2 Not Required)
Step 1 Step 2
Reporting Unit Not Required
Cash $ 100
PP&E 800
Goodwill 400
Subtotal 1,300
Liabilities (200)
Carryingamount 1,100
Fairvalueofreportingunit 1,200
Result: Pass step 1* $ 100
*Becausethefairvalueofthereportingunitexceedsthecarryingamount,nofurthertestingofgoodwillforimpairmentisnecessary.
Example 11-6
Illustration of a Goodwill Impairment Test When Step 2 Is Required and Goodwill ImpairmentResults
Step 1 Step 2
Reporting Unit Reporting Unit
Cash $ 100
PP&E 1,100
Goodwill 400
Subtotal 1,600
Liabilities (200)
Carryingamount 1,400
Fairvalueofreportingunit 1,200
Result: Fail step 1* $ (200)
Cash $ 100
PP&E 1,200
Trademark* 50
Subtotal 1,350
Liabilities (200)
Netassets 1,150
Fairvalueofreportingunit 1,200
Impliedfairvalueofgoodwill $ 50
Carryingamountofgoodwill $ 400
Impairmentamount $ 350
*Trademarkrepresentsapreviouslyunrecognizedintangibleasset.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 194/286181
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 11-7
Illustration of a Goodwill Impairment Test When Step 2 Is Required but No Goodwill ImpairmentResults
Step 1 Step 2
Reporting Unit Reporting Unit
Cash $ 100
PP&E 1,100
Goodwill 400
Subtotal 1,600
Liabilities (200)
Carryingamount 1,400
Fairvalueofreportingunit 1,300
Result: Fail step 1* $ (100)
Cash $ 100
PP&E* 950
Subtotal 1,050
Liabilities (200)
Netassets 850
Fairvalueofreportingunit 1,300
Impliedfairvalueofgoodwill $ 450
Carryingamountofgoodwill $ 400Impairmentamount $ 0
*EventhoughReportingUnit1failedstep1,nogoodwillimpairmentisrecognizedbecausetheimpliedfairvalueofgoodwillis$450.ThedeclineinfairvalueofthereportingunitisduetothedeclineinfairvalueofPP&E.Beforestep1ofthegoodwillimpairmenttest,thePP&Ewasnotconsideredimpaired.See 11.33–11.35regardingtheorderoftestinglong-livedassetsandgoodwillforimpairment.
Interaction of the Goodwill Impairment Test and the Long-Lived Asset ImpairmentTest
11.33 Calculatingthefairvalueofassetsandliabilitiesunderstep2mayrevealthatanasset’scarrying
valueisgreaterthanitsfairvalueandthatthereforetheassetorgroupofassetsshouldbetestedfor
impairmentunderStatement144.Iftheassetorassetgroupisimpaired,theimpairmentlosswouldbe
recognizedbeforegoodwillistestedforimpairment.Consequently,step1ofthegoodwillimpairment
testwouldneedtobeperformedagain.
11.34 Paragraph29ofStatement142states:
Ifgoodwillandanotherasset(orassetgroup)ofareportingunitaretestedforimpairmentatthe
sametime,theotherasset(orassetgroup)shallbetestedforimpairmentbeforegoodwill.For
example,ifasignificantassetgroupistobetestedforimpairmentunderStatement144(thus
potentiallyrequiringagoodwillimpairmenttest),theimpairmenttestforthesignificantassetgroup
wouldbeperformedbeforethegoodwillimpairmenttest.Iftheassetgroupwasimpaired,the
impairmentlosswouldberecognizedpriortogoodwillbeingtestedforimpairment.
11.35 Becausetheimpairmenttestforlong-livedassetsisperformedbeforetheimpairmenttestfor
goodwill,goodwillislesslikelytobeimpairedbecausewritingdownlong-livedassetswillcausethe
carryingvalueofthereportingunittobereduced.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 195/286182
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 11-8
Interaction Between the Goodwill Impairment Test and the Long-Lived Asset Impairment Test
Step 1 Step 2
Initial Reporting Unit Test Reporting Unit
Cash $ 100
PP&E 1,100
Goodwill 400
Subtotal 1,600
Liabilities (200)
Carryingamount 1,400
Fairvalueofreportingunit 1,200
Result: Fail step 1 $ (200)
Cash $ 100
PP&E 800
Subtotal 900
Liabilities (200)
Netassets 700
Fairvalueofreportingunit 1,200
Impliedfairvalueofgoodwill $ 500
Carryingamountofgoodwill $ 400
Impairmentamount $ 0
Step2ofthegoodwillimpairmenttestrevealsthatthefairvalueofthecompany’sPP&E($800)isactuallylessthanthecarryingvalue($1,100).ManagementbelievesthatbecausethePP&Eisitsownassetgroup,itmustbetestedforimpairmentinaccordancewithStatement144.Asaresultoftheimpairmenttest,thecompanyrecordsanimpairmentchargeforthePP&Eof$300(assumethatstep1oftheimpairmenttestrequiredbyStatement144wasalsofailed)andperformsstep1ofthegoodwillimpairmenttestagainasshownbelow.
Step 1
Subsequent Reporting Unit Test
Cash $ 100
PP&E 800 ($1,100–$300impairment)
Goodwill 400
Subtotal 1,300
Liabilities (200)Carryingamount 1,100
Fairvalueofreportingunit 1,200
Result: Pass step 1 $ 100
Becausethefairvalueofthereportingunitisnowgreaterthantheadjustedcarryingamountofthereportingunit,thecompanywouldnotrecordanyimpairmentchargesrelatedtoitsgoodwill.Theexcessofthereportingunit’scarryingamountoveritsfairvalueintheinitialstep1test($200)wascreatedasaresultoftheimpairedPP&E.
Consideration of Assembled Workforce in the Performance of Step 2 of theGoodwill Impairment Test
11.36 Asnotedin5.07,Statement141(R)doesnotallowanentitytorecognizeanintangibleassetforanassembledworkforceacquiredinabusinesscombination.However,anentitymayhaverecognized
anintangibleassetforanassembledworkforceifitacquiredtheworkforcewithagroupofassetsthat
didnotmeetthedefinitionofabusiness.Theassembledworkforceintangibleassetmaybepartof
areportingunitthatissubjectedtostep2ofthegoodwillimpairmenttest.Inperformingstep2,an
entitywouldassignnovaluetotheassembledworkforceintangibleassetbecausesuchassetisnot
recognizableunderStatement141(R).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 196/286183
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Fair Value Measurements
11.37 Paragraph23ofStatement142(asamendedbyparagraphE22ofStatement157)states:
Thefairvalueofareportingunitreferstothepricethatwouldbereceivedtoselltheunitasa
wholeinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Quoted
marketpricesinactivemarketsarethebestevidenceoffairvalueandshallbeusedasthebasisforthemeasurement,ifavailable.However,themarketpriceofanindividualequitysecurity(and
thusthemarketcapitalizationofareportingunitwithpubliclytradedequitysecurities)maynotbe
representativeofthefairvalueofthereportingunitasawhole.Substantialvaluemayarisefromthe
abilitytotakeadvantageofsynergiesandotherbenefitsthatflowfromcontroloveranotherentity.
Consequently,measuringthefairvalueofacollectionofassetsandliabilitiesthatoperatetogetherin
acontrolledentityisdifferentfrommeasuringthefairvalueofthatentity’sindividualequitysecurities.
Anacquiringentityofteniswillingtopaymoreforequitysecuritiesthatgiveitacontrollinginterest
thananinvestorwouldpayforanumberofequitysecuritiesrepresentinglessthanacontrolling
interest.Thatcontrolpremiummaycausethefairvalueofareportingunittoexceeditsmarket
capitalization.Thequotedmarketpriceofanindividualequitysecurity,therefore,neednotbethe
solemeasurementbasisofthefairvalueofareportingunit.
11.38 Paragraph25ofStatement142states:
Inestimatingthefairvalueofareportingunit,avaluationtechniquebasedonmultiplesofearnings
orrevenueorasimilarperformancemeasuremaybeusedifthattechniqueisconsistentwiththe
objectiveofmeasuringfairvalue.Useofmultiplesofearningsorrevenueindeterminingthefair
valueofareportingunitmaybeappropriate,forexample,whenthefairvalueofanentitythathas
comparableoperationsandeconomiccharacteristicsisobservableandtherelevantmultiplesofthe
comparableentityareknown.Conversely,useofmultipleswouldnotbeappropriateinsituations
inwhichtheoperationsoractivitiesofanentityforwhichthemultiplesareknownarenotofa
comparablenature,scope,orsizeasthereportingunitforwhichfairvalueisbeingestimated.
11.39 AnyvaluationtechniqueshouldincorporatetheprinciplesofStatement157.Oneofthe
Statement’soverallprinciplesisthatthefairvalueofassetsandliabilitiesshouldbedeterminedonthebasisofassumptionsthatmarketparticipantswoulduseinpricingassetsandliabilities.
11.40 Paragraph23ofStatement142(see11.37)indicatesthatmeasuringthefairvalueofareporting
unitbyreferringtothequotedmarketpriceoftheindividualequitysecuritiesofthatreportingunit
(pricetimesquantity)mayrequireadjustmentforacontrolpremium.Statement157doesnotamend
theguidanceinparagraph23ofStatement142regardingacontrolpremium.Accordingly,whenthe
fairvalueofareportingunitismeasuredbyreferencetoquotedmarketpricesofindividualequity
securitiesofthatreportingunit,thepresenceofacontrolpremiummustbeevaluatedand,ifdeemed
appropriate,included.
11.41 Ifindividualreportingunitsdonothaveseparatelytradedequitysecurities,itwouldbe
inappropriatetoallocatethepersharemarketvalueoftheconsolidatedentity’sequitytotheindividual
reportingunits.
11.42 Statement142doesnotrequireacomparisonofanentity’smarketcapitalizationwith
theaggregatesumofthefairvalueofitsreportingunitsaspartofanoverallassessmentofthe
appropriatenessofthefairvaluemeasurementsofindividualreportingunits.However,entitiesoften
performsuchacomparisonbecauseitcansometimesyieldusefulinformationaboutthereasonableness
ofthefairvaluemeasurements.Theexerciseofjudgmentwillberequiredwhenthecomparisonis
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 197/286184
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
reviewedforfactorsthatmayindicateappropriatedifferences(e.g.,acontrolpremium).Additional
estimatesorassumptionsarerequiredwhenportionsofanentity’sbusinessdonothavegoodwill
assignedandthusdonothavearequirementfortheperiodicmeasurementoffairvalue.Inprepared
remarksatthe2008AICPANationalConferenceonCurrentSECandPCAOBDevelopments,anSEC
staffmember(RobertG.FoxIII)addressedthestaff’sviewondeterminingthereasonablenessofcontrol
premiums:
…theamountofacontrolpremiuminexcessofaregistrant’smarketcapitalizationcanrequire
agreatdealofjudgment.ContrarytosomerumorsIhaveheard,thestaffdoesnothave“bright
line”teststhatweuseindeterminingthereasonablenessofacontrolpremium.Instead,webelieve
thataregistrantneedstocarefullyanalyzethefactsandcircumstancesoftheirparticularsituation
whendetermininganappropriatecontrolpremiumandthatthereisnormallyarangeofreasonable
judgmentsaregistrantmightreach.Whileitwouldbeprudenttoreconcilethecombinedfairvalueof
yourreportingunitstoyourmarketcapitalization,Ibelievethatthisshouldnotbeviewedastheonly
factortoconsiderinassessinggoodwillforimpairment.
11.43 TheSECstafffrequentlyreferstomarketcapitalizationofanentitywhencommentingabout
anentity’simpairmenttestingofgoodwill.Whenanenterprise’sbookvalueisgreaterthanitsmarket
capitalization,questionsmayberaisedaboutwhethersuchstatusindicatesthatgoodwillshouldbe
testedforimpairmentor,ifgoodwillwastested,whethergoodwillatoneormorereportingunitsis
impaired.Entitiesshouldbeabletoexplainhowsuchstatusaffectedtheirjudgmentsintheseareas.
11.44 See3.62–3.63fordiscussionabouttheuseofathird-partyspecialisttoassistinthe
measurementoffairvalue.
Determining Fair Value When an Entity Has Only One Reporting Unit
11.45 Whileparagraph23ofStatement142statesthat“[q]uotedmarketpricesinactivemarkets
arethebestevidenceoffairvalue,”itnotesthatthesemarketpricesmaynotberepresentativeoffair
valueasawhole.Therefore,incertaininstanceswhenanentityonlyhasonereportingunit,theuseof
thecurrentquotedmarketpriceofitspubliclytradedsecuritiesmaynotrepresentthefairvalueofthe
entity.Forexample,amarketparticipantmaybewillingtopayapremiumovercurrentmarketpriceto
obtainthesynergiesandotherbenefitsthatcontrolwouldprovide(i.e.,acontrolpremium).
Changing the Method of Determining the Fair Value of a Reporting Unit
11.46 AlthoughStatement142providesguidanceondeterminingthefairvalueofareportingunit,it
doesnotindicatewhetheraconsistentmethodmustbeusedeachtimethegoodwillimpairmenttest
isperformed.Whileentitiesshouldgenerallyuseaconsistentmethodtocalculatethefairvalueofa
reportingunitwhenperformingtheimpairmenttest,theremaybeinstanceswhenadifferentmethod
wouldyieldmorereliableresults.Forexample,areportingunitthatcompletesapublicofferingofits
commonstockmaywishtousethequotedmarketpriceofthecommonstockinsteadofapresent
valuetechnique.Undernocircumstancesshouldentitieschangetheirmethodstoavoidrecognizinga
goodwillimpairmentcharge.Similarly,entitiesshouldnotchangemethodstoacceleratetherecording
ofanimpairmentcharge.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 198/286185
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Carrying Forward the Fair Value of a Reporting Unit From One Annual Testing Dateto the Next
11.47 Anentitydoesnotnecessarilyhavetorecalculatethefairvalueofareportingunitdetermined
instep1ofthegoodwillimpairmenttesteachyear.IntegraltotheFASB’sdecisionthatgoodwillshould
betestedforimpairmentannuallywasitsviewthatanannualrequirementshouldnotcallfora“fresh
start”effortwitheveryfairvaluedetermination.Thatis,theBoardnotedthatmanyentitiesshould
beabletoconcludethatthefairvalueofareportingunitisgreaterthanitscarryingamountwithout
recalculatingthefairvalueofthereportinguniteachannualperiod.
11.48 Paragraph27ofStatement142states:
Adetaileddeterminationofthefairvalueofareportingunitmaybecarriedforwardfromoneyearto
thenextifallofthefollowingcriteriahavebeenmet:
a. Theassetsandliabilitiesthatmakeupthereportingunithavenotchangedsignificantlysince
themostrecentfairvaluedetermination.(Arecentsignificantacquisitionorareorganization
ofanentity’ssegmentreportingstructureisanexampleofaneventthatmightsignificantly
changethecompositionofareportingunit.)
b. Themostrecentfairvaluedeterminationresultedinanamountthatexceededthecarrying
amountofthereportingunitbyasubstantialmargin.
c. Basedonananalysisofeventsthathaveoccurredandcircumstancesthathavechangedsince
themostrecentfairvaluedetermination,thelikelihoodthatacurrentfairvaluedetermination
wouldbelessthanthecurrentcarryingamountofthereportingunitisremote.
11.49 Anentitywishingtocarryforwardthefairvaluemeasurementofareportingunitfromthe
previousyearmustcarefullyanalyzetheentity’sspecificsituationtodetermineiftheabovecriteriaare
met.See14.31foradditionaltransitionalconsiderationsuponanentity’sinitialadoptionofStatements
141(R)and157.
Applying the Goodwill Impairment Test to a Reporting Unit With a NegativeCarrying Value
11.50 InitsNovember21,2002,report,theEITFAgendaCommitteenotedthatitconsideredthe
followingissueregardingtheapplicationofstep1ofthegoodwillimpairmenttest:
Ifareportingunithasanegativecarryingvalue,thatis,theliabilitiesofthereportingunitexceedits
assets,whetherthereportingunitpassesStep1ofthegoodwillimpairmenttestsolelybasedonits
negativecarryingvalue,assumingitsfairvalueiszeroorgreater.
AlthoughthereportstatedthatthecommitteerecommendedthatthisissuenotbeaddedtotheEITF’s
agenda,itnoted:
[T]heAgendaCommitteeagreedthatparagraph19ofStatement142requiresthat‘Ifthefairvalue
ofareportingunitexceedsitscarryingamount,goodwillofthereportingunitisconsiderednot
impaired,thusthesecondstepoftheimpairmenttestisunnecessary.’WhiletheAgendaCommittee
membersagreedthat[theissue](involvingnegativecarryingvalue)warrantedfurtherconsideration,
theyindicatedthatresolutionofthatIssuewouldrequireBoardinvolvementandperhapsan
amendmenttoStatement142.
Todate,theFASBhasprovidednofurtherguidanceonthisissue.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 199/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 200/286187
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
8. TheTaskForceobservedthatinperformingStep2ofthegoodwillimpairmenttest,the
impliedfairvalueofareportingunit’sgoodwillisdeterminedinthesamemannerthat
theamountofgoodwillrecognizedinabusinesscombinationaccountedforinaccordance
withStatement141isdetermined.Paragraph38ofStatement141indicatesthatadeferred
taxliabilityorassetshallberecognizedfordifferencesbetweentheassignedvaluesand
theincometaxbasesoftherecognizedassetsacquiredandliabilitiesassumedinabusiness
combinationinaccordancewithparagraph30ofStatement109.Totheextentpresent,tax
attributesthatwillbetransferredintheassumedtaxstructure,suchasoperatinglossortax
creditcarryforwards,shouldbevaluedconsistentwiththeguidancecontainedinparagraph
135ofStatement109.
11.52 ExamplesdemonstratingtheconsensusesreachedinIssue02-13aregiveninparagraph9,which
notesthat“theseexamplesmaynotnecessarilybeindicativeofactualincometaxliabilitiesthatwould
ariseinthesaleofareportingunitortherelationshipofthoseliabilitiesinataxableversusnontaxable
structure.”
Reporting Requirements When Step 2 of the Goodwill Impairment Test Is NotComplete
11.53 Paragraph22ofStatement142states:
Ifthesecondstepofthegoodwillimpairmenttestisnotcompletebeforethefinancialstatements
areissuedandagoodwillimpairmentlossisprobableandcanbereasonablyestimated,thebest
estimateofthatlossshallberecognizedinthosefinancialstatements.[Footnoteomitted]Paragraph
47(c)requiresdisclosureofthefactthatthemeasurementoftheimpairmentlossisanestimate[see
13.32].Anyadjustmenttothatestimatedlossbasedonthecompletionofthemeasurementofthe
impairmentlossshallberecognizedinthesubsequentreportingperiod.
Goodwill Impairment Testing by a Subsidiary
11.54 Paragraph37ofStatement142states:
Allgoodwillrecognizedbyapublicornonpublicsubsidiary(subsidiarygoodwill)initsseparate
financialstatementsthatarepreparedinaccordancewithgenerallyacceptedaccountingprinciples
shallbeaccountedforinaccordancewiththisStatement.Subsidiarygoodwillshallbetestedfor
impairmentatthesubsidiarylevelusingthesubsidiary’sreportingunits.Ifagoodwillimpairmentloss
isrecognizedatthesubsidiarylevel,goodwillofthereportingunitorunits(atthehigherconsolidated
level)inwhichthesubsidiary’sreportingunitwithimpairedgoodwillresidesmustbetestedfor
impairmentiftheeventthatgaverisetothelossatthesubsidiarylevelwouldmorelikelythannot
reducethefairvalueofthereportingunit(atthehigherconsolidatedlevel)belowitscarryingamount
(refertoparagraph28(g)).Onlyifgoodwillofthathigher-levelreportingunitisimpairedwoulda
goodwillimpairmentlossberecognizedattheconsolidatedlevel.
Example 11-9 Goodwill Impairment Testing by a Subsidiary When the Subsidiary Is Public and Has GoodwillRecorded
AssumeCompanyP(Parent)acquired100percentofCompanyB,electingtoretainCompanyBasaseparatecorporateentity(SubsidiaryB).SubsidiaryB,anSECregistrantthroughtheissuanceofpublicdebt,hasgoodwillrecordedonitsbooksentirelyasaresultoftheapplicationofpush-downaccountingbyCompanyP(see Section 9fordiscussionofpush-downaccounting).Inaccordancewithparagraph37ofStatement142,goodwillrecognizedintheseparatefinancialstatementsofSubsidiaryBmustbetestedforimpairmentusingthereportingunitstructureidentifiedforSubsidiaryB.Also,inaccordancewithparagraph37ofStatement142,ifagoodwillimpairmentlossisrecognizedbySubsidiaryB,goodwillofthereportingunitorunitsatCompanyPinwhichSubsidiaryBresidesmustbetestedforimpairmentiftheeventthatgaverisetothelossatSubsidiaryBwouldmorelikelythannotreducethefairvalueofthereportingunitatCompanyPbelowitscarryingamount.Onlyifgoodwillofthathigher-levelreportingunitisimpairedwouldanimpairmentofgoodwillberecognizedattheconsolidatedlevelofCompanyP.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 201/286188
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 11-10
Goodwill Impairment Testing by a Subsidiary When the Subsidiary Is Nonpublic and Has GoodwillAssigned Under Statement 142
AssumeCompanyP(Parent)acquired100percentofCompanyB,electingtoretainCompanyBasaseparatecorporateentity(SubsidiaryB).SubsidiaryBisnotanSECregistrantandhasnopreexistinggoodwillrecognized.SubsidiaryBhas
beenidentifiedasareportingunitofCompanyP,whichhaselectednottoapplypush-downaccounting(seeSection9fordiscussionofpush-downaccounting).AlthoughSubsidiaryBhasnogoodwillrecognizedinitsseparatefinancialstatements,asareportingunitofCompanyP,CompanyPhasdeterminedanassignmentofgoodwilltothereportingunitisnecessary.FurtherassumethatseparatefinancialstatementsforSubsidiaryBarepreparedinaccordancewithGAAPforstatutoryreportingpurposes.AlthoughSubsidiaryBhasseparatefinancialstatementspreparedinaccordancewithGAAP,goodwilltestingattheseparatesubsidiarylevelisnotrequired,sincegoodwillisnotrecognizedintheseparatefinancialstatementsofSubsidiaryBbutisonlyassignedtoSubsidiaryBasareportingunitofCompanyP.
Disposal of All or a Portion of a Reporting Unit
11.55 Paragraph39ofStatement142statesthat“[w]henareportingunitistobedisposedofinits
entirety,goodwillofthatreportingunitshallbeincludedinthecarryingamountofthereportingunitin
determiningthegainorlossondisposal.”
11.56 Paragraph39ofStatement142furtherstates:
Whenaportionofareportingunitthatconstitutesabusiness[footnoteomitted][see1.08]istobe
disposedof,goodwillassociatedwiththatbusinessshallbeincludedinthecarryingamountofthe
businessindeterminingthegainorlossondisposal.Theamountofgoodwilltobeincludedinthat
carryingamountshallbebasedontherelativefairvaluesofthebusinesstobedisposedofandthe
portionofthereportingunitthatwillberetained.Forexample,ifabusinessisbeingsoldfor$100
andthefairvalueofthereportingunitexcludingthebusinessbeingsoldis$300,25percentofthe
goodwillresidinginthereportingunitwouldbeincludedinthecarryingamountofthebusinessto
besold.However,ifthebusinesstobedisposedofwasneverintegratedintothereportingunitafter
itsacquisitionandthusthebenefitsoftheacquiredgoodwillwereneverrealizedbytherestofthe
reportingunit,thecurrentcarryingamountofthatacquiredgoodwillshallbeincludedinthecarryingamountofthebusinesstobedisposedof.Thatsituationmightoccurwhentheacquiredbusinessis
operatedasastand-aloneentityorwhenthebusinessistobedisposedofshortlyafteritisacquired.
Whenonlyaportionofgoodwillisallocatedtoabusinesstobedisposedof,thegoodwillremaining
intheportionofthereportingunittoberetainedshallbetestedforimpairmentinaccordancewith
paragraphs19–22(usingitsadjustedcarryingamount).
11.57 ParagraphB166ofStatement142states,inpart:
[T]hisStatementrequiresthattherelative-fair-valueallocationmethod[seeparagraph39ofStatement
142and11.55]notbeusedtoallocategoodwilltoabusinessbeingdisposedofifthatbusinesswas
notintegratedintothereportingunitafteritsacquisition.Boardmembersnotedthatthosesituations
(suchaswhentheacquiredbusinessisoperatedasastand-aloneentity)wouldbeinfrequentbecause
someamountofintegrationgenerallyoccursafteranacquisition.
Goodwill Impairment Testing and Disposal of All or a Portion of a Reporting UnitWhen the Reporting Unit Is Less Than Wholly Owned
11.58 Paragraph39AofStatement142states:
Ifareportingunitislessthanwhollyowned,thefairvalueofthereportingunitandtheimplied
fairvalueofgoodwillshallbedeterminedinthesamemannerasitwouldbedeterminedina
businesscombinationaccountedforinaccordancewithStatement141(R).Anyimpairmentloss
measuredinthesecondstepofthegoodwillimpairmenttestshallbeattributedtotheparentand
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 202/286189
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
thenoncontrollinginterestonarationalbasis.Forexample,beforeStatement141(R)waseffective,
generallyonlythegoodwillattributabletotheparentwasrecognized.Ifthereportingunitincludes
onlygoodwillattributabletotheparent,thegoodwillimpairmentlosswouldbeattributedentirely
totheparent[see14.74].However,ifthereportingunitincludesgoodwillattributabletoboththe
parentandthenoncontrollinginterest,thegoodwillimpairmentlosswouldbeattributedtoboththe
parentandthenoncontrollinginterest.Similarly,whenalloraportionofaless-than-whollyowned
reportingunitisdisposedof,thegainorlossondisposalshallbeattributedtotheparentandthe
noncontrollinginterest.
11.59 Whenassetsofareportingunitthatdonotconstituteabusiness(asdeterminedunder
Statement141(R))aredisposedof,noamountofgoodwillisincludedinthecarryingamountofthose
assetssincegoodwillisonlyassociatedwithabusiness.Goodwillofthereportingunitmay,however,
requiretestingforimpairmentifthedisposalisdeterminedtoconstituteaneventorcircumstance
requiringtestingofgoodwillofthereportingunitbetweenannualdates(see11.26).
Assessing the Impact of Goodwill Assignments on the Determination of Gain orLoss on Disposal of a Reporting Unit
11.60 Paragraph39ofStatement142providesthat“[w]henareportingunitistobedisposedofin
itsentirety,goodwillofthatreportingunitshallbeincludedinthecarryingamountofthereporting
unitindeterminingthegainorlossondisposal.”Questionshavearisenconcerningsubsidiaries
(constitutingreportingunits)thatissueseparatefinancialstatementswhenparentshaveassignedan
amountofgoodwilltothosesubsidiaries(reportingunits)thatisdifferentfromtheamountrecorded
inthesubsidiaries’separatefinancialstatements.Whendeterminingthegainorlossondisposal,an
entityshouldincludeonlytheamountofgoodwillallocatedbytheparenttothereportingunittobe
disposedofindeterminingthecarryingvalueofthatreportingunit.Sincetheassignmentofgoodwill
tothereportingunitforStatement142impairmenttestingmaynothaveresultedinaformalentryto
theaccountsofthereportingunit,anadjustmentwillbenecessaryattheparent’sconsolidatedlevelto
reclassifygoodwilltoorfromthereportingunitdisposedoftoproperlycalculatetheparent’sgainorlossondisposal.Example11-11illustratestheseprinciples.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 203/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 204/286191
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
11.62 Ifthecostoftheinvestmentinanequitymethodinvesteeislessthantheacquirer’sunderlying
equityinthenetassets,abargainpurchaseresults.Suchdifferenceshouldbeaccountedforpursuantto
theguidanceinparagraphs36–38ofStatement141(R).
11.63 Inamannerconsistentwiththeprinciplethatgoodwillrelatedtoanequitymethodinvestment
shouldnotbeamortized,aninvestorshouldnotrecognizeamortizationexpenserelatedtoitsportionof
theindefinite-livedintangibleassetsoftheinvestee.Thisisconsistentwiththeguidanceinparagraph16
ofStatement142.Inaddition,investorsshouldnotseparatelytesttheirbasisintheinvestee’sindefinite-
livedintangibleassetsforimpairment.Rather,inaccordancewithparagraph19(h)ofOpinion18,
entitiesshouldcontinuetotestthetotalequitymethodinvestmentforimpairment.
11.64 Issue08-6statesthefollowing:
Anequitymethodinvestorisrequiredtorecognizeother-than-temporaryimpairmentsofanequity
methodinvestmentinaccordancewithparagraph19(h)ofOpinion18.Anequitymethodinvestor
shallnotseparatelytestaninvestee’sunderlyingasset(s)forimpairment.However,anequitymethod
investorshallrecognizeitsshareofanyimpairmentchargerecordedbyaninvesteeinaccordance
withparagraphs19(b)and19(c)ofOpinion18andconsidertheeffect,ifany,oftheimpairmentontheinvestor’sbasisdifferenceintheassetsgivingrisetotheinvestee’simpairmentcharge.
11.65 Whileparagraph37ofStatement142wouldonlyrequireagoodwillimpairmentlossrecognized
atasubsidiaryleveltoberecognizedintheconsolidatedfinancialstatementsifthegoodwillofthe
reportingunitinwhichthesubsidiaryresidesisalsoimpaired,thiswouldnotapplytoequitymethod
investments.Ifanequitymethodinvesteerecognizesagoodwillimpairmentcharge,theinvestorshould
recognizeitsshareoftheimpairmentinitsfinancialstatementsinthesamemannerinwhichother
earningsoftheinvesteearerecognizedbytheinvestor.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 205/286192
Section 12 — Financial StatementPresentation Requirements
Intangible Assets
12.01 Thefinancialstatementpresentationrequirementsforintangibleassets,whetheracquiredindividually,withagroupofotherassets,orinabusinesscombination,arespecifiedinStatement142.
Presentation of Intangible Assets in the Consolidated Statement of FinancialPosition
12.02 Paragraph42ofStatement142providesthat“[a]taminimum,allintangibleassetsshallbe
aggregatedandpresentedasaseparatelineiteminthestatementoffinancialposition.However,that
requirementdoesnotprecludepresentationofindividualintangibleassetsorclassesofintangibleassets
asseparatelineitems.”
Presentation of Intangible Asset Amortization Expense and Impairment Losses inthe Consolidated Income Statement
12.03 Paragraph42ofStatement142states,inpart:
Theamortizationexpenseandimpairmentlossesforintangibleassetsshallbepresentedinincome
statementlineitemswithincontinuingoperationsasdeemedappropriateforeachentity.Paragraphs
14and16requirethatanintangibleassetbetestedforimpairmentwhenitisdeterminedthatthe
assetshouldnolongerbeamortizedorshouldbegintobeamortizedduetoareassessmentofits
remainingusefullife.Animpairmentlossresultingfromthatimpairmenttestshallnotberecognized
asachangeinaccountingprinciple.
12.04 TheSECstaffhasemphasizedthatindeterminingtheappropriateincomestatementclassificationofintangibleassetamortizationexpense,entitiesshouldconsiderboth(1)costofsalesand
(2)selling,general,andadministrativeexpense.Accordingly,classificationunderageneralcaptionsuch
as“amortizationexpense,”evenifwithincontinuingoperations,maynotbedeemedappropriate.
12.05 Factorsforentitiestoconsiderindeterminingtheappropriateincomestatementclassification
ofintangibleassetamortizationexpenseshouldinclude,butarenotlimitedto,thefunctionofthe
intangibleassetandtherequirementsofSECRegulationS-X,Rule5-03.Forexample,iftheentity
acquiresapatentnecessarytoproducegoodsforsale,theamortizationexpenseofthepatentwould
generallybepresentedasacomponentofcostofsalesorasimilarexpensecategory.
12.06 Regardingtheappropriateincomestatementclassificationofamortizationexpenseforintangibleassetsspecifictoacquiredtechnologymarketedtoothers,theSECstaffreferstotheguidancein
Question17ofFASBStaffImplementationGuide(Statement86),whichaddressestheamortization
expensepresentationofcapitalizedsoftwarecosts.Question17providesthat“[s]incetheamortization
relatestoasoftwareproductthatismarketedtoothers,theexpensewouldbechargedtocostofsales
orasimilarexpensecategory.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 206/286193
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Goodwill
12.07 Statement142specifiesthefinancialstatementpresentationrequirementsforgoodwill
recognizedinaccordancewithStatement141(R).
Presentation of Goodwill in the Consolidated Statement of Financial Position
12.08 Paragraph43ofStatement142providesthat“[t]heaggregateamountofgoodwillshallbe
presentedasaseparatelineiteminthestatementoffinancialposition.”Thegoodwilllineiteminthe
statementoffinancialpositionincludesthenoncontrollinginterest’sshareofgoodwill,ifany.
Presentation of Goodwill Impairment Losses in the Consolidated Income Statement
12.09 Paragraph43ofStatement142states:
Theaggregateamountofgoodwillimpairmentlossesshallbepresentedasaseparatelineiteminthe
incomestatementbeforethesubtotalincomefromcontinuingoperations(orsimilarcaption)unless
agoodwillimpairmentlossisassociatedwithadiscontinuedoperation.Agoodwillimpairmentloss
associatedwithadiscontinuedoperationshallbeincluded(onanet-of-taxbasis)withintheresultsofdiscontinuedoperations.
Noncontrolling Interest in a Subsidiary
12.10 ARB51,asamendedbyStatement160,providesfinancialstatementpresentationrequirements
fornoncontrollinginterests.UponadoptionofStatement160,entitiesshouldapplysuchpresentation
requirementsretrospectivelyforallpreviouslyrecognizednoncontrollinginterests.
Presentation of Noncontrolling Interests in the Consolidated Statement ofFinancial Position
12.11 Asdiscussedin7.05,entitiesmustlooktootherrelevantGAAPtodeterminewhetherafinancialinstrumentissuedbyasubsidiarycanbeclassifiedinshareholders’equityasrequiredbyARB51,as
amendedbyStatement160.Forinstrumentsthatmeettheequitycriteria,paragraph26ofARB51,as
amendedbyStatement160,states:
Thenoncontrollinginterestshallbereportedintheconsolidatedstatementoffinancialposition
withinequity,separatelyfromtheparent’sequity.Thatamountshallbeclearlyidentifiedandlabeled,
forexample,asnoncontrollinginterestinsubsidiaries(paragraphA3).Anentitywithnoncontrolling
interestsinmorethanonesubsidiarymaypresentthoseinterestsinaggregateintheconsolidated
financialstatements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 207/286194
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
12.12 Thefollowingexampleofaconsolidatedstatementoffinancialpositionisbasedonthe
illustrationinparagraphA3ofStatement160:
Example 12-1
XYZ Co.
Consolidated Statement of Financial PositionAs of December 31:
20X9 20X8
Assets:
TotalAssets $ 250,000 $ 225,000
Liabilities:
TotalLiabilities $ 120,000 $ 100,000
Equity:
XYZCo.shareholders’equity:
Commonstock($1parvalue) 10,000 10,000
Additionalpaid-incapital 24,000 24,000
RetainedEarnings 80,000 75,000
Accumulatedothercomprehensiveincome 4,000 5,000
TotalXYZCo.shareholders’equity 118,000 114,000
Noncontrollinginterest 12,000 11,000
TotalEquity 130,000 125,000
Totalliabilitiesandequity $ 250,000 $ 225,000
Presentation of Noncontrolling Interests in the Consolidated Statement of Income
12.13 Paragraph29ofARB51,asamendedbyStatement160,states:
Revenues,expenses,gains,losses,netincomeorloss,andothercomprehensiveincomeshallbe
reportedintheconsolidatedfinancialstatementsattheconsolidatedamounts,whichincludethe
amountsattributabletotheownersoftheparentandthenoncontrollinginterest.
12.14 Paragraph30ofARB51,asamendedbyStatement160,states,inpart:
Netincomeorlossandcomprehensiveincomeorloss,asdescribedinparagraph10ofFASB
Statement130,ReportingComprehensiveIncome ,shallbeattributedtotheparentandthe
noncontrollinginterest.
12.15 Basicanddilutedearningspershare,ifpresented,arecalculatedsolelyonthebasisofincome
attributedtothecontrollinginterest’sshareofitssubsidiaries’income.Thatis,incomeattributableto
noncontrollinginterestisexcludedfromthecomputation.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 208/286195
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
12.16 Thefollowingexampleofaconsolidatedstatementofincomeisbasedontheillustrationin
paragraphA4ofStatement160.
Example 12-2
XYZ Co.
Consolidated Statement of Income12-Months Ended December 31:
20X9 20X8 20X7
Revenues $ 750,000 $ 600,000 $ 500,000
Costsandexpenses (525,000) (450,000) (400,000)
Incomefromcontinuingoperations,beforetax 225,000 150,000 100,000
Incometaxes (78,000) (50,000) (35,000)
Incomefromcontinuingoperations 147,000 100,000 65,000
Lossfromdiscontinuedoperations,netoftax (25,000) — —
Netincome 122,000 100,000 65,000
Less:netincomeattributabletothenoncontrollinginterest (27,800) (20,000) (13,500)
NetincomeattributabletoXYZCo. $ 94,200 $ 80,000 $ 51,500
Basic and diluted earnings per share:
IncomefromcontinuingoperationsattributabletoXYZCo.commonshareholders
$ 0.07 $ 0.05 $ 0.05
Lossfromdiscontinuedoperations,netoftax,attributabletoXYZCo.commonshareholders (0.01) — —
NetincomeattributabletoXYZCo.commonshareholders $ 0.06 $ 0.05 $ 0.05
Weighted-averagenumberofsharesoutstanding 2,000,000 1,750,000 1,250,000
Amounts attributable to XYZ Co. common shareholders*
Incomefromcontinuingoperations 132,300 90,000 58,500
Lossfromdiscontinuedoperations,netoftax (22,500) — —
NetIncome $ 109,800 $ 90,000 $ 58,500
*Tablecanbedisplayedonthefaceoftheconsolidatedincomestatementorinthenotestotheconsolidatedfinancialstatements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 209/286196
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Presentation of Noncontrolling Interests in the Statement of ConsolidatedComprehensive Income
12.17 ThefollowingstatementofcomprehensiveincomeisbasedontheillustrationinparagraphA5
ofStatement160.Notethatthisinformationcanalsobepresentedonthefaceoftheconsolidated
statementinwhichcomprehensiveincomeispresented.
Example 12-13
XYZ Co.
Statement of Consolidated Comprehensive Income
12-Months Ended December 31:
20X9 20X8 20X7
NetIncome $ 122,000 $ 100,000 $ 65,000
Othercomprehensiveincome,netoftax:
Unrealizedholding(loss)gainonavailable-for-salesecurities,
netoftax
$ (1,000) $ 3,000 $ 2,000
Foreigncurrencytranslationgains 2,000 1,000 3,000
Totalothercomprehensiveincome,netoftax 1,000 4,000 5,000
Comprehensiveincome 123,000 104,000 70,000
Comprehensiveincomeattributabletothenoncontrollinginterest (28,000) (20,800) (14,500)
ComprehensiveincomeattributabletoXYZCo. $ 95,000 $ 83,200 $ 55,500
Presentation of Noncontrolling Interests in the Consolidated Statement of Changesin Shareholders’ Equity
12.18 Asdiscussedin7.05,aparentmustlooktootherrelevantGAAPtodeterminewhetherafinancialinstrumentissuedbyasubsidiaryandheldbyathirdpartycanbeclassifiedaspermanent
equity.Ifso,thefinancialinstrumentisconsideredanoncontrollinginterestthatiswithinthescope
ofStatement160,andtheparentisrequiredtopresentthefollowinginformationasrequiredby
paragraph38(c)ofARB51,asamendedbyStatement160:
Eitherintheconsolidatedstatementofchangesinequity,ifpresented,orinthenotestothe
consolidatedfinancialstatements,areconciliationatthebeginningandtheendoftheperiodofthe
carryingamountoftotalequity(netassets),equity(netassets)attributabletotheparent,andequity
(netassets)attributabletothenoncontrollinginterest.Thatreconciliationshallseparatelydisclose
(paragraphA6):
(1) Netincome(2) Transactionswithownersactingintheircapacityasowners,showingseparatelycontributions
fromanddistributionstoowners
(3) Eachcomponentofothercomprehensiveincome.
Theparentcanpresenttheaboveinformationintheconsolidatedstatementofchangesinshareholders’
equity,ifpresented,orinthenotestotheconsolidatedfinancialstatements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 210/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 211/286198
Section 13 — Financial StatementDisclosure Requirements
Business Combination Disclosures
13.01 Paragraph67ofStatement141(R)states:
Theacquirershalldiscloseinformationthatenablesusersofitsfinancialstatementstoevaluatethe
natureandfinancialeffectofabusinesscombinationthatoccurseither:
a. Duringthecurrentreportingperiod;or
b. Afterthereportingdatebutbeforethefinancialstatementsareissued.
Inaddition,anyadjustmentsrecognizedinthecurrentyearrelatedtobusinesscombinationsthat
occurredinpriorreportingperiodsmustbedisclosedasrequiredbyParagraph71ofStatement141(R).
13.02Paragraph73ofStatement141(R)statesthat“[i]fthespecificdisclosuresrequiredbythis
StatementandotherGAAPdonotmeettheobjectivessetoutinparagraphs67and71,theacquirer
shalldisclosewhateveradditionalinformationisnecessarytomeetthoseobjectives.”
General Disclosures
13.03Paragraphs68(a)–(e)ofStatement141(R)statethatanentitymustdisclosethefollowingfor
eachmaterialbusinesscombinationthatoccursduringthereportingperiod:
a. Thenameandadescriptionoftheacquiree.
b. Theacquisitiondate.[See3.01.]
c. Thepercentageofvotingequityinterestsacquired.
d. Theprimaryreasonsforthebusinesscombinationandadescriptionofhowtheacquirer
obtainedcontroloftheacquiree.
e. Aqualitativedescriptionofthefactorsthatmakeupthegoodwillrecognized,suchas
expectedsynergiesfromcombiningoperationsoftheacquireeandtheacquirer,intangible
assetsthatdonotqualifyforseparaterecognition,orotherfactors.
Consideration Transferred
13.04Paragraph68(f)ofStatement141(R)statesthatanentitymustdisclosethefollowingforeach
materialbusinesscombinationthatoccursduringthereportingperiod:
Theacquisition-datefairvalueofthetotalconsiderationtransferredandtheacquisition-datefairvalue
ofeachmajorclassofconsideration,suchas:[SeeSection 6.]
(1) Cash
(2) Othertangibleorintangibleassets,includingabusinessorsubsidiaryoftheacquirer
(3) Liabilitiesincurred,forexample,aliabilityforcontingentconsideration
(4) Equityinterestsoftheacquirer,includingthenumberofinstrumentsorinterestsissuedor
issuableandthemethodofdeterminingthefairvalueofthoseinstrumentsorinterests.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 212/286199
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Contingent Consideration and Indemnification Assets
13.05Paragraph68(g)ofStatement141(R)indicatesthatanentitymustdisclosethefollowingforeach
materialbusinesscombinationthatoccursduringthereportingperiod:
Forcontingentconsiderationarrangementsandindemnificationassets:[See6.22and4.47.]
(1) Theamountrecognizedasoftheacquisitiondate
(2) Adescriptionofthearrangementandthebasisfordeterminingtheamountofthepayment
(3) Anestimateoftherangeofoutcomes(undiscounted)or,ifarangecannotbeestimated,
thatfactandthereasonswhyarangecannotbeestimated.Ifthemaximumamountofthe
paymentisunlimited,theacquirershalldisclosethatfact.
13.06Inreportingperiodsaftertheacquisitiondate,paragraph72(b)requiresthefollowingdisclosures
relatedtocontingentconsiderationarrangements:
Foreachreportingperiodaftertheacquisitiondateuntiltheentitycollects,sells,orotherwiseloses
therighttoacontingentconsiderationasset,oruntiltheentitysettlesacontingentconsideration
liabilityortheliabilityiscancelledorexpires:
(1) Anychangesintherecognizedamounts,includinganydifferencesarisinguponsettlement
(2) Anychangesintherangeofoutcomes(undiscounted)andthereasonsforthosechanges
(3) Thedisclosuresrequiredbyparagraph32ofStatement157.[See13.25.]
Acquired Receivables
13.07Paragraph68(h)ofStatement141(R)statesthatanentitymustdisclosethefollowingforeach
materialbusinesscombinationthatoccursduringthereportingperiod:
ForacquiredreceivablesnotsubjecttotherequirementsofAICPAStatementofPosition03-3,
AccountingforCertainLoansorDebtSecuritiesAcquiredinaTransfer :
(1) Thefairvalueofthereceivables
(2) Thegrosscontractualamountsreceivable
(3) Thebestestimateattheacquisitiondateofthecontractualcashflowsnotexpectedtobe
collected.
Thedisclosuresshallbeprovidedbymajorclassofreceivable,suchasloans,directfinanceleasesin
accordancewithStatement13,andanyotherclassofreceivables.
Assets Acquired and Liabilities Assumed by Major Class
13.08Paragraph68(i)ofStatement141(R)providesthatanentitymustdisclosethefollowingforeach
materialbusinesscombinationthatoccursduringthereportingperiod:
Theamountsrecognizedasoftheacquisitiondateforeachmajorclassofassetsacquiredand
liabilitiesassumed(paragraphA107).
13.09ParagraphA107ofStatement141(R)includesanillustrativeexampleofmanyofthestatement’s
disclosurerequirements,includingthefollowingtablethatdisclosestheamountsrecognizedasofthe
acquisitiondateforeachmajorclassofassetsacquiredandliabilitiesassumed:
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 213/286200
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Recognized amounts of identifiable assets acquired and liabilities assumed
Financialassets 3,500
Inventory 1,000
Property,plant,andequipment 10,000
Identifiableintangibleassets 3,300
Financialliabilities (4,000)
Liabil itiesarisingfromcontingencies (1,000)
Totalidentifiablenetassets 12,800
Assets and Liabilities Arising From Contingencies
13.10Paragraph68(j)ofStatement141(R)statesthatanentitymustdisclosethefollowingforeach
materialbusinesscombinationthatoccursduringthereportingperiod:
Forassetsandliabilitiesarisingfromcontingencies:[See4.32.]
(1) Theamountsrecognizedattheacquisitiondateoranexplanationofwhynoamountwasrecognized(paragraph24)
(2) Thenatureofrecognizedandunrecognizedcontingencies
(3) Anestimateoftherangeofoutcomes(undiscounted)forcontingencies(recognizedand
unrecognized)or,ifarangecannotbeestimated,thatfactandthereasonswhyarange
cannotbeestimated.
Anacquirermayaggregatedisclosuresforassetsandliabilitiesarisingfromcontingenciesthatare
similarinnature.
13.11Paragraph72(c)requiresthefollowingdisclosuresrelatedtoassetsandliabilitiesarisingfrom
contingenciesinreportingperiodsaftertheacquisitiondate:
Foreachreportingperiodaftertheacquisitiondateuntiltheacquirercollects,sells,orotherwiseloses
therighttorecognizedassetsarisingfromcontingencies,ortheacquirersettlesrecognizedliabilities
oritsobligationtosettlethemiscancelledorexpires:
(1) Anychangesintherecognizedamountsofassetsandliabilitiesarisingfromcontingenciesand
thereasonsforthosechanges
(2) Anychangesintherangeofoutcomes(undiscounted)forbothrecognizedandunrecognized
assetsandliabilitiesarisingfromcontingenciesandthereasonsforthosechanges.
Goodwill
13.12 Paragraphs68(k)–(l)ofStatement141(R)indicatesthatanentitymustdisclosethefollowingfor
eachmaterialbusinesscombinationthatoccursduringthereportingperiod:
k. Thetotalamountofgoodwillthatisexpectedtobedeductiblefortaxpurposes.
l. IftheacquirerisrequiredtodisclosesegmentinformationinaccordancewithFASBStatement
No.131,DisclosuresAboutSegmentsofanEnterpriseandRelatedInformation ,theamount
ofgoodwillbyreportablesegment.Iftheassignmentofgoodwilltoreportingunitsrequired
byStatement142hasnotbeencompletedasofthedatethefinancialstatementsareissued,
theacquirershalldisclosethatfact.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 214/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 215/286202
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
q.Inabusinesscombinationachievedinstages:[See1.28.]
(1)Theacquisition-datefairvalueoftheequityinterestintheacquireeheldbytheacquirer
immediatelybeforetheacquisitiondate
(2)Theamountofanygainorlossrecognizedasaresultofremeasuringtofairvaluethe
equityinterestintheacquireeheldbytheacquirerbeforethebusinesscombination
(paragraph48)andthelineitemintheincomestatementinwhichthatgainorlossis
recognized.
Additional Disclosures by a Public Business Enterprise
13.17Paragraph9ofStatement131defines“publicbusinessenterprises”asfollows:
Publicbusinessenterprisesarethosebusinessenterprisesthathaveissueddebtorequitysecuritiesor
areconduitbondobligorsforconduitdebtsecurities[Footnote1a]thataretradedinapublicmarket
(adomesticorforeignstockexchangeoranover-the-countermarket,includinglocalorregional
markets),thatarerequiredtofilefinancialstatementswiththeSecuritiesandExchangeCommission,
orthatprovidefinancialstatementsforthepurposeofissuinganyclassofsecuritiesinapublic
market.
Footnote1a—Conduitdebtsecuritiesreferstocertainlimited-obligationrevenuebonds,
certificatesofparticipation,orsimilardebtinstrumentsissuedbyastateorlocalgovernmental
entityfortheexpresspurposeofprovidingfinancingforaspecificthirdparty(theconduit
bondobligor)thatisnotapartofthestateorlocalgovernment’sfinancialreportingentity.
Althoughconduitdebtsecuritiesbearthenameofthegovernmentalentitythatissues
them,thegovernmentalentityoftenhasnoobligationforsuchdebtbeyondtheresources
providedbyaleaseorloanagreementwiththethirdpartyonwhosebehalfthesecurities
areissued.Further,theconduitbondobligorisresponsibleforanyfuturefinancialreporting
requirements.
13.18Paragraph68(r)ofStatement141(R)states:
Iftheacquirerisapublicbusinessenterprise,asdescribedinparagraph9ofStatement131:
(1) Theamountsofrevenueandearningsoftheacquireesincetheacquisitiondateincludedin
theconsolidatedincomestatementforthereportingperiod
(2) Therevenueandearningsofthecombinedentityforthecurrentreportingperiodasthough
theacquisitiondateforallbusinesscombinationsthatoccurredduringtheyearhadbeenas
ofthebeginningoftheannualreportingperiod(supplementalproformainformation)
(3) Ifcomparativefinancialstatementsarepresented,therevenueandearningsofthecombined
entityforthecomparablepriorreportingperiodasthoughtheacquisitiondateforallbusiness
combinationsthatoccurredduringthecurrentyearhadoccurredasofthebeginningofthe
comparablepriorannualreportingperiod(supplementalproformainformation).
Ifdisclosureofanyoftheinformationrequiredbythissubparagraphisimpracticable,theacquirer
shalldisclosethatfactandexplainwhythedisclosureisimpracticable.ThisStatementusesthetermimpracticablewiththesamemeaningasimpracticabilityinparagraph11ofStatement154.
13.19“Impracticability”isdefinedinparagraph11ofStatement154asfollows:
Itshallbedeemedimpracticabletoapplytheeffectsofachangeinaccountingprinciple
retrospectivelyonlyifanyofthefollowingconditionsexist:
a. Aftermakingeveryreasonableefforttodoso,theentityisunabletoapplytherequirement.
b. Retrospectiveapplicationrequiresassumptionsaboutmanagement’sintentinapriorperiod
thatcannotbeindependentlysubstantiated.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 216/286203
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
c. Retrospectiveapplicationrequiressignificantestimatesofamounts,anditisimpossibleto
distinguishobjectivelyinformationaboutthoseestimatesthat:
(1) Providesevidenceofcircumstancesthatexistedonthedate(s)atwhichthoseamounts
wouldberecognized,measured,ordisclosedunderretrospectiveapplication,and
(2) Wouldhavebeenavailablewhenthefinancialstatementsforthatpriorperiodwere
issued.[Footnoteomitted]
13.20Taxbenefitsofnetoperatinglossesofanacquireebeforeabusinesscombinationwouldnot
bereflectedintheproformaresultsofoperationsinthepresentationofthesupplementalproforma
informationrequiredbyParagraph68(r)ofStatement141(R)becausetheywouldberecognizedas
either(1)adeferredtaxassetintheidentificationofassetsacquiredor(2)additionalgoodwillifa
deferredtaxassetisnotrecognizedbecauseitismorelikelythannotthatthetaxbenefitswillnotbe
realized.However,disclosuresofamountsandexpirationdatesofnetoperatinglossesandreasonsfor
significantvariationsinthecustomaryrelationshipsbetweenincometaxexpenseandpretaxaccounting
incomeshouldbeincludedwithpresentationsofproformaresultsofoperations.
Immaterial Business Combinations13.21Paragraph69ofStatement141(R)states:
Forindividuallyimmaterialbusinesscombinationsoccurringduringthereportingperiodthatare
materialcollectively,theacquirershalldisclosetheinformationrequiredbyparagraphs68(e)–68(r)in
theaggregate.[See13.03–13.20.]
13.22MaterialityunderStatement141(R)isnotthesameassignificanceunderRegulationS-X,Rule
3-05.Therefore,registrantsmustseparatelydeterminewhatfinancialstatementdisclosuresarerequired
underStatement141(R)foranindividuallymaterialbusinesscombination(orforindividuallyimmaterial
businesscombinationsthatarecollectivelymaterial)intheperiodpresented.
Business Combinations Completed After the Balance Sheet Date
13.23 Paragraph70ofStatement141(R)providesthat“[i]ftheacquisitiondateofabusiness
combinationisafterthereportingdatebutbeforethefinancialstatementsareissued,theacquirershall
disclosetheinformationrequiredbyparagraph68[see13.03–13.20]unlesstheinitialaccountingfor
thebusinesscombinationisincompleteatthetimethefinancialstatementsareissued.Inthatsituation,
theacquirershalldescribewhichdisclosurescouldnotbemadeandthereasonwhytheycouldnotbe
made.”(See13.24.)
Initial Accounting for the Business Combination Is Not Complete
13.24Paragraph72(a)ofStatement141requiresanacquirertodisclosethefollowinginformationfor
eachmaterialbusinesscombination.Forindividuallyimmaterialbusinesscombinationsthatarematerial
collectivelyandforwhichtheinitialaccountingforthebusinesscombinationisnotcomplete,the
informationmustbedisclosedintheaggregate.Theparagraphstatesasfollows:
Iftheinitialaccountingforabusinesscombinationisincomplete(paragraph51)forparticularassets,
liabilities,noncontrollinginterests,oritemsofconsiderationandtheamountsrecognizedinthe
financialstatementsforthebusinesscombinationthushavebeendeterminedonlyprovisionally:
(1) Thereasonswhytheinitialaccountingisincomplete
(2) Theassets,liabilities,equityinterests,oritemsofconsiderationforwhichtheinitialaccounting
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 217/286204
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
isincomplete
(3) Thenatureandamountofanymeasurementperiodadjustmentsrecognizedduringthe
reportingperiodinaccordancewithparagraph55.[See3.21.]
Statement 157 Disclosure Considerations (Postcombination)
13.25Someassetsacquiredandliabilitiesassumed(e.g.,contingentconsiderationarrangementsclassifiedasliabilities;see13.06)maybemeasuredtofairvalueonarecurringbasisafterthebusiness
combination.Insuchinstances,thefollowingfairvaluedisclosuresfromparagraph32ofStatement157
arerequiredinthepostcombinationfinancialstatements:
Forassetsandliabilitiesthataremeasuredatfairvalueonarecurringbasisinperiodssubsequentto
initialrecognition(forexample,tradingsecurities),thereportingentityshalldiscloseinformationthat
enablesusersofitsfinancialstatementstoassesstheinputsusedtodevelopthosemeasurementsand
forrecurringfairvaluemeasurementsusingsignificantunobservableinputs(Level3),theeffectof
themeasurementsonearnings(orchangesinnetassets)fortheperiod.Tomeetthatobjective,the
reportingentityshalldisclosethefollowinginformationforeachinterimandannualperiod(exceptas
otherwisespecified)separatelyforeachmajorcategoryofassetsandliabilities:
a. Thefairvaluemeasurementsatthereportingdate
b. Thelevelwithinthefairvaluehierarchyinwhichthefairvaluemeasurementsintheirentirety
fall,segregatingfairvaluemeasurementsusingquotedpricesinactivemarketsforidentical
assetsorliabilities(Level1),significantotherobservableinputs(Level2),andsignificant
unobservableinputs(Level3)
c. Forfairvaluemeasurementsusingsignificantunobservableinputs(Level3),areconciliation
ofthebeginningandendingbalances,separatelypresentingchangesduringtheperiod
attributabletothefollowing:[Footnoteomitted]
(1) Totalgainsorlossesfortheperiod(realizedandunrealized),segregatingthosegains
orlossesincludedinearnings(orchangesinnetassets),andadescriptionofwhere
thosegainsorlossesincludedinearnings(orchangesinnetassets)arereportedinthe
statementofincome(oractivities)
(2) Purchases,sales,issuances,andsettlements(net)
(3) Transfersinand/oroutofLevel3(forexample,transfersduetochangesinthe
observabilityofsignificantinputs)
d. Theamountofthetotalgainsorlossesfortheperiodinsubparagraph(c)(1)aboveincluded
inearnings(orchangesinnetassets)thatareattributabletothechangeinunrealizedgainsor
lossesrelatingtothoseassetsandliabilitiesstillheldatthereportingdateandadescriptionof
wherethoseunrealizedgainsorlossesarereportedinthestatementofincome(oractivities)
e. Inannualperiodsonly,thevaluationtechnique(s)usedtomeasurefairvalueandadiscussion
ofchangesinvaluationtechniques,ifany,duringtheperiod.
Interim Financial Information
13.26Statement141(R)doesnotreducethedisclosurerequirementsforinterimfinancialinformation
ofapublicbusinessenterprise.Thoseinparagraphs67–73ofStatement141(R)shouldbeappliedin
theperiodinwhichthebusinesscombinationoccurs.Further,thesupplementalproformainformation
requiredbyparagraph68(r)(see13.18)shouldbepresentedforthecurrentyear,thecurrentinterim
period,andcumulativeinterimperiodsfromtheacquisitiondatethroughtheendofthecurrentyear.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 218/286205
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
13.27ForSECregistrants,S-X,Rule10-01(b)(4),providesthefollowingguidancerelatedtoproforma
disclosuresformaterialbusinesscombinations:
Whereamaterialbusinesscombinationaccountedforasapurchasehasoccurredduringthecurrent
fiscalyear,proformadisclosureshallbemadeoftheresultsofoperationsforthecurrentyearup
tothedateofthemostrecentinterimbalancesheetprovided(andforthecorrespondingperiod
intheprecedingyear)asthoughthecompanieshadcombinedatthebeginningoftheperiodbeingreportedon.Thisproformainformationshallataminimumshowrevenue,incomebefore
extraordinaryitemsandthecumulativeeffectofaccountingchanges,includingsuchincomeonaper
sharebasis,andnetincomeandnetincomepershare.
Goodwill and Intangible Assets Disclosures
Disclosures in the Period of Acquisition
13.28Paragraph44ofStatement142states:
Forintangibleassetsacquiredeitherindividuallyoraspartofagroupofassets(ineitheranasset
acquisitionorbusinesscombination),thefollowinginformationshallbedisclosedinthenotestothe
financialstatementsintheperiodofacquisition:
a. Forintangibleassetssubjecttoamortization:
(1) Thetotalamountassignedandtheamountassignedtoanymajor intangible asset
class[definedinAppendixFofStatement142as“[a]groupofintangibleassetsthat
aresimilar,eitherbytheirnatureorbytheiruseintheoperationsofanentity”]
(2) Theamountofanysignificantresidualvalue,intotalandbymajorintangibleasset
class
(3) Theweighted-averageamortizationperiod,intotalandbymajorintangibleassetclass
b. Forintangibleassetsnotsubjecttoamortization,thetotalamountassignedandtheamount
assignedtoanymajorintangibleassetclass
c. Theamountofresearchanddevelopmentassetsacquiredinatransactionotherthanabusinesscombinationandwrittenoffintheperiodandthelineitemintheincomestatement
inwhichtheamountswrittenoffareaggregated.
Thisinformationshallbedisclosedseparatelyforeachmaterialbusinesscombinationorinthe
aggregateforindividuallyimmaterialbusinesscombinationsthatarematerialcollectivelyifthe
aggregatefairvaluesofintangibleassetsacquired,otherthangoodwill,aresignificant.
Disclosures, Including Segment Information, in Each Period Presented
13.29 Paragraph45ofStatement142states:
Thefollowinginformationshallbedisclosedinthefinancialstatementsorthenotestothefinancial
statementsforeachperiodforwhichastatementoffinancialpositionispresented:
a. Forintangibleassetssubjecttoamortization:
(1) Thegrosscarryingamountandaccumulatedamortization,intotalandbymajor
intangibleassetclass
(2) Theaggregateamortizationexpensefortheperiod
(3) Theestimatedaggregateamortizationexpenseforeachofthefivesucceedingfiscal
years
b. Forintangibleassetsnotsubjecttoamortization,thetotalcarryingamountandthecarrying
amountforeachmajorintangibleassetclass
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 219/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 220/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 221/286208
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
13.35 Paragraphs38(a)–(c)ofARB51,asamendedbyStatement160,providethefollowingdisclosure
requirementsforaparentwithoneormoreless-than-wholly-ownedsubsidiaries(seeexamplesof
financialstatementpresentationin12.11–12.18):
a. Separately,onthefaceoftheconsolidatedfinancialstatements,theamountsofconsolidated
netincomeandconsolidatedcomprehensiveincomeandtherelatedamountsofeach
attributabletotheparentandnoncontrollinginterest(paragraphsA4andA5).
b. Eitherinthenotesoronthefaceoftheconsolidatedincomestatement,amountsattributable
totheparentforthefollowing,ifreportedintheconsolidatedfinancialstatements(paragraph
A4):
(1) Incomefromcontinuingoperations
(2) Discontinuedoperations
(3) Extraordinaryitems.
c. Eitherintheconsolidatedstatementofchangesinequity,ifpresented,orinthenotesto
consolidatedfinancialstatements,areconciliationatthebeginningandtheendoftheperiod
ofthecarryingamountoftotalequity(netassets),equity(netassets)attributabletothe
parent,andequity(netassets)attributabletothenoncontrollinginterest.Thatreconciliation
shallseparatelydisclose(paragraphA6):
(1) Netincome
(2) Transactionswithownersactingintheircapacityasowners,showingseparately
contributionsfromanddistributionstoowners
(3) Eachcomponentofothercomprehensiveincome.
Changes in a Parent’s Ownership Interest in a Subsidiary
13.36Paragraph38(d)ofARB51,asamendedbyStatement160,providesthefollowingdisclosure
requirement:
Innotestotheconsolidatedfinancialstatements,aseparateschedulethatshowstheeffectsofanychangesinaparent’sownershipinterestinasubsidiaryontheequityattributabletotheparent
(paragraphA7).
13.37 ParagraphA7ofStatement160includesthefollowingexampletohighlightthisdisclosure
requirement:
Additional Disclosure If a Parent’s Ownership Interest in a Subsidiary Changes during the
Period
Thisscheduleillustratestherequirementsinparagraph38(d)thatABCCo.presentinnotestothe
consolidatedfinancialstatementsaseparateschedulethatshowstheeffectsofchangesinABCCo.’s
ownershipinterestinitssubsidiaryonABCCo.’sequity.Thisscheduleisonlyrequirediftheparent’s
ownershipinterestinasubsidiarychangesinanyperiodspresentedintheconsolidatedfinancialstatements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 222/286209
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 13-1
ABC Co.
Notes to Consolidated Financial Statements
Net Income Attributable to ABC Co. and Transfers (to) From the Noncontrolling Interest
Year Ended December 31
ThepurposeofthisscheduleistodisclosetheeffectsofchangesinABCCo.’sownershipinterestinitssubsidiaryonABCCo.’sequity.
20X3 20X2 20X1
NetincomeattributabletoABCCo. $ 37,500 $ 22,000 $ 30,000
Transfers(to)fromthenoncontrollinginterest
IncreaseinABCCo.’spaid-incapitalforsaleof2,000SubsidiaryAcommonshares — 10,000 —
DecreaseinABCCo.’spaid-incapitalforpurchaseof1,000SubsidiaryAcommonshares (8,000) — —
Nettransfers(to)fromnoncontrollinginterest (8,000) 10,000 —
ChangefromnetincomeattributabletoABCCo.andtransfers(to)fromnoncontrollinginterest $ 29,500 $ 32,000 $ 30,000
13.38Notethatiftheparent’sownershipinterestchanges,paragraph34ofARB51,asamendedby
Statement160,requiresthattheentityreallocateaccumulatedothercomprehensiveincome,ifany,
betweentheparentandthenoncontrollinginterest.However,theseparateschedule,asillustrated
above,shouldexcludetheeffectsofthisreallocation.
Excess Losses
13.39 Statement160amendsARB51torequirelossestobeattributedtothenoncontrollinginterest
evenifadeficitbalanceresults(see7.18).Paragraph6ofStatement160states:
If,intheyearofadoption,anentity’sconsolidatednetincomeattributabletotheparentwouldhave
beensignificantlydifferenthadthepreviousrequirementinparagraph15ofARB51beenapplied,
theentityshalldiscloseproformaconsolidatednetincomeattributabletotheparentandproforma
earningspershareasifthepreviousrequirementinparagraph15ofARB51hadbeenappliedinthe
yearofadoption.
Other
Deconsolidations
13.40 Aparentdeconsolidatesasubsidiarywhenacontrollinginterestnolongerexists.Paragraph39
ofARB51,asamendedbyStatement160,providesthefollowingdisclosurerequirementsbytheparentwhenasubsidiaryisdeconsolidated:
a. Theamountofanygainorlossrecognizedinaccordancewithparagraph36[see 7.27]
b. Theportionofanygainorlossrelatedtotheremeasurementofanyretainedinvestmentin
theformersubsidiarytoitsfairvalue
c. Thecaptionintheincomestatementinwhichthegainorlossisrecognizedunlessseparately
presentedonthefaceoftheincomestatement.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 223/286210
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Underparagraph39(a)theformerparentisnotrequiredtodisclosethegainorlossamountasif
Statement160hadbeenapplied(proforma)fordispositionsbeforeadoptionofStatement160.
See13.34.
Income Taxes
13.41 See8.74–8.76forincometaxdisclosuresrelatedtobusinesscombinations.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 224/286211
Section 14 — Transition Requirementsand Other Adoption Considerations
Statement 141(R)
14.01 Statement141(R)iseffectiveprospectivelyforfiscalyearsbeginningonorafterDecember15,2008.Earlyadoptionisnotpermitted.Paragraph75ofStatement141(R)states:
Assetsandliabilitiesthatarosefrombusinesscombinationswhoseacquisitiondatesprecededthe
applicationofthisStatementshallnotbeadjusteduponapplicationofthisStatement.
14.02 Therefore,Statement141(R)willgenerallyonlyaffecttheaccountingforbusinesscombinations
thatareconsummatedafteritseffectivedate,withtwoexceptions:
• Certainincometaxbalancesrecognizedinpriorbusinesscombinations(see14.03–14.10).
• Businesscombinationsbetweentwoormoremutualentitiesthatwereaccountedforbyusing
thepurchasemethod(see14.39–14.45).
Example 14-1
Effective Date
CompanyA,whichhasaDecember31year-end,obtainscontrolofCompanyXonNovember30,2008,inatransactionaccountedforasabusinesscombinationunderStatement141.CompanyAdoesnotfinalizeitsbusinesscombinationaccountingbeforeitsfiscalyear-endonDecember31,2008.Thatis,A’sallocationperiodextendsinto2009.
BecausetheacquisitiondateofXprecededtheeffectivedateofStatement141(R),AmustaccountforthisbusinesscombinationinaccordancewithStatement141,withanexceptionforcertainincometaxbalances(asdescribedin 14.03–14.10).
Income Taxes
14.03 Paragraph77ofStatement141(R)providesthefollowingtransitionguidanceregardingcertain
incometaxbalances:
Forbusinesscombinationsinwhichtheacquisitiondatewasbeforetheeffectivedateofthis
Statement,theacquirershallapplytherequirementsofStatement109,asamendedbythis
Statement,prospectively.Thatis,theacquirershallnotadjusttheaccountingforpriorbusiness
combinationsforpreviouslyrecognizedchangesinacquiredtaxuncertaintiesorpreviouslyrecognized
changesinthevaluationallowanceforacquireddeferredtaxassets.However,aftertheeffectivedate
ofthisStatement:
a. Theacquirershallrecognize,asanadjustmenttoincometaxexpense(oradirectadjustment
tocontributedcapitalinaccordancewithparagraph26ofStatement109),changesinthevaluationallowanceforacquireddeferredtaxassets.
b. Theacquirershallrecognizechangesintheacquiredincometaxpositionsinaccordancewith
Interpretation48,asamendedbythisStatement.
Changes in the Valuation Allowance for Acquired Deferred Tax Assets
14.04 Insomebusinesscombinations,theacquirerrecognizes,asoftheacquisitiondate,avaluation
allowancerelatedtocertainacquireddeferredtaxassets.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 225/286212
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.05 BeforeStatement141(R),theacquirergenerallyaccountedforanysubsequentdecreasein
thevaluationallowancethatisrelatedtoacquireddeferredtaxassetsasareductionofgoodwill
relatedtotheacquisition,regardlessofwhethersuchadecreaseoccurredduringtheallocationperiod
orthereafter.Ifnogoodwillremainedrelatedtotheacquisition,theacquirerthenreducedother
noncurrentintangibleassetstozeroandrecordedanyremainingcreditasareductionofincometax
expense.IncreasesinvaluationallowancesweregenerallyrecordedasacomponentofincometaxexpenseunderStatement141,whichisconsistentwiththeaccountingunderStatement141(R).
14.06 UponadoptingStatement141(R),theacquirermustrecordalladjustmentsofvaluation
allowancesrelatedtoacquireddeferredtaxassetsinaccordancewithparagraph30A(addedby
Statement141(R))ofStatement109,includingadjustmentstodeferredtaxvaluationallowances
recordedaspartofbusinesscombinationsconsummatedbeforetheeffectivedateofStatement141(R).
Paragraph30AofStatement109requiresthefollowing:
Theeffectofachangeinavaluationallowanceforanacquiredentity’sdeferredtaxassetshallbe
recognizedasfollows:
a. Changeswithinthemeasurementperiod[footnoteomitted][see3.16]thatresultfromnewinformationaboutfactsandcircumstancesthatexistedattheacquisitiondateshall
berecognizedthroughacorrespondingadjustmenttogoodwill.However,oncegoodwillis
reducedtozero,anacquirershallrecognizeanyadditionaldecreaseinthevaluationallowance
asabargainpurchaseinaccordancewithparagraphs36–38ofStatement141(R).[See5.42.]
b. Allotherchangesshallbereportedasareductionorincreasetoincome tax expense(ora
directadjustmenttocontributedcapitalasrequiredbyparagraph26).[Emphasisadded]
Changes in Acquired Income Tax Positions
14.07 Insomebusinesscombinations,theacquirerrecordsaliabilityassociatedwithtaxuncertainties
thatexistatthetimeof,orthatariseinconnectionwith,abusinesscombination.
14.08 BeforeStatement141(R),theacquirergenerallyrecordedsubsequentadjustmentstouncertain
taxpositionsarisingfromabusinesscombinationthroughgoodwill,inaccordancewithIssue93-7,
regardlessofwhethersuchadjustmentsoccurredduringtheallocationperiodorthereafter.Ifgoodwill
attributabletotheacquisitionwasreducedtozero,theacquirerthenreducedothernoncurrent
intangibleassetsrelatedtothatacquisitiontozeroandrecordedanyremainingcreditasareductionof
incometaxexpense.
14.09 UponadoptingStatement141(R),theacquirermustrecordallchangestoacquiredtaxpositions
inaccordancewithparagraph12B(addedbyStatement141(R))ofInterpretation48,including
adjustmentstoacquiredtaxpositionsrecordedaspartofbusinesscombinationsconsummatedbefore
theeffectivedateofStatement141(R).Paragraph12BofInterpretation48states:
Theeffectofachangetoanacquiredtaxposition,orthosethatariseasaresultoftheacquisition,
shallberecognizedasfollows:
a. Changeswithinthemeasurementperiodthatresultfromnewinformationaboutfacts
andcircumstancesthatexistedasoftheacquisitiondateshallberecognizedthrougha
correspondingadjustmenttogoodwill.However,oncegoodwillisreducedtozero,the
remainingportionofthatadjustmentshallberecognizedasagainonabargainpurchasein
accordancewithparagraphs36–38ofStatement141(R).[See5.42.]
b. Allotherchangesinacquiredincometaxpositionsshallbeaccountedforinaccordancewith
thisInterpretation.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 226/286213
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.10 UnderStatement141(R),theacquirergenerallyrecordsallchangesintheacquiredtaxposition
outsideofthemeasurementperiodasareductionorincreasetoincometaxexpense.
Example 14-2
Allocation (Measurement) Period Ends Before the Adoption of Statement 141(R)
CompanyA,acalendar-year-endcompany,acquired100percentofCompanyMonJuly1,2007,inatransactionaccountedforasabusinesscombinationunderStatement141.Aspartofthetransaction,Arecorded(1)goodwillof$500and(2)adeferredtaxassetof$100relatedtoM’soperatinglosscarryforwards,withafullvaluationallowanceof$100.
OnSeptember30,2008,aftertheallocationperiod,Achangeditsestimateofthedeferredtaxassetvaluationallowanceto$75.UnderStatement141,Aadjusteditsbusinesscombinationaccountingbycreditinggoodwillfor$25.
CompanyAadoptsStatement141(R)onJanuary1,2009.OnMarch31,2009,Aagainchangesitsdeferredtaxassetvaluationallowance,thistimeto$30.UnderStatement141(R),Arecordstheentireadjustmentof$45($75–$30)asacredittoincometaxexpense.
Whilethisexampleillustrateschangesinavaluationallowancethatarerelatedtoanacquiredentity’sdeferredtaxassets,thesameapproachwouldbeusedifthebalancewereanuncertaintaxposition(liability).
Example 14-3
Allocation (Measurement) Period Ends After the Adoption of Statement 141(R)
CompanyB,acalendar-year-endcompany,acquired100percentofCompanyNonOctober1,2008,inatransactionaccountedforasabusinesscombinationunderStatement141.ForthefiscalyearendedDecember31,2008,Bdisclosedthatitrecordedprovisionalamountsforgoodwillandanuncertaintaxposition(liability)of$200and$80,respectively.
CompanyBadoptedStatement141(R)onJanuary1,2009.OnMarch31,2009,Bdisclosedinitsinterimfinancialstatementsthatithadfinalizeditsaccountingforthebusinesscombinationanddeterminedtheuncertaintaxpositiontobe$70.BecauseB’sadjustmentwas(1)madeduringtheallocationperiodand(2)aresultofnewinformationaboutfactsandcircumstancesthatexistedasoftheacquisitiondate,Brecordedtheoffsettingcreditof$10($80–$70)togoodwillunderStatement141.
OnNovember30,2009,Bobtainsnewfactsabouttheuncertaintaxpositionindicatingtheappropriatebalancetobe$100.Therefore,Badjuststheuncertaintaxpositionupwardby$30,withtheoffsettingdebitrecordedtoincometax
expense.BecausethemeasurementperiodhasendedfortheacquisitionaccountedforunderStatement141,BmustaccountforallsuchchangesunderStatement141(R),whichresultsinaccountingforsucheffectsthroughincometaxexpense.
Whiletheaboveexampleillustrateschangesinanuncertaintaxpositionthatarisesasaresultofabusinesscombination,thesameapproachwouldbeusedifthebalancewereavaluationallowancerelatedtoanacquiredentity’sdeferredtaxassets.
Contingent Consideration
14.11 UnderStatement141,theacquirergenerallyrecordedthecontingentconsiderationwhenthe
contingencywasresolvedandtheconsiderationwasissuedorbecameissuable.Distributionsupon
resolutionofcontingenciesbasedonearnings(commonlyreferredtoas“earnout”arrangements)
resultedinanadditionalcostoftheacquiredbusiness,whilecontingenciesbasedonsecuritiespricesdid
not.
14.12 UnderStatement141(R),theacquirermustrecordallcontingentconsiderationarrangementsat
fairvalueontheacquisitiondate.Inaddition,theacquirermustremeasureallcontingentconsideration
arrangementsclassifiedasliabilitiestofairvaluethroughtheincomestatementuntiltheirresolution.
Contingentconsiderationarrangementsclassifiedasequityarenotremeasured,andtheamount
recordedisnotreversed,evenifthecontingencyisnotmet.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 227/286214
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.13 Theacquirer’smethodofaccountingforcontingentconsiderationarrangementsdependsonthe
acquisitiondate.Theacquirerwouldaccountforacontingentconsiderationarrangemententirelyunder
Statement141iftheacquisitiondateisbeforetheeffectivedateofStatement141(R).Thisholdstrue
evenifthecontingencyisresolvedandtheconsiderationispaidorpayableaftertheeffectivedateof
Statement141(R).
Example 14-4
Contingent Consideration
OnDecember1,2008,CompanyA(acalendar-year-endcompany)acquired100percentofCompanyBfor$1million.CompanyAagreestopayanadditional$250,000iftheearningsofB(tobeoperatedaftertheacquisitionasaseparatesubsidiaryofA)equalorexceedaspecifiedtargetforthe12-monthperiodaftertheacquisition.BecausethecontingentarrangementwasincludedinatransactionaccountedforinaccordancewithStatement141andbasedonearningsinfutureperiods,Adidnotinitiallyrecordthecontingentconsiderationaspartofthecostofthebusinesscombination.
BecausethebusinesscombinationisconsummatedbeforeA’sadoptionofStatement141(R)(January1,2009),AisnotpermittedtorecordthecontingentconsiderationatfairvalueupontheadoptionofStatement141(R)andwouldcontinuetoapplyStatement141.Thatis,AwouldadjustthecostofacquiringBforanyamountspaidoutuponresolutionofthecontingency.
Restructuring and Exit Costs of the Acquiree
14.14 UnderStatement141,ifthecriteriainIssue95-3weremet,theacquirerrecognizedliabilities
asoftheacquisitiondateforplanstoexitanactivity,involuntarilyterminateemployees,orrelocate
employeesofanacquiree.Inaddition,iftheultimatecostsexpendedwerelessthantherecorded
liability,theacquirercouldadjustthecostofthebusinesscombination(and,mostlikely,goodwill)even
iftheallocationperiodhadended.
14.15 UnderStatement141(R),theacquirercanonlyrecognizeliabilitiesforplanstoexitanactivity
orrelocateemployeesofanacquireeiftheacquireehasacurrentplaninplaceandthecriteriain
Statement146aresatisfiedasoftheacquisitiondate.Thiswouldalsobethecaseforone-timeterminationbenefits(asdescribedinparagraph2(a)ofStatement146)thatarenotpartofanongoing
benefitarrangement.Inaddition,adjustmentstoarecordedliabilitythatarebasedonfactsand
circumstancesarisingaftertheacquisitiondatearerecordedintheincomestatement(see3.19).
14.16 UnderStatement141(R),theacquirermaybeabletorecognizeliabilitiesasoftheacquisition
dateforterminationbenefitstobepaidunderanongoingbenefitarrangementbetweentheacquiree
anditsemployees.Examplesofongoingbenefitarrangementswouldincludepreexistingplansorother
contractualarrangements.Paragraph28ofStatement141(R)providesanexceptiontoitsrecognition
andmeasurementprinciplesforthesetypesofliabilities,whichwouldbewithinthescopeofStatement
88andIssue96-5.
14.17 Theacquirer’saccountingforitsplanstoexitanactivity,involuntarilyterminateemployees,or
relocateemployeesofanacquireedependsontheacquisitiondate.Theacquirerwouldaccountfora
restructuringorexitliabilityentirelyunderStatement141andIssue95-3iftheacquisitiondateisbefore
theeffectivedateofStatement141(R).Thisholdstrueeveniftheultimatecoststosettletheliabilityare
paidorpayableaftertheacquireradoptsStatement141(R).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 228/286215
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 14-5
Restructuring and Exit Costs of the Acquiree
OnNovember1,2008,CompanyX(acalendar-year-endcompany)acquired100percentofCompanyY.InaccordancewithIssue95-3,Xrecordeda$2millionliabilityasoftheacquisitiondateforitsplanstoexitanactivityofY.
BecausethebusinesscombinationisconsummatedbeforeX’sadoptionofStatement141(R)(January1,2009),Xwould
continuetoapplyIssue95-3.CompanyXcanadjustthecostofthebusinesscombinationiftheultimatecostpaidforitsexitplansislessthanthe$2millionrecordedliability,eveniftheallocationperiodhasendedandXhasalreadyadoptedStatement141(R).Further,uponadoptionofStatement141(R),XshouldnoteliminatetherecognizedexitliabilityevenifthatliabilitydoesnotsatisfytherecognitioncriteriainStatement141(R).
Acquisition-Related Costs Incurred on Current Transactions
14.18 Whenconsummatingabusinesscombination,anacquirerfrequentlyincursincrementaland
directcosts,suchasadvisory,legal,accounting,andvaluationfees.UnderStatement141,suchcostsare
capitalizedasacostofthebusinesscombination.Statement141(R)significantlychangestheaccounting
fortheseacquisition-relatedcostsbyrequiringthattheybeexpensedasincurred.(See6.31.)
14.19 NotethatbecausethecoststoissuedebtorequitysecuritiesinconnectionwithabusinesscombinationarerecognizedinaccordancewithotherapplicableGAAP,Statement141(R)doesnot
modifytheaccountingforthesecosts.Suchcostsaregenerallyrecordedonthebalancesheetunderthe
otherapplicableGAAP.
14.20 Questionshavearisenabouthowanentitythatisincurringacquisition-relatedcosts(before
adoptingStatement141(R))forabusinesscombinationshouldaccountforthesecostswhenthe
acquisitiondateisnotexpectedtooccuruntilthefirstannualreportingperiodbeginningonorafter
December15,2008(i.e.,theeffectivedateofStatement141(R)).Thefollowingaretwoalternativesfor
accountingforthesecosts.
• Alternative A: Expense Acquisition-Related Costs as Incurred—Proponentsofthis
alternativebelievethatsincetheacquisitiondateisexpectedtooccurinthefirstannual
reportingperiodbeginningonorafterDecember15,2008,theacquisition-relatedcostswould
beexpensedasincurredinaccordancewiththeeffectivedateandtransitionguidancein
Statement141(R).
• Alternative B: Defer Acquisition-Related Costs Until the First Annual Reporting Period
Beginning on or After December 15, 2008—Proponentsofthisalternativebelievethat
becauseearlyapplicationofStatement141(R)isprohibited,anyacquisition-relatedcosts
incurredbeforethefirstannualreportingperiodbeginningonorafterDecember15,2008,
shouldbedeferreduntiltheentityadoptsStatement141(R).Viewsdiffer,however,onthe
subsequenttreatmentofthosecosts.SomeholdthatsuchcostsshouldbeexpensedinthefirstannualreportingperiodbeginningonorafterDecember15,2008,whileotherssubscribeto
retrospectiveapplicationandmaintainthatanentityshouldapplytheguidanceinStatement
154onreportingachangeinaccountingprinciple.
14.21 WeunderstandthatonthebasisofthetransitionguidanceinStatement141(R),theSEC
staffwillnotobjecttorecordingacquisitioncostsinamannerconsistentwitheitheroftheabove
alternatives,providedthatanentityappropriatelydisclosesitsaccountingpolicyinaccordancewith
Opinion22andappliesitconsistentlytoallsuchcosts.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 229/286216
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.22 Whilehistoricallymanyacquisition-relatedcostshavebeenbilledattheclosingofthetransaction
orsoonthereafter,anentityshouldascertainthatitisaccruingsuchcostsastheyareincurred.Anentity
mustcontinuetodifferentiateacquisition-relatedcostsfromothercostsincurredinconnectionwithan
acquisition(suchascoststoissuedebtorequitysecurities).Theentityshouldcontinuetoaccountfor
theseothercostsinaccordancewithotherapplicableGAAP.
14.23 Anentitymayneedtousejudgmentindeterminingwhetheratransactionisexpectedtohavean
acquisitiondateinthefirstannualreportingperiodbeginningonorafterDecember15,2008.Anentity
mayneedtoevaluatemanyfactorsaspartofthisdetermination,suchasrequiredshareholderand
regulatoryapprovalaswellastheintentionoftheparties.Judgmentsreachedshouldbeevaluatedand
documented.
Goodwill Impairment Considerations
Identifying Additional Reporting Units
14.24 Statement142requiresanentitytoassignallrecordedgoodwilltoitsreportingunits.Paragraph
30ofStatement142definesareportingunitasfollows:
Areportingunitisanoperatingsegmentoronelevelbelowanoperatingsegment(referredtoas
acomponent).[Footnoteomitted]Acomponentofanoperatingsegmentisareportingunitifthe
componentconstitutesabusiness18
forwhichdiscretefinancialinformationisavailableandsegment
management[footnoteomitted]regularlyreviewstheoperatingresultsofthatcomponent....The
relevantprovisionsofStatement131andrelatedinterpretiveliteratureshallbeusedtodeterminethe
reportingunitsofanentity.
18EmergingIssuesTaskForceIssueNo.98-3,“DeterminingWhetheraNonmonetaryTransaction
InvolvesReceiptofProductiveAssetsorofaBusiness,”includesguidanceondeterminingwhether
anassetgroupconstitutesabusiness.
14.25 BeforeStatement142wasamendedbyStatement141(R),footnote18ofStatement142referredtoIssue98-3,whichrequiredthatabusinessconsistofasetofactivitiesandassetsthatare
self-sustainingandthathaveinputs,processes,andoutputs.Footnote18nowreferstothedefinition
ofabusinessinStatement141(R).ToqualifyasabusinessunderStatement141(R),asetofactivities
andassetsnolongerhastobeself-sustaining;itonlyhastobecapableofproducingoutputs.Thatis,
certaindevelopment-stageentitiesmaynowqualifyasbusinessesunderStatement141(R).
14.26 Statement142alsorequiresthattheentitytestgoodwillforimpairmentatthereporting-unit
levelatleastannually.Paragraph28ofStatement142explainsthat“[g]oodwillofareportingunit
shallbetestedforimpairmentbetweenannualtestsifaneventoccursorcircumstanceschangethat
wouldmorelikelythannotreducethefairvalueofareportingunitbelowitscarryingamount[including
goodwill].”
14.27 WebelievethatalthoughthetransitionprovisionsofStatement141(R)donotexplicitlystateto
doso,anentityadoptingStatement141(R)should,becauseofStatement141(R)’sbroadeneddefinition
ofabusiness,considerwhetheradditionalcomponentsofanoperatingsegment(i.e.,reportingunits)
exist.Paragraph36ofStatement142requiresthatiftheentityidentifiesnewreportingunitsupon
adoptingStatement141(R),itmustdetermine,onthissamedate,whetheranyofitspreviouslyrecorded
goodwillshouldbereassignedtothenewreportingunit(s).Paragraph36statesthat“goodwillshallbe
reassignedtothereportingunitsaffectedusingarelativefairvalueallocationapproach.”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 230/286217
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.28 Becausetheentitymustlookforinterimgoodwillimpairmentindicatorsatthereporting-unit
level,webelievethattheentityshouldidentifyanynewreportingunitsandreallocategoodwillas
necessaryimmediately upon adopting Statement 141(R).Webelievethatonthissamedate,
theentityshouldalsoassesswhethertherelativefairvalueofeachreportingunit(usedtoreallocate
goodwill)isgreaterorlessthanthecarryingamountoftheaffectedreportingunits.Thatis,theentity
shouldevaluatewhetherthereportingunitisimpairedandwhetheritmustperformstep2ofthegoodwillimpairmenttest(see11.32).
Editor’s Note: TheFASBmadeconformingamendmentstoInterpretation46(R)suchthatthe
definitionofabusinessinInterpretation46(R)andStatement141(R)arethesame.Thebroadened
definitionofabusinessmaynowenableavariableinterestentitytoqualifyforthebusinessscope
exemptioninparagraph4(h)ofInterpretation46(R).However,beforeapplyingthebusinessscope
exemption,anenterpriseisstillrequiredtoconsiderifanyoftheconsiderationsinparagraph
4(h)(1)–(4)ofInterpretation46(R)exist(thesewerenotamendedbyStatement141(R)).
Applying Statement 157 to Goodwill Impairment Tests
14.29 Entitiesmusttestgoodwillandindefinite-livedintangibleassetsforimpairmentatleastannually,
asdescribedin11.02 and 10.41,respectively.
14.30 InFebruary2008,theFASBissuedFSPFAS157-2,whichdeferstheeffectivedateofStatement
157forcertainnonfinancialassetsandliabilitiesuntilfiscalyearsbeginningonorafterNovember
15,2008.Reportingunitsmeasuredatfairvalueunderstep1ofthegoodwillimpairmenttestand
indefinite-livedintangibleassetsrecordedatfairvalueinabusinesscombinationorforimpairment
assessmentarewithinthescopeoftheFSPFAS157-2deferral.
14.31 Paragraph27ofStatement142permitsanentitythatmeetscertaincriteriatocarryforwarda
reportingunit’sfairvalueamountfromitsprior-yeargoodwillimpairmenttest(see11.47–11.48).Inasimilarmanner,anentitymayalsobeabletocarryforwardfairvaluemeasurementsofindefinite-lived
intangibleassets(see10.54).Webelievethatduringthefirstannualperiodafteritsfulladoptionof
Statement157,anentity,beforecarryingforwardanyofitsprior-yearcalculations,shouldalsoconsider
whetherthosecalculationsproperlytakeintoaccountthemeasurementprovisionsofStatement
157.However,wedonotbelievethattheinitialandfulladoptionofStatement157,byitself,would
createanimpairmentindicatorthatwouldrequiretheentitytoperformaninterimimpairmenttestfor
goodwillorindefinite-livedintangibleassets.
14.32 Asdiscussedin3.56,Statement157’sfairvaluemeasurementguidancerequiresthattheentity
maximizetheuseofobservableinputs.Anentityshouldconsiderusingthefollowing(notall-inclusive)
whendeterminingwhetherafairvaluemeasurementofthereportingunitisconsistentwiththemeasurementprinciplesofStatement157:
• Avaluationmethodthatisconsistentwiththemarketapproach.Examplesincludethe(1)
guidelinepubliccompanymethod,(2)guidelinetransactionmethod,(3)pastsubjectcompany
transactionmethod,and(4)marketcapitalizationmethod.
• Impliedcontrolpremiums(i.e.,premiumsabovemarketcapitalization)—tocalculatethefair
valueofareportingunit,providedthatthesepremiumsareconsistentwithmarketparticipant
assumptionsandindustryandmarketdata.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 231/286218
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
• Observablemarketinputs—tocalculatethediscountrateusedinadiscountedcashflow
model.
• Marketparticipantassumptions—tocalculatelong-termgrowthratesusedinadiscounted
cashflowmodel.
Additional Considerations for Less Than Wholly Owned Reporting Units14.33 See14.65–14.75foradditionalgoodwillimpairmentconsiderationsthatanentityshouldtake
intoaccountuponadoptingStatement160.
SAB 74 Disclosures
14.34 SECregistrantsmustcomplywithSABTopic11.M(SAB74),whichrequiresaregistrantto
providecertaindisclosureswhenitsadoptionofanewaccountingstandardisexpectedtohavea
materialeffectonitsfinancialpositionandresultsofoperations.1
14.35 Thenotestothefinancialstatementsshould(1)notifythereaderabouttheissuanceofa
standardthattheregistrantwillberequiredtoadoptinthefutureand(2)helpthereaderassesstheimpactthestandardwillhaveonthefinancialstatementsoftheregistrantwhenitisadopted.
14.36 InthecontextofStatement141(R),theregistrantshouldconsiderprovidingthefollowingSAB
74disclosures:
• AbriefdescriptionofStatement141(R),includingtheregistrant’srequireddateofadoption(see
14.01).
• Theimpactthattheregistrant’sadoptionofStatement141(R)isexpectedtohaveonits
financialstatements,unlessthisimpactisunknownornotreasonablyestimable,inwhichcase
theregistrantshouldstatethisfact.Theregistrantshouldconsiderdisclosingthefollowing
items:
o Anyremainingvaluationallowancesfordeferredtaxassetsacquiredinpriorbusiness
combinationsandtheimpactthatfutureadjustmentstotheseallowanceswillhaveon
theregistrant’sfinancialstatements(see14.04–14.06).
o Anyremaininguncertaintaxpositions(liabilities)relatedtopriorbusiness
combinationsandtheimpactthatfutureadjustmentstotheseliabilitieswillhaveon
theregistrant’sfinancialstatements(see14.07–14.10).
o Anyaccumulatedtransactioncosts,thetransitionmethoditwillapply,andtheoverall
impactonthefinancialstatements(see14.18–14.23).
o AnyadditionalreportingunitsthatmaybeidentifieduponadoptionofStatement
141(R),aswellasanyanticipatedgoodwillimpairments(see14.24–14.28).
o AnyimpactthefulladoptionofStatement157willhaveontheentity’sgoodwill
impairmenttests,aswellasanyanticipatedgoodwillimpairments(see14.29–14.32).
o OtheranticipatedeffectsofStatement141(R)onfuturebusinesscombinationsorstep
2ofthegoodwillimpairmentrest.
• Thepotentialimpactofothersignificantmattersthattheregistrantbelievesmightresultfrom
theadoptionofStatement141(R)(e.g.,plannedorintendedchangesinbusinesspractices).
PrivateentitiesshouldalsogenerallyprovidethedisclosuresrequiredbySAB74.1 SAB74alsoindicatesthateveniftheregistrant’sadoptionofanewstandardisnotexpectedtohaveamaterialeffect,itisencouragedtodisclosethisfact.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 232/286219
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SEC Amendments
14.37 Atthe2008AICPANationalConferenceonCurrentSECandPCAOBDevelopments,Craig
C.Olinger,deputychiefaccountantintheSEC’sDivisionofCorporationFinance,acknowledgedina
question-and-answersessionthatcertainguidanceinRegulationS-Xconflictswiththeguidancein
Statements141(R)and160.Heindicatedthatinsuchcases,untiltheSECfinalizesamendmentsto
RegulationS-X,anentityshouldapplytheguidanceinStatements141(R)and160.Inaddition,atthe
July8,2008,SECRegulationsCommitteemeeting,theSECstaffacknowledgedthatthereareanumber
ofconflictsbetweenpublishedSECStaffAccountingBulletinsandStatements141(R)and160thatthe
SECstaffiscurrentlyaddressing.
14.38 OnDecember9,2008,theSEC’sDivisionofCorporationFinancereleasedaFinancialReporting
Manual .ThenewmanualsupersedestheDivision’sAccountingDisclosureRulesandPractices:An
Overview (alsoknownasthe“SECStaffTrainingManual”),whichhadnotbeenupdatedsince2000.
TheFinancialReportingManual provideshelpfulinsightintohowtheSECstaffappliesSECrulesand
regulationscovering,forexample,SECregistrants’andacquiredbusiness’financialstatements,aswell
asproformafinancialstatements.
Mutual Entities
14.39 Paragraph3(m)ofStatement141(R)definesamutualentityas“anentityotherthananinvestor-
ownedentitythatprovidesdividends,lowercosts,orothereconomicbenefitsdirectlytoitsowners,
members,orparticipants.”Examplesofmutualentitiesincludemutualinsurancecompanies,credit
unions,andcooperatives.
14.40 BeforeStatement141(R),mutualentitieswerewithinthescopeofStatements141and147
buttheeffectivedateofthesestatementswasindefinitelydeferredfortheseentities.Therefore,these
entitiesneverappliedStatement141or147anddidnotaccountforgoodwillandintangibleassets
recognizedinbusinesscombinationsunderStatement142.Rather,theyappliedtheguidanceinOpinion
16andStatement72.
14.41 Businesscombinationsbetweentwoormoremutualentitiesarenowwithinthescopeof
Statement141(R).Statement141(R)also(1)nullifiesStatement147;(2)eliminatesthepooling-of-
interestmethodofaccountingforbusinesscombinationsbetweentwoormoremutualentities;(3)
amendsthescopeofStatement142toincludegoodwillandintangibleassetsrecognizedinbusiness
combinationsbetweentwoormoremutualentities;and(4)providestransitionalaccountingguidance
ongoodwillandintangibleassetsrecognizedbyamutualentity,underthepurchasemethod,ina
transactionconsummatedbeforetheeffectivedateofStatement141(R)(see14.01).
14.42 Exceptasdiscussedin14.43,paragraphA134ofStatement141(R)prohibitsmutualentitiesfrom
adjusting“theamountofthepurchasepriceassignedtotheassetsacquiredandliabilitiesassumedina
businesscombinationforwhichtheacquisitiondatewasbefore”theeffectivedateofStatement141(R).
However,paragraphA134allowsforadjustmentstothepurchasepriceallocationfortheresolutionof
contingentconsiderationarrangementsandallocation-periodadjustments.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 233/286220
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.43 ParagraphA132ofStatement141(R)providesthefollowingtransitionalaccountingguidanceon
goodwillandintangibleassetsthatmutualentitiesrecognized,underthepurchasemethod,inbusiness
combinationsconsummatedbeforetheeffectivedateofStatement141(R):
a. Theentityshallreclassifytogoodwill(reclassifiedgoodwill) amountsthatdonotmeet
thecriteriainparagraph3(k)ofthisStatementforrecognitionseparatelyfromgoodwill.
Therefore,theentityshallreclassifytogoodwill:
(1) Thecarryingamountofacquiredintangibleassetsthatdonotmeetthecriteriain
paragraph3(k)ofthisStatementforrecognitionseparatelyfromgoodwill.
(2) Thecarryingamountofunidentifiableintangibleassetsthatdonotmeetthecriteriain
paragraph3(k)ofthisStatementforrecognitionseparatelyfromgoodwill.Statement
72describedunidentifiableintangibleassets astheamountbywhichthefairvalueof
theliabilitiesassumedexceedsthefairvalueoftangibleandidentifiedintangibleassets
acquired.
(3) Anydeferredtaxliabilitiesrelatedtotheintangibleassetsorunidentifiableintangible
assetsalsoshallbereclassifiedtogoodwilliftheamortizationoftheintangibleassets
ortheunidentifiableintangibleassetsisnotdeductiblefortaxpurposes.
b. Theentityshallreclassifytointangibleassetsthecarryingamountofanyintangibleassetthat:
(1) Meetsthedefinitionofidentifiableinparagraph3(k)ofthisStatement
(2) Hasbeenrecognizedbutreportedonthefaceofthestatementoffinancialposition
ingoodwill(orasgoodwillandintangibleassets)orasunidentifiableintangibleassets;
and
(3) Hasbeenseparatelyaccountedfor(thatis,separateaccountingrecordshavebeen
maintained).Anentitywouldbedeemedtohavemaintainedseparateaccounting
recordsifthereisaseparategeneralledgeraccountorothersubsidiaryledger(such
asaspreadsheetorsimilarledgeraccount)towhichperiodicamortizationcharges,
impairmentcharges,andotheraccountingentrieswereposted.Anentityshallnot
“carveout”fromgoodwillanyintangibleassetsthathadnotbeenidentifiedand
measuredatfairvalue(asdefinedordescribedinStatement141orOpinion16)in
theinitialrecordingofthebusinesscombinationandsubsequentlyaccountedfor
separatelyfromgoodwill.
c. Theentityshallwriteoffandrecognizeinearningstheamountofanyunamortizeddeferred
creditrelatedtoanexcessovercostarisingfromeitherabusinesscombinationaccountedfor
beforeapplyingthisStatementoraninvestmentaccountedforbytheequitymethodbefore
applyingthisStatement.
14.44 Mutualentitiesshouldapplythetransitionalimpairmentanddisclosureguidanceinparagraphs
53–61inStatement142,whichincludearequirementtotestindefinite-livedintangibleassetsand
goodwillforimpairmentuponadoptionofStatements141(R)and142(i.e.,fiscalperiodsbeginningon
orafterDecember15,2008).
14.45 Mutualentitieswithlong-termcustomer-relationshipintangibleassetsshouldalsofollowthe
transitionalaccountingguidanceinparagraphA133ofStatement141(R):
[T]heprovisionsofStatement144applytolong-termcustomer-relationshipintangibleassets,except
forservicingassets,recognizedintheacquisitionofafinancialinstitution.Examplesoflong-term
customer-relationshipintangibleassetsincludedepositor-andborrower-relationshipintangibleassets,
creditcardholderintangibleassets,andservicingassets.Servicingassets,however,areaccountedfor
inaccordancewith[Statement140],asamended.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 234/286221
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Entities Emerging From Bankruptcy
14.46 TheFASBissuedFSPSOP90-7-1inresponsetotheconflictingguidanceinSOP90-7and
Statements141(R)and160regardingtheearlyadoptionofnewaccountingstandards.Beforethe
effectivedateoftheFSP,SOP90-7requiredanentitythatappliesfresh-startreportingtoearlyadopt
allaccountingstandardsthatwillbecomeeffectivewithin12monthsoftheentity’semergencefrom
bankruptcy.FSPSOP90-7-1,whichbecameeffectiveonApril24,2008,amendsSOP90-7bygivingan
entityemergingfrombankruptcytheoptiontoearlyadoptanewaccountingstandardsaslongasthe
standardpermitsearlyadoption.Therefore,becauseStatements141(R)and160specificallyprohibit
suchearlyadoption,anentityemergingfrombankruptcymaynotearlyadoptthesestatementsinits
fresh-startreporting.
Example 14-6
Emergence From Bankruptcy
CompanyAemergesfrombankruptcyandadoptsfresh-startaccountingonJuly1,2008.Afterallocatingthereorganizationvalue,Adeterminesthatitstax-deductiblegoodwillisinexcessofitsbookgoodwill.
BeforeStatement141(R),nodeferredtaxassetswererecognizedasoftheacquisitiondateiftax-deductiblegoodwillexceededbookgoodwill.Ataxbenefitwasrecognizedforthisdifferenceonlyafteritwasrealizedontheincometaxreturn.However,underStatement141(R),adeferredtaxassetshouldberecognizedforthisdifferenceasoftheacquisitiondate.
BecauseAemergesfrombankruptcybeforetheeffectivedateofStatement141(R),Aisprohibitedfromrecognizingadeferredtaxassetrelatedtotheexcessofitstax-deductiblegoodwilloverbookgoodwill(i.e.,AisprohibitedfromearlyadoptingStatement141(R)underFSPSOP90-7-1).
IfAhademergedfrombankruptcyaftertheeffectivedateofStatement141(R),Acouldhaverecognizedadeferredtaxassetrelatedtotheexcessofitstax-deductiblegoodwilloveritsbookgoodwill.
Statement 160
14.47 Statement160iseffectiveforfiscalyearsbeginningonorafterDecember15,2008.Earlyadoptionisprohibited.AnentitymustapplyStatement160asfollows:
• Accountingprovisions—prospectively.
• Presentationanddisclosureprovisions—retrospectivelyforallperiodspresented.
14.48 Anentityisnotpermittedtorevisetransactionsorallocationsofincomeandlossesbetweenthe
parentandthenoncontrollinginterestthatoccurbeforetheentityadoptsStatement160.
Noncontrolling Interests That Are Within the Scope of Statement 160
14.49 Paragraph25ofARB51,asamendedbyStatement160,definesanoncontrollinginterestas
“[t]heportionofequity(netassets)inasubsidiarynotattributable,directlyorindirectly,toaparent”
(emphasisadded).
14.50 Paragraph27ofARB51,asamendedbyStatement160,states,inpart,“Onlyafinancial
instrumentissuedbyasubsidiarythatisclassifiedasequityinthesubsidiary’sfinancialstatementscan
beanoncontrollinginterestintheconsolidatedfinancialstatements.”
14.51 UponadoptingStatement160,anentitymustconsultotherGAAPtodeterminewhetherthe
financialinstrumentsheldbythenoncontrollingshareholderscanbeclassifiedaspermanentequity.
SuchGAAPmayincludeStatements133and150,TopicD-98,andASR268(FRRSection211).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 235/286222
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
14.52 Generally,thepresentationrequirementsofStatement160regardingthestatementoffinancial
positionwillonlyaffectlesscomplexfinancialinstrumentsheldbynoncontrollinginterests.More
complexfinancialinstruments(e.g.,thosewithputorcalloptions)arelesslikelytobeaffectedby
Statement160.IfdictatedbyotherGAAP,anentityshouldcontinuetoclassifysuchinstrumentsin
eithermezzanine(ortemporary)equityorliabilitiesunderotherGAAP.
Calculation of Earnings per Share
14.53 Statement160requiresthat(1)thenoncontrollinginterestbeclassifiedasaseparatepartof
shareholders’equityand(2)consolidatednetincomeincludeamountsattributabletoboththeparent
andthenoncontrollinginterest.However,asdescribedinparagraphB75ofStatement160,theFASB
didnotintendtochangethemethodsthatentitiesusetocalculateearnings-per-sharedata.Paragraph
B75states,inpart:
[A]lthoughamountsforboththeparentandthenoncontrollinginterestarereportedinconsolidated
netincome,theBoarddecidedthecalculationofearnings-per-sharedatainconsolidatedfinancial
statementsthatincludesubsidiariesthatarelessthanwhollyownedshouldbebasedonamounts
attributabletotheparent’sowners.Thus,thisStatement[160]amendsStatement128sothatearnings-per-sharedatawillcontinuetobecalculatedthesamewaytheywerecalculatedbeforethis
Statementwasissued,basedonamountsattributabletotheparent’sowners.
14.54 Paragraph9ofStatement128,asamendedbyStatement160,states,inpart:
ForpurposesofcomputingEPSinconsolidatedfinancialstatements(bothbasicanddiluted),ifone
ormoreless-than-wholly-ownedsubsidiariesareincludedintheconsolidatedgroup,incomefrom
continuingoperationsandnetincomeshallexcludetheincomeattributabletothenoncontrolling
interestinsubsidiaries.
Changes in a Parent’s Ownership Interest in a Subsidiary
14.55 Paragraph33ofARB51(addedbyStatement160)requiresthat“[c]hangesinaparent’s
ownershipinterestwhiletheparentretainsitscontrollingfinancialinterestinitssubsidiaryshallbe
accountedforasequity transactions”(emphasisadded).However,Statement160indicatesthata
decreaseinaparent’sownershipinterestthatresultsinalossofcontrolisasignificanteconomicevent
andthatanyretainednoncontrollinginterest(bytheformerparent)isremeasuredatfair valueonthe
datecontrolislost.
14.56 BeforeStatement160’samendments,theparententityaccountedforchangesinitsownership
interestsasfollows:
• Forincreasesinownershipthatresultedintheparent’sobtainingcontrolorincreasingitscontrollinginterest,theparentfollowedtheguidanceinparagraph14ofStatement141,which
requiredittoapplypurchase accountingandstepupthesubsidiary’snetassetstofairvalue
fortheacquiredinterest.Inmanyinstances,theparentrecordedadditionalgoodwillassociated
withthepurchaseofadditionalownershipinterestsevenaftercontrolwasobtained.
• Fordecreasesinownershipthatdidnotresultinalossofcontrol,theparenteither(1)
recognizedagain or lossforthetransactionor(2)recordedthechangeinownershipas
acapitaltransaction.EntitiesoftenreferredtotheguidanceinSABTopic5.H(SAB51)to
determinewhethergainorlossrecognitionwasappropriate.2
2 Referto14.37fordiscussionoftheSECstaff’splanstoupdateSECStaffAccountingBulletinsthatconflictwithStatements141(R)and160.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 236/286223
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
• Fordecreasesinownershipthatresultedinalossofcontrol,theformerparentrecorded
anyretainednoncontrollinginvestmentonthebasisofthecarryingamountoftheformer
subsidiary.Thatis,theretainednoncontrollinginvestmentwasnotremeasuredtofairvalueon
thedatecontrolwaslost.
14.57 BecauseofStatement160’srevisions,theparent’saccountingforchangesinitsownership
interestinasubsidiarymaydifferbeforeandafteritadoptsStatement160.However,because
Statement160requiresprospectiveapplicationofitsaccountingrequirements,theparentshouldnot
reviseitsaccountingfortransactionsthatoccurredbeforeitadoptedStatement160.
14.58 IftheparentadoptsStatement160andsubsequentlypurchasesanadditionalownershipinterest
initssubsidiary,itcannotfurtherstepupthesubsidiary’snetassetstofairvaluetotheextentofthe
additionalinterestacquired,norcanitrecordadditionalgoodwill(asitpreviouslydidunderStatement
141).Inotherwords,theparentwillneverfullystepuptofairvalueapartialcontrollinginterestinits
subsidiarythatwasacquiredpriortotheadoptionofStatement160.Seesection14.66–14.72fora
discussionoftheimpactofreportingunitsthatarelessthanwhollyownedongoodwillimpairment
testing.
Example 14-7
Parent Purchases Noncontrolling Interest in Its Subsidiary After Adopting Statement 160
BeforeadoptingStatement160,ParentXpurchasedan80percentcontrollinginterestinSubsidiaryY.InaccordancewithStatement141,XrecordedY’snetassetsacquiredat(1)80percentfairvalueand(2)20percentcarryingvalue.
AfteradoptingStatement160,Xpurchasesanadditional20percentinterestinY.Accordingly,Xaccountsforitsincreaseinownershipinterestasanequitytransactionbetweentheparentandthenoncontrollinginterest(see 7.20–7.23).Thatis,XdoesnotapplyadditionalpurchaseaccountingandstepupY’snetassetstofairvaluefortheadditional20percentinterestitacquired.Instead,thedifferencebetweenthecashconsiderationpaidandthecarryingamountofthenoncontrollinginterestisrecordedasanadjustmenttoX’sadditionalpaid-incapital.ParentXisnotpermittedtoadjustthebasisofY’snetassetswhenitpurchasesorsellsownershipinterestsinYbutretainscontroloverY.
Attributing Net Income or Loss to the Parent and the Noncontrolling Interest
14.59 ARB51requiresthatnetincomeorlossandcomprehensiveincomeorlossbeattributedtothe
parentandthenoncontrollinginterest.However,neitherARB51norStatement160providesdetailed
guidanceonhowtheentityshouldattributetheseamountstotheparentandthenoncontrolling
interest.ParagraphB38ofStatement160states,inpart:
TheBoard,therefore,decidedtorequirethatnetincomeandcomprehensiveincomebeattributed
totheparentandthenoncontrollinginterestbutnotprovidedetailedguidanceformakingthe
attribution.TheBoardobservedthatentitiesweremakingattributionsbeforethisStatement[160]
wasissuedandthatthoseattributionsgenerallywerereasonableandappropriate.Therefore,the
Boarddecidedthatdetailedguidancewasnotneeded.
Attribution of Losses That Exceed the Carrying Amount of the NoncontrollingInterest in a Subsidiary
14.60 BeforeStatement160,paragraph15ofARB513stated:
Intheunusualcaseinwhichlossesapplicabletotheminorityinterestinasubsidiaryexceedthe
minorityinterestintheequitycapitalofthesubsidiary,suchexcessandanyfurtherlossesapplicableto
theminorityinterestshouldbechargedagainstthemajorityinterest,asthereisnoobligationofthe
3 Not-for-profitorganizationsarenotwithinthescopeofStatement160andwouldcontinuetoapplytheguidanceinparagraph15ofARB51.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 237/286224
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
minorityinteresttomakegoodsuchlosses.However,iffutureearningsdomaterialize,themajority
interestshouldbecreditedtotheextentofsuchlossespreviouslyabsorbed.
14.61 Statement160amendsARB51’sguidanceontheallocationoflossestothenoncontrolling
interestinasubsidiary(formerlyreferredtoasthe“minorityinterest”)by(1)deletingparagraph15
ofARB51and(2)addingparagraph31ofARB51,whichrevisesthisguidance.Therevisedguidance
requiresanentitytoallocatelossestothenoncontrollinginterest“evenifthatattributionresultsina
deficitnoncontrollinginterestbalance.”Therefore,whenasubsidiaryhasincurredlosses,theaccounting
fortheallocationofthoselossestothenoncontrollinginterestwilldifferbeforeandafteradoptionof
Statement160ifthelossesexceedthecarryingamountofthenoncontrollinginterest.
14.62 BecauseStatement160requiresprospectiveapplicationofitsaccountingrequirements,an
entityshouldnotreviseitshistoricalallocationsoflosses(orincome)betweentheparentandthe
noncontrollinginterest.
14.63 IntheyearinwhichitadoptsStatement160,anentityshouldalsoconsiderthefollowing
disclosurerequirementinparagraph6:
If,intheyearofadoption,anentity’sconsolidatednetincomeattributabletotheparentwouldhave
beensignificantlydifferenthadthepreviousrequirementinparagraph15ofARB51beenapplied,
theentityshalldiscloseproformaconsolidatednetincomeattributabletotheparentandproforma
earningspershareasifthepreviousrequirementinparagraph15ofARB51hadbeenappliedinthe
yearofadoption.
Example 14-8
Attribution of Losses That Exceed the Carrying Amount of the Noncontrolling Interest in aSubsidiary — Transition to Statement 160
Case A
ParentXhasnotadoptedStatement160.ParentXholdsan80percentcontrollinginterestinSubsidiaryYandallocatesY’sprofitsandlossestotheparentandthenoncontrollinginterestonthebasisofrelativeownershipinterests,or80percentand20percent,respectively.AsofDecember31,20X1,thecarryingamountofY’sequitywas$120,ofwhich$100isattributabletotheparentand$20isanoncontrollinginterestinY.
During20X2,Yincurredlossesof$180.IfXweretoallocate20percentofY’s20X2losses($36)tothenoncontrollinginterest,thecarryingamountofthenoncontrollinginterestwouldbenegative.Therefore,Xonlyallocated$20,or11percent,ofthe20X2lossestothenoncontrollinginterest.ParentXabsorbedtheremaining$160oflosses,whichincluded$16([180×20%]–$20)oflossesthatwouldhaveotherwisebeenallocatedtothenoncontrollinginterestifthecarryingamounthadnotreached$0.
Incontrast,ifStatement160hadbeenappliedtothisperiod,Xwouldhavebeenrequiredtoallocate$36,or20percent,ofthe20X2lossestothenoncontrollinginterest.However,XcannotreviseitsallocationofprofitsandlossesbetweentheparentandthenoncontrollinginterestthatitmadebeforeadoptingStatement160,includingthe20X2allocationdescribedabove.
14.64 Thecarryingamountofthenoncontrollinginterestwillsometimesbe$0uponadoptionof
Statement160becausetheparenthaspreviouslyabsorbedlossesonbehalfofthenoncontrolling
shareholders.Webelievethatanentitycannot,afteradoptingStatement160,allocatefutureprofits
ofthesubsidiarysothattheparentisfirstcreditedtotheextentofthepreviouslossesitabsorbed.This
issupportedbythefactthatStatement160(1)deletedtheguidanceinparagraph15ofARB51(see
14.61)and(2)requiresprospectiveapplicationofitsaccountingrequirements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 238/286225
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 14-9
Attribution of Losses That Exceed the Carrying Amount of the Noncontrolling Interest in aSubsidiary — Transition to Statement 160
Case B
AssumethesamefactsasinExample14-8.Inaddition,assumethatParentXadoptsStatement160onJanuary1,20X3,
andthatYrecordsnetincomeof$80for20X3.InaccordancewiththetransitionprovisionsofStatement160,the20X3profitswouldbeallocatedpursuanttoX’sallocationmethod,whichinthiscaseisbasedonrelativeownershipinterests(i.e.,80percentforthecontrollinginterestand20percentforthenoncontrollingshareholders).Therefore,netincomewouldbeallocatedasfollows:$64toXand$16tothenoncontrollinginterest.ParentXwouldnotrecover(becreditedfor)theextra$16oflossesitabsorbedonbehalfofthenoncontrollingshareholdersduring20X2.
Goodwill Impairment Considerations
Goodwill Impairment Testing When the Reporting Unit Is Less Than Wholly Owned
14.65 Step1ofthegoodwillimpairmenttestistocomparethefairvalueofthereportingunitwithits
carryingamount,includinggoodwill(see11.32).
14.66 BeforeStatement160,thefairvalueandcarryingamountofthereportingunitinstep1generallywouldnotincludetheportionattributabletothenoncontrollinginterest.Forexample,ifthe
parentheldan80percentownershipinterestinareportingunit,itwouldhavereducedtheoverallfair
valueandcarryingamountofthereportingunitforthe20percentinterestheldbythenoncontrolling
shareholders.Also,becauseStatement141prescribedthe“partialgoodwill”method(seeA.26),the
entiregoodwillamountwasattributabletotheparentandwasincludedinthecarryingamountofthe
reportingunitusedinstep1ofthetest.
14.67 UponadoptingStatement160,anentitydeterminesthefairvalueofthereportingunitinthe
samemannerasitwouldinabusinesscombinationaccountedforunderStatement141(R).Thatis,
theentitycalculatesthefull fair valueofthereportinguniteveniftheparentdoesnothavea100
percentownershipinterestinthereportingunit.Similarly,theentityusesthefullcarryingamountofthe
reportingunit.
14.68 Ifanentityhasalessthanwhollyownedreportingunitandcalculatesthedifferencebetween
thefairvalueandcarryingamountofthatreportingunitinstep1immediatelybeforeandafter
adoptionofStatement160,theexcessofthefairvalueoverthecarryingamount(i.e.,“cushion”),
ifany,willbegreateraftertheentityadoptsStatement160.ThiscushionisduetoStatement160’s
revisionstohowthefairvalueandcarryingamountofthatreportingunitarecalculatedinstep1ofthe
goodwillimpairmenttest.Inotherwords,allelsebeingequal,theadoptionofStatement160could
createadditionalcushioninstep1ofthegoodwillimpairmenttest,asillustratedinExample14-10.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 239/286226
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 14-10
Step 1 of the Goodwill Impairment Test
ParentXisacalendar-year-endcompany.OnDecember31,2008,Xpurchasedan80percentcontrollinginterestinSubsidiaryY(aseparatereportingunit)for$1,000andaccountedforthetransactionunderStatement141.ThefairvalueofY’sidentifiablenetassetswas$800,thebookvalueofY’snetassetswas$500,andthefairvalueofYis$1,250(assumethatthereisnoimpliedcontrolpremium)asoftheacquisitiondate.InaccordancewithStatement141(seeExample A-4),Xrecognizedacquirednetassetsof$740*andgoodwillof$360**asoftheacquisitiondate.
Thefollowingillustratesstep1ofthegoodwillimpairmenttestforYifitwereperformedbeforeandafterXadoptsStatement160onJanuary1,2009.
Step 1Before Statement 160
Fairvalueofreportingunit
Carryingamountofreportingunit
Difference
$ 1,000
1,000
$ 0
ConsiderationpaidbyXforan80percentinterestinY
X’sbasisinY,calculatedas([$800×80%]+$360)
Step 1After Statement 160
Fairvalueofreportingunit
Carryingamountofreportingunit
Difference
$ 1,250
1,100
$ 150
Fairvalueoftheentirereportingunit
TotalcarryingamountofY,calculatedas($740+$360)
ParentXhasadditional“cushion”of$150becauseofStatement160’srevisionstohowthefairvalueandcarryingamountofthereportingunitarecalculatedinstep1ofthegoodwillimpairmenttest.
* Calculatedas([$800×80%]+[$500×20%]).
** Calculatedas($1,000–[$800×80%]).
14.69 Ifanentityfailsstep1ofthegoodwillimpairmenttest(i.e.,thecarryingamountofthereporting
unitisgreaterthanitsfairvalue),itmustthenperformstep2.Instep2,theentitycalculatesthe
reportingunit’simpliedfairvalueofgoodwillandcomparesitwiththecarryingamountofgoodwilltomeasuretheamountoftheimpairmentloss(see11.32).
14.70 BeforeStatement160,theentityusedStatement141’spurchasemethodofaccountingto
calculatetheimpliedfairvalueofgoodwill.Theparentallocateditsportionofthefairvalueofthe
reportingunitfromstep1(see11.32)toitsshareofthereportingunit’snetidentifiableassets.Any
residualamountwasconsideredgoodwillattributabletotheparent,whichwasthencomparedwith
thecarryingamountofgoodwill.Statement141prescribedthe“partialgoodwill”method,whichonly
includesgoodwillattributabletotheparent.
14.71 UponadoptingStatement160,theentityusesStatement141(R)’sacquisitionmethod
ofaccountingtocalculatetheimpliedfairvalueofgoodwill.Statement141(R)prescribesthe
“fullgoodwill”approach.Thatis,goodwillincludesamountsattributabletotheparentandthe
noncontrollinginterest.Allelsebeingequal,theimpliedfairvalueofgoodwillwillincreaseupon
adoptionofStatement160whenareportingunitislessthanwhollyowned.
14.72 Note,however,thattherearemanyrecognitionandmeasurementdifferencesbetween
Statement141andStatement141(R),whichmayalsocausetheimpliedfairvalueofgoodwilltodiffer
uponadoptionofStatement160.Forexample,itislikelythatmoreacquiredcontingencieswillbe
includedatfairvalueinthereportingunit’snetidentifiableassetsbalanceinaccordancewith
Statement141(R),whichwillincreasetheimpliedfairvalueofgoodwill.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 240/286227
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example 14-11
Step 2 of the Goodwill Impairment Test
AssumethesamefactsasinExample14-10.Althoughitisnotrequiredtodoso,thefollowingillustrateswhatX’sstep2goodwillimpairmenttestforYwouldlooklikeimmediatelybeforeandafterXadoptsStatement160onJanuary1,2009.
Step 2
Before Statement 160
Fairvalueofreportingunit
Fairvalueofreportingunit’sidentifiablenetassets
Impliedfairvalueofgoodwill
$ 1,000
640
$ 360
Fromstep1inExample14-10
Calculatedas($800×80%)
GoodwillrecordedbyParentCo.
Step 2After Statement 160
Fairvalueofreportingunit
Fairvalueofreportingunit’sidentifiablenetassets
Impliedfairvalueofgoodwill
$ 1,250
$ 800
$ 450
Fromstep1inExample14-10
Calculatedas($800×100%)*
Allelsebeingequal,Statement160’srevisionstostep2ofthegoodwillimpairmenttestresultinanincreaseintheimpliedfairvalueofgoodwillof$90($450–$360).ThisincreaseisattributabletoX’sapplicationofthe“fullgoodwill”approach,whichincludesgoodwillattributabletothenoncontrollinginterest.NotethatXwouldnotadjustthecarryingamountofitsgoodwilluponadoptingStatement160.
* NotethatthisamountwouldbecalculatedinaccordancewithStatement141(R).Inthisexample,itisassumedthatthefairvalueoftheidentifiablenetassets($800)isthesameunderStatements141and141(R).However,asdiscussedinAppendix A,manyoftherecognitionandmeasurementprovisionsinStatement141and141(R)aredifferent,whichcouldresultindifferentamountsrecordedforthefairvalueoftheidentifiablenetassets.
Attributing Goodwill Impairments to the Parent and the Noncontrolling Interest
14.73 Statement160amendsStatement142’sguidanceonattributinggoodwillimpairmentstothe
parentandthenoncontrollinginterest.Paragraph39AofStatement142(addedbyStatement160)
requiresthat“[a]nyimpairmentlossmeasuredinthesecondstepofthegoodwillimpairmenttestshallbeattributedtotheparentandthenoncontrollinginterestonarationalbasis.”
14.74 ForbusinesscombinationsconsummatedbeforetheeffectivedateofStatements141(R)and
160,theentityonlyrecognizedgoodwillattributabletotheparent.Incasesinwhichareportingunit
containsonlygoodwillassociatedwithapre–Statement141(R)businesscombination,a“rational”
methodgenerallywouldbefortheentitytoattribute100percentofallimpairmentlossestotheparent,
bothbeforeandaftertheentityadoptsStatement160.
14.75 ForbusinesscombinationsconsummatedaftertheeffectivedateofStatements141(R)and160,
theentityrecognizesgoodwillattributabletotheparentandthenoncontrollinginterest.Thatis,the
entityappliesthe“fullgoodwill”approachinStatement141(R).“Rational”methodsforallocatinggoodwillimpairmentlossestotheparentandthenoncontrollinginterestmayincludethefollowing:
• Allocateimpairmentlossesonthebasisoftherelativefairvalues,as of the acquisition date,
oftheparentandthenoncontrollinginterest.Becauseofapossiblecontrolpremium,the
amountofimpairmentlossattributedtotheparent,asapercentageofitsownershipinterest,
maybehigherthantheamountattributedtothenoncontrollinginterest.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 241/286228
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
• Allocateimpairmentlossesonthebasisoftherelativefairvalues,as of the impairment
testing date,oftheparentandthenoncontrollinginterest.Becauseofapossiblecontrol
premium,theamountofimpairmentlossattributedtotheparent,asapercentageofits
ownershipinterest,maybehigherthantheamountattributedtothenoncontrollinginterest.
• Allocateimpairmentlossesinamannerconsistentwithhowtheentityallocatesnetincome
andlossesofthereportingunit(subsidiary)betweentheparentandthenoncontrollinginterest(e.g.,onthebasisoftherelativeownershipinterestsoftheparentandthenoncontrolling
shareholders).
Additional Considerations
14.76 See14.24–14.32foradditionalgoodwillimpairmentconsiderationsthatanentityshouldtake
intoaccountuponadoptingStatements141(R)and157.
SAB 74 Disclosures
14.77 SECregistrantsmustcomplywithSABTopic11.M(SAB74),whichrequiresaregistrantto
providecertaindisclosureswhenitsadoptionofanewaccountingstandardisexpectedtohaveamaterialeffectonitsfinancialpositionandresultsofoperations.4
14.78 Thenotestothefinancialstatementsshould(1)notifythereaderabouttheissuanceofa
standardthatregistrantswillberequiredtoadoptinthefutureand(2)helpthereaderassesstheimpact
thestandardwillhaveonthefinancialstatementsoftheregistrantwhenitisadopted.
14.79 InthecontextofStatement160,theregistrantgenerallyshouldconsiderprovidingthefollowing
SAB74disclosures:
• AbriefdescriptionofStatement160,includingtheregistrant’srequireddateofadoption(see
14.47).• Theimpactthattheregistrant’sadoptionofStatement160isexpectedtohaveonitsfinancial
statements,unlessthisimpactisunknownornotreasonablyestimable,inwhichcasethis
shouldbestated.Theregistrantshouldconsiderdisclosingthefollowingitems:
o Changesinthepresentationofthenoncontrollinginterestontheconsolidated
statementoffinancialposition,consolidatedincomestatement,andconsolidated
statementofchangesinequity(see12.08–12.18).
o Anychangesinhowtheentityallocatesnetincomeorlossesbetweentheparentand
thenoncontrollinginterest(e.g.,ifthecarryingamountofthenoncontrollinginterest
inanunprofitablesubsidiaryis$0)(see14.60–14.64).
o AnyeffectsthatStatements160and157willhaveontheentity’sgoodwillimpairmenttests,includingfutureallocationsofanygoodwillimpairmentsbetweentheparent
andthenoncontrollinginterest(see14.65–14.75).
o OtheranticipatedimpactsofStatement160onfuturetransactionsbetweenthe
parentandthenoncontrollingshareholders.
• Thepotentialimpactofothersignificantmattersthattheregistrantbelievesmightresultfrom
theadoptionofStatement160(e.g.,plannedorintendedchangesinbusinesspractices).
14.80 PrivateentitiesshouldalsogenerallyprovidethedisclosuresrequiredbySAB74.
4 Seefootnote1.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 242/286229
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SEC Amendments
14.81See14.37fortheSEC’splanstoupdateRegulationS-XandvariousSECStaffAccountingBulletins
thatconflictwithStatement160asofthedateofthispublication.Seealso14.38regardingtheSEC’s
recentreleaseofitsFinancialReportingManual .
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 243/286230
A.01 ThisAppendixdiscusseskeydifferencesbetweentheguidanceinStatement141(including
relatedinterpretiveguidanceandpractices)andthenewguidanceinStatement141(R).
Scope
A.02 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Entitiesfollowedapurchasemodel(i.e.,anacquisitionofnetassetsthatconstituteabusinessoranacquisitionofequityinterestsinabusinessthatresultsincontroloverthatentity).MutualentitiesdidnotfollowtheguidanceinStatement141becauseitseffectivedatewasdeferreduntilinterpretiveguidancewasissuedfortransactionsinvolving
suchentities.
Entitiesfollowacontrolmodel(i.e.,anytransactionoreventinwhichanentityobtainscontroloverabusiness).Mutualentitiesareincludedinitsscope.However,likeStatement141’sscope,itsscopeexcludes(1)formationsofjointventures,(2)assetacquisitionsthatdonotconstituteabusiness,(3)combinationsofentitiesunder
commoncontrol,and(4)combinationsofnot-for-profitorganizationsoracquisitionsofafor-profitbusinessbyanot-for-profitorganization.(SeeSection 1.)
A.03 ThescopechangesinStatement141(R)helpeddrivetheterminologyswitchfrom“purchase
method”to“acquisitionmethod.”UnderStatement141,abusinesscombinationoccurredwhen
anentityacquirednetassetsthatconstitutedabusinessoracquiredequityinterestsofanentityand
obtainedcontrolofthatentity.UnderStatement141(R),abusinesscombinationcanoccurviaany
transactionoreventinwhichtheacquirerobtainscontrolofoneormorebusinesses,notjustviaan
acquisition.Forexample,CompanyAholdsamajorityvotinginterestinCompanyB,butdoesnot
controlthatentitybecauseanotherinvestorhasminorityvetorights.Ifsuchminorityvetorightslapse
andasaresultCompanyAgainscontrolofCompanyB,theacquisitionmethodofaccountingforabusinesscombinationappliesatthattimeinaccordancewithStatement141(R),eventhoughno
considerationwastransferred(seeparagraph49ofStatement141(R)).
A.04 Formutualentities,Statement141essentiallydeferredtheeffectivedateofthestandarduntil
interpretativeguidanceforsuchtransactionswasissued.BeforetheissuanceofStatement141(R),no
suchinterpretiveguidancewasissued.MutualentitiesareexplicitlyincludedinthescopeofStatement
141(R),withnodeferredeffectivedate,andthereforesuchentitiesmustnowaccountforbusiness
combinationsinaccordancewiththatguidance.
Definition of a Business
A.05 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Issue98-3definedabusinessandprovidedrelatedapplicationguidance.Anentityneededinputs,processes,andoutputstoqualifyasabusiness.
Thedefinitionofabusinessisbroadenedandclarifiedwithadditionalapplicationguidance.Anentitynolongerneedstohaveoutputsorbeself-sustainingtoqualifyasabusiness.Issue98-3isnullified.(See1.08–1.11.)
A.06 Statement141(R)nullifiesIssue98-3andincorporatesitsdefinitionofabusiness,withsome
importantmodifications.Forexample,toqualifyasabusinessunderStatement141(R),anentityno
Appendix A — Differences BetweenStatements 141 and 141(R)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 244/286231
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
longerhastobe“self-sustaining,”andagroupofassetsnolongerneedstohaveoutputs.Thatis,
development-stageentitiescanbebusinessesunderStatement141(R).Asaresult,sometransactions
thatwouldhavebeenaccountedforasassetacquisitionsunderStatement141willinsteadbebusiness
combinationsunderStatement141(R).
Determining the Acquisition DateA.07 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Businesscombinationswereaccountedforonthedatethetransactionclosedorthedatetheacquirerobtainedcontroloftheacquiree.Incertaincircumstances,aconveniencedateexceptionallowedanacquisitiondatetobedesignatedattheendofamonthoraccountingperiod.
Businesscombinationsareaccountedforontheacquisitiondate,whichisthedatetheacquirerobtainscontroloftheacquiree.However,thisdatemaynotnecessarilybetheclosingdateofthetransaction.Thereisnoconveniencedateexception.(See3.01–3.03.)
A.08 LikethoseunderStatement141,businesscombinationsunderStatement141(R)shouldbe
recordedasofthedatetheacquirerobtainscontroloftheacquiree,generallyreferredtoasthe
“acquisitiondate.”
A.09 TheacquisitiondateisimportantbecauseunderStatement141(R),onthisdate:
• Thefairvalueoftheassetsacquired,liabilitiesassumed,andnoncontrollinginterestsis
measured(see3.13).
• Thefairvalueoftheacquiredbusinessismeasured(see5.39).
• Thefairvalueoftheacquirer’sequitysecuritiesissuedtothesellerismeasured(see6.04).
• Theacquirerbeginsconsolidatingtheacquiredbusiness’sbalancesheet,resultsofoperations,
andcashflows.
Measurement Date for Marketable Equity Securities of the Acquirer Issued toEffect a Business Combination
A.10 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Thevalueoftheacquirer’smarketableequitysecuritiesweremeasuredovertheperiodofafewdaysbeforeandafterthetermsofthebusinesscombinationwereagreedto
andannouncedinaccordancewithIssue99-12.
Theacquirer’sequitysecuritiesissuedasconsiderationinabusinesscombinationaremeasuredatfairvalueasoftheacquisitiondate.(See6.04.)
A.11 Statement141(R)requiresthatequitysecuritiesoftheacquirer,issuedasconsiderationina
businesscombination,berecordedatfairvalueasoftheacquisitiondate.UnderStatement141,in
conjunctionwithIssue99-12,theacquirer’sequitysecuritieswerevaluedoveraperiodofafewdays
beforeandafterthetermsofthebusinesscombinationwereagreedtoandannounced.Becausethe
valueofsecuritiesmaychangesignificantlybetweenthedatethetermsofthetransactionareagreed
toandannouncedandtheacquisitiondate,theamountsrecordedasconsiderationmightdiffer
substantiallyunderStatement141(R)fromthosethatwouldhavebeenrecordedunderStatement141.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 245/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 246/286233
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
whichadjustmentstoprovisionalamountsweregenerallyaccountedforprospectivelyasachangein
accountingestimatewhenthenewinformationwasreceived.
Example A-2
Adjustments to Provisional Measurement Made During the Measurement Period
CompanyAacquires100percentofCompanyMonNovember1,20X9.CompanyAhasafiscalyear-endofDecember31.AspartoftheacquisitionofCompanyM,CompanyAhiredanindependentappraisalfirmtovaluetheassetsacquiredandliabilitiesassumed(the“netassets”).ThisappraisalisnotcompletebeforeCompanyAissuesitsfinancialstatementsfortheyearendedDecember31,20X9.Therefore,CompanyArecordstheassetsacquiredandliabilitiesassumedatprovisionalamountswhenfilingitsDecember31,20X9,financialstatements.Aspartofthisprovisionalallocation,theacquiredproperty,plant,andequipment(PP&E)isassignedavalueof$450,000.ThisPP&Ehasaremainingusefullifeofthreeyearsasoftheacquisitiondateanddepreciationisrecordedonastraight-linebasis.CompanyAreceivesthefinalappraisalofthenetassetsonApril1,20Y0.Intheappraisal,thefairvalueofthePP&Easoftheacquisitiondateisdeterminedtobe$480,000.
UnderStatement141(R),CompanyAisrequiredtoretrospectivelyadjustits20X9financialinformationasfollows:
• PP&EisincreasedonDecember31,20X9,by$28,333,calculatedasthe$30,000increaseinthefairvalueofthePP&E,less$1,667ofadditionaldepreciationexpensethatwouldhavebeenrecordedhadtherevisedfairvaluebeenusedasoftheacquisitiondate.
• Goodwillisdecreasedby$30,000onDecember31,20X9.
• DepreciationexpensefortheyearendedDecember31,20X9,isincreasedby$1,667,representingtheadditionaldepreciationexpensefor20X9onthebasisoftherevisedfairvalueofthePP&E.
UnderStatement141,CompanyAwouldhaverecordedalloftheseadjustmentsonApril1,20Y0,andrecognizedtheincrementaldepreciationexpenseprospectivelyasachangeinaccountingestimate.
Adjustments to Valuation Allowances for Acquired Deferred Tax Assets andUncertain Tax Positions
A.15 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Adjustmentsweregenerallyrecordedtogoodwill(notsubjecttotheup-to-one-yearallocationperiod).Ifnogoodwillremained,othernoncurrentintangibleassetswouldfirstbereducedtozero,thentheremainingamountrecordedasareductionofincometaxexpense.
Adjustmentsthatoccurafterthemeasurementperiodaregenerallyrecordedasacomponentofincometaxexpense.Adjustmentsduringthemeasurementperiodwouldgenerallyberecordedasacomponentofgoodwillunlesstheadjustmentrelatestoanidentifiableeventthatoccurredafterthebusinesscombination.Inthatcase,theadjustmentwouldberecordedtoincometaxexpense.(See14.03.)
A.16 UnderStatement141,decreasesinavaluationallowanceforacquireddeferredtaxassetsand
allchangesuncertaintaxpositionbalancesweregenerallyrecordedthroughgoodwill,regardlessofwhethersuchchangesoccurredduringtheallocationperiodorthereafter.However,underStatement
141,increasesinvaluationallowanceswererecordedasacomponentofincometaxexpense.Statement
141(R)requiresthatanyadjustmentstoanacquiredentity’svaluationallowancesfordeferredtax
assetsanduncertaintaxpositionbalancesthatoccurafterthemeasurementperiodarerecordedasa
componentofincometaxexpense.ThisrequirementunderStatement141(R)appliestoallbusiness
combinations,regardlessoftheconsummationdate.Inotherwords,thisrequirementistheone
transitionprovisionthatcouldaffectthefutureaccountingforbusinesscombinationsconsummated
beforeStatement141(R)’seffectivedate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 247/286234
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example A-3
Adjustments to Acquired Deferred Tax Assets
CompanyAacquires100percentofCompanyM.Aspartoftheacquisition,CompanyAacquired$1millionofdeferredtaxassets(DTAs)previouslyrecordedbyCompanyMandrecognizeda$400,000valuationallowanceduetouncertaintyaroundtherealizationoftheDTAs.
Scenario1—Sixmonthsaftertheacquisitionclosesandwithintheallocation/measurementperiod,CompanyAdeterminesthat,basedonfactsandcircumstancesthatexistedattheacquisitiondate,CompanyMshouldhaverecorded$100,000lessofavaluationallowanceagainsttheacquireddeferredtaxassets.
Statement 141 Statement 141(R)
UnderStatement141,decreasestovaluationallowancesonDTAsweregenerallyrecordedtogoodwillregardlessofwhetherthechangesrelatetofactsandcircumstancesexistingattheacquisitiondate.
BecausethedecreasetothevaluationallowanceontheDTAsiswithintheone-yearmeasurementperiodandrelatedtofactsandcircumstancesthatexistedasoftheacquisitiondate,suchadjustmentwasrecordedtogoodwillasfollows:
ValuationallowanceonDTAs $100,000
Goodwill $100,000 ValuationallowanceonDTAs $100,000
Goodwill $100,000
HadtheadjustmenttothevaluationallowancesonDTA’srelatedtoanidentifiableeventoccurringaftertheacquisitiondate,CompanyAwouldhaverecordedthefollowingentry:
ValuationallowanceonDTAs $100,000
Incometaxexpense $100,000
Scenario2—Eighteenmonthsaftertheacquisitioncloses,CompanyAdeterminesthatCompanyMshouldhaverecorded$100,000lessofavaluationallowanceagainsttheacquiredDTAs.
Statement 141 Statement 141(R)
DecreasestothevaluationallowanceonDTAswerenotsubjecttotheup-to-one-yearallocationperiodand
thereforeweregenerallyrecordedagainstgoodwill.Therefore,CompanyArecordedthefollowingentry:
AdjustmentstothevaluationallowanceonDTAsoccurringoutsidetheone-yearmeasurementperiodarerecordedto
theincomestatement.Therefore,CompanyArecordedthefollowingentry:
ValuationallowanceonDTAs $100,000 ValuationallowanceonDTAs $100,000
Goodwill $100,000 Incometaxexpense $100,000
Recognition of Deferred Tax Assets
A.17 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Nodeferredtaxassetswererecognizedasoftheacquisitiondateiftaxdeductiblegoodwillexceededgoodwillrecordedaspartofthepurchaseaccountingforbookpurposes.
Deferredtaxassetsshouldberecognizedaspartoftheacquisitionaccountingiftaxdeductiblegoodwillexceedsgoodwillrecordedaspartoftheacquisitionaccountingforbookpurposes.(See8.45.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 248/286235
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquisition-Related Costs
A.18 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Directcostsoftheacquisitionwerecapitalizedaspartofthebusinesscombinationaccounting(i.e.,generallyingoodwill).
Directcostsoftheacquisitionareaccountedforseparatelyfromthebusinesscombinationandgenerallyexpensedasincurred.(See6.31.)
A.19 Directandincrementalcostsincurredasaresultofthebusinesscombination(e.g.,dealfees
forlegal,accounting,andinvestmentbankingservices)mustbeexpensedasincurred,whichisa
significantchangefromStatement141.Costsincurredfortheissuanceofdebtorequitysecuritiesto
effectthecombinationarenotwithinthescopeofStatement141(R)andwouldbeaccountedforin
accordancewithotherapplicableGAAP.Statement141(R)alsostipulatesthatanagreementbythe
acquirertoreimbursetheacquireeoritsformerownersforpayingtheacquirer’sacquisition-relatedcosts
isatransactionthatisseparatefromthebusinesscombination.Inotherwords,thesecostsmustbe
expensedandexcludedfromtheacquisitionmethodaccounting.
Partial Acquisitions
A.20 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Onlythecontrollinginterest’sportionoftheassetsacquiredandliabilitiesassumedwererecordedatfairvalueaspartofpurchaseaccounting.
Whencontrolisobtained,100percentoftheassetsandliabilitiesoftheacquireearerecordedbytheacquireratfairvalue.Thisistrueeveniflessthan100percentoftheacquireeisobtained.(See1.27.)
A.21 Statement141(R)requirescompaniestorecord100percentofthefairvalueofassetsacquired
andliabilitiesassumedwhencontrolisobtained,eveniflessthan100percentofabusinessisacquired.
ThisdiffersfromStatement141anditsrelatedinterpretiveguidance,whichrequiredthatonlythe
controllinginterest’sshareoftheassetsacquiredandliabilitiesassumedberecognizedatfairvalueand
theremainderatbookvalue.TheFASBreasonedthatonceanacquirerobtainscontrolofanentity,it
controlsallofanasset,notjustaportionofit.
A.22 Asabasicexample,ifthefairvalueoftheacquiredbusiness’snetassetswas$10millionand
theacquirerpurchased80percentofthebusiness,Statement141(R)wouldrequiretheacquirer
toconsolidate$10millionworthofnetassetsinitsfinancialstatementsasoftheacquisitiondate.However,ifunderpriorGAAPthenetassetsacquiredhadabookvalueof$6millionasofthe
acquisitiondate,theacquirerwouldconsolidateonly$9.2millionofnetassets(80percentof$10
millionplus20percentof$6million).
A.23 UnderStatement141(R),theacquisitionofaless-than-100percentcontrollinginterestinanother
entitywillmostlikelyresultinagreateramountofdepreciationandamortizationexpenseinthe
postcombinationincomestatementthanwouldhavebeenrecognizedunderStatement141.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 249/286236
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Initial Measurement of the Noncontrolling Interest in a Subsidiary
A.24 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Thenoncontrollinginterest(previously“minorityinterest”)wasrecordedatitscarryingvalue.Nogoodwillwasallocatedtothenoncontrollinginterest.
Thenoncontrollinginterest’sshareofthefairvalueofnetassetsacquiredisrecorded,includingitsshareofgoodwill.(See7.11.)
A.25 Statement141referredtononcontrollinginterestsas“minorityinterests,”butthemeaningof
thetermsisthesame.Anoncontrollinginterestistheportionofasubsidiary’sequitythatisattributable
totheownersofthesubsidiary,otherthanitsparentoritsparent’saffiliates,whenthesubsidiary
iscontrolledbyitsparentandisincludedinitsparent’sconsolidatedfinancialstatements.Typically,
noncontrollinginterestsrepresentlessthana50percentinterestinanentity.However,anoncontrolling
shareholderinavariableinterestentitymightownmorethan50percentofthevotingstockofthe
entity(evenupto100percent)becausethecontrollingentityexercisescontrolbyothermeans.
A.26 Thenoncontrollinginterestwillbemeasuredinitiallyatfairvalue(insteadofbookvalue,as
previouslyrequired),whichrepresentsitsshareinthefairvalueoftheidentifiableassetsacquiredand
liabilitiesassumed,plusitsshareofgoodwill.
Example A-4
Acquisition of a Controlling Interest but Not 100 Percent of an Entity
CompanyAacquires80percentofCompanyBonJune1,20X9for$90.Ontheacquisitiondate,thefairvalueof100percentofCompanyB’snetassetsis$100andthebookvalueis$60.Thefairvalueofthenoncontrollinginterestis$22.
Statement 141 Statement 141(R)
CompanyAwouldhaveconsolidated$92ofnetassets,calculatedasfollows:
Controllinginterest = $100×80% = $80
Noncontrollinginterest = $60×20% = 12
$92
CompanyAwouldhaverecognized$10ofgoodwill($90–[100×80%]).
CompanyAwillconsolidate$100ofnetassetsandwillrecognizegoodwillof$12([$90+22]–100).Thenoncontrollinginterestwillberecordedat$22.
Recognition of Liabilities Associated With Restructuring or Exit Activities of theAcquiree
A.27 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
EstimatedcostswererecordedasaliabilityinthepurchasepriceallocationifthecriteriainIssue95-3weremet.
Generally,onlycoststhatmeetthecriteriainStatement146asoftheacquisitiondateareincludedinthebusinesscombinationaccounting;allothersareaccountedforseparatelyfromthebusinesscombination.(See4.28.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 250/286237
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
A.28 Coststhatanacquirerexpectstoincurinthefuturethatarerelatedtoitsplanstoexitanactivity,
involuntarilyterminateemployees,orrelocateemployeesofanacquireewillnotbeassumedliabilities
oftheacquiree.Inthisregard,Statement141(R)significantlychangesStatement141anditsrelated
interpretiveguidance,underwhichacquirersgenerallyrecordedliabilitiesforrestructuringcostsaslong
asthecriteriainIssue95-3weremet.UnderStatement141(R),iftheacquireehasrecordedliabilities
inaccordancewithStatement146relatedtoplansinplacetoexitanactivity,involuntarilyterminateemployees,orrelocateemployees,suchamountswillbeconsideredliabilitiesassumedbytheacquirer.
Reacquired Rights
A.29 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
RightswererecordedasanidentifiableintangibleassetapartfromgoodwillandmeasuredatfairvalueinaccordancewithIssue04-1.
Rightsarerecordedasanidentifiableintangibleassetapartfromgoodwill.Valueisbasedontheremainingcontractualterm(i.e.,valuedoesnottakeintoaccountwhethermarketparticipantswouldconsiderrenewals).Theassetshould
beamortizedovertheremainingcontractualperiod.(See5.31.)
A.30 Inabusinesscombination,theacquirermayreacquirearightthathadpreviouslybeengranted
totheacquiree(e.g.,alicenseorfranchise).Statement141andIssue04-1stipulatedthatreacquired
rightswereidentifiableintangibleassetsthatmustberecognizedapartfromgoodwill.Statement
141(R)incorporatesmuchoftheguidancefromIssue04-1.However,theBoardaddedguidanceto
Statement141(R)statingthattheassetwouldbemeasuredonthebasisoftheremainingcontractual
term,regardlessofwhethermarketparticipantswouldtakeintoaccountrenewalsinthefairvalue
determination.UnderStatement141anditsrelatedinterpretiveguidance,thefairvaluedetermination
mayhaveincludedexpectedrenewalperiods.Therefore,inthesesituations,reacquiredrightsrepresentanexceptiontothefairvaluemeasurementprincipleinStatement141(R).Inaddition,Statement141(R)
requiresthattheasset,onceacquired,beamortizedovertheremainingcontractualperiod.Finally,ifthe
intangibleassetissoldtoathirdparty,thecarryingamountwouldbeincludedinthegainorlosson
sale.
In-Process Research & Development (IPR&D)
A.31 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
ThefairvalueofacquiredIPR&Dwithnoalternativefutureusewasincludedinthepurchasepriceallocationbutwasimmediatelyexpensed.
ThefairvalueofacquiredIPR&Discapitalizedasanindefinite-livedintangibleassetuntilcompletionorabandonmentoftheassociatedproject.Uponprojectcompletion,theIPR&Dassetisaccountedforasafinite-livedintangibleassetandamortizedovertherelatedproduct’sestimatedusefullife.Iftheprojectisabandoned,theassetisexpensedimmediatelyifthereisnoalternativefutureuseforit.Anycostsincurredpostacquisitionareexpensedasincurred.(See5.26–5.30.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 251/286238
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
A.32 Researchanddevelopment(R&D)expendituresmayresultinthedevelopmentofcertain
intangibleassetsbytheacquiredentitythatwouldbeexpensedasincurredinaccordancewith
Statement2(unlesstheyhadanalternativefutureuse).Inotherwords,anacquiredentitywould
probablynotrecordanyassetsonitsbooksbeforetheconsummationofabusinesscombinationrelated
toR&D.However,theacquiredIPR&Dmayrepresentanidentifiableintangibleassettotheacquirer.
A.33 Statement141requiredacquiredIPR&Dassetstobevaluedinthepurchasepriceallocation
andthenimmediatelyexpensed.UnderStatement141(R),acquiredIPR&Dassetsarenotimmediately
expensed.Rather,acquiredIPR&Disaccountedforasanindefinite-livedintangibleassetuntilcompletion
orabandonmentoftheassociatedR&Defforts.Therefore,theseassetswouldnotbeamortized,but
wouldbetestedforimpairmentatleastannually.OncetheR&Dactivitiesarecompleted,theassets
wouldbeamortizedovertherelatedproduct’susefullife.Iftheprojectisabandoned,theassetswould
bewrittenoffiftheyhavenoalternativefutureuse.
A.34 Statement141(R)doesnotchangetheaccountingforR&Dexpendituresincurredoutsideofa
businesscombination.Therefore,anyR&Dexpendituresincurredaftertheacquisitiondatethatrelateto
anacquiredIPR&Dprojectwouldgenerallybeexpensedasincurred.
Example A-5
Acquired IPR&D
CompanyAacquiresCompanyBfor$2million.Thefairvalueoftheassetsacquiredandliabilitiesassumedisasfollows:
Investments $ 900,000
Building 500,000
IPR&D 500,000
Liabilities (100,000)
Netassets $ 1,800,000
Cost 2,000,000Goodwill $ 200,000
Theallocationofassetsacquired,liabilitiesassumed,andgoodwillrecordedisthesameunderStatement141andStatement141(R).However,underStatement141,CompanyAwouldhaveimmediatelyexpensedthe$500,000inthepostcombinationincomestatement.UnderStatement141(R),the$500,000wouldnotbeimmediatelyexpensedandtheassetwouldberecordedinpostcombinationperiodsuntilitis(1)fullyamortized,(2)writtenoffbecauseofabandonmentoftheR&Defforts,or(3)deemedimpaired.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 252/286239
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Preacquisition Contingencies
A.35 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Contractual/Noncontractual Contractual
InitialRecognition —Amountswererecognizedatfairvalue,ifdeterminable,duringtheallocationperiod.Iffairvaluewasnotdeterminable,Statement5wasfollowedifitsrecognitioncriteriaweremetasoftheacquisitiondate.
SubsequentAccounting —Nospecificguidancewasprovided.
InitialRecognition —Amountsarerecognizedatfairvalueasoftheacquisitiondate.(See4.32).
SubsequentAccounting —Liabilitiesaremeasuredatthegreaterof(1)theacquisition-datefairvalueor(2)theamountthatwouldberecordedunderStatement5.Assetsaremeasuredatthelowerof(1)theacquisition-datefairvalueor(2)thebestestimateofthefuturesettlementamount.(See4.34–4.35).
Noncontractual
InitialRecognition —Amountsarerecognizedatfairvalueasoftheacquisitiondateifitismorelikelythannotthatthecontingencymeetsthedefinitionofanassetorliability
inConceptsStatement6.(See4.32.)
SubsequentAccounting —Sameaccountingasforcontractualcontingencies.
A.36 UnderStatement141(R),anacquirermustfirstdeterminewhethercontingentassetsacquired
andliabilitiesassumedarecontractualornoncontractual.Allcontractualcontingenciesarerecognizedat
fairvalueasoftheacquisitiondate.Noncontractualcontingenciesarerecognizedatfairvalueonlyifit
ismorelikelythannot,asoftheacquisitiondate,thatthecontingencygivesrisetoanassetorliability,
asdefinedinConceptsStatement6.Inotherwords,anacquirerrecognizesanoncontractualcontingent
liabilityatfairvalueasoftheacquisitiondateifthereisagreaterthan50percentchancethatthe
acquirerhasassumedapresentobligation.AnacquirershouldaccountforanoncontractualcontingencythatdoesnotmeetthiscriterioninaccordancewithotherGAAP(e.g.,Statement5).Statement141
didnotdistinguishbetweencontractualandnoncontractualcontingencies.UnderStatement141,such
preacquisitioncontingenciesweregenerallyaccountedforunderStatement5,whichoftenmeantthat
noamountwasrecordedasoftheacquisitiondate.
A.37 UnderStatement141(R),whennewinformationabouttheoutcomeofacontingencyis
obtained,acontingentliabilityrecognizedasoftheacquisitiondateshouldsubsequentlybemeasured
atthehigheroftheacquisition-datefairvalueortheamountthatwouldberecognizedunder
Statement5.Similarly,acontingentassetrecognizedasoftheacquisitiondateshouldsubsequentlybe
measuredattheloweroftheacquisition-datefairvalueorthebestestimateofitsfuturesettlement
amount.Anacquirerwouldnotderecognizethecontingentassetorliabilityifitsubsequentlyfallsbelowthemore-likely-than-notthreshold.Rather,acontingentassetwouldbederecognizedwhenitis
collectedorsoldorwhenitsrightsarelost,whereasacontingentliabilitywouldbederecognizedwhen
itissettledortheobligationtosettleiscanceledorexpires.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 253/286240
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Editor’s Note: OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwould
amendStatement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfair
valueasoftheacquisitiondateifsuchamountscanbereasonablydetermined.Itisexpectedthatthe
guidanceintheproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilities
atfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)
guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.
Contingent Consideration
A.38 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
InitialRecognition —Amountsthatweredeterminableasoftheacquisitiondatewereincludedinthecostoftheacquiredbusiness.
InitialRecognition —Amountsarerecordedattheiracquisition-datefairvalueregardlessofwhethertheconsiderationisclassifiedasaliabilityorequity.(See6.23.)
SubsequentAccountingforLiabilitiesandEquity —Distributionsuponresolutionofcontingenciesthatwerebasedon(1)earningsresultedinadditionalcostoftheacquiredbusinessor(2)securitiespricesdidnotchangetherecordedcostoftheacquiredbusiness.
SubsequentAccountingforLiabilities—Amountsareremeasuredtofairvalueasofeachreportingdateuntilthecontingencyisresolved.ThechangesinfairvaluearerecognizedinearningsunlessthearrangementisahedginginstrumentforwhichStatement133,asamendedbyStatement141(R),requireschangestoberecognizedinothercomprehensiveincome.(See6.25and6.27.)
SubsequentAccountingforEquity—Amountsarenotremeasured.(See6.26.)
A.39 Contingentconsiderationrepresentsobligationsoftheacquirertotransferadditionalassets
(e.g.,cash)orequityintereststotheformerownersoftheacquiredentityifspecifiedfutureevents
occurorconditionsaremet.UnderStatement141,contingentconsiderationwasgenerallyrecorded
whenthecontingencywasresolved.Therefore,nothingwastypicallyrecordedasoftheacquisitiondate
forcontingentconsiderationarrangements.UnderStatement141(R),thefairvalueofallcontingent
considerationisrecordedintheacquisitionmethodaccountingasoftheacquisitiondate.Arrangements
classifiedasliabilitiesarealsorequiredtoberemeasuredtofairvalueattheendofeachreportingperiod
untiltheirsettlement,withchangesinfairvaluegenerallyrecognizedinearnings.
Indemnification Assets
A.40 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Lackofguidanceresultedindiverseaccountingforindemnificationassets.
Entitiesgenerallymeasureanindemnificationassetatthesameamountasitsassociatedliability(lessanycontractuallimitationsoranallowanceforcollectibility),evenifthismeasurementisnotfairvalue.(See4.46.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 254/286241
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
A.41 Inabusinesscombination,thesellermayindemnifytheacquirerfortheresolutionofa
contingencyoruncertaintythatrelatestoaspecificassetorliability.Forexample,thesellermay
indemnifytheacquirerforspecifiedlossesoveracertaindollarthresholdwhenthelossesareassociated
withalawsuitthatpredatedthebusinesscombination.Insuchacase,theacquirerhasacquiredan
indemnificationassetaspartofthebusinesscombination.Statement141(R)requiresthattheasset
bemeasuredonthesamebasisastheliability(lessanycontractuallimitationsoranallowanceforcollectibility),evenifthismeasureisnotfairvalue.
Example A-6
Indemnification Assets
OnJune15,20X9,CompanyAacquired100percentofCompanyB.Beforetheacquisition,CompanyBhada$1millionliabilityrelatedtoanuncertaintaxpositionthatwasrecognizedinaccordancewithInterpretation48.Inapplyingtheacquisitionmethodofaccounting,CompanyAmustfollowInterpretation48and,therefore,recognizea$1millionliabilityrelatedtoCompanyB’suncertaintaxposition(CompanyAagreedwithCompanyB’sanalysisoftheuncertaintaxposition).Aspartoftheacquisition,theformerownersofCompanyBagreedtoindemnifyCompanyAforanylossesrelatedtothetaxposition(includingthe$1millionliabilityrecognizedbyCompanyA).Statement141(R)requiresthatCompanyArecordanindemnificationassetatthesameamountastheliability:$1million(thisassumesthatcollectibility
isnotindoubt),eventhoughthisamountmostlikelydoesnotrepresentfairvalue(i.e.,themeasurementrequirementsofInterpretation48arenotfair-valuebased).
Step Acquisitions
A.42 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Anacquirerwithapreexistingequityinterestintheacquireeonlyrecordedthefairvalueoftheincrementalinterestthatwasacquired.Theremainingnoncontrollinginterestwasrecordedathistoricalbookvalue.
Anacquirerrecords100percentofthefairvalueoftheacquireeoncecontrolisobtained.Againorlossisrecognizedonthepreexistingequityinterestheldbytheacquirer.Onceanacquirerobtainscontroloftheacquiree,subsequenttransactionsarerecordedwithinequityanddonotresultinaremeasurementevent.(See5.41.)
A.43 “Stepacquisitions”occurwhencontrolofabusinessisobtainedaftertheacquireralready
ownsanoncontrollinginterestintheacquiree’sequity.UnderStatement141(R),inastepacquisition,
theacquirer’spreexistinginterestintheacquireeisremeasuredtoitsfairvalue,witharesultinggain
orlossrecordedintheincomestatementuponconsummationofthebusinesscombination.Afterthe
preexistinginterestisremeasuredtofairvalue,itisincludedinthefairvalueoftheentirebusiness
acquired.
A.44 Furthermore,oncecontrolisobtained,acquisitionsanddispositionsofnoncontrollinginterestsin
thesubsidiaryareaccountedforasequitytransactionsunderStatement160(i.e.,aslongascontrolis
retained,subsequentacquisitionsanddispositionsofequityinterestswillnotresultinagainorloss).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 255/286242
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example A-7
Step Acquisitions
CompanyApurchasesa35percentinterestinCompanyFfor$2milliononJanuary1,20X8.CompanyAusestheequitymethodtoaccountforits35percentinterestinCompanyF.CompanyA’sequityintheincomeofCompanyFfromJanuary1,20X8,totheendofDecember31,20X9,is$500,000;asaresult,thebookvalueofCompanyA’sinterestinCompanyFasofDecember31,20X9,is$2.5million.
OnDecember31,20X9,CompanyApurchasesanadditional40percentinterestinCompanyFfor$4million.Onthisdate,thetotalfairvalueofCompanyFis$10million(assumingthereisnocontrolpremium)andthefairvalueof35percentofCompanyFis$3.5million.
Statement 141 Statement 141(R)
OnDecember31,20X9,CompanyAaccountsfortheacquisitionofcontrolofCompanyFasabusinesscombinationinwhichthefairvalueoftheadditional40percentinterestacquiredisrecorded.Thepreviouslyheld35percentinterestwasnotremeasuredonthisdate.Theremaining25percentnoncontrollinginterestwasrecordedbyCompanyAatitshistoricalcost.
OnDecember31,20X9,CompanyA’sexisting35percentinterestinCompanyFisremeasuredto$3.5million,resultinginagainof$1million($3.5millionlessthe$2.5millionbookvalue)intheincomestatement.Inaddition,CompanyAwouldthenaccountfortheacquisitionofcontrolofCompanyFasabusinesscombinationinwhichthefairvaluesofthecontrollinginterestandnoncontrollinginterestsare$7.5millionand$2.5million,
respectively.
Valuation Allowance for Assets Recorded at Fair Value
A.45 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Generally,assetswererecognizedatpresentvaluelessallowancesforuncollectibilityandcollectioncosts.
AssetsarerecognizedatfairvalueinaccordancewithStatement157,withnoseparatevaluationallowance.(See4.03.)
A.46 Separatevaluationallowancesarenotrecognizedonassetsthatarerecordedatfairvalueasof
theacquisitiondate.Statement141(R)requiresthatreceivables,includingloansreceivable,berecorded
atfairvalue.Fairvaluemeasurementsincorporateassumptionsaboutcollectionrisk,obviatingtheneed
foraseparatevaluationallowance.Thus,theimpactofanuncollectiblereceivablebecomingcollectible
aftertheacquisitiondateisnotrecordeduntilreceiptofpayment.
A.47 UnderStatement141,acquiredloansandreceivablesweregenerallyrecordedatthepresent
valueofamountstobereceived,whichweredeterminedusingappropriateinterestrateslessallowances
foruncollectibilityandcollectioncosts,ifnecessary.However,forloanswithinitsscope,SOP03-3may
havelimitedtheamountofanacquiree’sallowanceforloanlossesthatcouldbecarriedforwardinabusinesscombination.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 256/286243
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Assets That an Acquirer Intends Not to Use or Use in a Way Other Than TheirHighest and Best Use
A.48 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)Practicewasdiverse;typicallyassetswereassignednovalue,ortheirvaluerelatedonlytotheperiodofexpecteduse.
AssetsarerecordedatfairvaluepursuanttoStatement157andaccordingtotheirhighestandbestuse.(See4.02 and 5.09.)
A.49 Anacquirermaydecidenottouseanacquiredassetforcompetitiveorotherreasons.For
example,anacquirermaydecidenottouseanacquiredbrandnamebecauseitbelievesthatitsown
brandisbetterpositionedinthemarketplace.Ifanacquirerdecidesnottouseanacquiredasset,but
woulddefendsuchassetifacompetitorattemptedtousetheasset,itisstillgenerallyrequiredto
recognizetheassetandmeasureitatfairvalueinaccordancewithStatement157.Thisvaluationwould
needtoreflecttheasset’shighestandbestuse,fromamarketparticipant’spointofview,bothasof
theacquisitiondateandinsubsequentimpairmenttests.PracticewasdiverseunderStatement141,
andsuchassetsweretypicallyassignedeithernovalueoravaluethatrelatedonlytotheperiodof
expecteduse.
Bargain Purchase (an Excess of Fair Value of Acquired Net Assets Over Cost)
A.50 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Theexcessofthefairvalueofthenetassetsacquiredover
thefairvalueoftheconsiderationtransferred(negativegoodwill)reducedcertainnoncurrentassetsonaproratabasis.Anyamountoftheexcessthatremainedaftertheseassetswerereducedtozerowasrecognizedasanextraordinary gain.
Againisrecognizedintheperiodtheacquisitionoccurs.
Thegainiscalculatedastheexcessofthefairvalueofthenetassetsacquiredoverthesumof(1)thefairvalueoftheconsiderationtransferred,(2)thefairvalueofanypreviouslyheldequityinterests,and(3)thefairvalueofanynoncontrollinginterests.Thereisnoproratareductionofcertainnoncurrentassets.(See5.42–5.45.)
A.51 Whilenotexpectedtobecommon,abargainpurchaseoccursunderStatement141(R)when
theaggregateofthefairvalueofthe(1)considerationtransferred,(2)noncontrollinginterestsinthe
acquiree,and(3)acquirer’spreviouslyheldequityinterestintheacquireeislessthanthefairvalueofthe
netassetsacquired.Abargainpurchasemayoccurif,forexample,theacquiredentityispurchasedina
forcedliquidationordistresssale.
A.52 Statement141(R)requirestheacquiringentitytodouble-checkitscalculationsbeforeconcluding
thatabargainpurchaseexists.Ifthesameconclusionisreached,anyfurtherexcessisrecognizedasa
gainintheincomestatementasoftheacquisitiondate.
A.53 UnderStatement141,nogainwasrecordeduntilcertainothernoncurrentassetsacquired(e.g.,
intangible,long-lived,andothernoncurrentassets)werereducedtozero.Also,anygainsfrombargain
purchaseswereclassifiedasextraordinaryundercurrentStatement141,whereasunderStatement
141(R)theyarenotconsideredextraordinarygains.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 257/286244
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example A-8
Bargain Purchase
CompanyAacquiresCompanyBfor$500,000.Thefairvalueoftheassetsacquiredandliabilitiesassumedareasfollows:
Investments $ 900,000
Building 500,000
Trademark 500,000
Liabilities (100,000)
Netassets $ 1,800,000
Cost 500,000
Excess $ 1,300,000
UnderStatement141,CompanyAwouldhavereduced,onaproratabasis,certainnoncurrentassets(i.e.,thebuildingandtrademark)andthenrecordedtheremainingexcess($300,000)asanextraordinarygainasfollows:
Value After ProAccount Fair Value Rata Reduction
Investments $ 900,000 $ 900,000
Building 500,000 0
Trademark 500,000 0
Liabilities (100,000) (100,000)
NetAssets $ 1,800,000 $ 800,000
Cost 500,000 500,000
Excess $ 1,300,000 $ 300,000
UnderStatement141(R),CompanyAwillrecordtheentireexcess($1.3million)asagain.
Note:Thisexampleisnotintendedtoillustratetheexpectedmagnitudeofagainfromabargainpurchase.
Leveraged Buyouts
A.54 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
TheguidanceinIssue88-16wasfollowed. TheacquisitionmethodofaccountinginStatement141(R)isfollowed.(See1.25.)
A.55 WhileStatement141(R)eliminatesthecomplexaccountingforleveragedbuyouts,itdoesnot
impacttheaccountingforaleveragedrecapitalizationtransaction.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 258/286245
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Share-Based Payment Awards Exchanged for Awards Held by the Acquiree’sEmployees
A.56 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Valueofacquirer’sreplacementawardsrecordedaspartoftotalconsiderationtransferred—Calculatedastheamountattributabletoanyserviceperiodthatwasexecutedbeforetheacquisitiondate,regardlessofwhethertheacquirerwasobligatedtoexchangetheawards.Suchamountdidnotincludetheexcessofthefairvalueofthereplacementawardsoverthefairvalueofthereplacedawards.Thisfairvaluewasmeasuredonthebasisofthetermsofthereplacementawards,evenifsuchawardswerenotfullyvestedontheacquisitiondate.
Valueofacquirer’sreplacementawardsrecordedaspartoftotalconsiderationtransferred—Ifanobligationexists,theacquisition-datefairvalueofthereplacedawardsismultipliedbytheratioofthepastserviceperiodtothegreaterof(1)thetotalserviceperiodor(2)theoriginalserviceperiod(see6.12–6.16).
Valueofacquirer’sreplacementawardsrecognizedascompensationcost—Calculatedastheamount
attributabletotheportionoftheserviceperiodthatoccurredaftertheacquisitiondate,aswellasanyexcessofthefairvalueofthereplacementawardsoverthefairvalueofthereplacedawards.
Valueofacquirer’sreplacementawardsrecognizedascompensationcost —Ifanobligationexists,calculatedas
theexcessofthetotalfairvalueofthereplacementawardslesstheamountrecordedaspartofthetotalconsiderationtransferred.Theacquirerrecognizesthisamountascompensationcostoverthepostacquisitionserviceperiod(see6.15).
A.57 Statement141anditsrelatedinterpretationsrequiredexchangesofemployeestockoptions
tobeincludedinthepurchasepriceeveniftheacquirerwasnotobligatedtoexchangetheawards.
Statement141(R)generallylimitsthisaccountingtosituationsinwhichtheacquirerisobligated
toreplacesuchawards.Notethatfairvalueasdescribedaboveisdeterminedinaccordancewith
Statement123(R).
A.58 ThemethodunderStatement141(R)preventsanacquirerthatacceleratesvestingofreplacement
awardsaspartoftheexchangefromreducingtotalcompensationcostinfutureperiods.Anyexcessfair
valueofthereplacementawardswillstillberecordedbytheacquirerascompensationcost.
Pension and Other Postretirement Benefit Obligations
A.59 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Iftheplanoftheacquireewasexpectedtobeterminated
orcurtailedpostacquisition,suchexpectationsshouldhavebeenconsideredwhentheentitymeasuredtheacquisition-dateprojectedandaccumulatedpostretirementbenefitobligationsthatwereassumedbytheacquirer.
Iftheplanoftheacquireeisexpectedtobeterminatedor
curtailedpostacquisition,suchexpectationsshould notbeconsideredwhentheentitymeasurestheacquisition-dateprojectedandaccumulatedpostretirementbenefitobligationsthatareassumedbytheacquirer.(See4.43.)
A.60 UnderStatement141(R),anychangestoanacquiree’sdefinedbenefitplansthatanacquireris
notrequiredtomakedonotaffecttheamountrecordedintheacquisitionmethodaccounting.Rather,
anysuchamendmentsthataremadebytheacquirertotheacquiree’sdefinedbenefitplansaffectthe
postcombinationfinancialstatements.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 259/286246
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Disclosure Additions, Modifications, and Deletions
A.61 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141 Statement 141(R)
Specificminimumdisclosurerequirementswerespecifiedinparagraphs51–58.
Overallobjectivesarespecifiedfordisclosureofinformationthatwouldbeusefultousersinevaluatingthefinancialeffectsofabusinesscombination.Specificdisclosuresareindicatedthatwillgenerallyberequiredtomeetthoseobjectives.Seeparagraphs67and71.
Nospecificdisclosureswererequiredforacquiredreceivablesotherthantheamountassignedtoreceivables.
Specificdisclosurerequirementsareindicatedforacquiredreceivables,includingfairvalue,grosscontractualamount,andbestestimateofcontractualcashflowsnotexpectedtobecollected.Seeparagraph68(h).
Basicdisclosureswererequiredfortheamountofcontingentconsideration.Seeparagraph51(f).
Expandeddisclosuresofcontingentconsiderationarerequiredthatincludeadescriptionofthearrangement,basisfordeterminingtheamount,andanestimateofthe
rangeofoutcomes.Seeparagraph68(g).Disclosureofsupplementalproformainformationwasrequiredforpubliccompaniesasifthebusinesscombinationwascompletedatthebeginningoftheearliestreportingperiodpresented.Seeparagraph54.
Disclosureofsupplementalproformainformationisrequiredforpubliccompaniesasifthebusinesscombinationwascompletedatthebeginningoftheannualreportingperiod,currentinterimperiod,andcumulativeinterimperiods.Seeparagraph68(r).
Nospecificdisclosureswererequiredforcontingentassetsorliabilitiesotherthantheamountsassigned.
Specificdisclosuresarerequiredforacquiredcontingencies,includingamountsrecognizedoranexplanationofnorecognition,thenatureofamountsrecognizedorunrecognized,andtheestimatedrangeofoutcomes.Seeparagraph68(j).
Nodisclosureswererequiredforacquisition-relatedcosts. Discloseacquisition-relatedcostsandthelineiteminwhich
theyarerecognized.Seeparagraph68(n).
Noncontrollinginterestswerenotaccountedforatfairvalue.
Thefairvalueofthenoncontrollinginterest,andthevaluationtechniquesandsignificantinputsusedtomeasurethefairvalue,mustbedisclosed.Seeparagraph68(p).
Nospecificdisclosureswererequiredforpreviouslyheldinterestsinacquisitionsachievedinstages.
Specificinformationonthepreviouslyheldinterests,andthegainorlossassociatedwithacquisitionsachievedinstages,mustbedisclosed.Seeparagraph68(q).
Disclosureswererequiredforanextraordinarygainrelatedtoabusinesscombination,includingadescriptionofthenatureoftheprincipalitemsenteringintothedeterminationofanextraordinarygain.Seeparagraph56.
Disclosureisrequiredoftheamountofanygainrecognizedinabargainpurchase,thelineitemintheincomestatementwhereitisrecognized,andadescriptionofthereasonswhythetransactionresultedinagain.Seeparagraph68(o).
Nospecificdisclosureswererequiredfortransactionsthatwererecognizedseparately.
Specificdisclosuresarerequiredfortransactionsthatarerecognizedseparatelyfromthebusinesscombination.Seeparagraph68(m).
DisclosureswererequiredoftheamountofIPR&Dassetsacquiredandwrittenoffintheperiod.Seeparagraph51(g).
IPR&Dassetsareaccountedforasintangibleassets,withdisclosuresasrequiredbyStatement142.
Disclosurerequirementsforinterimperiodswerereduced.Seeparagraph58.
Disclosurerequirementsarenotreducedforinterimperiods.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 260/286247
Appendix B — Differences BetweenPre-Amended ARB 51 and Statement 160
B.01 WhileStatement160amendsARB51’sguidanceonaccountingfornoncontrollinginterests
anddeconsolidations,includingrelatedpresentationanddisclosures,itcarriesforwardwithout
reconsiderationmuchoftheexistingguidanceontheconsolidationmodelandpolicies.Thisappendix
comparesthepreviousguidanceinARB51withthenewguidanceinStatement160.
Presentation of Noncontrolling Interests — Consolidated Statement of FinancialPosition
B.02 Thetablebelowhighlightsthedifferencesbetweenthestandards.
Pre-amended ARB 51 Statement 160
Classifyasaliabilityormezzanine(ortemporary)equity. Classifyasaseparatecomponentofshareholders’equity.(See12.11.)
B.03 Referredtoasa“minorityinterest”inStatement141,anoncontrollinginterestistheportionofa
subsidiary’sequitythatisattributabletotheownersofthesubsidiaryotherthanitsparentoritsparent’s
affiliates.(Thatsubsidiaryiscontrolledbyitsparentandisincludedinitsparent’sconsolidatedfinancial
statements.)Typically,anoncontrollinginterestholderownslessthan50percentofanentity;however,
thereareexceptions.Forexample,inthecaseofavariableinterestentityunderInterpretation46(R),a
noncontrollinginterestholdermightownmorethan50percentofthevotingstockoftheentity(even
upto100percent)becausethecontrollingentityexercisescontrolbyothermeans.
B.04 WhileStatement160requiresthatnoncontrollinginterestsberecordedinpermanentequity,
certainnoncontrollinginterestsmayneedtobeclassifiedoutsideofpermanentequityunderother
accountingliterature(e.g.,Statement150,ASR268(FRRSection211),TopicD-98).(See7.05–7.06.)
Fornoncontrollinginterestsnowconsideredpartofpermanentequity,theparentmustapplyStatement
160’spresentationrequirementsretrospectivelyforallperiodspresented.Thereclassificationof
noncontrollingintereststoshareholders’equitymayaffectkeyfinancialstatementratios(e.g.,debt-to-
equity,return-on-equity).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 261/286248
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example B-1
Consolidated Statement of Financial Position Presentation Under Statement 160
XYZ Co.Consolidated Balance Sheets
(in millions)
December 31, 20X9 December 31, 20X8
ASSETS
Totalassets $ 200 $ 180
LIABILITIES
Totalliabilities $ 120 $ 110
Minority interest 25 20
SHAREHOLDERS’EQUITY
Commonstock 15 15
Additionalpaid-incapital 30 30
Retainedearnings 10 5
TotalXYZCo.shareholders’equity 55 50
Noncontrolling interest 25 20
Totalshareholders’equity 80 70
Totalliabilitiesandshareholders’equity $ 200 $ 180
Presentation of Noncontrolling Interests — Consolidated Statement of Income
B.05 Thetablebelowhighlightsthedifferencesbetweenthestandards.
Pre-amended ARB 51 Statement 160
Recordthenoncontrollinginterest’sshareofearnings(or
losses)asadeduction(oraddition)usedindeterminingconsolidatednetincome.
Allocateconsolidatednetincometotheparentandthe
noncontrollinginterest.(See12.13.)
B.06 BeforeStatement160,theparentgenerallypresentednetincomeattributabletothe
noncontrollinginterestonasinglelineitemintheconsolidatedstatementofincome,between
thedeductionforincometaxesandincomefromcontinuingoperations.AsshowninExampleB-2
below,Statement160requirestheparenttopresentnetincomeattributabletothenoncontrolling
interestonasinglelineitemafter consolidatednetincomeintheconsolidatedstatementofincome.
Therefore,consolidatednetincomenowincludesamountsattributabletoboththecontrollingandthe
noncontrollinginterests.
B.07 Statement160changesneitherthemethodsusedtoallocatenetincomebetweentheparent
andthenoncontrollinginterest(exceptasindicatedinB.12below)northemethodsforcalculating
earningspershare(EPS)(i.e.,basicanddilutedEPSisstillcalculatedsolelyonthebasisofnetincome
attributedtotheparent).However,becauseofthechangeinpresentation,Statement160nowrequires
theparenttodiscloseitsshareofthefollowingconsolidatedamounts:(1)incomefromcontinuing
operations,(2)discontinuedoperations,and(3)extraordinaryitems.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 262/286
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 263/286250
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example B-3
Changes in the Parent’s Ownership Interest in a Subsidiary When There Is No Change in Control
ParentXowns80percentofSubsidiaryAbeforeenteringintothefollowingtwotransactions.Becausethetransactionsareindependent,Xisnotrequiredtoaccountforthemasasingletransaction.
Year 1 Transaction
• ParentXpurchasesanadditional20percentinterestinAfor$50.
• Immediatelybeforethetransaction,thebookvalueofA’snetassetsis$100,ofwhich$80isallocatedtoXand$20isallocatedtothenoncontrollinginterest.
• Asofthetransactiondate,thefairvalueofA’sidentifiablenetassetsis$200.
ParentXaccountsforthistransactionintheconsolidatedfinancialstatementsasfollows:
Pre-amended ARB 51 Statement 160
FairvalueofA’sassets
Noncontrollinginterest
Goodwill
Cash
Debit Credit
$20
20
10
$50
Noncontrollinginterest
APIC
Cash
Debit Credit
$20
30
$50
Torecordthestepuptofairvaluefortheacquisitionoftheremaining20percentnoncontrollinginterest([$200×20%]–$20bookvalue).Goodwilliscalculatedas($50–[$200×20%]).
Torecordthedifferencebetween(1)thecarryingvalueofthenoncontrollinginterestand(2)thecashpaidtoacquirethenoncontrollinginterestasadditionalpaidincapital(APIC).
Year 2 Transaction
• SubsidiaryAissuesadditionalstocktounrelatedpartiesfortotalproceedsof$90.
• Afterthetransaction,X’sownershipinterestinAisdilutedfrom100percentto70percent.
• Afterthetransaction,thebookvalueofA’snetassetsis$200,ofwhich$140(70percent)isallocatedtoXand$60(30percent)isallocatedtothenoncontrollinginterest.
ParentXaccountsforthistransactionintheconsolidatedfinancialstatementsasfollows:
Pre-amended ARB 51 Statement 160
Cash
Noncontrollinginterest
Gain
Debit Credit
$90
$60
30
Cash
Noncontrollinginterest
APIC
Debit Credit
$90
$60
30
Torecordthenoncontrollinginterestandgainresultingfromtheissuanceofstock.Thisexampleassumesthatthecriteriaforgainrecognitionaremet.
Torecordthenoncontrollinginterestresultingfromtheissuanceofstock.ThedifferencebetweenthecashreceivedandcarryingvalueoftheinterestinSubsidiaryAisrecordedinAPIC.
Accumulated Net Losses Attributable to the Noncontrolling Interest
B.12 Thetablebelowhighlightsthedifferencesbetweenthestandards.
Pre-amended ARB 51 Statement 160
Generally,limitedtothecarryingamountofthenoncontrollinginterest.
Nolongerlimitedtothecarryingamountofthenoncontrollinginterest.Noncontrollinginterestcouldhaveanegativecarryingbalance.(See7.18.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 264/286251
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
B.13 Unlikethepre-amendedARB51,Statement160allowsaccumulatedlossesattributabletothe
noncontrollinginteresttoexceedtheirequityinterestsinthesubsidiary.Thatis,anoncontrolling
interestcanbeinadebitposition(i.e.,anegativenoncontrollinginterest).Whilethischangeis
prospective,Statement160requiresproformadisclosures,intheyearofadoption,ofanysignificant
impactthischangewouldhavehadonthecontrollinginterest’sshareofnetincomeandearningsper
share.(See14.63.)
Parent Deconsolidates a Subsidiary but Retains a Noncontrolling Investment
B.14 Thetablebelowhighlightsthedifferencesbetweenthestandards.
Pre-amended ARB 51 Statement 160
Noremeasurementofretainednoncontrollinginvestment. Remeasureretainednoncontrollinginvestmenttofairvalueonthedatecontrolislost.(See7.24.)
B.15 Insomeinstances,aparentdeconsolidatesasubsidiarybutretainsanoncontrollinginvestment
inthatformersubsidiary(e.g.,aparentsellsonly75percentofawhollyownedsubsidiary).BeforeStatement160,theformerparentmeasureditsretainednoncontrollinginvestmentasapercentage
ofthesubsidiary’sbookvalueonthedatecontrolwaslost.Inotherwords,theformerparent’snew
investmentbalancewasderivedfromthecarryingvalueoftheformersubsidiaryandnogainorloss
wasrecognizedinconnectionwiththeretainedinvestment.UnderStatement160,theformerparent’s
retainednoncontrollinginvestmentisremeasuredtofairvalueonthedatecontrolislost,thereby
affectingtheoverallgainorlossondeconsolidationoftheformersubsidiary.
Example B-4
Parent Deconsolidates a Subsidiary but Retains a Noncontrolling Investment
OnJanuary1,20X9,ParentXsells75percentofitswhollyownedsubsidiary(Y)toanunrelatedthirdpartyfor$250.Assumethat(1)thebookvalueofYis$100immediatelybeforethetransaction;(2)X’sretained25percentinvestmentinYhasafairvalueof$75asofJanuary1,20X9;and(3)thefairvalueof100percentofYis$325asofJanuary1,20X9.
Thetablebelowillustrateshowtheguidanceinthepre-amendedARB51woulddifferfromthatinStatement160regarding(1)calculationofthegain/lossondeconsolidationand(2)measurementofthecarryingvalueofX’sretainedinvestmentasofthetransactiondate.
Pre-amended ARB 51 Statement 160
Cashproceeds $ 250 $ 250
RetainednoncontrollinginvestmentinY 25 75
275 325
Less:CurrentbookvalueofY (100) (100)
Gain on Sale $ 175 $ 225
Carrying value for former parent’s retained investment
B.16 Inaddition,Statement160requirestheparenttoconsiderwhethermultiplearrangements
shouldbeaccountedforasasingletransaction.(See7.31.)Thisrequirementisintendedtoprevent
companiesfromminimizingearningsimplicationswhendisposingofasubsidiary(e.g.,aparentthat
intendedtosella100-percent-ownedsubsidiaryataloss).Withoutthisrequirement,theparentmay
attempttostructurethesaleintwotransactionsinawaythatminimizesthesale’snegativeeffecton
earnings.Inthefirsttransaction,forexample,theparentmaysell49percent.Sincetheparentretains
control,thelosswouldberecordedinequityandtherewouldbenoeffectonearnings.Inthesecond
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 265/286252
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
transaction,theparentmayselltheremaining51percent.However,sincetheparentnowlosescontrol,
thisportionofthelossisrecordedintheincomestatement.
Disclosure of Changes in Equity That Are Attributable to the NoncontrollingInterest
B.17 Thetablebelowhighlightsthedifferencesbetweenthestandards.
Pre-amended ARB 51 Statement 160
Nosuchdisclosureswererequiredbecauseentitiesrecordednoncontrollinginterestsoutsideofshareholders’equity.
Discloseeitherintheconsolidatedstatementofchangesinequity,ifpresented,orinthenotestotheconsolidatedfinancialstatements,(1)changesintotalequity,(2)changesinequitythatareattributabletotheparent,and(3)changesinequitythatareattributabletothenoncontrollinginterest.(See13.35.)
B.18 Statement160doesnotexplicitlystatewhichentitiesmustpresentaseparateconsolidated
statementofchangesinequity.Generally,onlySECregistrantsarerequiredtopresentsuchastatement.
Disclosure of Effects of Changes in the Parent’s Ownership Interest
B.19 Thetablebelowhighlightsthedifferencesbetweenthestandards.
Pre-amended ARB 51 Statement 160
Nospecificdisclosurerequirement. Disclosetheeffectsonequitythatareattributabletotheparentinaseparatescheduleinthefootnotestotheconsolidatedfinancialstatements.(See13.36–13.38.)
B.20 Thisseparatescheduleisonlyrequiredforperiodsinwhichtheparent’sownershipinterestinits
subsidiarychanges.Inaddition,thescheduleexcludeschangesinaccumulatedothercomprehensive
incomethatareattributabletotheparent,akeydifferencefromthedisclosureofchangesinequitythat
areattributabletothenoncontrollinginterest.(SeeB.17.)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 266/286253
Appendix C — Differences BetweenU.S. GAAP and IFRSs
C.01 ThisAppendixdiscusseskeydifferencesbetweenthefollowingstandards:
• Statement141(R)andIFRS3(R)—accountingforbusinesscombinations.
• Statement160andIAS27(R)—accountingfornoncontrollinginterests,changesinaparent’s
ownershipinterest,anddeconsolidations.
• Statement142andbothIAS36andIAS38—accountingforintangibleassetsandgoodwill.
Differences Between Statement 141(R) and IFRS 3(R)
C.02 AlthoughtheissuanceofStatement141(R)andIFRS3(R)markedthecompletionofthemost
significantconvergenceprojecttodatebetweentheFASBandIASB,somedifferencesremainbetween
thestandards.
C.03 Thedifferencesdiscussedinthissectioncanbecategorizedasfollows:(1)differentconclusions
reachedduringthejointbusinesscombinationsconvergenceprojectand(2)differencesoutsidethe
scopeofthejointbusinesscombinationsconvergenceprojectthatstemprimarilyfromreferencesto
otherFASBorIASBstandards.Theboardsintendtoaddresssomeofthelatterdifferencesinfuture
convergenceprojects(e.g.,leases,consolidations,fairvalue,andpostemploymentbenefits).
Different Conclusions Reached During the Joint Business Combinations Convergence Project
Effective Date and Transition
C.04 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
ApplyprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2008.Earlyadoptionisprohibited.(See14.01.)
ApplyprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterJuly1,2009.Earlyadoptionispermitted.
C.05 Theboardsoriginallyintendedtomaketheeffectivedatesoftherespectivestandards
approximatelythesame.However,becauseofdelaysintheissuanceofthefinalstandards,aswellasthe
IASB’spromisetogiveitsconstituentsatleastan18-monthtransitionperiodfornewlyissuedstandards,theIASBpushedbackitseffectivedate.EarlyadoptionispermittedbytheIASBpartiallybecausethe
revisionstotheexistingguidanceinIFRS3werenotassignificantastherevisionstoStatement141.
EntitieselectingtoearlyadoptIFRS3(R)mustalsoearlyadoptIAS27(R)andconsequentialamendments
toIAS28(R)andIAS31(R)atthesametime.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 267/286254
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Scope
C.06 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Scopeexceptionforcombinationsbetweennot-for-profitorganizationsoracquisitionsofafor-profitbusinessbyanot-for-profitorganization.(See1.47.)
Theprimarybeneficiaryofavariableinterestentity(VIE)underInterpretation46(R)thatmeetsthedefinitionofabusinessmustapplyStatement141(R)uponinitialconsolidationoftheVIE.(See1.17–1.21.)
Noscopeexceptionforcombinationsbetweennot-for-profitorganizationsoracquisitionsofafor-profitbusinessbyanot-for-profitorganization.
TheIASBdoesnothaveavariableinterestconsolidationmodelthatisequivalenttotheFASB’sInterpretation46(R).
C.07 UnlikeU.S.GAAP,IFRSsgenerallydonothavescopelimitationsfornot-for-profitorganizations.
C.08 Whilenotpartofinternationalconvergence,aprojectontheFASB’sagendaaddresses
accountingformergersandacquisitionsinvolvingnot-for-profitorganizations,aswellassubsequent
accountingforgoodwillandotherintangibleassetsforsuchentities.InOctober2006,theFASB
releasedtwoexposuredrafts:Not-for-ProfitOrganizations:MergersandAcquisitionsandNot-for-Profit
Organizations:GoodwillandOtherIntangibleAssetsAcquiredinaMergerorAcquisition.InMay2008,
theFASBrequestedcomments,dueinJuly2008,onpotentialrevisionstotheexposuredraftsand
expectstoissuefinalstandardsinthefirsthalfof2009.
C.09 Along-termgoaloftheFASBandIASBisconvergenceoftheirrespectiveconsolidationmodels
andguidance,buttheyhavemadenosignificantprogresstodate.SeeC.31belowforacomparison
ofthedefinitionofcontrolunderU.S.GAAPandIFRSs.(Notethatthedefinitionsfalloutsidethescope
ofthejointbusinesscombinationsconvergenceproject.)OnDecember18,2008,theIASBissuedan
exposuredraft,ED10,ConsolidatedFinancialStatements ,whichwouldmodifythedefinitionofcontrolunderIFRS.Thisexposuredocumentwasnotissuedaspartofajointconvergenceprojectwiththe
FASB.
C.10 TransactionsbetweenentitiesundercommoncontrolarenotinthescopeofStatement141(R)
andIFRS3(R).UnderU.S.GAAP,AppendixDofStatement141(R)providessupplementalguidanceon
accountingforthesetransactions(see1.41–1.42).UnderIFRSs,thereiscurrentlynospecificguidance
onaccountingforcommoncontroltransactions.However,inDecember2007theIASBaddedaproject
onthistopictoitsagenda.Intheabsenceofspecificguidance,entitiesreportingunderIFRSsandthat
areinvolvedincommoncontroltransactionsshouldselectanappropriateaccountingpolicybyusingthe
hierarchydescribedinparagraphs10–12ofIAS8.Becausethehierarchypermitstheconsiderationof
pronouncementsofotherstandard-settingbodies,theguidanceoncommoncontroltransactionsinU.S.GAAPmaybeappliedinpractice.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 268/286255
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Noncontrolling Interests — Initial Measurement
C.11 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Measureatfairvalue.Disclosevaluationtechniquesandsignificantinputsused.(See7.07 and13.16.)
Measureatfairvalueorproportionateshareofthefairvalueoftheacquiree’sidentifiablenetassets(i.e.,nogoodwillattributed).Disclose(1)measurementbasisusedand(2)ifmeasuredatfairvalue,valuationtechniquesandsignificantinputsused.
C.12 TheIASBgivesentitiestwooptions,onanacquisition-by-acquisition-basis,formeasuringthe
noncontrollinginterestinabusinesscombinationwherecontrolisobtainedbutlessthan100percent
ofthebusinessacquired.Thefirstistomeasurethenoncontrollinginterestatitsproportionateshareof
thefairvalueoftheacquiree’sidentifiablenetassets,whichisconsistentwithpriorrequirementsinIFRS
3.Thesecondistomeasurethenoncontrollinginterestatfairvalue,whichisconsistentwiththeFASB’s
Statement141(R)requirement.Fairvaluemeasurementsofthenoncontrollinginterest,undereither
standard,includegoodwillattributabletothenoncontrollinginterest.
Example C-1
Comparison of the IASB’s Options for Measuring Noncontrolling Interests
CompanyAacquires65percentofCompanyBinabusinesscombinationfor$750incash,whichrepresentsthefairvalueofthecontrollinginterestandincludesacontrolpremium.Thefairvalueofthenoncontrollinginterestis$350,soforpurposesofthisexampleassumethatthetotalfairvalueofCompanyBis$1,100($750+$350).*Asoftheacquisitiondate,thefairvalueofCompanyB’sidentifiablenetassetsacquired(i.e.,assetsacquirednetofliabilitiesassumed)is$800.
Thefollowingtableillustratesthedifferencebetweenmeasuringthenoncontrollinginterestat(1)fairvalue,asrequiredunderStatement141(R)andoneoftwooptionsavailabletoentitiesapplyingIFRS3(R)and(2)theproportionateshareofthefairvalueoftheacquiree’sidentifiablenetassets,whichistheotheroptionavailabletoentitiesapplyingIFRS3(R):
Fair Value
Proportionate Share ofAcquiree’s Identifiable NetAssets
NetAssetsAcquired $ 800 $ 800
Total Goodwill $ 300** $ 230†
GoodwillAttributedtotheControllingInterest (230)† (230)
GoodwillAttributedtotheNoncontrollingInterest $ 70 $ 0‡
Noncontrolling Interest $ 350 $ 280^
Note:ThisexampleisintendedtohighlightthedifferencebetweenthevaluesofthenoncontrollinginterestunderthetwoacceptablemethodologiesunderIFRS3(R).Itisnotintendedtoillustratethemannerinwhichgoodwilliscalculated.SeeExample5-4foranillustrativeexampleofthecalculationofgoodwillunderStatement141(R),whichwouldbesimilar
underIFRS3(R).
* Thefairvalueofanentityasawholewillnotalwaysequalthesumofthefairvalueofthecontrollinginterestandnoncontrollinginterest.
**FairvalueofCompanyB($1,100)lessfairvalueofCompanyB’sidentifiablenetassetsacquired($800).
† Fairvalueof65percentofCompanyB($750)lessfairvalueof65percentofCompanyB’sidentifiablenetassetsacquired($800×65%,or$520).Underthefairvaluescenario,thecontrollinginterest’sshareofgoodwillisnot65percentofthetotalamountofgoodwillbecauseofthepresenceofacontrolpremium.
‡ Underthisoption,thenoncontrollinginterestdoesnotincludeanyvaluerelatedtothegoodwill.
^ Fairvalueof35percentofCompanyB’sidentifiablenetassetsacquired($800×35%).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 269/286256
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquired Contingencies — Initial Measurement
C.13 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Recognizeassetsacquiredandliabilitiesassumedthatarisefromcontractualcontingenciesatfairvalue.Recognizeassetsacquiredandliabilitiesassumedthatarisefromnoncontractualcontingenciesatfairvalueifthecontingencymeetsthemore-likely-than-notthreshold.(See4.32.)
Recognizeacontingentliabilityatfairvalueifit(1)isapresentobligationthatarisesfromapasteventand(2)canbemeasuredreliably.
C.14 Statement141(R)andIFRS3(R)differinthreekeywaysontheinitialmeasurementofacquired
contingencies.First,contingentassetsarenotrecognizedunderIFRS3(R).Second,Statement141(R)has
arecognitionthresholdfornoncontractualcontingencies(i.e.,thecontingencymustmorelikelythan
notgiverisetoanassetoraliabilityinaccordancewithConceptsStatementNo.6toberecognized)
whileIFRS3(R)doesnothaveasimilarthresholdforcontingentliabilities.Thisdifferencemayresultin
morecontingentliabilitiesbeingrecognizedunderIFRS3(R)thanunderStatement141(R).Finally,IFRS
3(R)hasareliabilitythresholdfordeterminingthefairvaluemeasurementofacontingentliability,while
Statement141(R),whichreferstoStatement157’sfairvaluemeasurementguidance,doesnothavea
similarthreshold.
C.15 OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwouldamend
Statement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfairvalueasof
theacquisitiondateifsuchamountscanbereasonablydetermined.Itisexpectedthattheguidancein
theproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilitiesatfairvalue
thantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)guidance.This
RoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.
Example C-2
Initial Measurement of an Assumed Noncontractual Contingency — Statement 141(R) andIFRS 3(R)
OnJanuary1,20X9,CompanyAacquiresCompanyBinabusinesscombination.Asoftheacquisitiondate,CompanyBisdefendingapendinglawsuitinwhichtheplaintiffsareclaimingtheirpropertywascontaminatedbypollutantsfromCompanyB’sneighboringfactory.Theplaintiffshaveassertedaclaimof$100millionforthecostsofthecleanup,andCompanyAbelievesthatthereisonlya30percentchancethatthecombinedcompanieswillbefoundliableinacourtoflaw.
BecauseCompanyAestimatesthatitdoesnothaveagreaterthan50percentchanceofbeingfoundliableforthisnoncontractualcontingency,underStatement141(R)themore-likely-than-notrecognitionthresholdisnotmet,and
CompanyAwouldnotrecordanassumedliabilityasoftheacquisitiondate.Insubsequentperiods,CompanyAwouldfollowtheaccountingguidanceinStatement5.
UnderIFRS3(R),becausethecontingencyisapresentobligationthatarisesfromapasteventandcanbemeasuredreliably,CompanyAwouldrecognizealiabilityasoftheacquisitiondatemeasuredatfairvalue.Uncertaintyabouttheoutcomeofthelawsuit,aswellasotheradjustmentssuchasdiscounting,wouldbefactoredintotheliability’sfairvaluemeasurement.Asaresult,thefairvalueoftheliabilityasoftheacquisitiondatewillmostlikelybelessthanthetotalestimatedfutureclaimsof$100million.UnlikeStatement141(R),IFRS3(R)doesnothaveamore-than-likely-than-notrecognitionthresholdforassumedcontingencies.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 270/286257
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Acquired Contingencies Recognized as of the Acquisition Date — SubsequentMeasurement
C.16 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Foracontingentasset,recordthelowerofitsacquisition-datefairvalueorthebestestimateofitsfuturesettlementamount.Foracontingentliability,recordthehigherofitsacquisition-datefairvalueortheamountthatwouldberecognizedunderStatement5.(See4.34–4.35.)
Foracontingentliability,untiltheliabilityissettled,cancelled,orexpired,recordthehigheroftheamountcalculatedunderIAS37ortheacquisition-datefairvaluelesscumulativeamortizationrecognizedunderIAS18(ifappropriate).
C.17 BothStatement141(R)andIFRS3(R)containspecificguidanceonthesubsequentmeasurement
ofacquiredcontingencies.Becausetheguidanceisnotfullyconverged,however,accountingcandiffer
asaresultofthemodelsforcontingenciesunderU.S.GAAP(Statement5)andIFRSs(IAS37).
C.18 NotethattheIASBhasaprojectonitsagendatoreconsidertheguidanceontherecognitionandmeasurementofliabilities,includingcontingentliabilities,underIAS37.Afinalstandardisnot
expecteduntilthesecondhalfof2009.Also,theFASB’sagendaincludesaprojecttoreconsiderthe
disclosurerequirementsforcontingenciesinStatements5and141(R).Afinalstandard,ifissued,would
beeffectiveforfiscalyearsnosoonerthanthoseendingafterDecember15,2009.Thisprojectmay
alsoincludeasecondphaseinwhichtherecognitionandmeasurementrequirementsforcontingencies
wouldbereconsidered.
Operating Leases in Which the Acquiree Is the Lessor
C.19 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Recognizeanintangibleassetorliabilityapartfromtheacquiredasset(thatissubjecttoanoperatingleaseinwhichtheacquireeisthelessor)ifthetermsoftheleasearefavorableorunfavorable,respectively,relativetocurrentmarkettermsorprices.(See4.18.)
Recognizefavorableorunfavorabletermsoftheoperatinglease,relativetocurrentmarkettermsorprices,aspartofthefairvalueoftheacquiredasset(thatissubjecttoanoperatingleaseinwhichtheacquireeisthelessor);theacquirerdoesnotpresentaseparateintangibleassetorliability.
C.20 BothStatement141(R)andIFRS3(R)requiretheacquirertorecognizefavorableorunfavorable
termsoftheacquiree’soperatingleases.However,theacquirer’spresentationoftherecognizedamounts
differsunderStatement141(R)andIFRS3(R)whentheacquireeisthelessor.UnderStatement141(R),theacquirerpresentsthevalueofthefavorableorunfavorabletermsseparatelyfromtheacquiredasset
(thatissubjecttoanoperatingleaseinwhichtheacquireeisthelessor),whereasunderIFRS3(R),when
acostmodelisfollowed,theacquirerpresentsthevalueofthefavorableorunfavorabletermsaspartof
thefairvalueoftheacquiredassetsubjecttothelease.Despitethedifferenceinpresentation,IAS16’s
requirementforentitiestodepreciateoramortizeseparatelyeachsignificantportionofplant,property,
andequipmentislikelytoresultinsimilardepreciationoramortizationexpenseoverthelifeofthelease
underU.S.GAAPandIFRSs.Inotherwords,thedepreciablelivesanddepreciationmethodsforthe
buildingandthefavorableorunfavorablecomponentoftheoperatingleasemaydiffer.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 271/286258
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Example C-3
Acquired Operating Lease in Which the Acquiree Is the Lessor and the Terms Are Favorable toMarket
CompanyCacquiresCompanyDinabusinesscombination.CompanyDhasbeenleasingaportionofitswarehousetoathirdpartyunderalong-termleaseagreementthatisnotrenewableandexpiresfiveyearsaftertheacquisitiondate.Asoftheacquisitiondate,theleaseisfavorableby$10millionrelativetocurrentmarketpricesforsimilarpropertiesinthearea.
Theacquiredwarehousehasanacquisition-datefairvalueof$75million(valued“asifvacant,”whichexcludesthevalueofthefavorablelease;see5.37)andaremainingusefullifeof20years.
UnderStatement141(R),CompanyCwouldrecordtwoidentifiableassetsacquiredasoftheacquisitiondateasfollows:(1)abuildingwithafairvalueof$75millionand(2)afinite-livedintangibleassetwithafairvalueof$10million.Thebuildingandintangibleassetwouldbeamortizedovertheirremainingusefullivesof20and5years,respectively.
UnderIFRS3(R),CompanyCwouldgenerallyrecordasingleassetforthebuildingat$85millionasoftheacquisitiondate.However,paragraph43ofIAS16statesthatinthecalculationofsubsequentdepreciationexpense,theamountattributabletothebuilding($75million)mustbedepreciatedseparately,usinga20-yearlife,fromtheamountattributabletothefavorablelease($10million),whichwouldusea5-yearlife.DepreciationexpensewouldberecordedinaccordancewithIAS16.
Contingent Consideration Classified as a Liability — Subsequent Measurement
C.21 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Recordatfairvalue.(See6.25.) RecordfinancialinstrumentsthatarewithinthescopeofIAS39atfairvalue.Otherwise,usethebest-estimateapproachunderIAS37orfollowotherIFRSsasappropriate.
C.22 Whenacontingentconsiderationarrangementisclassifiedasaliability,theacquirerremeasures
theliabilityeachreportingperioduntilthecontingencyisresolved.Inpractice,underbothStatement141(R)andIFRS3(R),subsequentfluctuationsintherecordedliabilityaregenerallyrecognizedin
earnings.UnderIAS37,theacquirermeasuresliabilitiesusingthebestestimateoftheexpendituresit
expectstoincurinthefuturetosettletheobligation,whichcanalsobediscountedifthatamountis
materialtotheoverallestimate.
C.23 AdifferenceisoutlinedinC.34betweenU.S.GAAPandIFRSsintheinitialclassificationofa
contingentconsiderationarrangementaseitheraliabilityorequity.
Disclosures — Pro Forma Financial Information
C.24 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Requiredonlyforpublicbusinessenterprises(unlessimpracticable);comparableprior-perioddisclosuresmustbepresented.(See13.18.)
Requiredforallacquirersforthecurrentperiodonly,unlessimpracticabletodoso.
C.25 TheFASBcitedcost-benefitconcernsasthereasonforitspositionthatproformadisclosures
shouldnotberequiredforprivatebusinessenterprises.TheIASBcarriedforwarditspriorguidance
inIFRS3becauseitcurrentlyhasaprojectonitsagendatoreconsidertheapplicationofallIFRSs
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 272/286259
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
tosmaller,nonlistedentities.TheIASBreleasedanexposuredraft(IFRSforSmallandMedium-sized
Entities )inFebruary2007that,amongotherthings,proposestoeliminateproformadisclosuresfor
nonlistedcompaniesthatareacquirersinabusinesscombination.Theproformainformationrequired
byIFRS3(R)isasfollows:
(i) theamountsofrevenueandprofitorlossoftheacquireesincetheacquisitiondateincluded
intheconsolidatedstatementofcomprehensiveincomeforthereportingperiod;and
(ii) therevenueandprofitorlossofthecombinedentityforthecurrentreportingperiodas
thoughtheacquisitiondateforallbusinesscombinationsthatoccurredduringtheyearhad
beenasofthebeginningoftheannualreportingperiod.
C.26 TheIASBelectednottorequiredisclosureofcomparableprior-periodinformationbecauseof
thepotentialcostsanddifficultiesinvolvedinobtainingtheneededinformationincertainsituations.
Forexample,itmaybecostlyanddifficultforanacquirertoobtaintheacquiree’sfinancialinformation,
preparedinaccordancewithIFRS,iftheacquireeisbasedinaforeigncountrythathasnotadopted
IFRSs.
Disclosures — Gain or Loss Recognized After the Acquisition Date for Net AssetsAcquired
C.27 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Nodisclosurerequirement. Disclosurerequiredofamountandexplanationofanygainorlossrecognizedinthecurrentperiodthatrelatestoidentifiableassetsacquiredandliabilitiesassumedinabusinesscombination(onlyifsizeandnatureofamountisrelevanttounderstandingthepostcombinationresults).
C.28 TheIASBcarriedforwardthisdisclosurerequirementfromIFRS3.Statement141(R)doesnot
haveasimilardisclosurerequirement;however,underU.S.GAAP,significantgainsorlossesrecognized
bythecombinedentityrelatedtotheacquiredassetsandassumedliabilities(e.g.,impairmentofa
long-livedassetunderStatement144aftertheacquisitiondate)arelikelytobedisclosedunderthe
requirementsofotheraccountingliterature.Inotherwords,itislikelythatU.S.GAAPdisclosuresofsuch
gainandlossinformationwillbesimilartoIFRSsdisclosureswhenalltheotherdisclosurerequirements
inU.S.GAAP(otherthanStatement141(R))aretakenintoaccount.
Disclosures — Goodwill
C.29 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
EntitiesthatapplysegmentreportingunderStatement131arerequiredtodisclosetheamountofgoodwillallocatedtoeachsegment,asoftheacquisitiondate,foreachmaterialbusinesscombination(orintheaggregateforindividuallyimmaterialbusinesscombinationsthatarematerialintheaggregate).(See13.29.)
Norequirementtodisclosegoodwillallocatedtoeachcash-generatingunitasoftheacquisitiondate.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 273/286260
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
C.30 IAS36,whichappliestoallentities(i.e.,bothprivateandpublicbusinessenterprises),contains
arequirementtodisclosegoodwillforeachcash-generatingunitasofthebalancesheetdate ifthe
amountsaresignificantrelativetotheentity’stotalgoodwill.Statement142requiresasimilardisclosure
ofgoodwillbyreportablesegmentsasofeachbalancesheetdate,butonlyforentitieswithinthescope
ofStatement131(i.e.,publicbusinessenterprises).
Differences Outside the Scope of the Joint Business Combinations Convergence Project
Definition of Control
C.31 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Controlreferstoacontrollingfinancialinterest,generallythroughownershipofamajorityvotinginterest.DefinitionisfromARB51,asamendedandinterpretedbyInterpretation46(R),whichisnotconvergedwithIFRSs.(See1.03.)
Controlreferstothepowertogovernthefinancialandoperatingpoliciesofanentitytoobtainbenefitsfromitsactivities.DefinitionisfromIAS27,whichisnotconvergedwithU.S.GAAP.
OnDecember18,2008,theIASBissuedanexposuredraft,ED10,ConsolidatedFinancialStatements ,
whichwouldmodifythedefinitionofcontrolunderIFRS.Thisexposuredocumentwasnotissuedaspart
ofajointconvergenceprojectwiththeFASB.
Definition of Fair Value
C.32 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Fairvalueisdefinedasthepricethatwouldbereceivedtosellanassetorthatwouldbepaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsasofthemeasurementdate.Definitionisfromparagraph5ofStatement157,whichisnotconvergedwithIFRSs.(See3.40–3.58.)
Fairvalueisdefinedastheamountforwhichanassetcouldbeexchangedoraliabilitysettledbetweenknowledgeable,willingpartiesinanarm’s-lengthtransaction.DefinitionisnotconvergedwithU.S.GAAP.
C.33 NotethattheIASBiscurrentlyworkingonaprojecttodevelopaconsistentdefinitionoffair
valueamongallIFRSsaswellasdevelopfairvaluemeasurementguidance.Thedefinitionandguidance
wouldbesubstantiallyconvergedwiththeFASB’sStatement157.TheIASBexpectstoissueanexposure
draftin2009andafinalstandardin2010.
Contingent Consideration — Initial Classification
C.34 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Classifyasaliabilityorequityinaccordancewithexistingstandards(e.g.,Statement150),whicharenotconvergedwithIFRSs.(See6.22.)
Classifyasaliabilityorequityinaccordancewithexistingstandards(e.g.,IAS32andIAS39),whicharenotconvergedwithU.S.GAAP.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 274/286261
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Deferred Taxes and Uncertain Tax Positions
C.35 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
RecognizeandmeasureinaccordancewithStatement109andInterpretation48,whicharenotconvergedwithIFRSs.(SeeSection 8.)
RecognizeandmeasuredeferredtaxesinaccordancewithIAS12,whichisnotconvergedwithU.S.GAAP.IAS12doesnotcontainspecificguidanceonaccountingforuncertaintaxpositions.
Employee Benefits
C.36 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Recognizeandmeasureinaccordancewithexistingstandards(e.g.,Statements87and106),whicharenotconvergedwithIFRSs.(See4.41–4.45.)
RecognizeandmeasureinaccordancewithIAS19,whichisnotconvergedwithU.S.GAAP.
Share-Based Payment Awards — Initial Measurement
C.37 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
RecognizeandmeasureinaccordancewithStatement123(R),whichisnotconvergedwithIFRSs.(See4.49.)
RecognizeandmeasureinaccordancewithIFRS2,whichisnotconvergedwithU.S.GAAP.
Replacement Share-Based Payment Awards — Allocation of Amounts toConsideration Transferred
C.38 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
Iftheacquirerisobligatedtoreplacetheacquiree’sawards:
• Recognizetheexcessofthefairvalueofacquirer’sreplacementawardoveracquiree’sawardinpostcombinationearnings.
• Allocateremainderofreplacementawardto
considerationtransferredonthebasisoftheratioofthepastserviceperiodtothegreaterofthetotalserviceperiodororiginalserviceperiod.
FormulausedtoallocateremainderofreplacementawardisnotconsistentwithIFRS3(R)formulabecauseofdifferencesbetweenStatement123(R)andIFRS2,whicharenotconverged.(See6.10–6.16.)
Iftheacquirerisobligatedtoreplacetheacquiree’sawards:
• Recognizetheexcessofthefairvalueofacquirer’sreplacementawardoveracquiree’sawardinpostcombinationearnings.
• Allocateremainderofreplacementawardto
considerationtransferredonthebasisoftheratioofthevestingperiodcompleted(whichcanincludebothserviceandperformanceconditions)tothegreaterofthetotalserviceperiodororiginalvestingperiod.
FormulausedtoallocateremainderofreplacementawardisnotconsistentwithStatement141(R)formulabecauseofdifferencesbetweenStatement123(R)andIFRS2,whicharenotconverged.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 275/286262
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Disclosures — Acquired Contingencies
C.39 Thetablebelowhighlightsdifferencesbetweenthestandards.
Statement 141(R) IFRS 3(R)
UnlikeIFRS3(R),andbecauseofexistingdifferencesbetweenStatement5andIAS37,disclosureisnotrequiredofmajorassumptionsmadeaboutfutureeventsortheamountofexpectedreimbursements.
Disclosureisrequiredofmajorassumptionsmadeaboutfutureeventsandtheamountofexpectedreimbursements,ifany,pursuanttoparagraph85ofIAS37.IAS37isnotconvergedwithU.S.GAAP.
Differences Between Statement 160 and IAS 27(R)
C.40 Statement160andIAS27(R)wereissuedaspartofthejointbusinesscombinationsconvergence
projectbetweentheFASBandIASB.Bothstandardsamendthepreviousaccountingfornoncontrolling
interests,changesinaparent’sownershipinterest,anddeconsolidations,andaresubstantially
converged,withoneexceptionrelatedtotheeffectivedate.
C.41 ThissectiondoesnotdiscussdifferencesbetweenARB51andIAS27relatedtotherespectiveconsolidationmodelsandpoliciesbecausetheboardscarriedforwardmuchoftheexistingguidance
withoutreconsideration.Suchdifferencesmaybeaddressedinafutureconvergenceproject.
C.42 ThetablebelowindicatesdifferencesrelatedtotheeffectivedatesofStatement160,which
amendsARB51,andIAS27(R).
Statement 160 IAS 27(R)
EffectiveforfiscalyearsbeginningonorafterDecember15,2008.Earlyadoptionisprohibited.(See14.47.)
EffectiveforfiscalyearsbeginningonorafterJuly1,2009.Earlyadoptionispermitted.
NotethatentitieselectingtoearlyadoptIAS27(R)mustalsoadoptIFRS3(R)atthesametime.
Differences Between Statement 142 and IAS 36/38
C.43 Thedifferencesdiscussedbelowrelatetoareasofaccountingforgoodwillandotherintangible
assetsthatwerenotwithintheprimaryscopeofthejointbusinesscombinationsconvergenceproject.
ThemainsourcesofguidanceontheseareasareStatement142underU.S.GAAP,andIAS36andIAS
38underIFRSs.Incertaincircumstances,accountingforspecifictransactions(e.g.,advertisingcosts)is
prescribedbyotherliterature.Guidanceforsuchcircumstancesisnotedbelow.
Level of Impairment Testing for Goodwill
C.44 ThetablebelowhighlightsdifferencesbetweenStatement142andIAS36.
Statement 142 IAS 36
Reportingunit—eitheranoperatingsegmentoronelevelbelow.(See11.05.)
Cashgeneratingunit(CGU)—thelowestlevelatwhichinternalmanagementmonitorsgoodwill.Thislevelcannotbelargerthananoperatingsegment.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 276/286263
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
C.45 ThelevelatwhichgoodwillimpairmenttestingiscompletedcoulddifferunderU.S.GAAPand
IFRSs.ThelowestlevelatwhichanentitymaytestgoodwillforimpairmentunderU.S.GAAPisone
levelbelowtheoperatingsegment,whereasunderIFRSs,thelowestlevelfortestingisnotspecifically
prescribed.TheonlyrequirementstatedunderIFRSsisthattheleveloftestingmustnotbelargerthan
anoperatingsegmentlevel.
C.46 Paragraph30ofStatement142providesthefollowingguidanceforidentifyingreportingunits:
Areportingunitisanoperatingsegmentoronelevelbelowanoperatingsegment(referredtoasa
component).Acomponentofanoperatingsegmentisareportingunitifthecomponentconstitutes
abusinessforwhichdiscretefinancialinformationisavailableandsegmentmanagementregularly
reviewstheoperatingresultsofthatcomponent.However,twoormorecomponentsofanoperating
segmentshallbeaggregatedanddeemedasinglereportingunitifthecomponentshavesimilar
economiccharacteristics.Anoperatingsegmentshallbedeemedtobeareportingunitifallofits
componentsaresimilar,ifnoneofitscomponentsisareportingunit,orifitcomprisesonlyasingle
component.TherelevantprovisionsofStatement131andrelatedinterpretiveliteratureshallbeused
todeterminethereportingunitsofanentity.[Footnotesomitted]
C.47 UnderIFRSs,theCGUisthelevelatwhichgoodwillistestedforimpairmentunderIAS36.Paragraph6ofIAS36definesaCGUas“thesmallestidentifiablegroupofassetsthatgeneratescash
inflowsthatarelargelyindependentofthecashinflowsfromotherassetsorgroupsofassets.”
C.48 Inaddition,paragraph80ofIAS36states:
Forthepurposeofimpairmenttesting,goodwillacquiredinabusinesscombinationshall,fromthe
acquisitiondate,beallocatedtoeachoftheacquirer’scash-generatingunits,orgroupsofcash
generatingunits,thatisexpectedtobenefitfromthesynergiesofthecombination,irrespectiveof
whetherotherassetsorliabilitiesoftheacquireeareassignedtothoseunitsorgroupsofunits.Each
unitorgroupofunitstowhichthegoodwillissoallocatedshall:
(a) representthelowestlevelwithintheentityatwhichthegoodwillismonitoredfor
internalmanagementpurposes;and
(b) notbelargerthananoperatingsegmentdeterminedinaccordancewithIFRS8,
OperatingSegments.
Goodwill Impairment Testing
C.49 ThetablebelowhighlightsthesignificantdifferencebetweenStatement142andIAS36.
Statement 142 IAS 36
Atwo-steptestisperformed:
Step1—Fairvalueofthereportingunitiscompared
withitscarryingamount,includinggoodwill.Iffairvalueisgreaterthancarryingamount,step2isskippedbecausegoodwillisnotimpaired.
Step2—The“impliedfairvalue”ofreportingunitgoodwilliscomparedwithitscarryingamount.Ifthecarryingamountexceedstheimpliedfairvalueofgoodwill,thenanimpairmentlossisrecognizedinanamountequaltothatexcess.(See11.32.)
TherecoverableamountofaCGU(higherof(1)fairvaluelesscoststoselland(2)valueinuse)iscomparedwiththe
carryingamount.Theimpairmentlossisallocatedby(1)reducinganygoodwilloftheCGUandthen(2)reducingthecarryingamountofotherassetsoftheCGUonaproratabasis.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 277/286264
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
C.50 UnderU.S.GAAP,paragraphs19and20ofStatement142outlinethefollowingtwo-step
methodfortestinggoodwillforimpairment:
Step1
• Determinewhetherthefairvalueofthereportingunitislessthanitscarryingamount,including
goodwill.
• Ifthefairvalueofthereportingunitisless,proceedtostep2.
• Ifthefairvalueofthereportingunitisnotless,performnoadditionaltestingofgoodwillfor
impairment.
Step2
• Determinetheimpliedfairvalueofgoodwillofthereportingunitbyallocatingthefairvalueof
thereportingunitusedinstep1toalltheassetsandliabilitiesofthatreportingunit(including
anyrecognizedandunrecognizedintangibleassets)asifthereportingunithadbeenacquired
inabusinesscombinationandthefairvalueofthereportingunitwasthepricepaidtoacquire
thereportingunit.
• Comparetheimpliedfairvalueofgoodwilltothecarryingamountofgoodwilltodetermine
whethergoodwillisimpaired.Ifthecarryingamountexceedstheimpliedfairvalueofgoodwill,
animpairmentlossisrecognizedinanamountequaltothatexcess.
C.51 UnderIFRSs,therecoverableamountofaCGU(higherof(1)fairvaluelesscoststoselland(2)
valueinuse)iscomparedwiththecarryingamountoftheCGU.Paragraph104ofIAS36statesthat
iftherecoverableamountoftheCGUislessthanthecarryingamountoftheCGU,“theimpairment
lossshallbeallocatedtoreducethecarryingamountoftheassetsoftheunit(groupofunits)inthe
followingorder:
(a) first,toreducethecarryingamountofanygoodwillallocatedtothecash-generatingunit
(groupofunits);and
(b) then,totheotherassetsoftheunit(groupofunits)prorataonthebasisofthecarrying
amountofeachassetintheunit(groupofunits).”
Paragraph105ofIAS36furtherstates:
Inallocatinganimpairmentlossinaccordancewithparagraph104,anentityshallnotreducethe
carryingamountofanassetbelowthehighestof:
(a) itsfairvaluelesscoststosell(ifdeterminable);
(b) itsvalueinuse(ifdeterminable);and
(c) zero.
C.52 Inaccordancewithparagraph60ofIAS36,suchreductionsincarryingamountsaretreatedas
impairmentlossesonindividualassets.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 278/286265
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Impairment Testing of Indefinite-Lived Intangible Assets
C.53 ThetablebelowhighlightsdifferencesbetweenStatement142andIAS36.
Statement 142 IAS 36
Thefairvalueoftheassetiscomparedwithitscarryingamount.Animpairmentlossisrecognizedfortheamountbywhichthecarryingamountexceedsthefairvalue.(See10.41.)
Therecoverableamountoftheasset(higherof(1)fairvaluelesscoststoselland(2)valueinuse)iscomparedwithitscarryingamount.Animpairmentlossisrecognizedfortheamountbywhichthecarryingamountexceedstherecoverableamount.
C.54 UnderU.S.GAAP,anintangibleassetthatisnotsubjecttoamortizationistestedforimpairment
bycomparingthefairvalueoftheintangibleassetwiththecarryingamount.UnderIFRSs,the
recoverableamountiscomparedwiththecarryingamount.
C.55 Paragraph17ofStatement142states,inpart:
Ifthecarryingamountofanintangibleassetexceedsitsfairvalue,animpairmentlossshallbe
recognizedinanamountequaltothatexcess.Aftertheimpairmentlossisrecognized,theadjusted
carryingamountoftheintangibleassetshallbeitsnewaccountingbasis.Subsequentreversalofa
previouslyrecognizedimpairmentlossisprohibited.
C.56 Inaddition,underU.S.GAAP,Issue02-7providesguidanceongroupingcertainindefinite-lived
intangibleassetsforimpairmenttesting.UnderIFRSsthereisnocomparableguidance.
C.57 UnderIFRSs,anintangibleassetwithanindefiniteusefullifeisgenerallytestedforimpairment
bycomparingitsrecoverableamounttoitscarryingamount.Iftherecoverableamountislessthanthe
carryingamount,animpairmentlossisrecognizedfortheexcess.UnlikeU.S.GAAP,paragraph114of
IAS36allowsforthesubsequentreversalofanimpairmentlossonanintangibleassetwithanindefinite
usefullife(notincludinggoodwill).Theparagraphstates:
Animpairmentlossrecognizedinpriorperiodsforanassetotherthangoodwillshallbereversed
if,andonlyif,therehasbeenachangeintheestimatesusedtodeterminetheasset’srecoverable
amountsincethelastimpairmentlossrecognized.Ifthisisthecase,thecarryingamountoftheasset
shall,exceptasdescribedinparagraph117,beincreasedtoitsrecoverableamount.Thatincreaseisa
reversalofanimpairmentloss.
C.58 Inaddition,paragraph117ofIAS36states:
Theincreasedcarryingamountofanassetotherthangoodwillattributabletoareversalofan
impairmentlossshallnotexceedthecarryingamountthatwouldhavebeendetermined(netof
amortisationordeprecation)hadnoimpairmentlossbeenrecognisedfortheassetinprioryears.
Intangible Asset Revaluations
C.59 ThetablebelowhighlightsdifferencesbetweenStatement142andIAS38.
Statement 142 IAS 38
Norevaluationofintangibleassetsispermitted(otherthanforimpairments).
Intangibleassetsmaybeaccountedforathistoricalcost(lessaccumulatedamortizationandimpairments)orpursuanttoarevaluationmodel(permittedinlimitedsituations).
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 279/286266
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
C.60 UnderU.S.GAAP,intangibleassetsarecarriedatcostlessaccumulatedamortizationand
impairments,andrevaluationoftheamountinitiallyrecognizedisnotallowed.Asimilarcostmodelis
generallyusedunderIFRSstoaccountforintangibleassets;however,ifanintangibleassethasaquoted
marketpriceinanactivemarket(whichisrare),thentheentitymustmakeanaccountingpolicychoice
whethertousetherevaluationmodelorthecostmodel.
C.61 Therevaluationmodelisappliedaftertheintangibleassethasbeeninitiallyrecognizedat
cost.Undertherevaluationmodel,theintangibleassetiscarriedatarevaluedamount,whichisfair
valueasoftherevaluationdate,lessanysubsequentaccumulatedamortizationandanysubsequent
accumulatedimpairments.Paragraphs85and86ofIAS38indicatethatrevaluationincreasesand
decreasesarerecognizedeitherinequityortheincomestatement.Theparagraphsstate:
• Ifanintangibleasset’scarryingamountisincreasedasaresultofarevaluation,theincrease
shallbecrediteddirectlytoequityundertheheadingofrevaluationsurplus.However,the
increaseshallberecognisedinprofitorlosstotheextentthatitreversesarevaluation
decreaseofthesameassetpreviouslyrecognizedinprofitorloss.
• Ifanintangibleasset’scarryingamountisdecreasedasaresultofarevaluation,thedecrease
shallberecognisedinprofitorloss.However,thedecreaseshallbedebiteddirectlytoequity
undertheheadingofrevaluationsurplustotheextentofanycreditbalanceintherevaluation
surplusinrespectofthatasset.
Internally Developed Intangible Assets
C.62 ThetablebelowhighlightsdifferencesbetweenStatement142andIAS38.
Statement 142 IAS 38
Generally,costsincurredtodevelop,maintain,orrestoreintangibleassetsarerecognizedasanexpensewhenincurred.Exceptionsincludecostsassociatedwithcomputersoftwareintendedtobesold,Websitedevelopment,andcomputersoftwareforinternaluse.
Internallydevelopedintangibleassetsshallberecognizedonlyif(1)itisprobablethattheexpectedfutureeconomicbenefitsthatareattributabletotheassetwillflowtotheentityand(2)thecostoftheassetcanbemeasuredreliably.
C.63 Paragraph10ofStatement142statesthat“[c]ostsofinternallydeveloping,maintaining,
orrestoringintangibleassets(includinggoodwill)thatarenotspecificallyidentifiable,thathave
indeterminatelives,orthatareinherentinacontinuingbusinessandrelatedtoanentityasawhole,
shallberecognizedasanexpensewhenincurred.”IAS38,however,requirestherecognitionof
internallydevelopedintangibleassetsiftheyareincurredinthe“developmentphase”and(1)itis
probablethattheexpectedfutureeconomicbenefitsthatareattributabletotheassetwillflowtothe
entityand(2)thecostoftheassetcanbemeasuredreliably.
C.64 Inabusinesscombination,anacquirershallrecognizeanintangibleassetforcertaincosts
thatmayhavebeenexpensedbytheacquiree.Paragraph15ofStatement141(R)statesthat“the
acquirerrecognizestheacquiredidentifiableintangibleassets,suchasabrandname,apatent,ora
customerrelationship,thattheacquireedidnotrecognizeasassetsinitsfinancialstatementsbecauseit
developedtheminternallyandchargedtherelatedcoststoexpense.”UnderIFRS3(R),thesamenotion
wouldapplyandsuchassetswouldberecognizedintheacquisitionmethodaccounting.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 280/286267
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Advertising Costs
C.65 ThetablebelowhighlightsdifferencesbetweenSOP93-7andIAS38.
SOP 93-7 IAS 38
Advertisingcostsareeitherexpensedasincurredorexpensedthefirsttimetheadvertisingtakesplace.Exceptionsinclude(1)direct-responseadvertisingand(2)expendituresforadvertisingcoststhatareincurredafterrecognizingrevenuesrelatedtothosecosts(e.g.,cooperativeadvertising).
Advertisingcostsaregenerallyexpensedasincurredunlesstheexpenditurerelatestoprepaymentforthedeliveryofgoodsandservices(i.e.,TVcommercialsnotyetaired).Insuchcases,aprepaidassetwouldgenerallyberecognized.
C.66 UnderU.S.GAAP,advertisingcostsareaccountedforpursuanttoSOP93-7.Typically,they
areexpensedeitherasincurredorwhentheadvertisingfirsttakesplaceunlessthecostsrelateto
either(1)direct-responseadvertisingor(2)expendituresforadvertisingcoststhatareincurredafter
recognizingrevenuesrelatedtothosecosts(e.g.,cooperativeadvertising).Enterprisesmayelectto
expenseadvertisingcostseitherasincurred,orthefirsttimetheadvertisingtakesplace,aslongasthe
accountingpolicyisconsistentlyappliedtosimilarkindsofadvertisingexpenses.Paragraph26ofSOP
93-7notesthat“thefirsttimeadvertisingtakesplace”wouldinclude“thefirstpublicshowingofa
televisioncommercialforitsintendedpurposeandthefirstappearanceofamagazineadvertisement
foritsintendedpurpose.”Similarly,underIFRSs,advertisingcostsareexpensedasincurred.Theone
exceptionisforcoststhatrelatetotheprepaymentofadvertisingforwhichtheadvertisingserviceshave
notyetbeenrendered(e.g.,atelevisioncommercialnotyetaired).Aprepaidassetwouldberecognized
forsuchcostsonlyuntilanentityhasgainedarighttoaccesstherelatedgoodsorhasreceivedthe
relatedservices.
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 281/286268
Appendix D — Glossary of Standards andRegulations
FASBStatementNo.160,NoncontrollingInterestsinConsolidatedFinancialStatements—an
amendmentofARBNo.51
FASBStatementNo.159,TheFairValueOptionforFinancialAssetsandFinancialLiabilities —Including
anamendmentofFASBStatementNo.115
FASBStatementNo.158,Employers’AccountingforDefinedBenefitPensionandOtherPostretirement
Plans —anamendmentofFASBStatementsNo.87,88,106,and132(R)
FASBStatementNo.157,FairValueMeasurements
FASBStatementNo.154,AccountingChangesandErrorCorrections
FASBStatementNo.150,AccountingforCertainFinancialInstrumentsWithCharacteristicsofBoth
LiabilitiesandEquity
FASBStatementNo.147,AcquisitionsofCertainFinancialInstitutions—anamendmentofFASB
StatementsNo.72and144andFASBInterpretationNo.9
FASBStatementNo.146,AccountingforCostsAssociatedWithExitorDisposalActivities
FASBStatementNo.144,AccountingfortheImpairmentorDisposalofLong-LivedAssets
FASBStatementNo.142,GoodwillandOtherIntangibleAssets
FASBStatementNo.141(R),BusinessCombinations
FASBStatementNo.141,BusinessCombinations
FASBStatementNo.140,AccountingforTransfersandServicingofFinancialAssetsandExtinguishments
ofLiabilities —areplacementofFASBStatement125
FASBStatementNo.133,AccountingforDerivativeInstrumentsandHedgingActivities
FASBStatementNo.131,DisclosuresAboutSegmentsofanEnterpriseandRelatedInformation
FASBStatementNo.130,ReportingComprehensiveIncome
FASBStatementNo.128,EarningsperShare
FASBStatementNo.123(R),Share-BasedPayment
FASBStatementNo.116,AccountingforContributionsReceivedandContributionsMade
FASBStatementNo.115,AccountingforCertainInvestmentsinDebtandEquitySecurities
FASBStatementNo.114,AccountingbyCreditorsforImpairmentofaLoan—anamendmentofFASB
StatementsNo.5and15
FASBStatementNo.112,Employers’AccountingforPostemploymentBenefits —anamendmentof
FASBStatementsNo.5and43
FASBStatementNo.109,AccountingforIncomeTaxes
FASBStatementNo.106,Employers’AccountingforPostretirementBenefitsOtherThanPensions
FASBStatementNo.95,StatementofCashFlows
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 282/286269
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
FASBStatementNo.88,Employers’AccountingforSettlementsandCurtailmentsofDefinedBenefit
PensionPlansandforTerminationBenefits
FASBStatementNo.87,Employers’AccountingforPensions
FASBStatementNo.86,AccountingfortheCostsofComputerSoftwaretoBeSold,Leased,or
OtherwiseMarketed
FASBStatementNo.72,AccountingforCertainAcquisitionsofBankingorThriftInstitutions—an
amendmentofAPBOpinionNo.17,aninterpretationofAPBOpinions16and17,andanamendment
ofFASBInterpretationNo.9
FASBStatementNo.60,AccountingandReportingbyInsuranceEnterprises
FASBStatementNo.57,RelatedPartyDisclosures
FASBStatementNo.52,ForeignCurrencyTranslation
FASBStatementNo.43,AccountingforCompensatedAbsences
FASBStatementNo.13,AccountingforLeases
FASBStatementNo.5,AccountingforContingencies
FASBStatementNo.2,AccountingforResearchandDevelopmentCosts
FASBInterpretationNo.48,AccountingforUncertaintyinIncomeTaxes —aninterpretationofFASB
StatementNo.109
FASBInterpretationNo.46(R),ConsolidationofVariableInterestEntities—aninterpretationof
ARBNo.51
FASBInterpretationNo.45,Guarantor’sAccountingandDisclosureRequirementsforGuarantees,
IncludingGuaranteesofIndebtednessofOthers—aninterpretationofFASBStatementsNo.5,57,and
107andrescissionofFASBInterpretationNo.34FASBInterpretationNo.37,AccountingforTranslationAdjustmentsUponSaleofPartofanInvestment
inaForeignEntity —aninterpretationofFASBStatementNo.52
FASBInterpretationNo.21,AccountingforLeasesinaBusinessCombination—aninterpretationof
FASBStatementNo.13
FASBInterpretationNo.4,ApplicabilityofFASBStatementNo.2toBusinessCombinationsAccounted
forbythePurchaseMethod—aninterpretationofFASBStatementNo.2
FASBTechnicalBulletinNo.85-5, IssuesRelatingtoAccountingforBusinessCombinations,Including
CostsofClosingDuplicateFacilitiesofanAcquirer,StockTransactionsBetweenCompaniesUnder
CommonControl,DownstreamMergers,IdenticalCommonSharesforaPoolingofInterests,PoolingofInterestsbyMutualandCooperativeEnterprises
FASBConceptsStatementNo.6,ElementsofFinancialStatements
FASBConceptsStatementNo.5,RecognitionandMeasurementinFinancialStatementsofBusiness
Enterprises
FASBConceptsStatementNo.4,ObjectivesofFinancialReportingbyNonbusinessOrganizations
Question2ofFASBStaffImplementationGuide(Statement131),“SegmentInformation:Guidanceon
ApplyingStatement131”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 283/286270
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
Question17ofFASBStaffImplementationGuide(Statement86),“ComputerSoftware:Guidanceon
ApplyingStatement86”
FASBStaffPosition(FSP)No.FAS157-2,“EffectiveDateofFASBStatementNo.157”
FASBStaffPosition(FSP)No.FAS142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”
ProposedFASBStaffPosition(FSP)No.FAS142-d,“AmortizationandImpairmentofAcquiredRenewableIntangibleAssets”
ProposedFASBStaffPosition(FSP)No.FAS141(R)-a,“AccountingforAssetsAcquiredandLiabilities
AssumedinaBusinessCombinationThatAriseFromContingencies”
FASBStaffPosition(FSP)No.FIN45-2,“WhetherFASBInterpretationNo.45ProvidesSupportfor
SubsequentlyAccountingforaGuarantor’sLiabilityatFairValue”
FASBStaffPosition(FSP)No.SOP90-7-1,“AnAmendmentofAICPAStatementofPosition90-7”
EITFIssueNo.08-7,“AccountingforDefensiveIntangibleAssets”
EITFIssueNo.08-6,“EquityMethodInvestmentAccountingConsiderations”
EITFIssueNo.07-5,“DeterminingWhetheranInstrument(orEmbeddedFeature)IsIndexedtoan
Entity’sOwnStock”
EITFIssueNo.04-4,“AllocationofGoodwilltoReportingUnitsforaMiningEnterprise”
EITFIssueNo.04-3,“MiningAssets:ImpairmentandBusinessCombinations”
EITFIssueNo.04-2,“WhetherMineralRightsAreTangibleorIntangibleAssets”
EITFIssueNo.04-1,“AccountingforPreexistingRelationshipsBetweenthePartiestoaBusiness
Combination”
EITFIssueNo.03-9,“DeterminationoftheUsefulLifeofRenewableIntangibleAssetsUnderFASB
StatementNo.142”
EITFIssueNo.02-17,“RecognitionofCustomerRelationshipIntangibleAssetsAcquiredinaBusiness
Combination”
EITFIssueNo.02-13,“DeferredIncomeTaxConsiderationsinApplyingtheGoodwillImpairmentTestin
FASBStatementNo.142”
EITFIssueNo.02-7,“UnitofAccountingforTestingImpairmentofIndefinite-LivedIntangibleAssets”
EITFIssueNo.02-5,“Definitionof‘CommonControl’inRelationtoFASBStatementNo.141”
EITFIssueNo.01-5,“ApplicationofFASBStatementNo.52toanInvestmentBeingEvaluatedfor
ImpairmentThatWillBeDisposedOf”EITFIssueNo.00-19,“AccountingforDerivativeFinancialInstrumentsIndexedto,andPotentially
Settledin,aCompany’sOwnStock”
EITFIssueNo.99-12,“DeterminationoftheMeasurementDatefortheMarketPriceofAcquirer
SecuritiesIssuedinaPurchaseBusinessCombination”
EITFIssueNo.98-4,“AccountingbyaJointVentureforBusinessesReceivedatItsFormation”
EITFIssueNo.98-3,”DeterminingWhetheraNonmonetaryTransactionInvolvesReceiptofProductive
AssetsorofaBusiness”
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 284/286271
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
EITFIssueNo.96-16,“Investor’sAccountingforanInvesteeWhentheInvestorHasaMajorityofthe
VotingInterestbuttheMinorityShareholderorShareholdersHaveCertainApprovalorVetoRights”
EITFIssueNo.96-5,“RecognitionofLiabilitiesforContractualTerminationBenefitsorChangingBenefit
PlanAssumptionsinAnticipationofaBusinessCombination”
EITFIssueNo.95-3,“RecognitionofLiabilitiesinConnectionWithaPurchaseBusinessCombination”
EITFIssueNo.93-7,“UncertaintiesRelatedtoIncomeTaxesinaPurchaseBusinessCombination”
EITFIssueNo.88-16,“BasisinLeveragedBuyoutTransactions”
EITFIssueNo.86-9,“IRCSection338andPush-DownAccounting”
EITFTopicNo.D-108,“UseoftheResidualMethodtoValueAcquiredAssetsOtherThanGoodwill”
EITFTopicNo.D-101,“ClarificationofReportingUnitGuidanceinParagraph30ofFASBStatementNo.
142”
EITFTopicNo.D-98,“ClassificationandMeasurementofRedeemableSecurities”
EITFTopicNo.D-97,“Push-DownAccounting”APBOpinionNo.29,AccountingforNonmonetaryTransactions
APBOpinionNo.23,AccountingforIncomeTaxes—SpecialAreas
APBOpinionNo.22,DisclosureofAccountingPolicies
APBOpinionNo.18,TheEquityMethodofAccountingforInvestmentsinCommonStock
APBOpinionNo.17,IntangibleAssets
APBOpinionNo.16,BusinessCombinations
APBOpinionNo.12,OmnibusOpinion—1967
AccountingResearchBulletinNo.51,ConsolidatedFinancialStatements
AICPAStatementofPosition03-3,AccountingforCertainLoansorDebtSecuritiesAcquiredina
Transfer
AICPAStatementofPosition94-6,DisclosureofCertainSignificantRisksandUncertainties
AICPAStatementofPosition93-7,ReportingonAdvertisingCosts
AICPAStatementofPosition90-7,FinancialReportingbyEntitiesinReorganizationUnderthe
BankruptcyCode
AICPAPracticeBulletin14,AccountingandReportingbyLimitedLiabilityCompaniesandLimited
LiabilityPartnerships
SECStaffAccountingBulletinTopic2.A.5,“AdjustmentstoAllowancesforLoanLossesinConnection
WithBusinessCombinations”(SAB61)
SECStaffAccountingBulletinTopic2.A.6,“DebtIssueCosts”(SAB77)
SECStaffAccountingBulletinTopic5.A,“ExpensesofOffering”
SECStaffAccountingBulletinTopic5.H,“AccountingforSalesofStockbyaSubsidiary”(SAB51)
SECStaffAccountingBulletinTopic5.J,“PushDownBasisofAccountingRequiredinCertainLimited
Circumstances”(SAB54)
8/14/2019 Roadmap_Business Combinations - Deloitte
http://slidepdf.com/reader/full/roadmapbusiness-combinations-deloitte 285/286272
AccountingforBusinessCombinationsandRelatedTopics Deloitte
ARoadmaptoApplyingFASBStatements141(R),142,and160
SECStaffAccountingBulletinTopic5.L,“LIFOInventoryPractices”(SAB58)
SECStaffAccountingBulletinTopic6.G,“AccountingSeriesReleases177and286—Relatingto
AmendmentstoForm10-Q,RegulationS-K,andRegulationS-XRegardingInterimFinancialReporting”
SECStaffAccountingBulletinTopic11.M,“MiscellaneousDisclosure”(SAB74)
SECRegulationS-X,Rule1-02,“DefinitionofTermsUsedinRegulationS-X”
SECRegulationS-X,Rule3-05,“FinancialStatementsofBusinessesAcquiredortoBeAcquired”
SECRegulationS-X,Rule4-08,“GeneralNotestoFinancialStatements”
SECRegulationS-X,Rule5-03,“IncomeStatements”
SECRegulationS-X,Rule10-01,“InterimFinancialStatements”
SECRegulationS-X,Rule11-01,“PresentationRequirements”
SECRegulationS-K,Item303,“Management’sDiscussionandAnalysisofFinancialConditionand
ResultsofOperations”
SECRegulationS-K,Item512,“Undertakings”
SECRegulationS-K,Item601,“Exhibits”
SECAccountingSeriesReleaseNo.268(FRRSection211),RedeemablePreferredStocks
IFRS8,OperatingSegments
IFRS3(revised2008),BusinessCombinations(IFRS3(R))
IFRS3,BusinessCombinations
IFRS2,Share-basedPayment
IAS39,FinancialInstruments:RecognitionandMeasurement
IAS38,IntangibleAssets
IAS37,Provisions,ContingentLiabilitiesandContingentAssets
IAS36,ImpairmentofAssets
IAS27(revised2008),ConsolidatedandSeparateFinancialStatements(IAS27(R))
IAS27,ConsolidatedandSeparateFinancialStatements
IAS19,EmployeeBenefits
IAS18,Revenue
IAS16,Property,PlantandEquipment
IAS12,IncomeTaxes
IAS8,AccountingPolicies,ChangesinAccountingEstimatesandErrors