141(R)'s Effect on Goodwill

BY CHESLEY H. ERICKSON

In reading your article, “A New Day for Business Combinations,” (June 08, page 34) I had some questions regarding [FASB] statement 141(R). A client purchases a company for $20 million. The company has $10 million of tangible assets, mainly cash, receivables and some property. The purchase is highly leveraged and results in debt of about the same as the purchase price.

I believe currently it would result in about $10 million of goodwill. Do you see any differences from current standards on recording this after 141(R)?

Chesley H. Erickson, CPA
Salt Lake City

Author’s Reply: Yes, potentially a lot of difference. The flowchart in the article identifies a number of places where different amounts will be attributed to the acquired company’s assets and liabilities, which would in turn impact the amount of goodwill.

For example, acquisition-related expenses will not be added to the cost of goodwill. Any in-process R&D is recognized as an asset and carried forward. In addition, various contingencies may surround the acquired company’s assets and liabilities, and some contingent consideration may be looming. These items are all recorded in the process of booking the transaction. Thus, the value of goodwill could be substantially different, depending on the facts and circumstances.

Another point in your example is the source of the funding. It doesn’t matter what form is used—cash, debt or equity—the measure of the goodwill is based on the difference between the fair value of all the other assets and assumed liabilities and the fair value of the consideration paid to acquire the company. Thanks for asking.

Paul B.W. Miller, CPA
Colorado Springs, Colo.

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