FAF reviewing FASB business combinations standard

The Financial Accounting Foundation (FAF) is gathering survey participants for a post-implementation review of a FASB standard on business combinations that generated controversy after it was issued in 2007.

A joint project with the International Accounting Standards Board (IASB) resulted in FASB Statements No. 141(R), Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements, which were issued in December 2007.

A month later, the IASB issued a revised version of IFRS 3, Business Combinations, and an amended version of IAS 27, Consolidated and Separate Financial Statements.

FAF is seeking stakeholders who want to be considered to participate in a post-implementation review survey of Statement No. 141(R). IFRS 3 also is scheduled to be reviewed by the IASB.

During the project, the boards reconsidered the guidance that had existed for applying the purchase method of accounting for business combinations, which now is called the “acquisition method.”

Before Statement No. 141(R) was issued, combination accounting had been controversial because of disagreement on how to provide the most useful information. Implementation problems arose because many combinations had unusual features that brought about questions on how to apply the guidance.

Practices were inconsistent and diverse, with minority interests reported in several ways and debate centering on goodwill and other intangibles.

The fundamental concept of Statement No. 141(R) said that the reporting entity is the entire economic enterprise created by the combination. All acquired assets and liabilities were required to be described in the consolidated statement of financial position. Any minority interest, which was called a “noncontrolling interest,” was considered stockholders’ equity.

In April 2009, FASB released a staff position amending and clarifying Statement No. 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The application concerns included disclosing potentially prejudicial information in financial statements and determining the acquisition-date fair value of a litigation-related contingency.

Later in 2009, 44% of executives in a Deloitte survey said they were rethinking their deal strategy or that the standard would affect their deal strategy or planned deal activity. Concerns expressed in the survey included the shortened time frame within which fair value estimates were needed subsequent to the acquisition, and the increased likelihood of company earnings volatility tied to new rules for fair value estimation.

Three years later, the standard is set for review. Stakeholders can register on the FAF website to be considered for participation in the post-implementation review.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.