Mixed results in FAF review of FASB business combinations standard

A Financial Accounting Foundation (FAF) team gave FASB’s standard on business combinations a mixed review, according to information provided by FAF on Wednesday.

The FAF post-implementation review team performed an in-depth analysis of FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141R), which is codified in ASC Topic 805, Business Combinations.

Statement 141R’s principles and requirements generally are understandable and can be applied as intended, according to the review report. The review also found that investors generally find the information resulting from application of the standard useful, and that the standard generally resolves some of the issues associated with the purchase method of accounting for business combinations.

But the report said investors question the reliability of reported information for business combinations that:

• Include a significant portion of assets and liabilities that are difficult to measure at fair value;
• Result in a bargain purchase;
• May in fact be asset purchases (such as single real estate assets or drug compounds); or
• Involve mutual entities or more than two entities.

In certain areas, the standard also is more costly and complex to implement than FASB had anticipated, according to the review, which was undertaken by a FAF team working under the oversight of the FAF board of trustees.

The International Accounting Standards Board (IASB) also is conducting a post-implementation review of IFRS 3 (revised 2007), Business Combinations, which was issued concurrently with Statement 141R. FASB will review the results of the FAF analysis in coordination with the IASB.

“The post-implementation review report on Statement 141R identified many positive aspects of the business combinations standard, including the resolution of prior practice issues as well as enhancements in the usefulness of information about a business combination,” FASB Chairman Leslie Seidman said in a news release. “The report also identified some stakeholder concerns, many of which the board has already begun to address, for example, push-down accounting and the definition of a business.”

Investors, preparers, academics, and financial regulators provided input in the review. The review team’s conclusions included:

• Although some practice issues associated with the purchase method of accounting for business combinations were resolved, others remain unresolved. These include identifying when a new basis of accounting is appropriate, and accounting for combinations between joint ventures and organizations under common control.
• Much of the complexity and cost of applying the standard relate to the application of fair value measurement requirements to certain items and the need to use external valuation experts.
• The standard improved the relevance and completeness of business combination information.

The PIR team also recommended the following improvements to the standard-setting process:

• Enhancing and formalizing the process for identifying, prioritizing, tracking, and resolving significant financial reporting issues.
• Regular reporting on and updating the status of those issues and their relative priorities.
• Identifying and documenting the need a project will address and how that determination was made.
• Consistently conducting key research, such as field work and reviewing academic studies, as early as possible in the agenda-setting and deliberation phases. Any research or economic principles relied upon when concluding on a significant issue should be fully identified, according to the review team.

The review team’s next task will be reviewing Statement No. 157, Fair Value Measurements. Stakeholders who would like to participate in a review can register online.

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