New Rules Require New Methods for M&A Accounting
Global impact
In their first major joint undertaking, FASB and the International Accounting Standards Board (IASB) collaborated to create merger financial reporting standards applicable not only to the United States, but worldwide.
Statement of Financial Accounting Standards (SFAS) Nos. 141R and 160, which take effect Dec. 15, 2008, mark a radical departure from traditional Generally Accepted Accounting Principles (GAAP) procedures. The IASB's International Financial Reporting Standard (IFRS) 3 and International Accounting Standard (IAS) 27, also effective Dec. 15, are less revolutionary for international business. All contain the same fundamental principles, and together they represent a significant step toward convergence.
More important, they give investors a better way to compare financial statements and assess how combining businesses are likely to function. The new rules require buyers to use the acquisition method of accounting for all mergers and acquisitions, adding consistency to statements across all business combinations.
SFAS 141R
Under the new rules, buyers must recognize acquired assets and liabilities based on fair market values on the date the deal closes, rather than allocating acquisition costs to individual assets and liabilities based on estimated fair market values when the deal was announced. Additionally, the costs associated with completing the acquisition (such as fees to investment banks) and any anticipated restructuring costs must be recognized separately from the merger, providing a clearer picture of the actual assets and liabilities that change hands.
When mergers are accomplished in stages, sometimes called step acquisitions, the new rules require buyers to recognize identifiable assets and liabilities, as well as noncontrolling interests, at their full fair market value on the acquisition date. Under existing practices, buyers use a blend of historical costs and fair value to measure assets and liabilities in step acquisitions.
SFAS 160
Under the new rules, parent companies must report minority interests in subsidiaries as equity in the consolidated financial statements. In addition, they must clearly identify the amount of consolidated net income that's attributable to the parent and to the minority interests.
If parent companies buy, sell or reacquire interests in subsidiaries they control, or if the subsidiaries issue additional ownership interests, the transactions must be treated as equity transactions. If a subsidiary is deconsolidated, the gain or loss is measured on the fair market value of any minority equity investment rather than on the carrying amount of the retained investment.
Last, parent companies must provide enough disclosures to clearly distinguish between their own interest and the interests of minority owners.
Make adjustments, if necessary
The full impact of the new rules can't be measured until they're in use, but one thing seems likely: If you're contemplating a merger or acquisition after Dec. 15, 2008, you'll want to consult your financial advisor before you complete the deal.
The new regulations may cause you to rethink the way it's structured. You can still make accounting adjustments after the merger closes, but you must record them as of the closing date rather than when they are changed.
If you have any questions about these new rules, contact Chris Hootman at chootman@badencpa.com or 260-969-2515.
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Chris has over 25 years of professional experience including 21 years with Baden, Gage & Schroeder. Her practice focuses on providing audit and accounting, merger and acquisition, and litigation support services for manufacturers, wholesalers and distributors with revenues of $10 million to $200 million. | | |
