Business Combinations Harry Klompas, CA Principal, Accounting Standards Board

Transcription

1 Business Combinations Harry Klompas, CA Principal, Accounting Standards Board September 2005

2 Background Focus of Section 1581: eliminate pooling Goodwill and intangible changes were a consequence of this Did not re-address measurement of the acquisition, or of the assets & liabilities Scope excluded co-ops; limited to business combinations involving the purchase of a business 2

3 Background FASB and AcSB limited scope of Section 1581 project so that pooling could be addressed in a reasonable time Second phase planned to address outstanding issues FASB, IASB & AcSB working together to have a converged standard on all issues 3

4 Summary Business Combinations, Section 1582 Transactions covered Measurement of the acquisition Measurement of the assets and liabilities Non-controlling interests Additional disclosures Timing 4

5 Transactions Covered Business combination: a transaction or other event in which an acquirer obtains control of one or more businesses Not limited to purchase of equity/assets Mutual enterprises a business combination between two mutuals is included Additional application guidance provided 5

6 Transactions Not Covered Formation of joint ventures Enterprises under common control Not-for-profit organizations 6

7 Measurement of the Acquisition Acquired business is measured at fair value at acquisition date (date control of acquiree acquired) Presumption that fair value of consideration equals the fair value of acquired business unless persuasive evidence to contrary e.g. bargain purchase, forced sale, mutuals use other valuation techniques 7

8 Measurement of the Acquisition Fair value of consideration includes all consideration, but excludes items not part of exchange for acquiree Include contingent consideration at fair value Subsequent changes affect post-acquisition income Arrangements with owners/employees Determine if these are part of purchase consideration or related to future services Consideration measured at acquisition date Securities not measured at agreement date 8

9 Measurement of the Acquisition Purchase of less than 100% of a business Acquisition recorded at fair value of 100% of business; Non-controlling interest (NCI) also at fair value Does grossing up the price represent fair value? Acquisition achieved in stages Acquisition recorded at fair value when control achieved Gain/loss recognized on difference to carrying amount of existing investment 9

10 Measurement of the Acquisition Fair value is the amount of the consideration that would be agreed upon in an arm s length transaction between knowledgeable, willing parties who are under no compulsion to act Does not include transaction costs Expense as incurred 10

11 Measurement of Assets/Liabilities All measured at fair value except Future income taxes and liabilities (Section 3465) Employee future benefits (Section 3461) Leases (Section 3065) Assets held for sale [measured at FV less cost to sell] (Section 3475) Intangible assets that do not meet criteria for separate recognition [included in goodwill] (Section 1582) Goodwill [measured as a residual] (Section 1582) 11

12 Measurement of Assets/Liabilities Recognize and measure at fair value all assets and liabilities, whether or not recognized by acquiree Intangibles such as research Contingent assets and liabilities even if do not meet recognition criteria in Section 3290 (e.g. lawsuits) Measurement period not to exceed one year 12

13 Measurement of Assets/Liabilities Only include assets and liabilities that are part of the acquired business. Exclude future restructuring costs transactions entered into in anticipation of the acquisition for benefit of combined entity anticipated EFB amendments previously unrecognized tax assets of acquirer 13

14 Measurement of Assets/Liabilities Assets and liabilities are measured at full fair value whether or not there is a non-controlling interest Includes goodwill Existing GAAP measures controlling interest portion at fair value and NCI portion at the acquiree s carrying amount Only controlling interest portion of goodwill is currently recognized 14

15 Measurement of Assets/Liabilities Excess of fair value of net assets over consideration (negative goodwill) Re-examine valuation of assets & liabilities to ensure at fair value; and that all liabilities recognized If excess remains, this is a bargain purchase; goodwill is reduced to zero and remaining excess is recognized in income (not as an extraordinary gain) 15

16 Non-controlling Interests Accounting at time of acquisition Section 1582 Accounting post acquisition Section 1601 ED to be issued early 2006 Key principles in addendum to 1582 ED 16

17 Non-controlling Interests Measure at fair value at date of acquisition Change in size of NCI without change in control is a capital transaction Loss of control Cease consolidation Difference between controlling interest and sum of consideration plus fair value of remaining investment is gain/loss 17

18 Non-controlling Interests Presentation Include as a separate component of equity Net income and comprehensive income attributable to the controlling and noncontrolling interests 18

19 Additional disclosures - 1 Primary reasons for the business combination Factors that contributed to goodwill recognition Fair value of acquisition and consideration, by class of consideration Reconciliation of changes in NCI Effect of transactions with NCI on equity EPS for the controlling interest including effect of transactions with NCI 19

20 Additional disclosures - 2 Contingent consideration Maximum payable Reconciliation Income statement amounts Acquisition expenses Negative goodwill Impact of acquisition Acquiree revenue and net income from date of acquisition Pro forma revenue and net income for year as though acquisition had been from beginning of year 20

21 Timing Exposure Draft of proposed Section 1582 issued. Comments due October 28 Final Sections 1582 and 1601 expected to be issued in third quarter of 2006 Effective date expected to be years beginning on or after January 1,