22 May 2013

FASB: FAF completes post-implementation review of FASB standard on business combinations

The FAF completed the Post-Implementation Review (PIR) of an accounting standard intended to improve the relevance, representational faithfulness, and comparability of information that a company or organisation reports about a business combination and its effects.

FASB Statement No 141 (revised 2007), Business Combinations (Statement 141R) (codified in Accounting Standards Codification Topic 805, Business Combinations), requires an acquiring organisation to recognise the assets acquired, the liabilities assumed, and any non-controlling interest in the acquired organisation at the acquisition date, measured at their fair values as of that date, with limited exceptions.

The PIR found that Statement 141R resolved some of the issues associated with the purchase method of accounting for business combinations; that its principles and requirements generally are understandable and can be applied as intended; and that investors generally find the resulting information to be useful.

The review determined that some investors question the reliability of reported information related to assets and liabilities that are difficult to measure at fair value, that result in a bargain purchase, or that may be asset purchases. The review also found that the standard in certain areas introduced more costs and complexity to business combination accounting than FASB had anticipated.

The IASB also is conducting a post-implementation review of International Financial Reporting Standards (IFRS) 3 (revised 2007), 'Business Combinations', which was issued concurrently with Statement 141R.

The Statement 141R review team received input from investors and other financial statement users; preparers of various sizes, industries and levels of experience with the standard; auditors; academics; and financial regulators. The review team reached its conclusions using judgement, considering all the input received, and striving to be objective and balanced. Based on its research, the review team concluded that:

• Statement 141R resolved some of the practice issues associated with the purchase method of accounting for business combinations. Some practice issues remain unresolved, including identifying when a new basis of accounting is appropriate and accounting for combinations between joint ventures and organisations under common control. Additionally, Statement 141R is convergent with IFRS 3 in many areas; however, some differences remain between the requirements of Statement 141R and IFRS 3.
• Statement 141R’s principles and requirements are understandable and generally can be applied as the FASB intended. The requirements in Statement 141R that stakeholders had the most difficulty applying relate to measuring assets acquired and liabilities assumed using the fair value requirements in FASB Statement No.157, 'Fair Value Measurements'; measuring the fair value of contingent consideration; and determining whether a transaction is a business combination or an asset purchase. Preparers for medium to small organisations reported the most difficulty in applying the standard.
• Investors generally find the information resulting from application of Statement 141R useful in understanding and analysing most business combination transactions, including the measurement of the transaction at fair value. However, some review participants question the reliability or decision usefulness of the reported information for business combinations that (a) include assets and liabilities that are difficult to measure at fair value, (b) result in a bargain purchase, or (c) in substance may be asset purchases.
• The costs and complexity of applying Statement 141R are higher than the FASB anticipated. Much of the complexity relates to the application of Statement 157’s measurement requirements to certain items. The costs relate to the extensive external valuation expertise being sought by both preparers and auditors of financial statements. Smaller organisations may face additional costs for timely access to external resources. 
• Statement 141R achieved improvements in the relevance and completeness of business combination information. Improvements in the area of comparability, reliability, and representational faithfulness of that information were not fully achieved in large part because of the questions about the reliability of fair value measurement requirements.

Press release

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