FASB 141R PDF

SFAS No. Also, valuation analysts often rely on these GAAP business financial statements as a starting point in the valuation of the corporate entity in the bankruptcy state. However, many valuation analysts who perform bankruptcy analyses are not sufficiently familiar with the valuation and accounting implications of SFAS Nos. This discussion also presents a simplified goodwill valuation example within the context of SFAS Nos.

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Statement of Financial Accounting Standards No. The objective of FAS R , per Paragraph 1, "is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects" To accomplish this objective, FAS R establishes guidance for how an acquirer recognizes and measures identifiable assets, assumed liabilities, and any noncontrolling interest in an acquiree and also how an acquirer recognizes and measures goodwill related to a business combination.

FAS R also requires additional financial statement disclosures to assist financial statement users with the evaluation of the economic impact of a business combination. FAS R applies to all business combinations in which an acquirer obtains control of one or more businesses. However, it does not apply to the formation of a joint venture, the acquisition of an asset or a group of assets that does not constitute a business, a combination between entities or businesses under common control, or a combination of not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization.

FAS R retains the "acquisition method" formerly known as the "purchase method" of accounting for all business combinations and requires an acquirer to be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date that the acquirer achieves control.

The "measurement period" gives an acquirer up to one year after the acquisition date to finalize business combination accounting. FAS R applies to business combinations that are completed during a year beginning on or after December 15, However, there are certain provisions that may apply to acquisitions completed in years beginning prior to December 15, i.

Under FAS R , the determination of unrecognized tax benefits of the acquired entity as of the acquisition date will be subject to the measurement and recognition provisions of FASB Interpretation No. Any changes to the unrecognized tax benefits during the measurement period that do not relate to facts and circumstances that existed as of the acquisition date and subsequent to the measurement period are recorded as an adjustment to income tax expense.

Under prior guidance, any changes in acquired tax contingencies would generally have been an adjustment to goodwill and other intangibles. As noted above, the accounting treatment for changes to uncertain tax positions is one exception to the prospective application of FAS R. Regardless of the acquisition date of a business combination, changes in acquired tax uncertainties beyond the measurement period are recorded as adjustments to income tax from continuing operations.

FAS R amended FAS to include the effect of a reduction in an acquired entity's valuation allowance to be recognized through the income tax provision. However, if the change occurs in the measurement period and relates to facts and circumstances that existed at the acquisition date, then the change will be recorded to goodwill.

Reductions in acquired valuation allowances are also an exception to the prospective application of FAS R , and are recorded as a reduction to income tax expense. Prior to FAS R , a reduction in an acquirer's valuation allowance due to a business combination was recorded in goodwill. After the adoption of FAS R , the reduction is a discrete item in the acquirer's income tax provision for the quarter in which the acquisition is consummated. FAS R amended FAS to require a deferred tax asset to be recorded for the excess of tax deductible goodwill over book goodwill as of the acquisition date.

This change in accounting ultimately increases the deferred taxes recorded as of the acquisition date as part of a business combination and decreases goodwill recorded for financial reporting purposes. Under prior guidance, a deferred tax asset was not recorded and the tax effect of the excess tax deductible goodwill was reflected as an adjustment to book goodwill in the period in which it became deductible for tax purposes.

Under FAS R , restructuring costs of the acquiree that are not obligations as of the acquisition date are charged to post-acquisition earnings. In certain circumstances, if restructuring costs are "liabilities" as of the acquisition date, then the liabilities can be accounted for as part of a business combination.

For acquisitions occurring after the effective date of FAS R , the book and tax treatment of restructuring costs will need to be determined and deferred taxes established as required. Under FAS R , transaction costs incurred as part of a business combination such as fees for investment banking, advisory, attorneys, accountants, valuation and other experts are to be expensed as incurred. For tax purposes, a determination of the future tax treatment of such costs needs to be made as the costs are incurred.

If the costs will be tax deductible in the future i. This change in financial accounting can result in a significant impact on an entity's quarterly and annual effective tax rates. For example, if an entity incurs significant non-deductible costs for a potential acquisition, the quarterly effective tax rate would be increased by the resulting permanent difference. If later the acquisition is abandoned, the costs incurred could be deductible, resulting in a favorable permanent difference.

The financial accounting changes included in FAS R have a significant impact on the accounting for income taxes related to business combinations. Many of the changes not only impact an acquirer's net income, but they also impact the quarterly and annual effective tax rates, making it even more important for financial and tax professionals to focus on and plan for the tax treatment of transaction costs incurred and the financial statement implications related to current and prior acquisitions.

Effective Date FAS R applies to business combinations that are completed during a year beginning on or after December 15, Acquired Valuation Allowances FAS R amended FAS to include the effect of a reduction in an acquired entity's valuation allowance to be recognized through the income tax provision. Change in Acquirer's Valuation Allowance Prior to FAS R , a reduction in an acquirer's valuation allowance due to a business combination was recorded in goodwill.

Restructuring Costs Under FAS R , restructuring costs of the acquiree that are not obligations as of the acquisition date are charged to post-acquisition earnings. Transaction Costs Under FAS R , transaction costs incurred as part of a business combination such as fees for investment banking, advisory, attorneys, accountants, valuation and other experts are to be expensed as incurred.

Assessing The Impact The financial accounting changes included in FAS R have a significant impact on the accounting for income taxes related to business combinations.

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I recently wrote about one of the most dramatic changes since the inception of the fair value concept for financial reporting imposed by Statement of Financial Accounting Standards No. One of the most frequently encountered situations requiring fair value accounting is the business combination, when the fair value of the intangible assets acquired by the buyer must be determined. The process is simply to first apply the consideration paid for the business unit to the tangible assets, such as cash, accounts receivable, and fixed assets, based upon the fair value of each asset class. Next the fair value of the specifically identifiable intangible assets with a definite useful life is determined on an asset-by-asset basis. Any remaining consideration is allocated to goodwill. This is referred to as the residual method of determining the fair value of goodwill.

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FAS 141(R) - Impact On The Accounting For Income Taxes

Statement of Financial Accounting Standards No. The objective of FAS R , per Paragraph 1, "is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects" To accomplish this objective, FAS R establishes guidance for how an acquirer recognizes and measures identifiable assets, assumed liabilities, and any noncontrolling interest in an acquiree and also how an acquirer recognizes and measures goodwill related to a business combination. FAS R also requires additional financial statement disclosures to assist financial statement users with the evaluation of the economic impact of a business combination. FAS R applies to all business combinations in which an acquirer obtains control of one or more businesses.

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Effective Date for SFAS 141R Approaching Fast

SFAS R presents significant changes from current accounting practices for business combinations, most notably the following:. Post-transaction, the changes will likely increase income-statement volatility as restructuring expenses are recognized and acquisition-related contingencies change or are resolved. SFAS R applies to transactions in which an acquirer obtains control of one or more businesses. The Standard also applies to mutual entities, step acquisitions and variable interest entities. In applying the acquisition method, the acquirer must determine the fair value of the acquired business as of the acquisition date and recognize the fair value of the assets acquired and liabilities assumed. The acquisition date is the date on which the acquirer obtains control of the target, generally the closing date.

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