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Outcomes from United States review of business combination accounting

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23 May 2013

The United States Financial Accounting Foundation (FAF) has announced the completion of its post-implementation review of FASB Statement No. 141 (revised 2007), 'Business Combinations' (Statement 141R). The review 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. However, the review also noted a number of other issues and makes a number of recommendations for improvements to FASB's standard-setting process.

Statement 141R, codified in United States Accounting Standards Codification Topic 805, Business Combinations, was issued in 2007 as a result of a joint IASB-FASB project and is largely consistent with IFRS 3 Business Combinations published by the International Accounting Standards Board (IASB) in January 2008. The Statement introduced a number of changes designed to improve the accounting for business combinations, focusing on the recognition of assets acquired, liabilities assumed, and non-controlling interests in the acquiree, at their fair values at acquisition date (subject to some exceptions).

The FAF post-implementation review was undertaken by a review team whose procedures included reviewing the FASB’s historical files, conducting stakeholder surveys and questionnaires, interviewing stakeholders, reviewing academic publications, and reviewing disclosures and other public information of selected public companies. Accordingly, the conclusions of the review were based on consideration of the input received from a broad range of constituents, including investors preparers, auditors, academics, and financial regulators.

The review sought to evaluate whether Statement 141R is accomplishing its stated objectives of improving 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. It also considered the implementation and continuing compliance costs and related benefits of Statement 141R, and is designed to provide feedback on improving the standard setting process.

Although the review found Statement 141R resolved some practice issues, that its principles and requirements are understandable and generally can be applied as intended, and achieved improvements in the relevance and completeness of business combination information, a number of additional findings were also noted:

  • 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. Stakeholders participating in the review indicated guidance in these areas is still needed
  • Although Statement 141R is converged with IFRS 3 in many areas, some substantive differences remain between their requirements
  • Some stakeholders, particularly preparers for medium to small organisations, had difficulty applying Statement 141R in the areas of measuring the fair value of assets acquired and liabilities assumed, measuring the fair value of contingent consideration, and determining whether a transaction is a business combination or an asset purchase (the latter issue also recently considered under IFRS by the IFRS Interpretations Committee)
  • Some review participants question the reliability or decision usefulness of the reported information for business combinations that include assets and liabilities that are difficult to measure at fair value, result in a bargain purchase gain, or in substance may be asset purchases
  • The costs and complexity of applying Statement 141R are higher than the FASB anticipated, particularly due to costs of determining measurements required by the standard
  • Improvements in the area of comparability, reliability, and representational faithfulness of business combination information were not fully achieved in large part because of the questions about the reliability of fair value measurement requirements.

The review's recommendations on improving the FASB's standard-setting process included:

  • The process for identifying, prioritising, tracking, and resolving significant financial reporting issues should be enhanced and formalised, and issues subject to regular reporting and updates
  • The decision making around the need for a project or resuming a deferred project should be clearly identified and documented
  • Key research (such as field work and reviewing academic studies) should be consistently conducted as early as possible in the agenda-setting and deliberation phases of a project, and research and economic principles relied upon fully identified in a standard's basis for conclusions.

The IASB also has a post-implementation review of IFRS 3 on its active agenda, with formal launch of the project expected in the second or third quarter of 2013.

The FAF has also announced commencement of a post-implementation review of FASB Statement No. 157, Fair Value Measurements (FAS 157), and has launched a survey to solicit constituent feedback on this standard.

Click for FAF press release (link to FAF website).

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