Roadmap_Business Combinations - Deloitte

8/14/2019 Roadmap_Business Combinations - Deloitte

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Accounting for Business

Combinations and Related TopicsA Roadmap to Applying FASBStatements 141(R), 142, and 160



Port ions of various FASB pronoun cements, copyrigh t by t he Financial Account ing Foundat ion, 401 M errit t 7, PO Box 5116, Norw alk, CT 06856-5116, are reproduced

wit h permi ssion. Complete copies of th ese documents are available fr om t he FAF.

APB Opinions and Accounti ng Research Bullet ins: Copyrigh t 2008, by t he American Instit ute of Certi fied Public Accountant s, Inc. All ri ght s reserved. Reproduced w ith

permission.

This publication i s provided as an inf ormat ion service by the Accountin g Standard s and Communicatio ns Group of Deloit te & Touche LLP. It d oes not address all

possible f act patt erns and the gu idance is subject t o change. Deloitt e & Touche LLP is not, b y means of t his publicatio n, rendering account ing, bu siness, fi nancial,

investm ent, l egal, tax, or ot her prof essional advice or services. This publication is not a substitu te f or such prof essional advice or services, nor should it be used as a

basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a

qualif ied pro fessional advisor. Deloitt e & Touche LLP shall no t b e responsible f or any lo ss sustained by any person w ho reli es on t his publication .

January 2009

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Contents

Executive Summary 2

Background 2

EffectiveDateandTransition 3

OverviewofSignificantAccountingChanges 3

HowThisRoadmapIsStructured 7

Section 1 — Scope of Statement 141(R) 9

OccurrenceofaBusinessCombination 9

ObtainingControl 9

DefinitionofaBusiness 10

AcquiringNetAssetsorEquityInterestsThatDoNotMeettheDefinitionofaBusiness 12IdentifyingaBusinessDuringtheAssessmentofReportingRequirementsUnderSECRegulationS-X 14

VariableInterestEntities 15

CombinationsBetweenTwoorMoreMutualEntities 16

LeveragedBuyoutTransactions 17

Additional Scope Considerations 17

ControlObtainedbutLessThan100PercentoftheBusinessIsAcquired(i.e.,PartialAcquisitions) 17

BusinessCombinationsAchievedinStages 18

AcquisitionofaNoncontrollingInterestofaSubsidiary 19

Roll-UporPut-TogetherTransactions 19

FormationofaJointVenture 19

Recapitalizations 20

TransactionsBetweenEntitiesUnderCommonControl 20

CombinationsBetweenEntitiesWithCommonOwnership 22

CombinationsInvolvingNot-for-ProfitOrganizations 23

Section 2 — Identifying the Acquirer 24

BusinessCombinationsEffectedPrimarilybyTransferringCashorOtherAssetsorbyIncurring

Liabilities 24BusinessCombinationsEffectedPrimarilybyExchangingEquityInterests 24

ConsiderationoftheRelativeVotingRightsintheCombinedEntityAftertheBusinessCombination 25

ConsiderationoftheExistenceofaLargeMinorityVotingInterestintheCombinedEntityIfNoOtherOwnerorOrganizedGroupofOwnersHasaSignificantVotingInterest 25

ConsiderationoftheCompositionoftheGoverningBodyoftheCombinedEntity 26

ConsiderationoftheCompositionoftheSeniorManagementoftheCombinedEntity 26

ConsiderationoftheTermsoftheExchangeofEquitySecurities 27

ConsiderationoftheRelativeSizeoftheCombiningEntities 27


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AccountingforBusinessCombinationsandRelatedTopics Deloitte

ARoadmaptoApplyingFASBStatements141(R),142,and160

BusinessCombinationsInvolvingMoreThanTwoEntities 27

UseofaNewEntitytoEffectaBusinessCombination 27

ReverseAcquisitions 28

MergersofaPrivateOperatingCompanyIntoaNonoperatingPublicShellCorporation 30

Section 3 — Recognizing and Measuring Assets Acquired and LiabilitiesAssumed — General 31

DateofAcquisition 31

RecognitionandMeasurementPrinciples 31

MeasurementPeriod 34

ImpactonSECRegistrants 36

DeterminingWhatIsPartoftheBusinessCombinationTransaction 37

FairValueMeasurementsinBusinessCombinations 41

FairValueMeasurements—TaxAmortizationBenefits 47

UseofaThird-PartySpecialisttoAssistintheMeasurementofFairValue 48

ElectionDatefortheFairValueOption 49

UseoftheResidualMethodtoValueAcquiredIntangibleAssetsOtherThanGoodwill 50

Section 4 — Recognizing and Measuring Assets Acquired and Liabilities Assumed(Other Than Intangible Assets and Goodwill) 51

Specific Guidance for Recognizing and Measuring Assets and Liabilities at Fair Value 51

TangibleAssetsThattheAcquirerIntendsNottoUseortoUseinaWayOtherThanTheirHighestandBestUse 51

AssetsWithUncertainCashFlows(ValuationAllowances) 51Inventory 52

Property,Plant,andEquipment 52

MiningAssets 53

Leases 53

Guarantees 54

LossContractsandUnfavorableContracts 55

AmountsDuetoEmployeesoftheAcquireeUponaChangeinControl 55

LiabilitiesforExitinganActivityofanAcquiredEntity,InvoluntaryTerminationBenefits,andRelocationCosts 56

RecognitionofLiabilitiesforContractualTerminationBenefitsorChangingBenefitPlanAssumptionsinAnticipationofaBusinessCombination 56

Exceptions to the Recognition and Measurement Principles 57

AssetsandLiabilitiesArisingFromContingencies 57

IncomeTaxes 58

EmployeeBenefits 59

IndemnificationAssets 60

Share-BasedPaymentAwards 61

AssetsHeldforSale 61


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Section 5 — Recognizing and Measuring Acquired Intangible Assets andGoodwill 62

Intangible Assets 62

ExamplesofIntangibleAssetsThatAreIdentifiable 62

IntangibleAssetsThatAreNotIdentifiable 64AssembledWorkforce 64

IntangibleAssetstheAcquirerIntendsNottoUseortoUseinaWayOtherThanTheirHighestandBestUse 64

GroupingComplementaryAssets 66

CustomerLists 66

OrderorProductionBacklog 67

CustomerContractsandRelatedCustomerRelationships 67

CustomerLoyaltyPrograms 68

OverlappingCustomers 68

NoncontractualCustomerRelationships 69

ConsiderationsRegardingValuationTechniquesandAssumptionstoBeUsedinMeasuringFairValueofCustomer-RelationshipIntangibleAssets 69

In-ProcessResearchandDevelopmentAssets 70

ReacquiredRights 72

FavorableorUnfavorableOperatingLeasesWhentheAcquireeIstheLessee 73

Valuing“At-the-Money”Contracts 73

IntangibleAssetsAssociatedWithIncome-ProducingRealEstate 73

Goodwill 74

MeasurementofGoodwill 74

BargainPurchases 76

Section 6 — Recognizing and Measuring the Consideration Transferred ina Business Combination 78

ConsiderationTransferredbytheAcquiringEntitytotheFormerOwnersoftheAcquiree 78

EquitySecuritiesIssuedasConsideration 78

Share-BasedPaymentAwards 78

GainsorLossesonAssetsTransferredasConsiderationbytheAcquiringEntity 83

ContingentConsideration 84

Acquisition-RelatedCostsoftheBusinessCombination 86

Separate Transactions Not Included in the Accounting for a Business Combination 87

CompensationtoEmployeesorFormerOwnersoftheAcquireeforFutureProductsorServices 87

FactorstoConsiderinAssessingWhetherContingentPaymentIsPartoftheConsiderationTransferred 88

ReimbursementMadetotheAcquireefortheAcquirer’sAcquisition-RelatedCosts 89


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Section 7 — Noncontrolling Interests 90

ScopeofStatement160 90

RecognizingandMeasuringNoncontrollingInterestsasoftheAcquisitionDate 91

MeasuringNoncontrollingInterestsinReverseAcquisitions 92

FullGoodwillApproach 92AttributingNetIncome(Loss)andComprehensiveIncome(Loss)totheParentandNoncontrolling

Interest 92

LossesinExcessoftheCarryingAmountoftheNoncontrollingInterest 93

ChangesintheParent’sOwnershipInterestinaSubsidiaryWhenThereIsNoChangeinControl 94

FormerParentRetainsaNoncontrollingInterestofaSubsidiaryAfterControlIsLost 96

MultipleArrangementsAccountedforasaSingleDisposalTransaction 97

NonreciprocalTransferstoOwners 98

ConsiderationsforaPrimaryBeneficiaryofaVariableInterestEntity 99

Section 8 — Income Tax Considerations 100

Income Taxes — General 100

Tax Treatment of Business Combinations 100

TaxStatusoftheEnterprise 100

TaxableandNontaxableTransactions 100

The Basic Model — Tax Effects of Basis Differences 101

TheBasicModel 101

ImpactofTaxPlanningandBusinessIntegrationSteps 102

Push-DownofAcquisitionAccounting 102

ProcessforRecordingDeferredTaxes 102

BasisDifferences 104

Temporary Differences and Carryforwards 106

In-ProcessResearchandDevelopment 106

ContingentEnvironmentalLiability—TaxableBusinessCombination 107

AssetsHeldforSale 107

Preexisting Relationships Between Parties to a Business Combination and Reacquired

Rights 107

PreexistingRelationshipsBetweenPartiestoaBusinessCombination 107

ReacquiredRights 109

Tax Rates 111

TaxHolidays 111

StateTaxFootprint 112


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Costs of the Business Combination 112

Acquisition-RelatedCosts 112

Acquisition-RelatedCostsIncurredinaPeriodBeforetheBusinessCombination 114

DebtIssueCosts 114

CostsofRegisteringandIssuingEquitySecurities 114

Share-Based Payment Awards Exchanged for Awards Held by the Acquiree’s Employees 115

Contingent Consideration 118

InitialMeasurementofDeferredTaxesasoftheAcquisitionDate 119

AccountingforDeferredTaxesAftertheAcquisitionDate 119

Acquirer’s Valuation Allowance 121

ChangeinanAcquirer’sValuationAllowanceasaResultofaBusinessCombination 121

Acquired Uncertain Tax Position Measurement and Recognition 121

UncertainTaxPositions—SellerIndemnification 122

Goodwill 122

GoodwillComponents 122

BookBasisExceedsTaxBasis 123

TaxBasisExceedsBookBasis 123

Bargain Purchases 126

Business Combinations Achieved in Stages 129

International Tax Considerations 131

InsideBasisDifferencesinaForeignAcquiredEntity 131

OutsideBasisDifferencesinaForeignAcquiredEntity 131

Transition Provisions 131

AcquiredUncertainTaxPositions 132

AcquiredDeferredTaxAssetValuationAllowances 133

DeferredTaxAssetforDeductibleTaxGoodwillinExcessofFinancialReportingGoodwill 133

Income Tax Disclosures for Business Combinations 136

Section 9 — Push-Down Basis of Accounting 137

EvaluatingtheApplicabilityofPush-DownAccounting 137

SECStaffAccountingBulletinTopic5.J—Push-DownBasisofAccountingRequiredinCertainLimitedCircumstances 139

AdditionalSECStaffViews—ApplicabilityofEITFTopicD-97toCertainTransactions 140

ApplicabilityofPush-DownAccountingtoCompaniesThatAreNotSECRegistrants 141

CollaborativeGroups—TopicD-97 141

AdditionalConsiderationsinDeterminingthePresenceofaCollaborativeGroupUnderTopicD-97 144


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DeterminingWhetheraCompanyHasBecomeSubstantiallyWhollyOwned 146

EvaluatingtheAvailabilityofthePublicDebtException 147

EvaluatingtheAvailabilityofthePreferredStockException 147

SubsequentApplicationofPush-DownAccounting 148

Push-DownofGoodwilltoaSubsidiaryofanAcquiredCompany 148

Section 10 — Subsequent Accounting for Intangible Assets (Other ThanGoodwill) 149

FiniteUsefulLifeVersusIndefiniteUsefulLife 149

InternallyDevelopedIntangibleAssets 149

Determining the Useful Life of an Intangible Asset 150

AnalyzingtheExpectedUseoftheAsset 151

AnalyzingtheRelationshipoftheIntangibleAssettoOtherAssets 151

AnalyzingLegal,Regulatory,orContractualProvisionsThatMayLimitUsefulLife 152AnalyzingtheEntity’sOwnHistoricalExperienceWithRenewingorExtendingSimilar

Arrangements 152

AnalyzingtheEffectsofObsolescence,Demand,Competition,andOtherEconomicFactors 154

AnalyzingtheLevelofMaintenanceExpenditures 154

DeterminingWhetheranIntangibleAssetHasanIndefiniteUsefulLife 154

Intangible Assets Subject to Amortization 155

DeterminingtheUsefulLifeofanIntangibleAssetSubjecttoAmortizationEachReportingPeriod 155

AccountingforaChangeinRemainingUsefulLifeofanIntangibleAssetSubjecttoAmortization 155

IntangibleAssetstheAcquirerIntendsNottoUseortoUseinaWayOtherThanTheirHighestandBestUse 156

RecognitionandMeasurementofanImpairmentLossforIntangibleAssetsSubjecttoAmortization 156

MethodofAmortization 157

Intangible Assets Not Subject to Amortization 158

DeterminingtheUsefulLifeofanIntangibleAssetNotSubjecttoAmortizationEachReportingPeriod 158

In-ProcessResearchandDevelopmentIntangibleAssetsAcquiredinaBusinessCombination 158

RecognitionandMeasurementofanImpairmentLossforIntangibleAssetsNotSubjecttoAmortization 159

TimingoftheAnnualImpairmentTest 160

UnitofAccountingforImpairmentTestingofIndefinite-LivedIntangibleAssets 160

DeterminingtheCarryingAmountofanIndefinite-LivedIntangibleAssetWhenRemovingThatAssetFromaUnitofAccounting 163

CarryingForwardtheFairValueMeasurementsofIndefinite-LivedIntangibleAssetsFromOneYeartotheNext 164


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Section 11 — Subsequent Accounting for Goodwill 166

IdentificationofReportingUnits 166

EquityMethodInvestmentsasReportingUnits 169

DisclosureConsiderationsRegardingReportingUnitDeterminations 169

IdentificationofReportingUnits—Examples 169ComparisonofConclusionsReachedUnderStatements131and142inIdentifyingOperating

SegmentsandReportingUnits,Respectively 171

AssigningAssetsandLiabilitiestoReportingUnits 172

AssigningAssetsandLiabilitiesWhenanEntityHasOnlyOneReportingUnit 174

AssigningAccumulatedForeignCurrencyTranslationAdjustmentstoaReportingUnit 174

AssigningGoodwilltoReportingUnits 175

AllocationofGoodwilltoReportingUnitsforaMiningEnterprise 177

ReorganizationofReportingStructure—ReassigningAssets,Liabilities,andGoodwill 177

WhentoTestGoodwillforImpairment 177

ChangeinDateoftheAnnualGoodwillImpairmentTest—PreferabilityLetterRequirements 178

PerformingtheTwo-StepGoodwillImpairmentTest 179

InteractionoftheGoodwillImpairmentTestandtheLong-LivedAssetImpairmentTest 181

ConsiderationofAssembledWorkforceinthePerformanceofStep2oftheGoodwillImpairmentTest 182

FairValueMeasurements 183

DeterminingFairValueWhenanEntityHasOnlyOneReportingUnit 184

ChangingtheMethodofDeterminingtheFairValueofaReportingUnit 184

CarryingForwardtheFairValueofaReportingUnitFromOneAnnualTestingDatetotheNext 185

ApplyingtheGoodwillImpairmentTesttoaReportingUnitWithaNegativeCarryingValue 185DeferredIncomeTaxConsiderationsinApplyingtheGoodwillImpairmentTest 186

ReportingRequirementsWhenStep2oftheGoodwillImpairmentTestIsNotComplete 187

GoodwillImpairmentTestingbyaSubsidiary 187

DisposalofAlloraPortionofaReportingUnit 188

GoodwillImpairmentTestingandDisposalofAlloraPortionofaReportingUnitWhentheReportingUnitIsLessThanWhollyOwned 188

AssessingtheImpactofGoodwillAssignmentsontheDeterminationofGainorLossonDisposalofaReportingUnit 189

EquityMethodInvestments 190

Section 12 — Financial Statement Presentation Requirements 192

Intangible Assets 192

PresentationofIntangibleAssetsintheConsolidatedStatementofFinancialPosition 192

PresentationofIntangibleAssetAmortizationExpenseandImpairmentLossesintheConsolidatedIncomeStatement 192


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Goodwill 193

PresentationofGoodwillintheConsolidatedStatementofFinancialPosition 193

PresentationofGoodwillImpairmentLossesintheConsolidatedIncomeStatement 193

Noncontrolling Interest in a Subsidiary 193

PresentationofNoncontrollingInterestsintheConsolidatedStatementofFinancialPosition 193

PresentationofNoncontrollingInterestsintheConsolidatedStatementofIncome 194

PresentationofNoncontrollingInterestsintheStatementofConsolidatedComprehensiveIncome 196

PresentationofNoncontrollingInterestsintheConsolidatedStatementofChangesinShareholders’Equity 196

Statement of Cash Flows 197

PresentationofAcquisition-RelatedCosts 197

Section 13 — Financial Statement Disclosure Requirements 198

Business Combination Disclosures 198

GeneralDisclosures 198

ConsiderationTransferred 198

ContingentConsiderationandIndemnificationAssets 199

AcquiredReceivables 199

AssetsAcquiredandLiabilitiesAssumedbyMajorClass 199

AssetsandLiabilitiesArisingFromContingencies 200

Goodwill 200

TransactionsRecognizedSeparatelyFromtheBusinessCombination 201

BargainPurchases 201

PartialAcquisitions 201

AdditionalDisclosuresbyaPublicBusinessEnterprise 202

ImmaterialBusinessCombinations 203

BusinessCombinationsCompletedAftertheBalanceSheetDate 203

InitialAccountingfortheBusinessCombinationIsNotComplete 203

Statement157DisclosureConsiderations(Postcombination) 204

InterimFinancialInformation 204

Goodwill and Intangible Assets Disclosures 205

DisclosuresinthePeriodofAcquisition 205

Disclosures,IncludingSegmentInformation,inEachPeriodPresented 205

IntangibleAssetsSubjecttoRenewalorExtension 206

IntangibleAssetImpairments 207

GoodwillImpairments 207

DisclosureConsiderationsRegardingReportingUnitDeterminations 207


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Noncontrolling Interest in a Subsidiary Disclosures 207

ChangesinaParent’sOwnershipInterestinaSubsidiary 208

ExcessLosses 209

Other 209

Deconsolidations 209

IncomeTaxes 210

Section 14 — Transition Requirements and Other Adoption Considerations 211

Statement 141(R) 211

IncomeTaxes 211


RestructuringandExitCostsoftheAcquiree 214

Acquisition-RelatedCostsIncurredonCurrentTransactions 215

GoodwillImpairmentConsiderations 216

SAB74Disclosures 218

SECAmendments 219

MutualEntities 219

EntitiesEmergingFromBankruptcy 221

Statement 160 221

NoncontrollingInterestsThatAreWithintheScopeofStatement160 221

CalculationofEarningsperShare 222

ChangesinaParent’sOwnershipInterestinaSubsidiary 222

AttributingNetIncomeorLosstotheParentandtheNoncontrollingInterest 223

AttributionofLossesThatExceedtheCarryingAmountoftheNoncontrollingInterestinaSubsidiary 223

GoodwillImpairmentConsiderations 225

SAB74Disclosures 228

SECAmendments 229

Appendix A — Differences Between Statements 141 and 141(R) 230

Scope 230

DefinitionofaBusiness 230

DeterminingtheAcquisitionDate 231

MeasurementDateforMarketableEquitySecuritiesoftheAcquirerIssuedtoEffectaBusinessCombination 231

ProvisionalMeasurementofAssetsAcquiredandLiabilitiesAssumed 232

AdjustmentstoValuationAllowancesforAcquiredDeferredTaxAssetsandUncertainTaxPositions 233

RecognitionofDeferredTaxAssets 234

Acquisition-RelatedCosts 235

PartialAcquisitions 235


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InitialMeasurementoftheNoncontrollingInterestinaSubsidiary 236

RecognitionofLiabilitiesAssociatedWithRestructuringorExitActivitiesoftheAcquiree 236

ReacquiredRights 237

In-ProcessResearch&Development(IPR&D) 237

PreacquisitionContingencies 239


IndemnificationAssets 240

StepAcquisitions 241

ValuationAllowanceforAssetsRecordedatFairValue 242

AssetsThatanAcquirerIntendsNottoUseorUseinaWayOtherThanTheirHighestandBestUse 243

BargainPurchase(anExcessofFairValueofAcquiredNetAssetsOverCost) 243

LeveragedBuyouts 244

Share-BasedPaymentAwardsExchangedforAwardsHeldbytheAcquiree’sEmployees 245

PensionandOtherPostretirementBenefitObligations 245

DisclosureAdditions,Modifications,andDeletions 246

Appendix B — Differences Between Pre-Amended ARB 51 and Statement 160 247

PresentationofNoncontrollingInterests—ConsolidatedStatementofFinancialPosition 247

PresentationofNoncontrollingInterests—ConsolidatedStatementofIncome 248

ChangesintheParent’sOwnershipInterestinaSubsidiaryWhenThereIsNoChangeinControl 249

AccumulatedNetLossesAttributabletotheNoncontrollingInterest 250

ParentDeconsolidatesaSubsidiarybutRetainsaNoncontrollingInvestment 251

DisclosureofChangesinEquityThatAreAttributabletotheNoncontrollingInterest 252

DisclosureofEffectsofChangesintheParent’sOwnershipInterest 252

Appendix C — Differences Between U.S. GAAP and IFRSs 253

Differences Between Statement 141(R) and IFRS 3(R) 253

Different Conclusions Reached During the Joint Business Combinations Convergence

Project 253

EffectiveDateandTransition 253

Scope 254

NoncontrollingInterests—InitialMeasurement 255

AcquiredContingencies—InitialMeasurement 256

AcquiredContingenciesRecognizedasoftheAcquisitionDate—SubsequentMeasurement 257OperatingLeasesinWhichtheAcquireeIstheLessor 257

ContingentConsiderationClassifiedasaLiability—SubsequentMeasurement 258

Disclosures—ProFormaFinancialInformation 258

Disclosures—GainorLossRecognizedAftertheAcquisitionDateforNetAssetsAcquired 259

Disclosures—Goodwill 259


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Differences Outside the Scope of the Joint Business Combinations Convergence Project 260

DefinitionofControl 260

DefinitionofFairValue 260

ContingentConsideration—InitialClassification 260

DeferredTaxesandUncertainTaxPositions 261

EmployeeBenefits 261

Share-BasedPaymentAwards—InitialMeasurement 261

ReplacementShare-BasedPaymentAwards—AllocationofAmountstoConsiderationTransferred 261

Disclosures—AcquiredContingencies 262

Differences Between Statement 160 and IAS 27(R) 262

Differences Between Statement 142 and IAS 36/38 262

LevelofImpairmentTestingforGoodwill 262

GoodwillImpairmentTesting 263

ImpairmentTestingofIndefinite-LivedIntangibleAssets 265

IntangibleAssetRevaluations 265

InternallyDevelopedIntangibleAssets 266

AdvertisingCosts 267

Appendix D — Glossary of Standards and Regulations 268



Acknowledgments

Thispublicationistheresultofacollaborativeeffort,bringingtogetherthethoughtfulleadership

ofourassuranceandtaxprofessionals.WearegratefulforthecontributionsofChrisBarton,Jason

Embick,TrevorFarber,MarkFisher,HeatherJurek,RobinKramer,ConnieLee,DerekMalmberg,Michelle

Marseglia,JeffMinick,MichaelMorrissey,RichardPaul,MikeScheiner,StefanieTamulis,andStephanie

Wolfe.Inaddition,wewouldliketoacknowledgethehardworkofourProductionGroup,specifically

LynneCampbell,DianeCastro,YvonneDonnachie,MichaelLorenzo,JoanMeyers,JeaninePagliaro,

andJosephRenouf.StuartMosssupervisedtheoverallpreparationofthispublicationandwouldliketo

acknowledgethecontributionsoftheseprofessionals,extendingtothemhisdeepestappreciation.



Executive Summary

Background

InDecember2007,theFASBcompletedthesecondphaseofitsbusinesscombinationsproject.Thefirstphase,completedin2001,hadresultedintheissuanceofStatements1411and142andincluded

suchchangesastheeliminationofthepooling-of-interestmethodofaccountingandtheamortization

ofgoodwill.Thesecondphaseconstitutedamajoroverhauloftheaccountingrulesforbusiness

combinationsandnoncontrollinginterests(formerlyreferredtoas“minorityinterests”)thatwerenot

reconsideredinthefirstphase(e.g.,manyaspectsofthepurchasemethodofaccounting).

TheFASBissuedthefollowingtwostandardsattheendofthesecondphase:

• StatementNo.141(R),BusinessCombinations .

• StatementNo.160,NoncontrollingInterestsinConsolidatedFinancialStatements—an

amendmentofARBNo.51.

Thenewstatementswillgenerallyrequire:

• Additionaluseoffairvaluemeasurements,bothasoftheacquisitiondateandin

postcombinationperiods,whichmayresultinincreaseduseofthird-partyvaluationspecialists.

• Recognitionofadditionalassetsandliabilities,asoftheacquisitiondateandinpostcombination

periods,inaccountingforthebusinesscombination.Theseassetsandliabilitiesinclude(1)

preacquisitioncontingencies,(2)contingentconsideration,(3)assetsthatanacquirerdoesnot

intendtouse(e.g.,defensiveintangibleassets),and(4)acquiredassetsassociatedwithresearch

anddevelopmentactivities(i.e.,acquiredin-processresearchanddevelopment(IPR&D)).• Theaccountingforcertainitems,suchasacquisitioncostsandrestructuringchargesrelatedto

theacquiredbusiness,outsideofbusinesscombinationaccounting.Thisrequirementmayresult

inearningsvolatilitybothbeforeandafterconsummationofthebusinesscombination.

• Enhanceddisclosuresaboutcompletedbusinesscombinations.

SomeoftherecentchangestobusinesscombinationaccountingwillaffectnotonlyU.S.companiesbut

alsocompaniesreportingunderIFRSs.Inthesecondphaseoftheproject,theFASBworkedwiththe

IASBtosubstantiallyconvergetheaccountingforbusinesscombinationsandnoncontrollinginterests

underU.S.GAAPandIFRSs.Thishasbeenthemostsignificantconvergenceprojecttodateandhas

helpedpavethewayforfutureconvergenceprojectsinotherareas.AfewdifferencesbetweenU.S.GAAPandIFRSsintheaccountingforbusinesscombinationsstillremain,includingthedelayedeffective

datefortheIASB’sstandardsIFRS3(R)andIAS27(R)(annualperiodsbeginningonorafterJuly1,2009)

andtheinitialmeasurementofnoncontrollinginterestsinbusinesscombinations.

Inaddition,notethatStatements141(R)and160affectareasotherthanbusinesscombinations,

including(1)theaccountingforexistingnoncontrollinginterests,(2)goodwillimpairmenttesting

(regardlessofwhenthegoodwillwasrecognized),and(3)accountingforchangesintheparent’s

ownershipinterestinasubsidiary(includingdeconsolidations).Significantchangesfromtheprevious

accountingunderU.S.GAAParedescribedinmoredetailbelow.

1 ThetitlesofthestandardsandregulationsreferencedinthisRoadmaparedefinedinAppendix D.





Effective Date and Transition

Thestatements’accountingprovisionsrequireprospectiveapplicationtotransactionsconsummated

infiscalyearsbeginningonorafterDecember15,2008,withoneexceptionforcertainincometax

balances.2Earlyadoptionisprohibited.Therefore,forcalendar-year-endcompanies,thenewstatements

onlyaffecttransactionsclosingonorafterJanuary1,2009.Statement160requiresretrospective

applicationofitspresentation and disclosureprovisionsforallpriorperiodspresentedinthefinancial

statements.

Overview of Significant Accounting Changes

Contingent Consideration—Manypurchaseagreementscontaincontingentconsideration

arrangements(commonlyreferredtoas“earnouts”).Thesearrangementstypicallyobligatethe

acquirertotransferadditionalconsiderationtotheformerownersoftheacquireeifafutureeventor

conditionismet(e.g.,acontingencybasedonthepostcombinationperformanceoftheacquiredentity).

UnderStatement141(R),theacquirermust(1)recognizethearrangementintheacquisitionmethod

accountingatfairvalueand(2)classifytheamountaseitheraliabilityorequityinaccordancewith

otherexistingU.S.GAAP.Theacquirerrecognizessubsequentchangesinfairvalueofaliabilityinits

postcombinationearnings,butdoesnotadjustamountsclassifiedasequity.Underpreviousguidance,

theacquirertypicallyadjusteditspurchaseaccountingwhenthecontingencywassettledorpaid,with

nodirecteffectonpostcombinationearnings.

Thedeterminationoffairvalueinthesearrangementsandclassificationasaliabilityorequityisoften

difficultandmayrequiretheassistanceofthird-partyvaluationandfinancialinstrumentspecialists.The

structureofmanycontingentconsiderationarrangementswillmostlikelyresultinliabilityclassification

underthenewguidance,whichmayleadtopostcombinationearningsvolatility.Therefore,under

Statement141(R),entitiesmaychangethestructure,timing,anduseofearnoutsinfuturedealsto

avoiduncertaintiesintheirpostcombinationearnings.

Measurement Date of the Acquirer’s Equity Securities Issued —Statement141(R)requiresthat

equitysecuritiesissuedasconsiderationinabusinesscombinationberecordedatfairvalueasof

theacquisitiondate.Underpreviousguidance,theacquirer’sequitysecuritiesweregenerallyvalued

overareasonableperiodbeforeandafterthetermsofthebusinesscombinationareagreedtoand

announced.Becausethevalueofsecuritiesmaychangesignificantlybetweentheannouncementdate

andtheacquisitiondate,underStatement141(R),substantiallydifferentamountsmightberecordedas

considerationtransferredandthusasgoodwill.

Preacquisition Contingencies3—Theaccountingforanacquiredcontingencydependsonwhether

itiscontractualornoncontractual.Contractualcontingenciesarerecognizedattheiracquisition-datefairvalue.Noncontractualcontingenciesarerecognizedattheiracquisition-datefairvalue,butonlyif

itismorelikelythannot(i.e.,morethan50percentlikely)thatthecontingencymeetsthedefinition

ofanassetoraliability.Inotherwords,foranoncontractualcontingentliability,ifitismorethan50

percentlikelythatanacquirerhasassumedapresentobligation,therecognitionthresholdismet.If

not,noamountisrecognized.Therefore,underStatement141(R),moreacquiredcontingencieswill

2 Statement141(R)requiresthatanentityrecord,asacomponentofincometaxexpense,adjustmentsafterthemeasurementperiod(andadjustmentsduringthemeasurement

periodthatrelatetofactsandcircumstancesthatdidnotexistasoftheacquisitiondate)to(1)valuationallowancesforacquireddeferredtaxassetsand(2)uncertaintaxpositions

oftheacquiredentity.UnderthetransitionprovisionsofStatement141(R),thisrequirementappliestoallbusinesscombinations,regardlessoftheconsummationdate(i.e.,itcould

affectpriordeals).

3 Paragraph1ofStatement5definesacontingencyas“anexistingcondition,situation,orsetofcircumstancesinvolvinguncertaintyastopossiblegain...orloss...toanentity

thatwillultimatelyberesolvedwhenoneormorefutureeventsoccurorfailtooccur.”Theaccountingforcontingentconsiderationarrangementsisdiscussedseparately.





bemeasuredatfairvalueasoftheacquisitiondate.Underpreviousguidance,whenaccountingfor

acquiredcontingencies,entitiesoftendidnotrecordanyamountinthepurchaseaccountingand

generallyfollowedtheguidanceinStatement5.

Inaddition,unlikepreviousguidance,Statement141(R)coverssubsequentmeasurementof

contingenciesrecordedatfairvalueasoftheacquisitiondate.UnderStatement141(R),ifnew

informationbecomesavailableaftertheacquisitiondate,acontingentliabilityrecognizedasofthe

acquisitiondatemustberemeasuredatthehigherofitsacquisition-datefairvalueortheamount

thatwouldberecognizedunderStatement5.Acontingentassetisremeasuredatthelowerofits

acquisition-datefairvalueorthebestestimateofitsfuturesettlementamount.Inaddition,anacquired

contingencyisderecognizedonlyuponitsresolution.

Editor’s Note: OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwould

amendStatement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfair

valueasoftheacquisitiondateifsuchamountscanbereasonablydetermined.Itisexpectedthatthe

guidanceintheproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilities

atfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.

Assets That the Acquirer Intends Not to Use or to Use in a Way Other Than Their Highest

and Best Use (e.g., Defensive Value Intangible Assets) —Anacquirermaydecidenottouse

anacquiredassetforcompetitiveorotherreasons(e.g.,atradenameofanacquireethatcompetes

withtheacquirer’sowntradename),butitwouldstilldefendtheassetsothatotherscannotuseit.

UnderStatement141(R),anacquirermustrecognizeanacquiredassetandmeasureitatfairvaluein

accordancewithStatement157,evenifitdecidesnottousethatacquiredasset.Thisvaluationwould

needtoreflecttheasset’shighestandbestusefromamarketparticipant’spointofview(i.e.,someone

elsemaybewillingtopayforthisasset).Underthepreviousguidance,theacquirertypicallyassignedlittleornovaluetotheseacquiredassets.

Partial Acquisitions —Incertainbusinesscombinations,theacquirerobtainscontrol,butdoesnot

acquirea100percentinterestintheacquiree.UnderStatement141(R),onceanacquirerobtains

control,itwillmeasure100percentoftheacquirednetassetsatfairvalue(itmustmeasurefairvaluein

accordancewithStatement157)regardlessofitsownershipinterest.Underpreviousguidance,onlythe

portionofnetassetspurchasedbytheacquirerwasmeasuredatfairvalue;theremainderwasmeasured

athistoricalbookvalue.

UnderStatement141(R),anacquisitionofacontrollinginterestinanotherentitythatislessthan100

percentownedmayresultintherecognitionofhigher(1)netassetbalances,(2)depreciationandamortizationexpensesinpostcombinationperiods,and(3)assetimpairmentcharges,ascomparedwith

previousguidance.





Noncontrolling Interests—Statement141(R)requiresthatthenoncontrollinginterestinabusiness

combination,ifany,bemeasuredinitiallyatfairvalue,includingitsshareofgoodwill.Inaddition,

Statement160requiresthattheparent(acquirer)presentthenoncontrollinginterestasaseparate

componentofshareholders’equity.4Underpreviousguidance,thenoncontrollinginterestwasrecorded

athistoricalbookvalue,goodwillwasonlyrecordedfortheacquirer’sinterest,andthenoncontrolling

interestwaspresentedaseithermezzanine(ortemporary)equityoraliability.

Statement141(R)’s“fullgoodwill”method(i.e.,goodwillrepresentsamountsattributabletoboththe

parentandthenoncontrollinginterest)willresultinhigherinitialamountsofgoodwillthandidthe

previousguidance.Thismayleadtolargergoodwillimpairmentchargesinpostcombinationearnings.

Furthermore,theclassificationofthenoncontrollinginterestinpermanentequitymayaffectsomekey

financialstatementratiosusedbymanagementorinvestorsandincludedindebtcovenants(e.g.,debt-

to-equityratio).

Restructuring and Exit Costs—Restructuringandexitcostsarecoststhatanacquirerexpectsto

incurforexitinganactivity,involuntarilyterminatingemployees,orrelocatingemployeesofanacquiree.

UnderStatement141(R),anacquirerwillgenerallyrecordthesecostsoutsideofacquisitionmethodaccountingthroughachargetopostcombinationearnings.Thepreviousguidancewaslessstringent

and,aslongascertaincriteriaweremet,generallyresultedinanacquirer’srecordingliabilitiesrelatedto

afuturerestructuringaspartofitspurchaseaccounting(i.e.,generallyasacomponentofgoodwill).

Acquired IPR&D—Beforeabusinesscombination,anacquireemayhaveincurredcostsassociated

withresearchanddevelopmentactivities.Thesecostsmostlikelywouldhavebeenexpensed,with

noresultingassetrecordedontheacquiree’sbooks.Inabusinesscombination,theresearchand

developmentactivitiesmostlikelyrepresentanassettotheacquirer.Statement141(R),likeprevious

guidance,requiresthatthefairvalueofsuchanassetbemeasuredasoftheacquisitiondate.However,

Statement141(R)differsfrompreviousguidanceregardingtheaccountingfortheasset.Underthe

previousguidance,theacquirerimmediatelyexpensedtheentirefairvalueoftheIPR&D(assumingit

hadnoalternativefutureuse)inthepostcombinationincomestatement.Conversely,underStatement

141(R),theacquiredIPR&Discapitalizedasanindefinite-livedintangibleassetandtestedforimpairment

atleastannually.Oncetheresearchanddevelopmentactivitiesarecomplete,theintangibleassetis

amortizedintoearningsovertherelatedproduct’susefullife.Iftheprojectissubsequentlyabandoned,

thecarryingamountwouldgenerallybeexpensedatthattime.Therefore,underStatement141(R),the

timingofwhentheacquiredIPR&Dwillaffectpostcombinationearningsislesscertain.

Adjustments to Certain Acquired Tax Balances—Statement141(R)requiresthatanentity

record,generallythroughincometaxexpense,adjustmentsmadeafterthemeasurementperiod(and

adjustmentsduringthemeasurementperiodthatrelatetofactsandcircumstancesthatdidnotexistas

oftheacquisitiondate)to(1)valuationallowancesforacquireddeferredtaxassetsand(2)acquiredtax

uncertainties.UponadoptingStatement141(R),anentitymustalsoapplythisnewguidancetotax

balancesrecordedbeforetheStatement’seffectivedate.Therefore,thisnewguidancemayaffect

remainingvaluationallowancesfordeferredtaxassetsandtaxuncertaintybalancesfrompriordeals

and,consequently,mayaffectfutureearnings.Thisnewguidancediffersfrompreviousguidancein

whichadjustmentstothesetaxbalancesweregenerallyrecordedasanadjustmenttogoodwill(i.e.,

earningsweregenerallynotdirectlyaffected).

4 Indeterminingtheappropriateclassificationofanoncontrollinginterest,anentitymustlooktootherrelevantGAAPtodeterminewhetherthefinancialinstrumentissuedbya

subsidiarycanbeclassifiedaspermanentequity(e.g.,Statements133and150,EITFTopicD-98,andSECAccountingSeriesReleaseNo.268).Morecomplexfinancialinstruments

(e.g.,thosewithcertaincallorputfeatures)maybeoutsidethescopeofStatement160and,therefore,classifiedineithermezzanine(ortemporary)equityorasliabilities.





Acquisition-Related Costs—Statement141(R)requiresthattheacquirerexpenseallacquisition-

relatedcostsasincurred,eventhoseincurredbytheacquireeonbehalfoftheacquirer.However,

certaindirectcostspaidtoregisterdebtorequitysecuritiesaspartofabusinesscombinationmaystill

berecordedonthebalancesheetinaccordancewithotherapplicableU.S.GAAP.Acquisition-related

coststhatwillbeexpensedincludefeespaidtoinvestmentbankers,lawyers,accountants,valuation

specialists,andotherconsultants.Underthepreviousguidance,incrementalanddirectcostsofanacquisitionwerecapitalizedandgenerallyrecordedaspartofgoodwill.

Measurement-Period Adjustments—Likethepreviousguidance,thenewguidancegivesanacquirer

uptooneyear(formerlyreferredtoasthe“allocationperiod”)tofinalizeitsbusinesscombination

accounting,aslongasanyadjustmentsmadetoprovisionalamountsrelatetofactsandcircumstances

thatexistedasoftheacquisitiondate(e.g.,theacquirermaybewaitingonathird-partyvaluation

specialist’sreportthatdetailsthefairvalueofcertainassetsandliabilities).However,Statement141(R)

nowrequiresthattheacquirerrevisecomparativeprior-periodinformationforanyadjustmentsmade

toprovisionalamountsduringthemeasurementperiod(i.e.,adjustmentsaremaderetrospectively

asoftheacquisitiondate).Thisrepresentsasignificantchangefromprevailingpriorpractice,in

whichadjustmentstoprovisionalamountsweregenerallyaccountedforprospectivelyasachangeinaccountingestimate.

Therevisedguidancewillrequirethatanentityapplyadditionaleffortinrecordingmeasurement-

periodadjustments.Forexample,anentitythatsubsequentlyadjustsadepreciableasset’sprovisional

balancemustalsoretrospectivelyadjusttheasset’sdepreciationoramortizationexpense,accumulated

depreciationoramortization,andretainedearningsforallpriorperiodspresented.Additional

communicationanddisclosurestofinancialstatementusersmayalsoberequired.Publicentities

mayneedtoupdatefinancialstatementsandinformationincludedinaregistrationstatementifa

measurement-periodadjustment(1)isrecordedaftertheissuanceofthoseitemsand(2)wouldhavea

materialeffectontheamountsrecordedinthosefilings.

Bargain Purchases—Bargainpurchasesoccurwhenthefairvalueoftheconsiderationtransferred

islessthanthefairvalueofthenetassetsacquiredfromtheacquiree(thatdifferenceisreferredtoas

the“excess”).Statement141(R)requirestheacquirertorecordtheentireexcessinearnings.Under

thepreviousguidance,theacquirerwouldfirstreducethevalueassignedtocertainnoncurrentassets

acquired.Theacquirerwouldthenrecordanyremainingexcess,afterreducingthosenoncurrentassets

tozero,asanextraordinary gain.Therevisedguidancemayresultintherecognitionofalargergainby

theacquirer.Note,however,thatbargainpurchasesarenotexpectedtobecommon.

Definition of a Business—Statement141(R)significantlybroadensthedefinitionofabusiness(e.g.,

development-stageentitiesmayqualifyasabusinessunderStatement141(R),whereastheydidnot

underthepreviousguidance).Theexpandeddefinitionnotonlyaffectsthedeterminationofwhether

atransactionqualifiesasabusinesscombinationoranassetacquisition,butmayalsohaveaneffect

on(1)thegoodwillimpairmentanalysis(seebelow),(2)theconsolidationanalysisunderInterpretation

46(R),and(3)theallocationofgoodwillwhenaportionofreportingunitissoldorotherwisedisposed

of.





Changes in the Parent’s Ownership Interest—UnderStatement160,afteraparent(acquirer)

obtainscontroloverasubsidiary,theparentmustaccountforadditionalpurchasesandsalesof

asubsidiary’sstockasequitytransactions(aslongascontrolisretained).Thus,theparentcannot

recognizeagainorlossinearningsondispositions,norcanitapplyadditionalacquisitionmethod

accountingforincrementalinterestsacquired.Underthepreviousguidance,salesofthesubsidiary’s

stocktothirdpartiesmayhaveresultedingainsorlossesinearningsandapurchaseofthesubsidiary’ssharesbytheparentmayhaverequiredadditionalpurchaseaccounting(whichcouldhavealsoresulted

inadditionalgoodwill).

Goodwill Impairment Testing —Statement142requiresentitiestotestgoodwillforimpairment

atleastannually.Step2ofthegoodwillimpairmenttestrequiresthattheentitycomputethecurrent

impliedfairvalueofgoodwill.Theentitythencomparesthatbalancetothecurrentcarryingamount

ofthegoodwilltodeterminewhetheranimpairmentisrequired.Theimpliedfairvalueofgoodwill

isdeterminedinthesamemannerasgoodwillrecognizedinabusinesscombination.Inotherwords,

beforetheadoptionofStatement141(R),anentitywouldrefertoStatement141forthisanalysis.After

theentityadoptsStatements141(R)and160,itmustperformstep2ofthegoodwillimpairmenttestin

accordancewithStatement141(R).Therefore,Statement141(R)willmostlikelyaffectthemechanicsinwhichstep2ofthegoodwillimpairmentanalysisisperformed.

Inaddition,goodwillimpairmenttestingisperformedatthereporting-unitlevel.Akeyfactorin

determininganentity’sreporting-unitstructureistoidentifywhichcomponentsarebusinesses,as

definedintheaccountingliterature.Aspreviouslynoted,Statement141(R)significantlybroadensthe

definitionofabusiness.Therefore,uponadoptionofStatement141(R),anentityshouldcarefullyreview

whetherthenewguidancewillaffectitsreporting-unitstructureandthusitsgoodwillimpairment

testing.

How This Roadmap Is Structured

Thispublicationconstitutesasinglesourceforboththeaccountingrequirementsfor,andtheavailable

interpretiveguidanceon,thefollowingtopics:

Initial Acquisition Accounting

• Businesscombinations.

Post-Acquisition Accounting

• Goodwillandotherintangibleassets.

• Push-downaccounting.

• Noncontrollinginterests.

Whereappropriate,wehaveincludedourownviews,whicharebasedonourexperiencewithand

understandingoftheunderlyingprinciples.





TheRoadmapisstructuredasfollows:

Accounting for Business Combinations

Section1—ScopeofStatement141(R)

Section2—IdentifyingtheAcquirer

Section3—RecognizingandMeasuringAssetsAcquiredandLiabilitiesAssumed—General

Section4—RecognizingandMeasuringAssetsAcquiredandLiabilitiesAssumed(OtherThanIntangibleAssetsandGoodwill)

Section5—RecognizingandMeasuringAcquiredIntangibleAssetsandGoodwill

Section6—RecognizingandMeasuringtheConsiderationTransferredinaBusinessCombination

Accounting for Noncontrolling Interests During andAfter a Business Combination

Section7—NoncontrollingInterests

Income Tax Considerations for Business Combinations Section8—IncomeTaxConsiderations

Accounting After a Business Combination

Section9—Push-DownBasisofAccounting

Section10—SubsequentAccountingforIntangibleAssets(OtherThanGoodwill)

Section11—SubsequentAccountingforGoodwill

Presentation and Disclosure Considerations

Section12—FinancialStatementPresentationRequirements

Section13—FinancialStatementDisclosureRequirements

Transition Issues and ConsiderationsSection14—TransitionRequirementsandOtherAdoption

Considerations

Comparisons to IFRSs and Previous U.S. GAAP

AppendixA—DifferencesBetweenStatements141and141(R)

AppendixB—DifferencesBetweenPre-AmendedARB51andStatement160

AppendixC—DifferencesBetweenU.S.GAAPandIFRSs

Index of Standards and Regulations ReferencedThroughout the Roadmap

AppendixD—GlossaryofStandardsandRegulations



Section 1 — Scope of Statement 141(R)

Occurrence of a Business Combination

1.01 Paragraph3(e)ofStatement141(R)definesa“businesscombination”asfollows:

Abusinesscombination isatransactionorothereventinwhichanacquirerobtainscontrol[see

1.02–1.07]ofoneormorebusinesses[see 1.08–1.11].Transactionssometimesreferredtoas“true

mergers”or“mergerofequals”alsoarebusinesscombinationsasthattermisusedinthisStatement.

[Emphasisadded]

Obtaining Control

1.02 ParagraphA2ofStatement141(R)providesthefollowingexamplesoftransactionsoreventsthat

mayresultinanentity’sobtainingcontrolofanotherbusiness:

• Transfersofcash,cashequivalents,orotherassets(includingnetassetsthatconstituteabusiness).

• Incurrenceofliabilities.

• Issuanceofequityinterests.

• Issuanceofmorethanonetypeofconsideration.

• Othertransactionsoreventsthatdonotinvolvethetransferofconsideration,includingby

contractalone(see1.05–1.07).

1.03 Inspecifyinghowentitiesdeterminewhethertheyhaveobtainedcontrolofanotherbusiness,

Statement141(R)referstothedescriptionof“controllingfinancialinterest”inparagraph2ofARB51,

asamendedbyStatement160,whichstates:

Theusualconditionforacontrolling financial interestisownershipofamajorityvotinginterest,

and,therefore,asageneralruleownershipbyonecompany,directlyorindirectly,ofoverfiftypercent

oftheoutstandingvotingsharesofanothercompanyisaconditionpointingtowardconsolidation.

[Emphasisadded]

1.04 Acontrolassessmentisnotnecessarilybasedsolelyonavotinginterestmodelsuchasthat

describedinARB51.Entitiesmustalsodeterminewhethertheyhaveacontrollingfinancialinterestina

variableinterestentity(VIE)inaccordancewithInterpretation46(R).ControlunderInterpretation46(R)is

assessedonthebasisofeconomicrisksandrewardstotheinvestorandisnotdependentonthevoting

interest.See1.17–1.21foradiscussionoftheinteractionbetweenVIEsandStatement141(R).

1.05 Anacquirermayobtaincontrolofanacquireewithouttransferringconsiderationtotheformer

owners.Paragraph49ofStatement141(R)listscertaincircumstancesinwhichthismayoccur:

a. Theacquireerepurchasesasufficientnumberofitsownsharesforanexistinginvestor(the

acquirer)toobtaincontrol.

b. Minorityvetorightslapsethatpreviouslykepttheacquirerfromcontrollinganacquireein

whichtheacquirerheldthemajorityvotinginterest.





c. Theacquirerandacquireeagreetocombinetheirbusinessesbycontractalone.Theacquirer

transfersnoconsiderationinexchangeforcontrolofanacquireeandholdsnoequity

interestsintheacquiree,eitherontheacquisitiondateorpreviously.Examplesofbusiness

combinationsachievedbycontractaloneincludebringingtwobusinessestogetherina

staplingarrangementorformingaduallistedcorporation.[See1.06.]

1.06 Staplingarrangementsandtheformationofdual-listedcorporationsdonotoccurfrequentlyinpracticeandmostofteninvolveforeignentities.Characteristicsofsucharrangementsareasfollows:

• Staplingarrangements—Thesearegenerallycontractualagreementsbetweentwopartiesin

whichtheissuedequitysecuritiesofonelegalentityarecombinedwiththeissuedsecuritiesof

anotherlegalentity.Thesesecurities,oftenreferredtoas“stapled,”arethenquotedatasingle

marketpriceandcannotbeseparatelytradedortransferred.

• Dual-listedcorporation—Insuchtransactions,noconsiderationisexchangedbyeitherentity,

andcontractsareexecutedbetweenthepartiesthatequalizetherightsoftherespective

shareholders.Suchrightsoftenincludevoting,dividends,governance,andexecutive

managementdecisions.Althoughseparatelegalentitiesareretained(i.e.,thesecuritiesofeach

respectiveentityareusuallyseparatelyquotedandtradedinthecapitalmarkets),adual-listedcorporationissubstantivelysimilartoabusinesscombinationinthattheshareholdersofthe

respectiveentitiesbothshareintherisksandrewardsofthetwoentities.Historically,theSEC

hasrequiredsuchtransactionstobeaccountedforasabusinesscombination,andStatement

141(R)isnotexpectedtosignificantlychangethispractice.

1.07 Businesscombinationsachievedwithoutthetransferofconsiderationareaccountedforunder

theacquisitionmethodofaccounting.Paragraph50ofStatement141(R)statesthatforthoseachieved

bycontractalone,“theacquirershallattributetotheequityholdersoftheacquireetheamountofthe

acquiree’snetassetsrecognized.”Inotherwords,thenoncontrollinginterestshouldberecognizedin

theacquirer’spostcombinationfinancialstatementseveniftheresultisthatitrepresents100percentof

theacquiree’snetassets.

Definition of a Business

1.08 Anentitymayobtaincontrolofabusinessbyacquiringitsnetassetsoritsequityinterests.For

abusinesscombinationtobewithinthescopeofStatement141(R),theentityoverwhichcontrolis

obtainedmustbeabusiness.Paragraph3(d)ofStatement141(R)definesabusinessasfollows:

Abusiness isanintegratedsetofactivitiesandassetsthatiscapableofbeingconductedand

managedforthepurposeofprovidingareturnintheformofdividends,lowercosts,orother

economicbenefitsdirectlytoinvestorsorotherowners,members,orparticipants.

1.09 Statement141(R)nullifiesthedefinitionofabusinessthatwasinIssue98-3andsignificantly

broadenswhatisconsideredabusiness(seeA.05).

1.10 ParagraphsA4–A9ofStatement141(R)provideimplementationguidancetohelpentitiesidentify

whatconstitutesabusiness:

A4.ThisStatementdefinesabusinessasanintegratedsetofactivitiesandassetsthatiscapableof

beingconductedandmanagedforthepurposeofprovidingareturnintheformofdividends,lower

costs,orothereconomicbenefitsdirectlytoinvestorsorotherowners,members,orparticipants.





Abusinessconsistsofinputsandprocessesappliedtothoseinputsthathavetheabilitytocreate

outputs.Althoughbusinessesusuallyhaveoutputs,outputsarenotrequiredforanintegratedsetto

qualifyasabusiness.Thethreeelementsofabusinessaredefinedasfollows:

a. Input :Anyeconomicresourcethatcreates,orhastheabilitytocreate,outputswhenone

ormoreprocessesareappliedtoit.Examplesincludelong-livedassets(includingintangible

assetsorrightstouselong-livedassets),intellectualproperty,theabilitytoobtainaccessto

necessarymaterialsorrights,andemployees.

b. Process :Anysystem,standard,protocol,convention,orrulethatwhenappliedtoaninputor

inputs,createsorhastheabilitytocreateoutputs.Examplesincludestrategicmanagement

processes,operationalprocesses,andresourcemanagementprocesses.Theseprocesses

typicallyaredocumented,butanorganizedworkforcehavingthenecessaryskillsand

experiencefollowingrulesandconventionsmayprovidethenecessaryprocessesthatare

capableofbeingappliedtoinputstocreateoutputs.(Accounting,billing,payroll,andother

administrativesystemstypicallyarenotprocessesusedtocreateoutputs.)

c. Output :Theresultofinputsandprocessesappliedtothoseinputsthatprovideorhavethe

abilitytoprovideareturnintheformofdividends,lowercosts,orothereconomicbenefits

directlytoinvestorsorotherowners,members,orparticipants.

A5.Tobecapableofbeingconductedandmanagedforthepurposesdefined,anintegratedsetof

activitiesandassetsrequirestwoessentialelements—inputsandprocessesappliedtothoseinputs,

whichtogetherareorwillbeusedtocreateoutputs.However,abusinessneednotincludeallofthe

inputsorprocessesthatthesellerusedinoperatingthatbusinessifmarketparticipantsarecapableof

acquiringthebusinessandcontinuingtoproduceoutputs,forexample,byintegratingthebusiness

withtheirowninputsandprocesses.FASBStatementNo.157,FairValueMeasurements ,describes

marketparticipantsas:

...buyersandsellersintheprincipal(ormostadvantageous)marketfortheassetorliability

thatare:

a. Independentofthereportingentity;thatis,theyarenotrelatedparties

b. Knowledgeable,havingareasonableunderstandingabouttheassetorliabilityand

thetransactionbasedonallavailableinformation,includinginformationthatmightbe

obtainedthroughduediligenceeffortsthatareusualandcustomary

c. Abletotransactfortheassetorliability

d. Willingtotransactfortheassetorliability;thatis,theyaremotivatedbutnotforcedor

otherwisecompelledtodoso.[Paragraph10;footnotereferenceomitted.]

A6.Thenatureoftheelementsofabusinessvariesbyindustryandbythestructureofanentity’s

operations(activities),includingtheentity’sstageofdevelopment.Establishedbusinessesoftenhave

manydifferenttypesofinputs,processes,andoutputs,whereasnewbusinessesoftenhavefew

inputsandprocessesandsometimesonlyasingleoutput(product).Nearlyallbusinessesalsohave

liabilities,butabusinessneednothaveliabilities.

A7.Anintegratedsetofactivitiesandassetsinthedevelopmentstagemightnothaveoutputs.Ifnot,

theacquirershouldconsiderotherfactorstodeterminewhetherthesetisabusiness.Thosefactors

include,butarenotlimitedto,whethertheset:

a. Hasbegunplannedprincipalactivities

b. Hasemployees,intellectualproperty,andotherinputsandprocessesthatcouldbeappliedto

thoseinputs

c. Ispursuingaplantoproduceoutputs

d. Willbeabletoobtainaccesstocustomersthatwillpurchasetheoutputs.

Notallofthosefactorsneedtobepresentforaparticularintegratedsetofactivitiesandassetsinthe

developmentstagetoqualifyasabusiness.





A8.Determiningwhetheraparticularsetofassetsandactivitiesisabusinessshouldbebasedon

whethertheintegratedsetiscapableofbeingconductedandmanagedasabusinessbyamarket

participant.Thus,inevaluatingwhetheraparticularsetisabusiness,itisnotrelevantwhetheraseller

operatedthesetasabusinessorwhethertheacquirerintendstooperatethesetasabusiness.

A9.Intheabsenceofevidencetothecontrary,aparticularsetofassetsandactivitiesinwhich

goodwillispresentshallbepresumedtobeabusiness.However,abusinessneednothavegoodwill.

1.11 WhileStatement141(R)providesusefulfactorstoconsider,itdoesnotprescribeadefinitive

checklistforentitiestofollowwhenassessingwhetheragroupofassetsconstitutesabusiness.

Therefore,professionaljudgmentshouldbeused.

Acquiring Net Assets or Equity Interests That Do Not Meet the Definition of aBusiness

1.12 Theaccountingrequirementsforanacquisitionofnetassetsorequityintereststhatisnot

deemedtobeabusinesscombination(see1.01)willdifferincertainrespectsfromthoseusedfor

businesscombinations.Thefollowingtableshighlightsuchdifferences.

Cost of the Acquisition

Business CombinationAcquisition of an Asset Group

Determined Not to Be a Business

Paragraph39ofStatement141(R)states:

Theconsiderationtransferredinabusinesscombinationshallbemeasuredatfairvalue,whichshallbecalculatedasthesumoftheacquisition-datefairvaluesoftheassetstransferredbytheacquirer,theliabilitiesincurredbytheacquirertoformerownersoftheacquiree,andtheequityinterestsissuedbytheacquirer.

(However,anyportionoftheacquirer’sshare-basedpaymentawardsexchangedforawardsheldbytheacquiree’semployeesthatisincludedinconsiderationtransferredinthebusinesscombinationshallbemeasuredinaccordancewithparagraph32ratherthanatfairvalue.)Examplesofpotentialformsofconsiderationincludecash,otherassets,abusinessorasubsidiaryoftheacquirer,contingentconsideration(paragraphs41and42),commonorpreferredequityinstruments,options,warrants,andmemberinterestsofmutualentities.

Thefairvalueoftheconsiderationtransferred excludesthe transaction coststheacquirerincurstoeffectabusinesscombination(acquisition-relatedcosts).

ParagraphD4ofStatement141(R)states,inpart:

Assetsarerecognizedbasedontheircosttotheacquiringentity,whichgenerallyincludes thetransaction costs of the asset acquisition,andnogainorlossisrecognizedunlessthefairvalueofnoncashassetsgivenasconsiderationdiffersfromtheassets’carryingamountsontheacquiringentity’sbooks.[Emphasisadded]

Theaccountingforcontingentconsiderationdoesnotfollowtheguidanceinparagraphs41and42ofStatement141(R).ContingentconsiderationismeasuredinaccordancewithotherapplicableGAAP,includingStatement5andStatement133,asappropriate.





Measuring the Assets Acquired and Liabilities Assumed

Business Combination

Acquisition of an Asset Group

Determined Not to Be a Business

Paragraph20ofStatement141(R)providesthatthe“acquirershallmeasuretheidentifiableassetsacquired,theliabilitiesassumed,andanynoncontrollinginterestintheacquireeattheiracquisition-datefairvalues.”

Paragraph34ofStatement141(R)indicatesthatgoodwillshouldberecordedasthesumofthe(1)considerationtransferred,(2)fairvalueofanynoncontrollinginterest,and(3)fairvalueoftheacquirer’spreviouslyheldinterestintheacquiree,ifany,lesstheacquisition-datefairvalueofthenetassetsacquired.

InaccordancewithStatement141(R),contractualcontingenciesarerecognizedatfairvalueasoftheacquisitiondate,whereasnoncontractualcontingenciesarerecognizedatfairvalueonlyif,asoftheacquisitiondate,itismorelikelythannotthatthecontingencymeetsthedefinitionofanassetorliabilityinaccordancewithConceptsStatement6.*

*OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwouldamendStatement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfairvalueasoftheacquisitiondateifsuchamountscanbereasonablydetermined.ItisexpectedthattheguidanceintheproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilitiesatfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.

ParagraphD6ofStatement141(R)states,inpart:

Acquiringassetsingroupsrequiresnotonly

ascertainingthecostoftheasset(ornetasset)groupbutalsoallocatingthatcosttotheindividualassets(orindividualassetsandliabilities)thatmakeupthegroup.ThecostofsuchagroupisdeterminedusingtheconceptsdescribedinparagraphsD4andD5.Thecostofagroupofassetsacquiredinanassetacquisitionisallocatedtotheindividualassetsacquiredorliabilitiesassumedbasedontheirrelativefairvaluesanddoesnotgiverisetogoodwill.

AcquiredcontingentassetsandassumedcontingentliabilitiesareaccountedforinaccordancewithStatement5,generallyresultingin(1)norecognitionofacquiredcontingentassetsand(2)recognitionofacontingentliabilityonlyifitisprobablethataliabilityhasbeenincurredandtheamountcanbereasonablyestimated.

1.13 Whenanentityallocatesthecostofanassetgroupnotdeterminedtobeabusiness,itcannot

recognizethedifferencebetweenthetotalcostandtheamountsassignedtotheassets(andliabilities)

asgoodwill.If,uponreviewoftheinitialmeasurementsofthetangibleandintangibleassetsacquired,

theentitydoesnoteliminatethatdifference,itmustallocateit.Ifthedifferenceisanexcessofcost,the

differenceshouldbeallocatedprorataonthebasisofrelativefairvaluestoincreasetheassetsacquired,

exceptforfinancialassets(otherthaninvestmentsaccountedforbytheequitymethod)andassets

subjecttofairvalueimpairmenttesting,suchasinventoriesandindefinite-livedintangibleassets,since

increasingthevalueofsuchassetswouldmostlikelyresultinanimpairmentasofthenexttestingdate.







requiredinadditiontothesefinancialstatements.

1.15 Severalfactorsgovernwhetherfinancialstatementsfortheacquireearerequired,including

whethertheacquiredortobeacquiredassetsandliabilitiesmeettheSEC’sdefinitionofabusiness.SEC

RegulationS-X,Rule11-01(d),states:

Forpurposesofthisrule,thetermbusinessshouldbeevaluatedinlightofthefactsandcircumstances

involvedandwhetherthereissufficientcontinuityoftheacquiredentity’soperationspriortoand

afterthetransactionssothatdisclosureofpriorfinancialinformationismaterialtoanunderstanding

offutureoperations.Apresumptionexiststhataseparateentity,asubsidiary,oradivisionisa

business.However,alessercomponentofanentitymayalsoconstituteabusiness.Amongthe

factsandcircumstanceswhichshouldbeconsideredinevaluatingwhetheranacquisitionofalesser

componentofanentityconstitutesabusinessarethefollowing:

(1) Whetherthenatureoftherevenue-producingactivityofthecomponentwillremaingenerally

thesameasbeforethetransaction;or

(2) Whetheranyofthefollowingattributesremainwiththecomponentafterthetransaction:

(i) Physicalfacilities,

(ii) Employeebase,

(iii) Marketdistributionsystem,

(iv) Salesforce,

(v) Customerbase,

(vi) Operatingrights,

(vii)Productiontechniques,or

(viii)Tradenames.

1.16 BecausethedefinitionofabusinessinSECRegulationS-X,Rule11-01(d),differsfromthat

inStatement141(R),SECregistrantsmustundertakeaseparateanalysisunderRule11-01(d)when

evaluatingthereportingrequirementsofSECRegulationS-X.However,webelievethatthechangesto

thedefinitionofabusinessinStatement141(R)morecloselyaligntheFASB’sdefinitionwiththeSEC’s

thandidthepreviousguidance.

Variable Interest Entities

1.17 Statement141(R)amendstheinitialconsolidationguidanceforVIEsthatareaccountedforunder

Interpretation46(R).Inaddition,Statement141(R)amendsInterpretation46(R)tomakethedefinition

ofabusinessconsistentwiththatinStatement141(R)(see1.08).

1.18 Theprimarybeneficiaryisalwaystheacquirerwhentheacquisitionmethodofaccountingisused

(see2.02).RegardingdeterminationoftheVIE’sprimarybeneficiary,paragraph9ofStatement141(R)

states,inpart:

Thedeterminationofwhichparty,ifany,istheprimarybeneficiaryofavariableinterestentityshall

bemadeinaccordancewithFASBInterpretationNo.46(revisedDecember2003),Consolidation

ofVariableInterestEntities ,asamended,notbyapplyingeithertheguidanceinARB51orthatin

paragraphsA11–A15[ofStatement141(R)].

1.19 IfaVIEmeetsthedefinitionofabusiness(see1.08),theprimarybeneficiary’sinitialconsolidation

oftheVIEmustbeaccountedforasabusinesscombinationunderStatement141(R).





1.20 IfaVIEdoesnotmeetthedefinitionofabusiness,theprimarybeneficiary’sinitialmeasurement

oftheVIE’sassets(exceptgoodwill)andliabilitieswouldfollowthemeasurementguidanceofStatement

141(R).However,theprimarybeneficiaryisprohibitedfromrecognizinggoodwill,andwouldinstead

recognizealoss.Inaddition,paragraphs21(a)and21(b)ofInterpretation46(R),asamendedby

Statement141(R),state:

a. Theprimarybeneficiaryinitiallyshallmeasureandrecognizetheassets(exceptforgoodwill)

andliabilitiesofthevariableinterestentityinaccordancewithparagraphs12–33ofStatement

141(R).However,theprimarybeneficiaryshallinitiallymeasureassetsandliabilitiesthatithas

transferredtothatvariableinterestentityat,after,orshortlybeforethedatethattheentity

becametheprimarybeneficiaryatthesameamountsatwhichtheassetsandliabilitieswould

havebeenmeasurediftheyhadnotbeentransferred.Nogainorlossshallberecognized

becauseofsuchtransfers.

b. Theprimarybeneficiaryshallrecognizeagainorlossforthedifferencebetween(1)the

fairvalueofanyconsiderationpaid,thefairvalueofanynoncontrollinginterests,andthe

reportedamountofanypreviouslyheldinterestsand(2)thenetamountofthevariable

interestentity’sidentifiableassetsandliabilitiesrecognizedandmeasuredinaccordance

withStatement141(R).Nogoodwillshallberecognizedifthevariableinterestentityisnota

business.

1.21 ParagraphB21ofStatement141(R)explainstheFASB’srationalefortheamendmentsto

Interpretation46(R):

TheFASBconcludedthatvariableinterestentitiesthatarebusinessesshouldbeaffordedthesame

exceptionstofairvaluemeasurementandrecognitionthatareprovidedforassetsandliabilitiesof

acquiredbusinesses.TheFASBalsodecidedthatupontheinitialconsolidationofavariableinterest

entitythatisnotabusiness,theassets(otherthangoodwill),liabilities,andnoncontrollinginterests

shouldberecognizedandmeasuredinaccordancewiththerequirementsof[Statement141(R)],

ratherthanatfairvalueaspreviouslyrequiredbyInterpretation46(R).TheFASBreachedthatdecision

forthesamereasonsdescribedabove,thatis,ifthisStatementallowsanexceptiontofairvalue

measurementforaparticularassetorliability,itwouldbeinconsistenttorequirethesametypeofassetorliabilitytobemeasuredatfairvalue.Exceptforthatprovision,theFASBdidnotreconsider

therequirementsinInterpretation46(R)fortheinitialconsolidationofavariableinterestentitythatis

notabusiness.

Combinations Between Two or More Mutual Entities

1.22 BusinesscombinationsbetweentwoormoremutualentitiesarewithinthescopeofStatement

141(R).Paragraph3(m)ofStatement141(R)definesa“mutualentity”asfollows:

Amutualentity isanentityotherthananinvestor-ownedentitythatprovidesdividends,lowercosts,

orothereconomicbenefitsdirectlytoitsowners,members,orparticipants.Forexample,amutual

insurancecompany,acreditunion,andacooperativeentityareallmutualentities.

1.23 Sinceacombinationofmutualentitiesinvolvesanexchange,albeittypicallyofmembership

interests,Statement141(R)makesnoconcessiontoitsusualrequirementsregardingapplyingthe

acquisitionmethodofaccounting.Consequently,anacquirermustbeidentifiedinanycombinationof

mutualentitiesusingtheStatement141(R)criteria(seeSection 2).

1.24 MutualentitiesdidnotfollowtheguidanceinStatement141becauseitseffectivedatewas

deferreduntilinterpretiveguidancewasissuedfortransactionsinvolvingsuchentities.Seeadditional

Statement141(R)transitionguidanceformutualentitiesin14.39–14.45.





Leveraged Buyout Transactions

1.25 Statement141(R)nullifiesIssue88-16,whichpreviouslyprovidedguidancetoentitiesthat

participatedinleveragebuyout(LBO)transactions.Issue88-16describedLBOtransactionsasfollows:

[T]heLBOshouldbeeffectedinasinglehighlyleveragedtransactionoraseriesofrelatedand

anticipatedhighlyleveragedtransactionsthatresultintheacquisitionbyNEWCOofallpreviouslyoutstandingcommonstockofOLDCO;thatis,therecanbenoremainingminorityinterest.[footnote

2omitted]ThisIssueexcludesLBOtransactionsinwhichexistingmajoritystockholdersutilizea

holdingcompanytoacquireallofthesharesofOLDCOnotpreviouslyowned.Stepacquisition

accountingcontinuestobeappropriateinsuchtransactions.

UpontheiradoptionofStatement141(R),entitiesmustnowconsidertheprovisionsofStatement141(R)

fortransactionsthatwouldhavebeenpreviouslyaccountedforunderIssue88-16.NotethatStatement

141(R)doesnotprovideguidanceoramendtheaccountingforrecapitalizationtransactions,including

leveragedrecapitalizations(see1.37).

Additional Scope Considerations

1.26 Businesscombinationscanbeachievedinavarietyofways.Itmaynotalwaysbeclearwhether

aspecifictransactionformiswithinthescopeofStatement141(R),isotherwiseaddressedinStatement

141(R),orisaddressedinotherauthoritativeliterature.Transactionsdiscussedelsewhereinthis

Roadmapareasfollows:

• Controlobtainedbutlessthan100percentofthebusinessisacquired(see1.27).

• Businesscombinationsachievedinstages(see1.28–1.30).

• Acquisitionofanoncontrollinginterestofasubsidiary(see1.31).

• Roll-uporput-togethertransactions(see1.32–1.33).

• Formationofajointventure(see1.34–1.36).• Recapitalizations(see1.37).

• Transactionsbetweenentitiesundercommoncontrol(see1.38–1.44).

• Combinationsbetweenentitieswithcommonownership(see1.45–1.46).

• Combinationsinvolvingnot-for-profitorganizations(see1.47–1.49).

Control Obtained but Less Than 100 Percent of the Business Is Acquired (i.e., PartialAcquisitions)

1.27 Statement141(R)appliestotransactionsoreventsinwhichanentityobtainscontrolofone

ormorebusinesses(see1.01).Inatransactionoreventinvolvingequityinterests,controlisgenerallyindicatedbyownershipbyoneentity,directlyorindirectly,ofover50percentoftheoutstandingvoting

sharesofanotherentity(see1.02–1.07).Accordingly,abusinesscombinationmayoccurwhenan

entityacquiresenough,butlessthan100percentof,votingsharestoobtaincontrol.Insuchcases,the

acquirerrecognizesinitsconsolidatedfinancialstatementstheassetsacquired,liabilitiesassumed,and

thenoncontrollinginterestat100percentoftheiracquisition-datefairvalues(withcertainexceptions

specifiedinStatement141(R)),regardlessofitslevelofcontrollinginterest.TheFASBhasindicatedthat

onceanacquirerobtainscontrolofanentity,itcontrols100percentofitsassets,notjustaportionof

them.





Example 1-2

Control Obtained but Less Than 100 Percent of the Business Is Acquired

CompanyA,withnopriorownershipinterestinCompanyB,acquired80percentoftheequityinterestinCompanyBinabusinesscombinationfor$1,600.Thefairvalueofthenoncontrollinginterestis$400(assumingnocontrolpremium).ThefairvalueofallidentifiablenetassetsofCompanyBasoftheacquisitiondatewas$1,500.

Initsconsolidatedfinancialstatements,CompanyAwillreflecttheacquisitionoftheequityinterestinCompanyBasfollows:

Identifiablenetassets

Goodwill

Noncontrollinginterest(aseparatecomponentofshareholders’equity)

CompanyA’sinvestmentinB

$ 1,500

500

(400)

$ 1,600

FullfairvalueofCompanyB’snetassets

Calculatedas([$1,600+$400]–$1,500)

Fairvalue

Business Combinations Achieved in Stages

1.28 Abusinesscombinationachievedinstagesoccurswhencontrolofabusinessisobtainedafter

theacquireralreadyownsanoncontrollinginterestintheacquiree’sequity.Suchacquisitionsarecommonlycalledstepacquisitions.UnderStatement141(R),theacquirerappliesStatement141(R)’s

acquisitionmethodaccountingonthedatecontrolisobtained.Inaddition,theacquirer’spreexisting

interestintheacquireeisremeasuredtoitsfairvalue,witharesultinggainorlossrecordedinearnings

uponconsummationofthebusinesscombination.Inpriorperiods,thepreviouslyheldinterestmayhave

beenremeasuredtofairvaluewithchangesrecognizedinothercomprehensiveincome(e.g.,ifitwas

classifiedasavailableforsale).Insuchcases,theamountofothercomprehensiveincomerelatedtothe

previouslyheldinterestshouldbereclassifiedandincludedinthegainorloss.

1.29 ParagraphB384ofStatement141(R)explainstheFASB’srationalefortheaccountingtreatment:

TheBoardsconcludedthatachangefromholdinganoncontrollinginvestmentinanentityto

obtainingcontrolofthatentityisasignificantchangeinthenatureofandeconomiccircumstances

surroundingthatinvestment.Thatchangewarrantsachangeintheclassificationandmeasurement

ofthatinvestment.Onceitobtainscontrol,theacquirernolongeristheownerofanoncontrolling

investmentassetintheacquiree.Asinpresentpractice,theacquirerceasesitsaccountingforan

investmentassetandbeginsreportinginitsfinancialstatementstheunderlyingassets,liabilities,

andresultsofoperationsoftheacquiree.Ineffect,theacquirerexchangesitsstatusasanownerof

aninvestmentassetinanentityforacontrollingfinancialinterestinalloftheunderlyingassetsand

liabilitiesofthatentity(acquiree)andtherighttodirecthowtheacquireeanditsmanagementuse

thoseassetsinitsoperations.

1.30 See7.20–7.23regardingadditionalacquisitionsofnoncontrollinginterestsinasubsidiaryafter

controlisobtained.





Example 1-3

Business Combination Achieved in Stages

ACpurchasesa35percentinterestinTargetCompany(TC)for$2,000onJanuary1,20X8(exampleignoresdeferredtaxaccountingimplications).ACusestheequitymethodtoaccountforits35percentinterestinTC.OnDecember31,20X9:

• ACpurchasesanadditional40percentofTCfor$4,000.

• ThefairvalueofTC’sidentifiablenetassetsis$8,000.

• Thefairvalueofthe25percentnoncontrollinginterestis$1,800.

• ThefairvalueofAC’s35percentofTCis$3,500.Thebookvalueofthatinterestis$2,500.

• TCconstitutesabusiness.

Theacquisitionofthe40percentinterestresultsinAC’sobtainingcontrolofTC.Therefore,thattransactionisaccountedforasabusinesscombination.

AC’sexisting35percentinterestinTCisremeasuredto$3,500,resultinginagainof$1,000($3,500lessthe$2,500bookvalue)intheincomestatement.

ACrecognizesTC’sidentifiablenetassetsatthefullamountoftheirfairvalues($8,000).ACalsorecognizesgoodwillof$1,300([$4,000+$1,800+$3,500]–$8,000)(see5.38–5.41).

IfACpurchases(ordisposesof)additionalinterestsinTCinthefuture(providedthatcontrolisretained),thoseinterests

wouldbeaccountedforasequitytransactions—noassetsorliabilitieswouldberemeasuredatfairvalue,andnogainsorlosseswouldberecognized(see7.20–7.23).

Acquisition of a Noncontrolling Interest of a Subsidiary

1.31 Onceanentityhascontrolofasubsidiary,itsacquisitionsofsomeorallofthenoncontrolling

interestsinthatsubsidiaryareaccountedforasequitytransactionsunderStatement160(see 7.20–

7.23).SuchtransactionsarenotconsideredbusinesscombinationswithinthescopeofStatement

141(R).

Roll-Up or Put-Together Transactions

1.32 Insometransactions,morethantwoentitiesagreetocombinetheirbusinessesbutnoneofthe

ownersofthecombiningentitiesindividuallyorasagroupretainorreceiveamajorityofthevoting

rightsofthecombinedentity.Suchtransactions,oftenreferredtoas“roll-up”or“put-together”

transactions,arewithinthescopeofStatement141(R).

1.33 TheFASB’sviewonroll-uporput-togethertransactionsisdiscussedinparagraphB27of

Statement141(R):

TheBoardsconcludedthatmostbusinesscombinations,bothtwo-partytransactionsandthose

involvingthreeormoreentities(multipartycombinations)areacquisitions.TheBoardsacknowledged

thatsomemultipartycombinations(inparticular,thosethatarecommonlyreferredtoasroll-up

orput-togethertransactions)mightnotbeacquisitions;however,theynotedthattheacquisitionmethodhasgenerallybeenusedtoaccountforthem.TheBoardsdecidednottochangethatpractice

atthistime.Consequently,thisStatementrequirestheacquisitionmethodtobeusedtoaccountfor

allbusinesscombinations,includingthosethatsomemightnotconsideracquisitions.

Formation of a Joint Venture

1.34 Paragraph2(a)ofStatement141(R)statesthattheformationofajointventureisnotwithinthe

Statement’sscope.





1.35 Paragraph3(d)ofOpinion18defines“corporatejointventure,”whichisalsoconsideredtobe

applicabletootherformsofjointventures(e.g.,partnerships),asfollows:

“Corporatejointventure”referstoacorporationownedandoperatedbyasmallgroupofbusinesses

(the“jointventurers”)asaseparateandspecificbusinessorprojectforthemutualbenefitof

themembersofthegroup.Agovernmentmayalsobeamemberofthegroup.Thepurposeof

acorporatejointventurefrequentlyistosharerisksandrewardsindevelopinganewmarket,productortechnology;tocombinecomplementarytechnologicalknowledge;ortopoolresources

indevelopingproductionorotherfacilities.Acorporatejointventurealsousuallyprovidesan

arrangementunderwhicheachjointventurermayparticipate,directlyorindirectly,intheoverall

managementofthejointventure.Jointventurersthushaveaninterestorrelationshipotherthanas

passiveinvestors.Anentitywhichisasubsidiaryofoneofthe“jointventurers”isnotacorporate

jointventure.Theownershipofacorporatejointventureseldomchanges,anditsstockisusuallynot

tradedpublicly.Aminoritypublicownership,however,doesnotprecludeacorporationfrombeinga

corporatejointventure.

1.36 EITFIssue98-4states:

TheSECObserverindicatedthattheSECstaffwouldobjecttoaconclusionthatdidnotresultinthe

applicationofOpinion16[Statement141(R)]totransactionsinwhichbusinessesarecontributedto

anewlyformed,jointlycontrolledentityifthatentityisnotajointventure.TheSECstaffalsowould

objecttoaconclusionthatjointcontrolistheonlydefiningcharacteristicofajointventure.

Recapitalizations

1.37 Inarecapitalizationtransaction,aseriesofstepsisgenerallyundertakeninvolvingtheequity

ofanentity,whichmayresultintheestablishmentofanewcontrollingshareholder.Inaleveraged

recapitalization,newdebtisissuedwiththeproceedsusedtoredeemsharesfromexistingshareholders

aspartofaseriesofstepsthatalsomayresultintheestablishmentofanewcontrollingshareholder.

Questionsareoftenraisedaboutwhether,inrecapitalizationtransactionsthatresultinanewcontrolling

shareholderoftherecapitalizedentity,theaccountingbasisofthenetassetsoftherecapitalizedentityshouldbeadjusted.Statement141(R)doesnotprovidespecificguidanceinthisarea.Consultationwith

specialistsisrecommendedwhenthepotentialaccountingeffectsofrecapitalizationtransactionsare

evaluated.

Transactions Between Entities Under Common Control

1.38 Paragraph2(c)ofStatement141(R)statesthatacombinationbetweenentitiesorbusinesses

undercommoncontrolisnotwithinitsscope.ParagraphD8ofStatement141(R)providesthefollowing

examplesofthosetypesoftransactions:

a. Anentitychartersanewlyformedentityandthentransferssomeorallofitsnetassetstothat

newlycharteredentity.

b. Aparenttransfersthenetassetsofawhollyownedsubsidiaryintotheparentandliquidates

thesubsidiary.Thattransactionisachangeinlegalorganizationbutnochangeinthe

reportingentity.

c. Aparenttransfersitscontrollinginterestinseveralpartiallyownedsubsidiariestoanew

whollyownedsubsidiary.Thatalsoisachangeinlegalorganizationbutnottothereporting

entity.

d. Aparentexchangesitsownershipinterestsorthenetassetsofawhollyownedsubsidiaryfor

additionalsharesissuedbytheparent’sless-than-whollyownedsubsidiary,therebyincreasing

theparent’spercentageofownershipintheless-than-wholly-ownedsubsidiarybutleavingall

oftheexistingnoncontrollinginterestoutstanding.(FAS141,¶D11)





e. Aparent’sless-than-wholly-ownedsubsidiaryissuesitssharesinexchangeforsharesof

anothersubsidiarypreviouslyownedbythesameparent,andthenoncontrollingshareholders

arenotpartytotheexchange.Thatisnotabusinesscombinationfromtheperspectiveofthe

parent.(FTB85-5,¶7)

f. Alimitedliabilitycompanyisformedbycombiningentitiesundercommoncontrol.(Practice

Bulletin14,¶.05)

1.39 Statement141(R),however,doesnotdefine“commoncontrol.”InIssue02-5,theTaskForce

discussedhowtodefinecommoncontrol,butdidnotreachaconsensus.However,theSECobserver

statedthatcommoncontrolexistsbetween(oramong)separateentitiesinthefollowingsituations:

a. Anindividualorenterpriseholdsmorethan50percentofthevotingownershipinterestof

eachentity.

b. Immediatefamilymembersholdmorethan50percentofthevotingownershipinterestof

eachentity(withnoevidencethatthosefamilymemberswillvotetheirsharesinanyway

otherthaninconcert).

(1) Immediatefamilymembersincludeamarriedcoupleandtheirchildren,butnotthe

marriedcouple’sgrandchildren.(2) Entitiesmightbeownedinvaryingcombinationsamonglivingsiblingsandtheir

children.Thosesituationswouldrequirecarefulconsiderationregardingthesubstance

oftheownershipandvotingrelationships.

c. Agroupofshareholdersholdsmorethan50percentofthevotingownershipinterestofeach

entity,andcontemporaneouswrittenevidenceofanagreementtovoteamajorityofthe

entities’sharesinconcertexists.

1.40 Becauseofalackofguidance,theSEC’scommentsarewidelyappliedbypublicandprivate

companies.However,theremaybeothercircumstancesinwhichcommoncontrolexists.Therefore,

professionaljudgmentshouldbeused.

1.41 WhilenotspecificallywithinthescopeofStatement141(R),themeasurementofassetsand

liabilitiestransferredinacombinationbetweenentitiesundercommoncontrolisdiscussedinparagraph

D9ofStatement141(R):

Whenaccountingforatransferofassetsorexchangeofsharesbetweenentitiesundercommon

control,theentitythatreceivesthenetassetsortheequityinterestsshouldinitiallyrecognizethe

assetsandliabilitiestransferredattheircarrying amounts intheaccountsofthetransferringentity

atthedateoftransfer.(FAS141,¶D12)Ifthecarryingamountsoftheassetsandliabilitiestransferred

differfromthehistoricalcostoftheparentoftheentitiesundercommoncontrol,forexample,

becausepush-downaccountinghadnotbeenapplied,thenthefinancialstatementsofthereceiving

entityshouldreflectthetransferredassetsandliabilitiesatthehistoricalcostoftheparentofthe

entitiesundercommoncontrol.[Emphasisadded]

1.42 SeeparagraphsD10–D14ofStatement141(R)foradditionalproceduralguidanceoncommon

controltransactions.

1.43 Transactionsbetweenentitiesundercommoncontrolareaccountedforinamannersimilar

tothepooling-of-interestmethod.However,paragraphD13ofStatement141(R)statesthatin

thedeterminationoftheperiodforwhichcombinedfinancialinformationshouldbepresented,

“comparativeinformationinprioryearsshouldonlybeadjustedforperiodsduringwhichtheentities

wereundercommoncontrol.”





1.44 Regardingpreparationofthefinancialstatementsofthethen-combinedentitiesforperiods

beforecommoncontrol,weunderstandthattheSECstafffurtherbelievesthattheentitytobe

presentedasthehistorical(predecessor)entityisgenerallythecombiningentityfirstownedbythe

controllingshareholder,regardlessofthelegalformofthecommoncontrolcombination.Presentation

ofthehistorical(predecessor)entityforperiodsbeforecommoncontrolasotherthanthefirstentity

ownedbythecontrollingshareholderisexpectedtobeinfrequent,suchaswhenthefirstentityownedbythecontrollingshareholderisanonoperatingshellcorporation.

Example 1-4

Transaction Between Entities Under Common Control

InvestorAowns100percentofCompanyBandCompanyC.InvestorAacquiredCompanyBonJanuary1,20X9,andCompanyConJanuary1,20X4.InvestorAappliedpush-downaccountingtoCompanyBandCompanyCatthetimeoftheiracquisition.OnJanuary1,20Y0,InvestorAelectstocombineCompanyBandCompanyC.ThisisaccomplishedbyCompanyBissuingadditionalsharesinexchangefortheoutstandingsharesofCompanyC.BothCompanyBandCompanyCareoperatingbusinesses.

CompanyCispresentedasthehistoricalreportingentityuptothedateofcommoncontrolbyInvestorA(January1,20X9)whenpreparingthefinancialstatementsforthecombinedCompanyB/CompanyCentity.Despitethelegalformof

thecombination,CompanyCispresentedasthehistoricalreportingentitybecauseitwasthefirstentityofthecombiningentitiescontrolledbyInvestorA.AfterJanuary1,20X9,combinedfinancialinformationispresented.

Combinations Between Entities With Common Ownership

1.45 Insomeinstances,acombinationmayoccurbetweentwoormoreentitieswithahighdegree

ofcommonownership,butthecombiningentitiesarenotundercommoncontrol.Foratransaction

betweenentitieswithahighdegreeofcommonownershiptobeaccountedforinamannerconsistent

withacommoncontroltransaction(see1.41–1.44),identicalownersoftheentitiesbeforethe

transactionwithownershipinverysimilarpercentageswouldmostlikelyberequiredtodemonstrate

thatthetransactionlackssubstance.Suchfactpatternsareexpectedtoberare.

1.46 Theconclusionin1.45hashistoricallybeensupportedbytheSEC’sanalogytoparagraph6of

TechnicalBulletin85-5.WhileTechnicalBulletin85-5wasnullifiedbyStatement141(R),webelievethat

analogizingtothisguidanceremainsappropriate.Paragraph6ofTechnicalBulletin85-5states,inpart:

[I]ftheexchangelackssubstance,itisnotapurchaseeventandshouldbeaccountedforbasedon

existingcarryingamounts.Thatis,iftheminorityinterestdoesnotchangeandifinsubstancethe

onlyassetsofthecombinedentityaftertheexchangearethoseofthepartiallyownedsubsidiaryprior

totheexchange,achangeinownershiphasnottakenplace,andtheexchangeshouldbeaccounted

forbasedonthecarryingamountsofthepartiallyownedsubsidiary’sassetsandliabilities.

Example 1-5

Transaction Between Two Entities With Common Ownership

Beforebeingcombined,CompanyBandCompanyCwereownedasfollows:

Company B Company C

Owner1 80% 5%

Owner2 10 10

Owner3 5 20

Owner4 5 65





Section 2 — Identifying the Acquirer

2.01 Paragraph8ofStatement141(R)states,“Foreachbusinesscombination,oneofthecombining

entitiesshallbeidentifiedastheacquirer.”

2.02 Paragraph3(b)ofStatement141(R)definesthe“acquirer”asfollows:

Theacquirer istheentitythatobtainscontroloftheacquiree.However,inabusinesscombinationin

whichavariableinterestentityisacquired,theprimarybeneficiaryofthatentityalwaysistheacquirer.

2.03 ARB51,asamendedbyStatement160,indicatesthatoneentitycontrolsanotherifitholds

a“controllingfinancialinterest”anditprescribescriteriafordeterminingwhichentityhasobtained

control.If,uponevaluatingthesecriteria,thecombiningentitiesareunabletodeterminewhichentity

hasobtainedcontrol,theymayconsidertheadditionalfactorsinparagraphsA11–A15ofStatement

141(R).Eachofthesefactorsisdescribedinmoredetailbelow(see2.06–2.22).

2.04 InadditiontoevaluatingthecriteriainARB51,asamendedbyStatement160,anacquirermust

determinewhethertheacquireeisavariableinterestentity(VIE)inaccordancewithInterpretation46(R).

NotethatnotallVIEswouldmeetStatement141(R)’sdefinitionofabusiness.Therefore,theinitial

consolidationofcertainVIEsisoutsidethescopeofStatement141(R).(See1.17–1.21foradditional

scopeconsiderationsregardingVIEs.)

2.05 Theacquirerisdeterminedasoftheacquisitiondate.Anentitythatmadeaninitialassessment

oftheacquirerbeforetheacquisitiondatemustconsiderallpertinentfactsandcircumstancesasof

theacquisitiondatewhenmakingthefinaldetermination.Changesinfactsandcircumstancesafterthe

acquisitiondatedonotaffectthedeterminationoftheacquirer.

Business Combinations Effected Primarily by Transferring Cash or Other Assets orby Incurring Liabilities

2.06 ParagraphA11ofStatement141(R)states,“Inabusinesscombinationeffectedprimarilyby

transferringcashorotherassetsorbyincurringliabilities,theacquirerusuallyistheentitythattransfers

thecashorotherassetsorincurstheliabilities.”

Business Combinations Effected Primarily by Exchanging Equity Interests

2.07 ParagraphA12ofStatement141(R)states,inpart:

Inabusinesscombinationeffectedprimarilybyexchangingequityinterests,theacquirerusuallyis

theentitythatissuesitsequityinterests.However,insomebusinesscombinations,commonlycalled

reverseacquisitions ,theissuingentityistheacquiree.[See2.23.]

2.08 ParagraphA12ofStatement141(R)furtherindicates:

Otherpertinentfactsandcircumstancesalsoshallbeconsideredinidentifyingtheacquirerina

businesscombinationeffectedbyexchangingequityinterests,including:

a. Therelativevotingrightsinthecombinedentityafterthebusinesscombination....[See

2.10–2.11.]





b. Theexistenceofalargeminorityvotinginterestinthecombinedentityifnootherowneror

organizedgroupofownershasasignificantvotinginterest....[See2.12.]

c. Thecompositionofthegoverningbodyofthecombinedentity....[See2.13–2.15.]

d. Thecompositionoftheseniormanagementofthecombinedentity....[See2.16–2.17.]

e. Thetermsoftheexchangeofequityinterests....[See2.18.]

2.09 Statement141(R)providesnohierarchicalguidanceondeterminingtheacquirerinabusiness

combinationeffectedthroughanexchangeofequityinterests.Allpertinentfactsandcircumstances

shouldbeconsidered,particularlythoseinparagraphsA12(a)–A12(e).(See2.10–2.18.)Additionalfacts

andcircumstancesthatmaybepertinentincludewhichofthecombiningentitiesinitiatedthebusiness

combinationaswellastherelativesizeofthecombiningentities.(See2.19.)

Consideration of the Relative Voting Rights in the Combined Entity After theBusiness Combination

2.10 ParagraphA12(a)ofStatement141(R)states,inpart:

Theacquirerusuallyisthecombiningentitywhoseownersasagroupretainorreceivethelargest

portionofthevotingrightsinthecombinedentity.Indeterminingwhichgroupofownersretainsor

receivesthelargestportionofthevotingrights,anentityshallconsidertheexistenceofanyunusual

orspecialvotingarrangementsandoptions,warrants,orconvertiblesecurities.

2.11 Therelativevotingrightsinthecombinedentityshouldbeconsideredasoftheacquisition

dateonthebasisofallsecuritieswithvotingrights,notjustvotingcommonstock.Anyunusualor

specialvotingarrangementsinplaceasoftheacquisitiondatemustalsobeconsidered,becausesuch

arrangementsmayservetoaltertheoutstandingvotingrightsoftheholdersofvotingsecurities.In

addition,whilesomeoptions,warrants,orconvertiblesecuritiesofthelegalacquireemaybeexchanged

forvotingsecuritiesasoftheacquisitiondate,otheroptions,warrants,orconvertiblesecuritiesofthe

legalacquiree,aswellassimilarsecuritiesofthelegalacquirer,mayremainoutstandingasof

theacquisitiondate.Totheextentthatoptions,warrants,orconvertiblesecuritiesoutstandingasofthe

acquisitiondatecouldresultinthesubsequentissuanceofvotingsecuritiesinthecombinedentity,the

specificfactsandcircumstancesassociatedwithsuchoptions,warrants,orconvertiblesecuritiesmustbe

considered.

Example 2-1

Relative Voting Rights of the Combined Entity

Anonvotingsecuritythatisheldbyalargeminorityowner,thatisoutstandingasoftheacquisitiondate,andthatcanbeimmediatelyconvertedintoavotingsecuritymaybedeterminedtobeapertinentfactorcircumstance.However,optionswithvaryingtermsthatareheldbyemployeesofbothcombiningentitiesandthatwillremainoutstandinginthe

combinedentitymaynotbeapertinentfactorcircumstance.

Consideration of the Existence of a Large Minority Voting Interest in the CombinedEntity If No Other Owner or Organized Group of Owners Has a Significant VotingInterest

2.12 ParagraphA12(b)ofStatement141(R)states,inpart:

Theacquirerusuallyisthecombiningentitywhosesingleownerororganizedgroupofownersholds

thelargestminorityvotinginterestinthecombinedentity.





Consideration of the Composition of the Governing Body of the Combined Entity

2.13 ParagraphA12(c)ofStatement141(R)states,inpart:

Theacquirerusuallyisthecombiningentitywhoseownershavetheabilitytoelectorappointorto

removeamajorityofthemembersofthegoverningbodyofthecombinedentity.

2.14 Considerationshouldbegivento(1)theinitialcompositionofthegoverningbodyofthe

combinedentityand(2)theprocessinplaceasoftheacquisitiondategoverninghowsubsequent

membersofthegoverningbodyaretobeelectedorappointedandwhenthenextelectionor

appointmentmayoccur.Aplan,asoftheacquisitiondate,toaltertheinitialcompositionofthe

governingbodyoraprocessinplaceasoftheacquisitiondatethatcouldresultinanalterationofthe

governingbodyshouldbeevaluatedtodeterminewhethersuchaplanorprocessisapertinentfactor

circumstance.

2.15 Atthe2007AICPANationalConferenceonCurrentSECandPCAOBDevelopments,anSECstaff

member(EricC.West),inpreparedremarks,addressedthestaff’sviewonevaluatingtemporarycontrol

ofthecombinedentity’sgoverningbody.Mr.Weststated,inpart:

Thegoalistodeterminewhethercontroloftheboardbyanyshareholdergroupistemporaryand,

therefore,controlmaynotbesubstantive.Thisisparticularlyimportantinsituationswherethe

boardofdirectorsofthecombinedentityisdominatedbymembersthatrepresenttheminority

shareholders’interests.Inthissituationmanyhaveassertedthatthe[SEC]staffemploysabrightline.

Somebelievethatwewon’tacceptaconclusionthattheminorityshareholdercontrolstheboardif

itsmemberscontrolforaperiodoflessthantwoyears,threeyearsandsometimesevenfiveyears.

I’dliketotellyouwehavenobrightlineandsimplybelievethatcontroloftheboardshouldbe

substantive.I’dalsoliketoemphasizethatweunderstandthatjudgmentmayberequiredinapplying

paragraph17c[supersededbyparagraphA12(c)ofStatement141(R)].

Consideration of the Composition of the Senior Management of the CombinedEntity

2.16 ParagraphA12(d)ofStatement141(R)states,inpart:

Theacquirerusuallyisthecombiningentitywhoseformermanagementdominatesthemanagement

ofthecombinedentity.

2.17 Seniormanagementwouldgenerallyinclude,butnotbelimitedto,thechiefexecutiveofficer,

thechieffinancialofficer,andthechiefoperatingofficer.Considerationshouldbegivento(1)theinitial

compositionoftheseniormanagementofthecombinedentityand(2)anyplanorintentionasofthe

acquisitiondatetomakesubsequentchangesintheinitialcompositionoftheseniormanagementafter

theacquisitiondate.Aplanorintentionasoftheacquisitiondatetoaltertheinitialcompositionof

seniormanagement,suchasaplannedretirementwithadeterminedsuccessor,shouldbeevaluated

todeterminewhethersuchaplanorintentionisapertinentfactorcircumstance.Thepertinenceof

aplannedorintendedchangetotheinitialcompositionoftheseniormanagementofthecombined

entitywillmostlikelybeinfluencedbyboththespecificseniormanagementposition(s)affectedandthe

expectedtimingofthechange(s).





Consideration of the Terms of the Exchange of Equity Securities

2.18 ParagraphA12(e)ofStatement141(R)states,inpart:

Theacquirerusuallyisthecombiningentitythatpaysapremiumovertheprecombinationfairvalueof

theequityinterestsoftheothercombiningentityorentities.

Consideration of the Relative Size of the Combining Entities


Theacquirerusuallyisthecombiningentitywhoserelativesize(measuredin,forexample,assets,

revenues,orearnings),issignificantlylargerthanthatoftheothercombiningentityorentities.

Business Combinations Involving More Than Two Entities


Inabusinesscombinationinvolvingmorethantwoentities,determiningtheacquirershallincludea

considerationof,amongotherthings,whichofthecombiningentitiesinitiatedthecombination,as

wellastherelativesizeofthecombiningentities(paragraphA13).[See2.19.]

Use of a New Entity to Effect a Business Combination


Anewentityformedtoeffectabusinesscombinationisnotnecessarilytheacquirer.Ifanewentityis

formedtoissueequityintereststoeffectabusinesscombination,oneofthecombiningentitiesthat

existedbeforethebusinesscombinationshallbeidentifiedastheacquirerbyapplyingtheguidancein

paragraphsA10–A14.[See2.03–2.20.]Incontrast,anewentitythattransferscashorotherassetsor

incursliabilitiesasconsiderationmaybetheacquirer.

Example 2-2

NewCo Issues Equity Interests to Combining Entities

CompanyAandCompanyBagreetocombineinatransactiontobeaccountedforasabusinesscombination.Toeffectthetransaction,anewentity(“NewCo”)willbeformedtoissueequityintereststotheshareholdersofbothAandB.Inthistransaction,eitherAorBwillbedeterminedtobetheacquiringentityonthebasisoftheavailableevidence.TheguidanceinparagraphsA12–A15ofStatement141(R)(see 2.07–2.20)shouldbeusedinidentifyingtheacquirer.

2.22 Paragraph19ofStatement141prohibitedanewentity(oftenreferredtoasa“NewCo”)from

beingidentifiedasanacquirerinabusinesscombination.However,incertainsituations,theSECstaff

mayhaverequiredaNewCotobedeemedtheacquirer.InanAugust16,2001,correspondencetothe

FASBstaff,thenSECChiefAccountantLynnE.Turnerdiscussesonesuchsituation:

Thestaffcontinuestobelievehowever,thatwhenaNewcohasanyprecombinationactivitiesthatare

deemedtobesignificant,theNewcocannotbeviewedasanewcorporationsolelyformedtoissue

stocktoeffectabusinesscombinationandthereforecouldbedeemedtheaccountingacquirer.

UnderStatement141(R),aNewCocanbeconsideredtheacquiringentityincertainsituations.





Example 2-3

NewCo as the Acquirer

CompanyC,aninvestmentcompany,andseveralunrelatedinvestorsformanewentity(“NewCo”)bycontributingcashinexchangeforequityinterestsofNewCo.NewCosubsequentlysecuresdebtfinancingfromathird-partybank.Usingthecashcontributionsanddebtfinancing,NewConegotiatesandacquiresacontrollinginterestinanunrelatedcompany,CompanyD.NewCosurvivestheacquisitionandbecomesthenewparenttoD.Onthebasisoftheavailableevidence,thepartiestothetransactionmightdeterminethatNewCoisasubstantivecompanyratherthananewcorporationformedsolelytoissueequityinterests.Ifso,NewCowouldbedeemedtheacquirer.

Reverse Acquisitions

2.23 UnderStatement141(R),areverseacquisitionisabusinesscombinationinwhichtheentitythat

issuesitsstockorgivesotherconsiderationtoeffectthetransactionisdeterminedtobetheaccounting

acquiree(alsocalledthelegalacquirerorlegalparent),whiletheentityreceivingthestockorother

considerationistheaccountingacquirer(alsocalledthelegalacquireeorlegalsubsidiary).Statement

141(R)’sguidanceonreverseacquisitionsappliesonlywhentheaccountingacquireemeetsthe

definitionofabusiness.(See1.08.)Otherwise,thetransactionisnotconsideredabusinesscombination

andwouldbeaccountedforaseitheranassetacquisitionoracapitaltransaction.

Example 2-4

Reverse Acquisition

CompanyA,apublicentitywithaDecember31year-end,has1millioncommonsharesoutstandingasofJune30,20X9.CompanyAhassubstantiveoperationsandisnotconsideredanonoperatingpublicshellcorporation.(See 2.32.)OnJuly1,20X9,inatransactionaccountedforasabusinesscombination,Aissues4millionofitsnewlyregisteredcommonsharestoCompanyB,aprivateentity,inexchangeforallofB’s2millionoutstandingcommonshares(anexchangerateof2:1).Afterthetransaction,BcontrolsthevotingrightsofAthroughits80percentownershipinterest(4millioncommonsharesheld÷5milliontotalcommonsharesoutstanding)aswellasitsabilitytoelectamajorityoftheboardmembersofthecombinedentity.AlthoughAissuedcommonsharestoeffectthebusinesscombination,Bwouldbeconsideredtheaccountingacquirer(legalacquiree)underStatement141(R),providedthattherearenootherexistingpertinentfacts

andcircumstancestothecontraryafterconsiderationofthefactorsinparagraphsA12–A14ofStatement141(R).(See2.07–2.20.)

Calculating Consideration Transferred

2.24 Inareverseacquisition,theaccountingacquirer(legalacquiree)usuallyissuesnoconsideration

fortheacquiree.However,toapplyacquisitionmethodaccounting,theaccountingacquirermuststill

calculateahypotheticalamountofconsiderationitwouldhavetransferredtoacquiretheaccounting

acquiree(legalacquirer)toobtainthesamepercentageofownershipinterestinthecombinedentity

thatresultsfromthetransaction.ParagraphA109ofStatement141(R)states,inpart:

Accordingly,theacquisition-datefairvalueoftheconsiderationtransferredbytheaccounting

acquirerforitsinterestintheaccountingacquireeisbasedonthenumberofequityintereststhe

legalsubsidiary[legalacquiree]wouldhavehadtoissuetogivetheownersofthelegalparent[legal

acquirer]thesamepercentageequityinterestinthecombinedentitythatresultsfromthereverse

acquisition....Thefairvalueofthenumberofequityinterestscalculatedinthatwaycanbeusedas

thefairvalueofconsiderationtransferredinexchangefortheacquiree.

2.25 Insomereverseacquisitions,theaccountingacquireemayissuecashorotherconsideration,as

wellasstock,toacquirethesharesoftheaccountingacquirer.Thepaymentofcashtotheshareholders

oftheaccountingacquirershouldbeconsideredadistributionofcapitaland,accordingly,areductionof

shareholders’equityoftheaccountingacquirer.





Measuring Goodwill

2.26 ParagraphA121ofStatement141(R)indicatesthatgoodwillinareverseacquisitionismeasured

astheexcessofthefairvalueoftheconsiderationeffectivelytransferredbytheaccountingacquirerover

thefairvalueoftheaccountingacquiree’sidentifiablenetassets.

Noncontrolling Interests2.27 Insomereverseacquisitions,certainshareholdersoftheaccountingacquirer(legalacquiree)may

notexchangetheirinterestsforinterestsintheaccountingacquiree(legalacquirer),therebycreating

noncontrollinginterestsinthecombinedentity.(Forinformationaboutaccountingfornoncontrolling

interestsinareverseacquisition,see7.10.)

Measurement Basis of the Combined Entity’s Financial Statements

2.28 ParagraphA110ofStatement141(R)states:

Consolidatedfinancialstatementspreparedfollowingareverseacquisitionareissuedunderthename

ofthelegalparent(accountingacquiree)butdescribedinthenotesasacontinuationofthefinancial

statementsofthelegalsubsidiary(accountingacquirer),withoneadjustment,whichistoretroactivelyadjusttheaccountingacquirer’slegalcapitaltoreflectthelegalcapitaloftheaccountingacquiree.

Thatadjustmentisrequiredtoreflectthecapitalofthelegalparent(theaccountingacquiree).

Comparativeinformationpresentedinthoseconsolidatedfinancialstatementsalsoisretroactively

adjustedtoreflectthelegalcapitalofthelegalparent(accountingacquiree).

2.29 Thefollowingtablesummarizesthemeasurementbasisforthecombinedentity’sfinancial

statementsafterareverseacquisition:

Statement of Financial Position Balance(s) Measurement Basis

Assetsandliabilities Sumof(1)theaccountingacquiree’sassetsandliabilities,measuredbyusingtheacquisitionmethodunderStatement

141(R),and(2)theaccountingacquirer’sassetsandliabilities,measuredbyusingtheprecombinationcarryingvalues.

Retainedearningsandotherequitybalances Theaccountingacquirer’sprecombinationcarryingamount,proportionatelyreducedforanynoncontrollinginterests.

Issuedequity Sumof(1)theaccountingacquirer’sissuedequityimmediatelybeforethebusinesscombination,proportionatelyreducedforanynoncontrollinginterests,and(2)thefairvalueoftheaccountingacquiree(i.e.,thehypotheticalconsiderationtransferred).Theequitystructure(i.e.,thenumberandtypeofequityinterestsissued)reflectstheequitystructureoftheaccountingacquiree.

Noncontrollinginterest Thenoncontrollinginterest’sproportionateshareoftheaccountingacquirer’sprecombinationretainedearnings,issuedequity,andotherequitybalances.(See7.10.)





Earnings per Share

2.30 ParagraphA115ofStatement141(R)statesthattheweighted-averagenumberofcommon

sharesoutstanding,usedwhencalculatingearningspershareduringtheperiodinwhichthereverse

acquisitionoccurs,shouldbecalculatedasthesumofthefollowingtwoitems:

a. Thenumberofcommonsharesoutstandingfromthebeginningofthatperiodtotheacquisitiondateshallbecomputedonthebasisoftheweighted-averagenumberofcommon

sharesofthelegalacquiree(accountingacquirer)outstandingduringtheperiodmultipliedby

theexchangeratioestablishedinthemergeragreement.

b. Thenumberofcommonsharesoutstandingfromtheacquisitiondatetotheendofthat

periodshallbetheactualnumberofcommonsharesofthelegalacquirer(theaccounting

acquiree)outstandingduringthatperiod.

2.31 Forpriorperiods,paragraphA116ofStatement141(R)requiresthatcomparativeearnings-per-

shareamountsbecalculatedbydividing:

a. Theincomeofthelegalacquireeattributabletocommonshareholdersineachofthose

periods,byb. Thelegalacquiree’shistoricalweightedaveragenumberofcommonsharesoutstanding

multipliedbytheexchangeratioestablishedintheacquisitionagreement.

Mergers of a Private Operating Company Into a Nonoperating Public ShellCorporation

2.32 Inareverseacquisition(see2.23),thelegalacquirergenerallycontinuesinexistenceasthe

legalentitywhosesharesrepresenttheoutstandingcommonstockofthecombinedcompany.Insome

instances,thelegalacquirerisapubliccompanywhosesharesarelistedonanexchange.Byeffecting

areverseacquisition,theaccountingacquirer(ifaprivateentity)cangainaccesstothepublicmarket

withoutgoingthroughaninitialpublicoffering.TheSEC’sDivisionofCorporationFinance,FrequentlyRequestedAccountingandFinancialReportingInterpretationsandGuidance,datedMarch31,2001,

states:

Themergerofaprivateoperatingcompanyintoanon-operatingpublicshellcorporationwith

nominalnetassetstypicallyresultsintheownersandmanagementoftheprivatecompany

havingactualoreffectiveoperatingcontrolofthecombinedcompanyafterthetransaction,with

shareholdersoftheformerpublicshellcontinuingonlyaspassiveinvestors.Thesetransactionsare

consideredbythestafftobecapitaltransactionsinsubstance,ratherthanbusinesscombinations.

Thatis,thetransactionisequivalenttotheissuanceofstockbytheprivatecompanyforthenet

monetaryassetsoftheshellcorporation,accompaniedbyarecapitalization.Theaccountingis

identicaltothatresultingfromareverseacquisition,exceptthatnogoodwillorotherintangible

shouldberecorded.



Section 3 — Recognizing and MeasuringAssets Acquired and Liabilities Assumed —General

Date of Acquisition

3.01 Transferofcontrolistheconceptusedtodeterminetheacquisitiondate.Controlisgenerally

obtainedonthedateonwhichanacquirerlegallytransfersconsiderationtoasellerandacquires

theassetsandassumestheliabilitiesoftheacquiree(i.e.,theclosingdate).However,entitiesshould

considerallrelevantdetailsassociatedwithabusinesscombinationtodeterminewhencontrolhasbeen

obtained.Suchconsiderationsmayincludethefollowing:

• Regulatoryorshareholderapproval—Certainbusinesscombinationsrequireregulatory

orshareholderapproval(shareholderapprovalmaybesoughtbyeithertheacquirerorthe

acquiree).Itisgenerallypresumedthateffectivecontrolcannotpasstotheacquireruntilsuch

requiredapprovalisobtained.

• Acquisitiondatedifferentfromtheclosingdate—Anacquirermayobtaincontroloveran

acquireeonadatethateitherprecedesorfollowstheclosingdate.Thismayoccurwhen

controltransfersviaawrittenagreementthatmaynotcorrespondtotheclosingdate.Although

suchsituationsareexpectedtooccurrarely,allrelevantdetailsabouthowtheacquisitiondate

wasdeterminedmustbeconsidered.

3.02 Determiningtheacquisitiondateisimportant,becauseonthisdate:

• Allformsofconsiderationaremeasured,includingcontingentconsiderationandtheacquirer’s

equitysecuritiesissuedtotheseller.(SeeSection 6.)

• Theassetsacquired,liabilitiesassumed,andanynoncontrollinginterestsaremeasured.

• Theacquirerbeginsconsolidatingtheacquiredentity.

3.03 Statement141(R)eliminatesthe“convenience”exceptioninparagraph48ofStatement141.

Thatexceptionallowedanacquirer,incertaincircumstances,todesignateaneffectivedatethatwas

otherthantheacquisitiondateofthebusinesscombination(e.g.,theendofanaccountingperiod

betweenthedatesabusinesscombinationisinitiatedandconsummated).

Recognition and Measurement Principles

Recognition Principle3.04 Paragraph12ofStatement141(R)specifiesanoverallrecognitionprincipleandstatesthat“[a]s

oftheacquisitiondate,theacquirershallrecognize,separatelyfromgoodwill,theidentifiableassets

acquired,theliabilitiesassumed,andanynoncontrollinginterestintheacquiree.”

3.05 TheguidanceinStatement141(R)emphasizestwofundamentalprinciplesabouttherecognition

ofassetsacquired,liabilitiesassumed,andnoncontrollinginterestsoftheacquiree:

1. Theymust“meetthedefinitionofanassetoraliabilityinFASBConceptsStatementNo.6”as

oftheacquisitiondate.





2. Theymustbe“[p]artofthebusinesscombination[andnot]theresultofaseparate

transaction.”

3.06 Paragraphs25and35ofConceptsStatement6,respectively,defineassetsandliabilitiesas

follows:

• Assetsareprobable[footnote18]futureeconomicbenefitsobtainedorcontrolledbya

particularentityasaresultofpasttransactionsorevents.[Emphasisadded]

• Liabilitiesareprobable[footnote21]futuresacrificesofeconomicbenefitsarisingfrom

presentobligations[footnoteomitted]ofaparticularentitytotransferassetsorprovide

servicestootherentitiesinthefutureasaresultofpasttransactionsorevents.[Emphasis

added]

Footnotes18and21inConceptsStatement6bothstate:

Probable isusedwithitsusualgeneralmeaning,ratherthaninaspecificaccountingortechnical

sense(suchasthatinFASBStatementNo.5,AccountingforContingencies ,par.3),andreferstothat

whichcanreasonablybeexpectedorbelievedonthebasisofavailableevidenceorlogicbutisneither

certainnorproved...).Itsinclusioninthedefinitionisintendedtoacknowledgethatbusiness

andothereconomicactivitiesoccurinanenvironmentcharacterizedbyuncertaintyinwhichfew

outcomesarecertain(pars.44–48).

3.07 Statement141(R)mayresultinanacquirerrecognizingsomeassetsandliabilitiesthatwere

notpreviouslyrecognizedintheacquiree’sfinancialstatements.Forexample,Statement142generally

requiresthatcostsassociatedwithinternallygeneratedintangibleassetsbeexpensedasincurred.

Therefore,anentitymayhaveincurredasignificantamountofcostsindevelopingitstradename;

however,itwouldgenerallyhaveexpensedsuchcostsasincurred,ratherthanrecognizingthemas

anasset.If,however,thatentitywasacquiredinabusinesscombination,underStatement141(R)the

acquirerwouldgenerallyrecognizethefairvalueofthattradenameasanintangibleassetapartfrom

goodwill.

3.08 Transactionsthataretobeaccountedforseparatelyfromabusinesscombinationarediscussed

in3.28–3.39and6.37–6.38.

3.09 TherearelimitedexceptionstoStatement141(R)’srequirementthatanacquirerrecognizeevery

identifiableassetandliability.Forexample,assetsandliabilitiesarisingfromcontingenciesarenot

recognizedunlesstheymeetcertaincriteria.Exceptionstothegeneralrecognitionandmeasurement

principlesaresummarizedin3.15 anddiscussedfurtherinSections 4 and 5.

Classification or Designation on the Acquisition Date for Subsequent Accounting

3.10 Afterassetsacquiredorliabilitiesassumedarerecognized,Statement141(R)requiresthatthe

acquirerclassifyordesignatethemontheacquisitiondate.Specifically,paragraph17ofStatement

141(R)states:

Attheacquisitiondate,theacquirershallclassifyordesignatetheidentifiableassetsacquired

andliabilitiesassumedasnecessarytosubsequentlyapplyotherGAAP.Theacquirershallmake

thoseclassificationsordesignationsonthebasisofthecontractualterms,economicconditions,its

operatingoraccountingpolicies,andotherpertinentconditionsastheyexistattheacquisitiondate.





3.11 Paragraph18ofStatement141(R)providessomeexamplesofclassificationsordesignations

thattheacquirermayberequiredtomakeontheacquisitiondateinaccordancewiththeguidancein

paragraph17:

a. Classificationofparticularinvestmentsinsecuritiesastrading,availableforsale,orheldto

maturityinaccordancewithFASBStatementNo.115,AccountingforCertainInvestmentsin

DebtandEquitySecurities

b. DesignationofaderivativeinstrumentasahedginginstrumentinaccordancewithFASB

StatementNo.133,AccountingforDerivativeInstrumentsandHedgingActivities

c. Assessmentofwhetheranembeddedderivativeshouldbeseparatedfromthehostcontract

inaccordancewithStatement133(whichisamatterofclassification asthisStatementuses

thatterm).

3.12 Anacquirerisrequiredtodesignateorclassifyassetsorliabilitiesasoftheacquisitiondate

becausethesubsequentaccountingcanvaryaccordingtotheirclassification.Forexample,anacquirer’s

subsequentaccountingforasecuritydiffersdependingonwhethertheacquirerclassifiesthesecurity

astrading,availableforsale,orheldtomaturity.However,paragraph19ofStatement141(R)provides

someexceptionstotheclassificationordesignationrequirement:

a. Classificationofaleasecontractaseitheranoperatingleaseoracapitalleaseinaccordance

withFASBStatementNo.13,AccountingforLeases,asinterpretedbyFASBInterpretationNo.

21,AccountingforLeasesinaBusinessCombination

b. ClassificationofacontractwrittenbyanentitythatisinthescopeofFASBStatementNo.

60,AccountingandReportingbyInsuranceEnterprises ,asamendedbythisStatement,asan

insuranceorreinsurancecontractoradepositcontract.

Theacquirershallclassifythosecontractsonthebasisofthecontractualtermsandotherfactorsat

theinceptionofthecontract(or,ifthetermsofthecontracthavebeenmodifiedinamannerthat

wouldchangeitsclassification,atthedateofthatmodification,whichmightbetheacquisitiondate).

Exceptionstothegeneralclassificationanddesignationprinciplesaresummarizedin3.15anddiscussed

furtherinSections 3and4.

Measurement Principle

3.13 Paragraph20ofStatement141(R)providesanoverallmeasurementprincipleandstates

that“[t]heacquirershallmeasuretheidentifiableassetsacquired,theliabilitiesassumed,andany

noncontrollinginterestintheacquireeattheiracquisition-date fair values”(emphasisadded).Refer

to3.40–3.58 foradiscussionofgeneralfairvalueconcepts.

3.14 ThereareexceptionstoStatement141(R)’srequirementthateveryidentifiableasset,liability,

andequityinstrumentbemeasuredatfairvalue.Forexample,anacquirermustmeasureanacquiree’sdeferredtaxes,employeebenefits,share-basedpayments,andassetsheldforsaleinaccordance

withotherapplicableaccountingliterature.Exceptionstothegeneralrecognitionandmeasurement

principlesaresummarizedin3.15anddiscussedfurtherinSections 4 and5.

Summary of Exceptions to General Principles of Recognition and Measurement

3.15 AnacquirershouldapplythespecifiedaccountingguidanceofeachapplicableU.S.GAAP

standard,ratherthanthegeneralprinciplesdiscussedinStatement141(R),totheexceptionsnoted

below.Refertothesectionnumberindicatedaftertheindividualexceptionsforamoredetailed

discussion.





Exceptions to General Principles of Recognition and Measurement

Recognitionexceptions • Contingencies(see4.32–4.37).

Measurementexceptions • Share-basedpaymentawards(see4.49).

• Assetsheldforsale(see4.50–4.51).

• Reacquiredrights(see5.31–5.34).

Recognitionandmeasurementexceptions • Incometaxes(see4.38–4.40).

• Employeebenefits(see4.41–4.45).

• Indemnificationassets(see4.46–4.47).

Classificationordesignationexceptions1 • LeaseswithinthescopeofStatement13(see3.12and

4.14–4.19).

• ContractswithinthescopeofStatement60(see3.12).

Measurement Period

3.16 Themeasurementperiodisthetimeafteranacquisitionduringwhichtheacquirerobtainsthe

informationneededtoidentifyandmeasuretheconsiderationtransferred,theassetsacquired,the

liabilitiesassumed,andanynoncontrollinginterests.

3.17 Thedurationofthemeasurementperiodisnotthesameforeveryacquisition,orevenforall

itemsacquiredinaspecificacquisition.Themeasurementperiodforaparticularasset,liability,orequity

instrumentendsoncetheacquirerdeterminesthattheavailableinformationhasbeenobtainedor

thattheinformationisnotavailable.Themeasurementperiodforallitemsacquiredinanacquisition,

however,islimitedtooneyearfromtheacquisitiondate.

3.18 Theacquirermustdeterminewhether,foreachitemtobemeasured,additionalinformationis

requiredorobtainableandmustdocumentanddisclose,ateachreportingperiod,theitemsrequiring

additionalinformation.Referto13.24foradiscussionofthespecificdisclosurerequirementsfor

provisionalmeasurements.

3.19 Theacquirermustconsiderallpertinentfactorsindeterminingwhetherinformationobtained

aftertheacquisitiondateshouldresultinanadjustmenttotheprovisionalamountsrecognized(see

3.20–3.23)orwhetherthatinformationresultsfromeventsthatoccurredaftertheacquisitiondate.This

determinationrequiresjudgment.Inmakingthatdetermination,theacquirershouldconsiderwhether

itcanidentifythereasonforthechangeandhowlongaftertheacquisitionthenewinformation

wasreceived.Newinformationreceivedsoonaftertheacquisitionismorelikelytoreflectfactsand

circumstancesexistingasoftheacquisitiondate.Accordingly,themeasurementperiodisnotintendedtoallowforsubsequentadjustmentsoftheamountsrecordedasapartofthebusinesscombination

thatresultfromtheuncertaintiesandrelatedrisksassumedinthecombination.Decisionsmadebythe

combinedcompany,andeconomiceventsoccurringaftertheacquisition,donotresultinanadjustment

totheprovisionalamounts.Rather,suchadjustmentsareincludedinthedeterminationofnetincome

intheperiodinwhichtheadjustmentismade.Forexample,contingentconsiderationissubject

tothesamemeasurement-periodrequirementsasallotherassetsacquiredandliabilitiesassumed.

Aftertheacquisitiondate,changesinthefairvalueofcontingentconsiderationduetotheacquiree

1 Paragraph19ofStatement141(R)states,“Theacquirershallclassifythosecontractsonthebasisofthecontractualtermsandotherfactorsattheinceptionofthecontract(or,if

thetermsofthecontracthavebeenmodifiedinamannerthatwouldchangeitsclassification,atthedateofthatmodification,whichmightbetheacquisitiondate).”





meetingcertainearningstargetsormilestonesaresubsequenteventsandshouldnotberecognizedas

measurement-periodadjustments.

Provisional Measurement of Consideration Transferred, Assets Acquired, Liabilities Assumed, andNoncontrolling Interests

3.20 Becauseofthecomplexityofcompletingcertainfairvaluemeasurementsorbecausethe

acquisitionmayoccurincloseproximitytotheacquirer’snextreportingdate,theassignmentof

amountstotheconsiderationtransferred,theassetsacquired,theliabilitiesassumed,andany

noncontrollinginterestsmaynotbecompletebytheacquirer’snextreportingdate.Therefore,the

acquirermustreportprovisionalamountsonthebasisofbestestimatesofinformationavailableasof

thereportingdate.

3.21 Ifamaterialadjustmenttotheprovisionalamountsisidentifiedduringthemeasurementperiod,

theacquirermustrecognizetheadjustmentasiftheaccountingforthebusinesscombinationhadbeen

completedasoftheacquisitiondate.Thus,theacquirermustrevisecomparativeinformationforprior

periods(i.e.,viaretrospectiveadjustment)asneeded,includingmakinganychangeindepreciation,

amortization,orotherincomeeffectsrecognizedincompletingtheinitialaccounting.

3.22 Becausemeasurement-periodadjustmentsarerecognizedretrospectively,entitiesmaywant

tocompletevaluationsasquicklyaspossible,totheextentpracticable,tolimitthenumberoftimes

previouslyreportedamountswillneedtobeadjusted.

3.23 Oncethemeasurementperiodends,anyadjustmentstotheinitialaccountingforthebusiness

combinationcanonlyberecognizedasthecorrectionofanerrorinaccordancewithStatement154.

Example 3-1

Accounting for Adjustments to Provisional Amounts Assigned to Identifiable Assets Acquired and

Liabilities AssumedThefollowingexampleisextractedfromparagraphsA74–A76ofStatement141(R)andassumesthatthebusinesscombinationwasaccountedforunderStatement141(R).Theexampledoesnotincludeanyquarterlyreportingrequirements.

ACacquiresTConSeptember30,20X7.ACseeksanindependentappraisalforanitemofproperty,plant,andequipmentacquiredinthecombination,andtheappraisalwasnotcompletebythetimeACissueditsfinancialstatementsfortheyearendingDecember31,20X7.Inits20X7annualfinancialstatements,ACrecognizedaprovisionalfairvaluefortheassetof$30,000.Attheacquisitiondate,theitemofproperty,plant,andequipmenthadaremainingusefullifeoffiveyears.Fivemonthsaftertheacquisitiondate,ACreceivedtheindependentappraisal,whichestimatedtheasset’sacquisition-datefairvalueas$40,000.

InitsfinancialstatementsfortheyearendingDecember31,20X8,ACretrospectivelyadjuststhe20X7prior-yearinformationasfollows:

a. Thecarryingamountofproperty,plant,andequipmentasofDecember31,20X7,isincreasedby$9,500.Thatadjustmentismeasuredasthefairvalueadjustmentattheacquisitiondateof$10,000lesstheadditionaldepreciationthatwouldhavebeenrecognizedhadtheasset’sfairvalueattheacquisitiondatebeenrecognizedfromthatdate($500for3months’depreciation).

b. ThecarryingamountofgoodwillasofDecember31,20X7,isdecreasedby$10,000.

c. Depreciationexpensefor20X7isincreasedby$500.





Example 3-1 (continued)

Accounting for Adjustments to Provisional Amounts Assigned to Identifiable Assets Acquired andLiabilities Assumed

Inaccordancewithparagraph72(a),ACdiscloses:

a. Inits20X7financialstatements,thattheinitialaccountingforbusinesscombinationhasnotbeencompleted

becausetheappraisalofproperty,plant,andequipmenthasnotyetbeenreceived.b. Inits20X8financialstatements,theamountsandexplanationsoftheadjustmentstotheprovisionalvalues

recognizedduringthecurrentreportingperiod.Therefore,ACdisclosesthatthe20X7comparativeinformationisretrospectivelyadjustedtoincreasethefairvalueoftheitemofproperty,plant,andequipmentattheacquisitiondateby$9,500,offsetbyadecreasetogoodwillof$10,000andanincreaseindepreciationexpenseof$500.

Impact on SEC Registrants

3.24 SECregistrantsarenotrequiredtofileanamendmenttoretrospectivelyadjustpreviously

filedExchangeActperiodicreportsonForms10-Q/Aand10-K/Aformaterialmeasurement-period

adjustmentsbecausetheydidnotcontainerrorswhentheywereoriginallyfiled.Rather,comparative

financialinformationisrevisedinsubsequentfilingstoreflecttheeffectofthemeasurement-period

adjustment.ThisrequirementcouldaffectSECregistrantsthat(1)plantoissueanewregistration

statement(see3.25)or(2)haveexistingeffectiveregistrationstatements(see3.26)(e.g.,anexisting

FormS-3thatalreadyiseffectivebutuponwhicharegistrantwishestodrawdownorissuesecurities).

New Registration Statements

3.25 Anewregistrationorproxystatementthatisfiledaftertheregistrantdeterminesthatitmust

makeamaterialretrospectiveadjustmenttoprovisionalamounts2mustinclude(orincorporateby

reference)financialstatementsthatreflecttheretrospectiveadjustmentsforallperiodspresented.In

thiscontext,materialityisamatterofjudgment.TherevisedfinancialstatementsarefiledonForm

8-Korincludedinthenewregistrationstatement.Otheraffectedfinancialinformation(e.g.,MD&Aandselectedfinancialdata)thatwasreportedintheregistrant’sreportsonForms10-Kand10-Qalso

mustbeupdatedtoreflecttheretrospectiveadjustments.Tobepreparedforapotentialregistration

statement,aregistrantispermittedtofileupdatedfinancialstatementsandotheraffectedfinancial

informationthatreflecttheretrospectiveadjustmentinaForm8-Konceithasdeterminedthatit

hasamaterialadjustmenttoprovisionalamounts.However,thereisnorequirementtodosountil

immediatelybeforearegistrationstatementisfiled.

Effective Registration Statements

3.26 Aregistrantisundernospecificobligationtoupdateanexisting,effectiveregistrationstatement

unlessafundamentalchangeoccursasstipulatedbySecuritiesActRule10(a)(3)regardingtheage

ofinformationintheprospectus.Theterm“fundamentalchange”isnotdefined.Management,inconsultationwithlegalcounsel,shoulddeterminewhetheraretrospectiveadjustmentconstitutesa

fundamentalchange.Generally,suchadeterminationshouldbebasedonwhethertheadditional

informationisnecessaryforaninvestortomakeaninformedinvestmentdecision(refertoSEC

RegulationS-K,Item512(a)).Iftheregistrantanditslegalcounseldeterminethattheretrospective

adjustmentisafundamentalchange,updatedfinancialstatementsandotheraffectedfinancial

information,suchasMD&Aandselectedfinancialdata,shouldbefiledonForm8-Korincludedinthe

2 Thisrequirementapplieswhenaregistrantdeterminesthatitmustmakeamaterialretrospectiveadjustmenttoprovisionalamounts.Incontrast,forcertainotherretrospective

changes,aregistrantmayfileupdatedfinancialstatementsonlyafterithasfileda10-Qthatfirstreportsthenewaccountingtreatment(e.g.,segmentchangesunderStatement

131anddiscontinuedoperationsunderStatement144andtheretrospectiveadoptionofanewaccountingpronouncement).





registrationstatement,asdescribedabove.Allpost-effectiveamendmentsthatadjusttheprospectusare

considered“newfilings”andwouldbetreatedpursuanttotheguidancein3.25.

Form S-8

3.27 TheHighlightsoftheJuly8,2008,SECRegulationsCommitteeMeetingindicatethefollowing:

Thestaffunderstandsthattherehasbeenconfusionregardingtheneedtoproviderestatedfinancial

statementsinaFormS-8forcertaineventsoccurringafterthefilingofaForm10-Kthatresultin

differencesbetweenthefinancialpresentationintheForm10-KandsubsequentForm10-Qsthatare

incorporatedbyreferenceintotheS-8....ItistheresponsibilityoftheCompanyandtheircounselto

determineiftherehasbeenamaterialchangethatisrequiredtobedisclosedinaFormS-8.Likewise,

itistheresponsibilityoftheauditortodetermineiftheywillissueaconsenttotheuseoftheirreport

iftherehasbeenachangeinthefinancialstatementsthatisreflectedinthe10-Qbuttheannual

accountshavenotbeenretroactivelyrestated.

Example 3-2

SEC Registrant’s Accounting for Adjustments to Provisional Amounts Assigned to IdentifiableAssets Acquired and Liabilities Assumed

AssumethesamefactsasinExample3-1aboveexceptthatACisanSECregistrantthatisalargeacceleratedfiler.OnFebruary15,20X8,ACfileditsForm10-KfortheyearendedDecember31,20X7,anddisclosedaprovisionalamountrelatedtoanitemofproperty,plant,andequipmentacquiredthroughabusinesscombination.OnFebruary28,20X8,ACreceivedtheindependentappraisalanddeterminedthatitmustmakeamaterialretrospectiveadjustmenttotheprovisionalamountrelatedtotheitemofproperty,plant,andequipment.ACplanstoissueanewregistrationstatementonApril5,20X8.

Asaresultofthenewregistrationstatement,ACmustincludeinitsnewregistrationstatement(orincorporatebyreferenceonaForm8-K)adjustedannualfinancialstatementsfortheyearendedDecember31,20X7,reflectingtheretrospectiveadjustmentsfortherevisedamountofgoodwill,property,plant,andequipmentandrelateddepreciation.TheForm8-KwouldalsoincluderevisionstothefinancialinformationoutsideofthefinancialstatementssuchastheselectedfinancialdatasectionandMD&Atotheextentapplicable.

Determining What Is Part of the Business Combination Transaction

3.28 Sometimesanacquirermaysettleapreexistingrelationshiporotherarrangementsimultaneously

withthebusinesscombination.Theacquirermustaccountforsucharrangementsasatransaction

separatefromthebusinesscombination.Paragraph57ofStatement141(R)providesthefollowing

guidancefortheaccountingforpreexistingrelationshipsorotherarrangementsbetweenanacquirer

andanacquireethatarepresentbeforethebusinesscombination:

Theacquirerandtheacquireemayhaveapreexistingrelationshiporotherarrangementbefore

negotiationsforthebusinesscombinationbegan,ortheymayenterintoanarrangementduring

thenegotiationsthatisseparatefromthebusinesscombination.Ineithersituation,theacquirer

shallidentifyanyamountsthatarenotpartofwhattheacquirerandtheacquiree(oritsformer

owners)exchangedinthebusinesscombination,thatis,amountsthatarenotpartoftheexchange

fortheacquiree.Theacquirershallrecognizeaspartofapplyingtheacquisitionmethodonlythe

considerationtransferredfortheacquiree.Separate transactions shall be accounted for in

accordance with the relevant GAAP.[Emphasisadded]





3.29 Astrongindicatorofapreexistingrelationshipthatwouldqualifyforaccountingapartfromthe

businesscombinationisatransactionthatisenteredintobyoronbehalfoftheacquirerorprimarily

forthebenefitoftheacquirerortheanticipatedcombinedentity.Paragraph58ofStatement141(R)

specifiesexamplesofsuchtransactions:

• “Atransactionthatineffectsettlespreexistingrelationshipsbetweentheacquirerand

acquiree.”

• “Atransactionthatcompensatesemployeesorformerownersoftheacquireeforfuture

services”(i.e.,compensationarrangements);see6.39.

• “Atransactionthatreimbursestheacquireeoritsformerownersforpayingtheacquirer’s

acquisition-relatedcosts;”see3.36.

3.30 Determiningwhatisorisnotpartofabusinesscombinationrequiresjudgment.Paragraph

A77ofStatement141(R)specifiesthreefactorsthat“areneithermutuallyexclusivenorindividually

conclusive”thatshouldbeconsideredinmakingthisdetermination:

a. Thereasonsforthetransaction —Understandingthereasonswhythepartiestothe

combination(theacquirer,theacquiree,andtheirowners,directors,managers,andtheir

agents)enteredintoaparticulartransactionorarrangementmayprovideinsightintowhether

itispartoftheconsiderationtransferredandtheassetsacquiredorliabilitiesassumed.For

example,ifatransactionisarrangedprimarilyforthebenefitoftheacquirerorthecombined

entityratherthanprimarilyforthebenefitoftheacquireeoritsformerownersbeforethe

combination,thatportionofthetransactionpricepaid(andanyrelatedassetsorliabilities)

islesslikelytobepartoftheexchangefortheacquiree.Accordingly,theacquirerwould

accountforthatportionseparatelyfromthebusinesscombination.

b. Whoinitiatedthetransaction —Understandingwhoinitiatedthetransactionmayalso

provideinsightintowhetheritispartoftheexchangefortheacquiree.Forexample,a

transactionorothereventthatisinitiatedbytheacquirermaybeenteredintoforthepurpose

ofprovidingfutureeconomicbenefitstotheacquirerorcombinedentitywithlittleorno

benefitreceivedbytheacquireeoritsformerownersbeforethecombination.Ontheotherhand,atransactionorarrangementinitiatedbytheacquireeoritsformerownersislesslikely

tobeforthebenefitoftheacquirerorthecombinedentityandmorelikelytobepartofthe

businesscombinationtransaction.

c. Thetimingofthetransaction —Thetimingofthetransactionmayalsoprovideinsightinto

whetheritispartoftheexchangefortheacquiree.Forexample,atransactionbetweenthe

acquirerandtheacquireethattakesplaceduringthenegotiationsofthetermsofabusiness

combinationmayhavebeenenteredintoincontemplationofthebusinesscombinationto

providefutureeconomicbenefitstotheacquirerorthecombinedentity.Ifso,theacquiree

oritsformerownersbeforethebusinesscombinationarelikelytoreceivelittleornobenefit

fromthetransactionexceptforbenefitstheyreceiveaspartofthecombinedentity.

3.31 Acontractinapreexistingrelationshipmayrepresentareacquiredrightoftheacquirer,asdiscussedin5.31–5.34.Ifthecontractcontainsfavorableorunfavorabletermsregardingpricingfor

currentmarkettransactions,thenasettlementgainorlosswouldberecognizedapartfromthebusiness

combinationandmeasuredinaccordancewith3.32.





3.32 Ifabusinesscombinationeffectivelyresultsinthesettlementofapreexistingrelationship

betweenanacquirerandanacquiree,theacquirerwouldrecognizeagainorloss.ParagraphA79

indicateshowsuchgainorlossshouldbemeasured:

a. Forapreexistingnoncontractualrelationship(suchasalawsuit),fairvalue

b. Forapreexistingcontractualrelationship,thelesserof:

(1) Theamountbywhichthecontractisfavorableorunfavorablefromtheperspectiveof

theacquirerwhencomparedwithpricingforcurrentmarkettransactionsforthesame

orsimilaritems.(Anunfavorablecontractisacontractthatisunfavorableinterms

ofcurrentmarketterms.Itisnotnecessarilyalosscontractinwhichtheunavoidable

costsofmeetingtheobligationsunderthecontractexceedtheeconomicbenefits

expectedtobereceivedunderit.)

(2) Theamountofanystatedsettlementprovisionsinthecontractavailabletothe

counterpartytowhomthecontractisunfavorable.

If(2)islessthan(1),thedifferenceisincludedaspartofthebusinesscombinationaccounting.

3.33 Theacquirer’srecognitionofanassetorliabilityrelatedtothepreexistingrelationshipbeforethe

businesscombinationwillaffectthecalculationofthesettlement(seeExample3-4below).

Example 3-3

Effective Settlement of a Supply Contract as a Result of a Business Combination

ThefollowingexampleisextractedfromparagraphsA82–A84ofStatement141(R):

ACpurchaseselectroniccomponentsfromTCunderafive-yearsupplycontractatfixedrates.Currently,thefixedratesarehigherthanratesatwhichACcouldpurchasesimilarelectroniccomponentsfromanothersupplier.ThesupplycontractallowsACtoterminatethecontractbeforetheendoftheinitial5-yeartermonlybypayinga$6millionpenalty.With3yearsremainingunderthesupplycontract,ACpays$50milliontoacquireTC,whichisthefairvalueofTCbasedonwhatothermarketparticipantswouldbewillingtopay.

IncludedinthetotalfairvalueofTCis$8millionrelatedtothefairvalueofthesupplycontractwithAC.The

$8millionrepresentsa$3millioncomponentthatis“at-market”becausethepricingiscomparabletopricingforcurrentmarkettransactionsforthesameorsimilaritems(sellingeffort,customerrelationships,andsoforth)anda$5millioncomponentforpricingthatisunfavorabletoACbecauseitexceedsthepriceofcurrentmarkettransactionsforsimilaritems.TChasnootheridentifiableassetsorliabilitiesrelatedtothesupplycontract,andAChasnotrecognizedanyassetsorliabilitiesrelatedtothesupplycontractbeforethebusinesscombination.

Inthisexample,ACrecognizesalossof$5million(thelesserofthe$6millionstatedsettlementamountandtheamountbywhichthecontractisunfavorabletotheacquirer)separatelyfromthebusinesscombination.The$3millionat-marketcomponentofthecontractispartofgoodwill.

Example 3-4

Effective Settlement of a Contract Between the Acquirer and Acquiree in Which the Acquirer HadRecognized a Liability Before the Business Combination

ParagraphA85ofStatement141(R)states:

WhetherAChadpreviouslyrecognizedanamountinitsfinancialstatementsrelatedtoapreexistingrelationshipwillaffecttheamountrecognizedasagainorlossfortheeffectivesettlementoftherelationship.InExample4[Example 3-3],GAAPmighthaverequiredACtorecognizea$6millionliabilityforthesupplycontractbeforethebusinesscombination.Inthatsituation,ACrecognizesa$1millionsettlementgainonthecontractinearningsattheacquisitiondate(the$5millionmeasuredlossonthecontractlessthe$6millionlosspreviouslyrecognized).Inotherwords,AChasineffectsettledarecognizedliabilityof$6millionfor$5million,resultinginagainof$1million.

3.34 See13.13fordiscussionofdisclosuresrequiredforbusinesscombinationsbetweenpartieswitha

preexistingrelationship.





Types of Transactions to Be Assessed

EmployeeCompensationArrangements

3.35 Replacementawardsorothercompensationarrangementsforpastservicesorfutureservices

maybegiventoemployeesoftheacquiree.Theacquirermustdeterminewhatportionofthe

arrangement,ifany,shouldbeconsideredpartofthebusinesscombination.Amountsnotrelatedtothe

businesscombinationareaccountedforundertheapplicableotherstandards(e.g.,Statement123(R)).See6.05–6.19forfurtherdiscussionofcompensationarrangements.

ReimbursementforPayingtheAcquirer’sAcquisitionCosts

3.36 Acquisitioncostscannotbepartoftheconsiderationtransferredinabusinesscombination.That

is,iftheacquirerandacquireeenterintoanarrangementinwhichtheacquireepaystheacquisition-

relatedcostsandtheacquireragreestoreimbursetheacquiree,suchcostsmustbeaccountedfor

separatelyfromthebusinesscombinationandnotaspartoftheconsiderationtransferred.Statement

141(R)generallyrequiressuchtransactioncoststobeexpensedasincurred.See6.31–6.36forfurther

discussionoftheaccountingtreatmentforacquisitioncosts.

SettlementofDisputesWiththeFormerOwnersofaBusinessCombination

3.37 Afterabusinesscombination,disputesmayoccurbetweentheacquirerandtheformerowners

oftheacquiree,sometimesresultinginamountsbeingtransferredbetweenthepartiesafterthe

acquisitiondate.Questionsmayariseaboutwhether,inaccountingforsuchsubsequentpayments,

theacquiringentityshouldreflecttheamountpaidorreceivedasanadjustmenttotheconsideration

transferred(formerlyreferredtoas“purchaseprice”underStatement141)fortheacquiredentity

orinthepostacquisitionincomestatement.Atthe2003AICPANationalConferenceonCurrentSEC

Developments,SECstaffmemberRandolphP.GreenindicatedinpreparedremarksthattheSEChas

“generallyconcludedthatlegalclaimsbetweenanacquirerandtheformerownersofanacquired

businessshouldbereflectedintheincomestatementwhensettled.”Thisviewisbasedonthegeneral

beliefthatsuchcontingenciesrelatedtolitigationaboutthebusinesscombinationitselfarenotpreacquisitioncontingencies.Mr.Greenofferedthattreatmentofsuchpaymentsbytheacquirerasan

adjustmenttotheconsiderationtransferredfortheacquisitionmaybewarrantedwhenthereisa“clear

anddirectlinktothepurchaseprice.”Mr.Greengavethefollowingexample:

[A]ssumeapurchaseagreementexplicitlysetsforththeunderstandingthateach“acquired

customer”isworth$1,000,thatnotlessthanonethousandcustomerswillbetransferredasof

theconsummationdate,andsubsequentlitigationdeterminesthattheactualnumberofacquired

customerswasonlyninehundred.Theeffectsofthelitigationshouldproperlybereflectedaspart

ofthepurchaseprice.Incontrast,ifthepurchaseagreementobligatesthesellertoaffectitsbest

effortstoretaincustomersthroughtheconsummationdateandlitigationsubsequentlydetermines

thatthesellerfailedtodoso,theeffectsarenotclearlyanddirectlylinkedtothepurchasepriceand,

accordingly,shouldbereflectedintheincomestatement.

Note: WhilenotstatedbyMr.Green,ifthebuyerhadincurredlegalcoststosettlethedisputeorif

thesettlementamounthadincludedreimbursementtothesellersforlegalcostsorotherdamages,

thoseamountsarenotclearlyanddirectlylinkedtotheconsiderationtransferred.Thus,theyshouldbe

reflectedintheincomestatement.

3.38 Asanalternativetotheexamplein3.37,Mr.Greenalsonotedthat“claimsthatassertoneparty

misledtheotherorthataprovisionoftheagreementisuncleararenotuniquetobusinesscombination

agreements.”Therefore,theywouldnotgenerallyestablishaclearanddirectlinktotheconsideration

transferredandshouldbereflectedintheincomestatement.





SettlementDisputesWiththeShareholdersoftheAcquiringEntityOveraBusinessCombination

3.39 Inconnectionwithabusinesscombination,theacquiringentity’sshareholdersmaybringa

claimagainsttheacquiringentityforvariousreasons,suchasthattheacquiringentityoverpaidfor

theacquisition.Theacquiringentityshouldrecognizecostsincurredforsuchdisputes,includingany

settlementamountifpaid,intheincomestatementandnotaspartoftheconsiderationtransferredfor

theacquiredentity.ThisviewisconsistentwithanadditionalstatementbySECstaffmemberRandolphGreen(see3.37and3.38).Referringtosettlementsoflitigationoverconsiderationtransferred,Mr.

Greenstatedthat“thecostoflitigationbroughtbytheacquirer’sshareholdersshouldalwaysbe

reflectedintheincomestatement.”

Fair Value Measurements in Business Combinations

3.40 Statement141(R)requiresmostidentifiableassetsacquired,liabilitiesassumedorincurred,

andnoncontrollingintereststobemeasuredatfairvalue.Statement157providestheguidance

formeasuringfairvalue.Paragraph5ofStatement157definesfairvalueas“thepricethatwould

bereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarket

participants[see3.45]atthemeasurementdate.”

3.41 ThesummarysectionofStatement157discussesthedefinitionoffairvalue:

Thedefinitionoffairvalueretainstheexchangepricenotioninearlierdefinitionsoffairvalue.This

Statementclarifiesthattheexchangepriceisthepriceinanorderlytransactionbetween market

participants to sell the asset or transfer the liability in the market in which the reporting

entity would transact fortheassetorliability,thatis,theprincipalormostadvantageousmarket

fortheassetorliability.Thetransactiontoselltheassetortransfertheliabilityisahypothetical

transactionatthemeasurementdate,consideredfromtheperspectiveofamarketparticipantthat

holdstheassetorowestheliability.Therefore,the definition focuses on the price that would

be received to sell the asset or paid to transfer the liability (an exit price), not the price

that would be paid to acquire the asset or received to assume the liability (an entry price).

[Emphasisadded]

3.42 Thereareconceptualdifferencesbetweenan“entryprice”andan“exitprice.”Assetsare

typicallynotsoldandliabilitiesaretypicallynotsettledforthesamepricepaidtoobtainthem.However,

paragraph17ofStatement157acknowledgesthatuponinitialrecognition,theentryandexitpricemay

bethesameintheabsenceofcertainfactors(e.g.,relatedpartytransactions,forcedtransactions,the

unitofvaluation,ordifferingmarkets).

3.43 Statement157furtheremphasizesthat“fairvalueisamarket-basedmeasurement,notan

entity-specificmeasurement.Therefore,afairvaluemeasurementshouldbedeterminedbasedonthe

assumptionsthatmarketparticipantswoulduseinpricingtheassetorliability.”

3.44 ParagraphA2ofStatement157statesthatbecausefairvalueisanexitpriceforassetsand

liabilities,thefollowingneedtobedeterminedforanentitytocalculatethefairvaluemeasurement:

a. Theparticularassetorliabilitythatisthesubjectofthemeasurement(consistentwithitsunit

ofaccount)

b. Foranasset,thevaluationpremiseappropriateforthemeasurement(consistentwithits

highestandbestuse)[See3.50–3.53.]

c. Theprincipal(ormostadvantageous)marketfortheassetorliability(foranasset,consistent

withitshighestandbestuse)[See3.54–3.55.]







participantsthatwouldmaximizethevalueoftheassetorthegroupofassetswithinwhichthe

assetwouldbeused.Highestandbestuseisdeterminedbasedontheuseoftheassetbymarket

participants,eveniftheintendeduseoftheassetbythereportingentityisdifferent.

3.51 Thehighestandbestuseofanassetestablishesthevaluationpremise.Thevaluationpremise

isusedtomeasurethefairvalueofanasset.Paragraph13ofStatement157statesthatthevaluation

premiseofanassetiseitherofthefollowing:

a. In-use .Thehighestandbestuseoftheassetisin-useiftheassetwouldprovidemaximum

valuetomarketparticipantsprincipallythroughitsuseincombinationwithotherassetsasa

group(asinstalledorotherwiseconfiguredforuse).Forexample,thatmightbethecasefor

certainnonfinancialassets.Ifthehighestandbestuseoftheassetisin-use,thefairvalueof

theassetshallbemeasuredusinganin-usevaluationpremise.Whenusinganin-usevaluation

premise,thefairvalueoftheassetisdeterminedbasedonthepricethatwouldbereceived

inacurrenttransactiontoselltheassetassumingthattheassetwouldbeusedwithother

assetsasagroupandthatthoseassetswouldbeavailabletomarketparticipants.Generally,

assumptionsaboutthehighestandbestuseoftheassetshouldbeconsistentforallofthe

assetsofthegroupwithinwhichitwouldbeused.

b. In-exchange.Thehighestandbestuseoftheassetisin-exchangeiftheassetwouldprovidemaximumvaluetomarketparticipantsprincipallyonastandalonebasis.Forexample,that

mightbethecaseforafinancialasset.Ifthehighestandbestuseoftheassetisin-exchange,

thefairvalueoftheassetshallbemeasuredusinganin-exchangevaluationpremise.When

usinganin-exchangevaluationpremise,thefairvalueoftheassetisdeterminedbasedonthe

pricethatwouldbereceivedinacurrenttransactiontoselltheassetstandalone.

3.52 Paragraph14ofStatement157statesthat“[b]ecausethehighestandbestuseoftheasset

isdeterminedbasedonitsusebymarketparticipants,thefairvaluemeasurementconsidersthe

assumptionsthatmarketparticipantswoulduseinpricingtheasset,whetherusinganin-useoranin-

exchangevaluationpremise.”Althoughthediscussioninparagraphs12–14ofStatement157appears

undertheheading“ApplicationtoAssets,”thein-use(incombination)valuationpremisemayalsobe

appropriateforliabilities(e.g.,aportfolioofsimilarwrittenlifeinsurancepolicies)orforacombination

ofassetsandliabilities(e.g.,aportfolioofsimilarderivatives).

Example 3-5

Highest and Best Use of an Asset Group

ThefollowingexampleisextractedfromparagraphsA7–A9ofStatement157:

Thereportingentity,astrategicbuyer,acquiresagroupofassets(AssetsA,B,andC)inabusinesscombination.AssetCisbillingsoftwaredevelopedbytheacquiredentityforitsownuseinconjunctionwithAssetsAandB(relatedassets).Thereportingentitymeasuresthefairvalueofeachoftheassetsindividually,consistentwiththespecifiedunitofaccountfortheassets.Thereportingentitydeterminesthateachassetwouldprovidemaximumvaluetomarketparticipantsprincipallythroughitsuseincombinationwithotherassetsasagroup(highestand

bestuseisin-use).Inthisinstance,themarketinwhichthereportingentitywouldselltheassetsisthemarketinwhichitinitiallyacquiredtheassets(thatis,the“entry”and“exit”marketsfromtheperspectiveofthereportingentityarethesame).Marketparticipantbuyerswithwhomthereportingentitywouldtransactinthatmarkethavecharacteristicsthataregenerallyrepresentativeofbothfinancialbuyersandstrategicbuyersandincludethosebuyersthatinitiallybidfortheassets.[Footnote13]Asdiscussedbelow,differencesbetweentheindicatedfairvaluesoftheindividualassetsrelateprincipallytotheuseoftheassetsbythosemarketparticipantswithindifferentassetgroups:






Highest and Best Use of an Asset Group

a. Strategicbuyerassetgroup.Thereportingentity,astrategicbuyer,determinesthatstrategicbuyershaverelatedassetsthatwouldenhancethevalueofthegroupwithinwhichtheassetswouldbeused(marketparticipantsynergies).ThoseassetsincludeasubstituteassetforAssetC(thebillingsoftware),whichwouldbeusedforonlyalimitedtransitionperiodandcouldnotbesoldstandaloneattheendofthatperiod.Becausestrategicbuyershavesubstituteassets,AssetCwouldnotbeusedforitsfullremainingeconomiclife.TheindicatedfairvaluesofAssetsA,B,andCwithinthestrategicbuyerassetgroup(reflectingthesynergiesresultingfromtheuseoftheassetswithinthatgroup)are$360,$260,and$30,respectively.Theindicatedfairvalueoftheassetsasagroupwithinthestrategicbuyerassetgroupis$650.

b. Financialbuyerassetgroup .Thereportingentitydeterminesthatfinancialbuyersdonothaverelatedorsubstituteassetsthatwouldenhancethevalueofthegroupwithinwhichtheassetswouldbeused.Becausefinancialbuyersdonothavesubstituteassets,AssetC(thebillingsoftware)wouldbeusedforitsfullremainingeconomiclife.TheindicatedfairvaluesofAssetsA,B,andCwithinthefinancialbuyerassetgroupare$300,$200,and$100,respectively.Theindicatedfairvalueoftheassetsasagroupwithinthefinancialbuyerassetgroupis$600.

ThefairvaluesofAssetsA,B,andCwouldbedeterminedbasedontheuseoftheassetsasagroupwithinthestrategicbuyergroup($360,$260,and$30).Althoughtheuseoftheassetswithinthestrategicbuyergroupdoesnotmaximizethefairvalueofeachoftheassetsindividually,itmaximizesthefairvalueoftheassetsasagroup($650).

Footnote13states,“Whilemarketparticipantbuyersmightbebroadlyclassifiedasstrategicand/orfinancialbuyers,thereoftenwillbedifferencesamongthemarketparticipantbuyerswithineachofthosegroups,reflecting,forexample,differentusesforanassetanddifferentoperatingstrategies.”

3.53 Example3-6belowillustratesthedifferencebetweenanin-use valuation premise (i.e.,

maximumvaluetomarketparticipantsisprincipallyderivedthroughtheuseoftheassetincombination

withotherassetsasagroup)andanin-exchange valuation premise(i.e.,theassetprovides

maximumvaluetomarketparticipantsprincipallyonastand-alonebasis).Withanin-usevaluation

premise,assumptionsmadebytheentitytodeterminethehighestandbestuseoftheassetshouldbe

consistentforalloftheassetsinthegroupinwhichtheassetwouldbeused.Incontrast,withanin-

exchangevaluationpremise,thefairvalueoftheassetisbasedtheassumptionthattheassetwould

besoldonastand-alonebasis.Whenentitiesmeasurethefairvalueofagroupofassets,theyshould

followthesamevaluationpremiseforeachassetinthegroup.Forexample,ifthehighestandbestuse

ofamanufacturingplantisassumedtobeinuse,thevalueassignedtothelandshouldnotbebasedon

theassumptionthathigh-risecondominiumswouldbebuiltontheproperty(“in-exchange”).

Example 3-6

Highest and Best Use of Land

ThefollowingexampleisextractedfromparagraphsA10andA11ofStatement157:

Thereportingentityacquireslandinabusinesscombination.Thelandiscurrentlydevelopedforindustrialuseasasiteforamanufacturingfacility.Thecurrentuseoflandoftenispresumedtobeitshighestandbestuse.However,nearbysiteshaverecentlybeendevelopedforresidentialuseassitesforhigh-risecondominiums.Basedonthatdevelopmentandrecentzoningandotherchangestofacilitatethatdevelopment,thereportingentitydeterminesthatthelandcurrentlyusedasasiteforamanufacturingfacilitycouldbedevelopedasasiteforresidentialuse(forhigh-risecondominiums).






Highest and Best Use of Land

Inthisinstance,thehighestandbestuseofthelandwouldbedeterminedbycomparing(a)thefairvalueofthemanufacturingoperation,whichpresumesthatthelandwouldcontinuetobeusedascurrentlydevelopedforindustrialuse(in-use)and(b)thevalueofthelandasavacantsiteforresidentialuse,consideringthedemolitionandothercostsnecessarytoconvertthelandtoavacantsite(in-exchange).Thehighestandbestuseofthelandwouldbedeterminedbasedonthehigherofthosevalues.[Footnote14]

Footnote14states,“Insituationsinvolvingrealestateappraisal,thedeterminationofhighestandbestuseinthemannerdescribedabovealsomightconsiderotherfactorsrelatingtothemanufacturingoperation,includingitsassetsandliabilities.”

Determining the Market

3.54 Accordingtoparagraph8ofStatement157,a“fairvaluemeasurementassumesthatthe

transactiontoselltheassetortransfertheliabilityoccursintheprincipalmarketfortheassetorliability

or,intheabsenceofaprincipalmarket,themostadvantageousmarketfortheassetorliability.”The

determinationoftheprincipal(ormostadvantageous)marketisfromtheperspectiveofthereporting

entity.Thisallowsfordifferencesinfairvalueamongreportingentitiesdependingonthemarketormarketsinwhichtheytransact.

3.55 Theprincipalmarketisthemarketinwhichthereportingentitywouldselltheassetortransfer

theliabilitywiththegreatestvolumeorlevelofactivity.Oftenanentity’sprincipalmarketwillbeitsmost

advantageousmarketbecausemostentitiesattempttomaximizeprofits.Therefore,itwilltransactin

themostadvantageousmarketwiththegreatestvolumeorlevelofactivity.Ifanentitydoesnothave

aprincipalmarket,inaccordancewiththehighestandbestuseconcept,itshouldusethepriceinthe

marketthatmaximizesthefairvalueofanassetorminimizesthefairvalueofaliability(i.e.,themost

advantageousmarket).

Example 3-7 Determination of the Market

ParagraphA23ofStatement157statesthefollowing:

Afinancialassetistradedontwodifferentexchangeswithdifferentprices.Thereportingentitytransactsinbothmarketsandhastheabilitytoaccessthepriceinthosemarketsfortheassetatthemeasurementdate.InMarketA,thepricethatwouldbereceivedis$26,andtransactioncostsinthatmarketare$3(thenetamountthatwouldbereceivedis$23).InMarketB,thepricethatwouldbereceivedis$25,andtransactioncostsinthatmarketare$1(thenetamountthatwouldbereceivedinMarketBis$24).

a. IfMarketAistheprincipalmarketfortheasset(themarketinwhichthereportingentitywouldselltheassetwiththegreatestvolumeandlevelofactivityfortheasset),thefairvalueoftheassetwouldbemeasuredusingthepricethatwouldbereceivedinthatmarket($26).

b. Ifneithermarketistheprincipalmarketfortheasset,thefairvalueoftheassetwouldbemeasuredusingthepriceinthemostadvantageousmarket.Themostadvantageousmarketisthemarketinwhichthereportingentitywouldselltheassetwiththepricethatmaximizestheamountthatwouldbereceivedfortheasset,consideringtransactioncostsintherespectivemarkets(thatis,thenetamountthatwouldbereceivedintherespectivemarkets).BecausethepriceinMarketBadjustedfortransactioncostswouldmaximizethenetamountthatwouldbereceivedfortheasset($24),thefairvalueoftheassetwouldbemeasuredusingthepriceinthatmarket($25).Althoughtransactioncostsareconsideredindeterminingthemostadvantageousmarket,thepriceinthatmarketusedtomeasurethefairvalueoftheassetisnotadjustedforthosecosts.









liability.Undereitherapproach,thenetresultofallocatingthepurchasepriceisthesame.TheBoard

concludedthattheamountsassignedtoassetsandliabilitiesinapurchasebusinesscombination

shouldnotbenetofanyrelateddeferredtaxliabilityorasset.

3.60 Theappropriatetreatmentoftaxamortizationbenefitsinthemeasurementoffairvalueofan

assetwasaddressedatthe2006AICPANationalConferenceonCurrentSECandPCAOBDevelopments

bySECstaffmemberCherylTjon-Hing,whosepreparedremarksstated:

Taxamortizationbenefits(TAB)represents,asitsnameimplies,thecashflowgeneratedtoanowner

ofanassetasaresultofbeingabletowrite-offthefullfairvalueofthatassetfortaxpurposes

—generally,thisbenefitmayimpactafairvalueconclusion,derivedusinganincomeapproach,by

asmuchas20%to30%.Now,itseemslogicalthatthefairvalueofanassetshouldnotchangejust

becauseofthewayatransactionisstructured.SoTABsshouldbetakenintoaccount,indetermining

assetfairvalues,nomatterwhatthetaxattributesofatransactionare.Butforthoserequiring

morespecificguidance,FAS109,paragraphA129[footnoteomitted]implicitlystatesthatTABs

shouldbefactoredintoanasset’sfairvalue.Totheextentthataportionofthestep-upvalueisnot

deductiblefortaxpurposes,thatiswhatdeferredtaxliabilitiesarefor.Infact,preparersoffairvalue

measurementsshouldbeawarethatifaTABisnotfactoredintothefairvalueofanasset,there

maybeamismatchifanyassociateddeferredtaxliabilityisrecorded,foraccountingpurposes,inan

acquisitiontransaction.Now,despitetheaforementionedaccountingguidance,weoftenseethat

TABsareexcludedfromassetfairvaluesmeasuredforbusinesscombinationseffectedthrougha

purchaseofshares—usually,thisisbecausepreparersarguethatanystep-upinfairvalueovertax

valueisnotdeductiblefortaxpurposes.

3.61 Sections5.3.97–.108oftheAICPAPracticeAid,AssetsAcquiredinaBusinessCombination

toBeUsedinResearchandDevelopmentActivities:AFocusonSoftware,ElectronicDevices,and

PharmaceuticalIndustries,illustratetherequirementsofparagraphsA127–A129ofStatement109(see

3.59)inthecontextofapplyingthemultiperiodexcessearningsmethodinestimatingthefairvalueof

intangibleassetsacquiredforuseinresearchanddevelopment(R&D)activities,includingspecificin-

processR&Dprojects,forbusinesscombinations.

Use of a Third-Party Specialist to Assist in the Measurement of Fair Value

3.62 Manyentitiesengagethird-partyspecialiststoperformvaluations.Whetherafairvalue

measurementispreparedentirelybytheentityorwiththeassistanceofathird-partyspecialist,the

levelofevidenceneededtosupportameasurementisexpectedtobesimilar.Further,theentityshould

documentitsanalysisofthequalificationsoftheindividualsperformingthefairvaluemeasurements.

3.63 TheSECstaffhasoftencommentedaboutregistrants’useofvaluationexpertstoassignvalues

toassetsandliabilitiesinbusinesscombinations.Specifically,theSECstaffhasremindedregistrants

thattheirfilingsneednotrefertoathird-partyvaluationfirm.However,ifregistrantsdonotreferto

thevaluationfirm,theymustprovidedisclosuresthatexplainthemethodandassumptionstheyusedinthevaluation.Iftheyrefertothevaluationfirm,registrantsmustdisclosethefirm’snameanda

consentfromthevaluationfirmasrequiredbyItem601(a)(23)ofRegulationS-K.TheSECstaffhas

alsocautionedregistrantsthatiftheywanttoincorporatetheirfinancialstatementsintoaregistration

statement,thefinancialstatementsmustbeamendedtonametheexpertandtoincludeaconsentfrom

themifthestatementsdonotalreadydoso.





OnNovember26,2008,theSEC’sDivisionofCorporationFinanceissuedrevisedComplianceand

DisclosureInterpretations(C&DIs)ofSecuritiesActsectionsrelatedtotheuseofthird-partyspecialists.

Question141.02states:

Question:Aregistranthasengagedathirdpartyexperttoassistindeterminingthefairvaluesof

certainassetsorliabilitiesdisclosedintheregistrant’sSecuritiesActregistrationstatement.Mustthe

registrantdiscloseintheregistrationstatementthatitusedathirdpartyexpertforthispurpose?Inwhatcircumstancesmusttheregistrantdisclosethenameofthethirdpartyexpertinitsregistration

statementandobtainthethirdparty’sconsenttobenamed?

Answer:Theregistranthasnorequirementtomakereferencetoathirdpartyexpertsimply

becausetheregistrantusedorreliedonthethirdpartyexpert’sreportorvaluationoropinionin

connectionwiththepreparationofaSecuritiesActregistrationstatement.Theconsentrequirement

inSecuritiesActSection7(a)appliesonlywhenareport,valuationoropinionofanexpertisincluded

orsummarizedintheregistrationstatementandattributedtothethirdpartyandthusbecomes

“expertised”disclosureforpurposesofSecuritiesActSection11(a),withresultantSection11liability

fortheexpertandareductionintheduediligencedefenseburdenofproofforotherSection11

defendantswithrespecttosuchdisclosure,asprovidedinSecuritiesActSection11(b).

Iftheregistrantdeterminestomakereferencetoathirdpartyexpert,thedisclosureshouldmakeclear

whetheranyrelatedstatementincludedorincorporatedinaregistrationstatementisastatement

ofthethirdpartyexpertorastatementoftheregistrant.Ifthedisclosureattributesastatementtoa

thirdpartyexpert,theregistrantmustcomplywiththerequirementsofSecuritiesActRule436with

respecttosuchstatement.Forexample,ifaregistrantdisclosespurchasepriceallocationfiguresin

thenotestoitsfinancialstatementsanddisclosesthatthesefiguresweretakenfromorprepared

basedonthereportofathirdpartyexpert,orprovidessimilardisclosurethatattributesthepurchase

priceallocationfigurestothethirdpartyexpertandnottheregistrant,thentheregistrantshould

complywithRule436withrespecttothepurchasepriceallocationfigures.Ontheotherhand,ifthe

disclosurestatesthatmanagementortheboardpreparedthepurchasepriceallocationsandindoing

soconsideredorreliedinpartuponareportofathirdpartyexpert,orprovidessimilardisclosurethat

attributesthepurchasepriceallocationfigurestotheregistrantandnotthethirdpartyexpert,then

therewouldbenorequirementtocomplywithRule436withrespecttothepurchasepriceallocation

figuresasthepurchasepriceallocationfiguresareattributedtotheregistrant.

IndependentofSection7(a)considerations,aregistrantthatusesorreliesonathirdpartyexpert

report,valuationoropinionshouldconsiderwhethertheinclusionorsummaryofthatreport,

valuationoropinionisrequiredintheregistrationstatementtocomplywithspecificdisclosure

requirements,suchasItem1015ofRegulationM-A,Item601(b)ofRegulationS-Korthegeneral

disclosurerequirementofSecuritiesActRule408.

Election Date for the Fair Value Option

3.64 Statement159allowsanentitytomakeanirrevocableelectiononspecifieddatestomeasure

certainfinancialassetsandliabilitiesatfairvalue,bothinitiallyandinsubsequentperiods(referredtoas

the“fairvalueoption”).Thescopeofeligiblefinancialassetsandliabilitiesisdescribedinparagraphs

7and8ofStatement159.Thefollowingexcerpts(emphasisadded)fromparagraphs9and10ofStatement159,asamended,describetheelectiondatesapplicabletobusinesscombinations:

9.Anentitymaydecidewhethertoelectthefairvalueoptionforeacheligibleitemonitselection

date.Alternatively,anentitymayelectthefairvalueoptionaccordingtoapreexistingpolicyfor

specifiedtypesofeligibleitems.Anentitymaychoosetoelectthefairvalueoptionforaneligible

itemonlyonthedatethatoneofthefollowingoccurs...

e.An event that requires an eligible item to be measured at fair value at the time

of the event butdoesnotrequirefairvaluemeasurementateachreportingdateafterthat,

excludingtherecognitionofimpairmentunderlower-of-cost-or-marketaccountingorother-

than-temporaryimpairment.(Seeparagraph10.)[Emphasisadded]





10.Some of the events that require remeasurement of eligible items at fair value,initial

recognitionofeligibleitems,orboth,andtherebycreateanelectiondateforthefairvalueoptionas

discussedinparagraph9(e)are:

a.Business combinations,asdefinedinFASBStatementNo.141(revised2007),Business

Combinations[Emphasisadded]

3.65 Statement159statesthatthedecisiontoelectthefairvalueoption(FVO)shouldbemadeasoftheelectiondateforeacheligibleitem.ItalsoallowsanentitytoautomaticallyelecttheFVOin

accordancewithapreexistingpolicyforspecifiedtypesofeligibleitems.Forexample,anentitymay

documentinawrittenpolicythatitwillelecttheFVOforalleligibleassetsitacquiresandliabilitiesit

assumesthroughbusinesscombinations.

3.66 UnlikeStatement133,Statement159provideslittleguidanceonthedocumentationrequiredto

supportanentity’sdecisiontoelecttheFVO.ParagraphA22ofStatement159notesthatcompliance

withthedocumentationrequirementsoftheStatementisamatterofinternalcontrol.Although

Statement159leavesroomfordiscretionaboutdocumentation,ifanentitydoesnothaveawell-

developedpreexistingpolicyforelection,itshoulddocumentevidenceoftheelectionconcurrentlywith

therecognitionorremeasurementofeligibleitems.

Use of the Residual Method to Value Acquired Intangible Assets Other ThanGoodwill

3.67 Certainentities,particularlyinthetelecommunications,broadcasting,andcableindustries,

havehistoricallyadopteda“residualmethod”forassigningfairvaluetocertainintangibleassetsthat

werebelievedcouldnotbeseparatelyanddirectlyvalued.Therefore,theresidualmethodwasusedto

allocatefairvaluetoan“indistinguishable”intangibleassetwitheitherzerogoodwillortorecognize

goodwillinamanneroutsideoftheguidanceinStatement141(R).Inresponsetothispractice,theEITF

issuedTopicD-108,whichstates:

TheSECstaffisawareofinstancesinwhichregistrantshaveassertedthatcertainintangibleassets

thatarisefromlegalorcontractualrightscannotbeseparatelyanddirectlyvalued(hereinafter

referredtoasa“directvaluemethod”)becausethenatureoftheparticularassetmakesit

fundamentallyindistinguishablefromgoodwillinabusinesscombination(forexample,cellular/

spectrumlicenses,cablefranchiseagreements,andsoforth).

3.68 TopicD-108alsoindicates:

TheSECstaffnotesthatafundamentaldistinctionbetweenotherrecognizedintangibleassetsand

goodwillisthatgoodwillisbothdefinedandmeasuredasanexcessorresidualasset,whileother

recognizedintangibleassetsarerequiredtobemeasuredatfairvalue.TheSECstaffdoesnotbelieve

thattheapplicationoftheresidualmethodtothevaluationofintangibleassetscanbeassumedto

produceamountsrepresentingthefairvaluesofthoseassets....Furthermore,theSECstaffnotes

thatthesametypesofassetsbeingvaluedusingtheresidualmethodbysomeentitiesarebeing

valuedusingadirectvaluemethodbyotherentities.Accordingly,theSECstaffbelievestheresidual

methodshouldnolongerbeusedtovalueintangibleassetsotherthangoodwill.







Inventory

4.06 Inventoryacquiredinabusinesscombinationmustbemeasuredatfairvalueasoftheacquisition

date.NeitherStatement141(R)norStatement157providesdetailedguidanceformeasuringinventory

atfairvalue.Somehavequestionedwhether,underStatement157’sexitpricenotionandhighest-and-

best-useconcept,anacquiringentityispermittedtorecognizeanyprofitonfinishedgoodsinventory

acquiredinabusinesscombination.Whenaskedtodiscusstheissue,theFASB’sValuationResource

Group(VRG)1indicatedthatthefairvalueofinventoryisprobablyclosetoitsnetrealizablevalue,which

allowsanacquiringentitytorealizeaprofitonthesellingeffort.TheVRGindicatedthatthisviewis

supportedbyparagraphA24(f)ofStatement157,whichprovidesthefollowingguidanceonvaluing

finishedgoodsinventoryataretailoutlet:

Forfinishedgoodsinventorythatisacquiredinabusinesscombination,aLevel2inputwouldinclude

eitherapricetocustomersinaretailmarketorawholesalepricetoretailersinawholesalemarket,

adjustedfordifferencesbetweentheconditionandlocationoftheinventoryitemandthecomparable

(similar)inventoryitemssothatthefairvaluemeasurementreflectsthepricethatwouldbereceived

inatransactiontoselltheinventorytoanotherretailerthatwouldcompletetherequisiteselling

efforts.Conceptually,thefairvaluemeasurementshouldbethesame,whetheradjustmentsaremadetoaretailprice(downward)ortoawholesaleprice(upward).Generally,thepricethatrequiresthe

leastamountofsubjectiveadjustmentsshouldbeusedforthefairvaluemeasurement.

4.07 OnthebasisoftheVRG’scommentsandtheguidanceinStatement157,themeasurement

offinishedgoodsinventoryatfairvalueunderStatement141(R)isunlikelytodiffersignificantlyfrom

thatunderStatement141(i.e.,estimatedsellingpricelessthesumof(a)costsofdisposaland(b)a

reasonableprofitallowanceonthesellingeffort).

LIFO Inventory

4.08 Inventoriesshouldbemeasuredatfairvalueasoftheacquisitiondateeveniftheacquiree

previouslyusedthelast-in,first-out(LIFO)methodofaccounting.Themethodofaccountingthattheacquiringentitywillfolloworthattheacquireewasfollowingisnotrelevant.Carryoverofthebook

basisoftheacquiredentity’sLIFOinventoriesisnotpermitted.

4.09 SABTopic5.L(SAB58)statesthatregistrantsshouldrefertotheAICPAIssuePaper,

“IdentificationandDiscussionofCertainFinancialAccountingandReportingIssuesConcerningLIFO

Inventories,”forguidanceondeterminingwhatconstitutesacceptableLIFOaccountingpractice.The

IssuePaperstatesthatifacquiredinventoryisaddedtoanexistingLIFOpool,itshouldbeconsidered

partofcurrent-yearpurchases.Paragraph2-15oftheIssuePapernotesthattheorder-of-acquisition

approach(firstpurchaseprice)topricingcurrentpurchasesisthemostcompatiblewiththeLIFO

objective;however,anyofthethreeapproachesnotedinparagraph2-10maybeused:“(a)theorderof

acquisitionprice(firstpurchaseprice),(b)themostrecentacquisitionprice(latestpurchaseprice),or(c)theaveragepurchaseprice.”

Property, Plant, and Equipment

4.10 Property,plant,andequipmentacquiredinabusinesscombinationthatwillbeusedbythe

acquiringentityshouldbemeasuredatfairvalue.Theestimatedusefullifeofthepropertyisbased

ontheexpectedremainingusefullifetotheacquiringentity.Accordingly,neithertheacquiree’s

accumulateddepreciationnortheacquiree’sestimatedusefullifeforthepropertycarryovertothe

acquiringentity.

1 TheFASBestablishedtheVRGtoprovidetheFASBstaffwithinformationonexistingimplementationissuesaboutfairvaluemeasurementsusedforfinancialstatementreporting

andthealternativeviewpointsassociatedwiththoseimplementationissues.TheVRG’sdiscussionsarenotauthoritative.







CapitalLeases

4.17 Assetssubjecttoacapitalleaseandcapitalleaseobligationsmustbeseparatelyrecognizedat

fairvalueasoftheacquisitiondate.

Lessor Accounting

OperatingLeases 4.18 Ifanacquireeisalessorinanoperatinglease,theassetssubjecttothatleasearemeasured

atfairvaluewithoutconsiderationofthein-placeleases.Thatis,theassetshavethesamefairvalue

regardlessofwhethertheyaresubjecttoanoperatinglease.Anintangibleassetorliabilitymustbe

recognizediftheleasetermsarefavorableorunfavorablerelativetothemarkettermsofsimilarleases.

Inaddition,insomecircumstancesanintangibleassetmayberecognizedasoftheacquisitiondatefor

thevalueassociatedwithin-placeleasesandforanycustomerrelationshipwiththelessee.See 5.37for

furtherdiscussion.

DirectFinanceorSalesTypeLeases

4.19 Ifanacquireeisalessorinadirectfinanceorsalestypelease,theacquirerrecognizesand

measuresatfairvaluethereceivablethatrepresentsitsremaininginvestmentinthelease.

Guarantees

4.20 Liabilitiesforguaranteesmadebytheacquireethatareassumedbytheacquiringentitymust

bemeasuredatfairvalueasoftheacquisitiondate.Interpretation45’stransitionwastobeapplied

prospectivelytoguaranteesissuedormodifiedafterDecember31,2002.Therefore,anacquireemay

nothaverecognizedaliabilityforaguaranteeinitsfinancialstatementsifitwasissuedormodified

beforeDecember31,2002.Nevertheless,anacquiringentitymustrecognizeallliabilitiesforguarantees,

eveniftheacquireehadnotpreviouslyrecognizedthem.Allassumedguaranteearrangementsare

considerednewarrangementsfortheacquiringentity.Therefore,theexemptioninInterpretation45

doesnotapplytoacquisitionsoccurringafterDecember31,2002.

4.21 Afterinitialrecognitioninabusinesscombination,theaccountingforassetsandliabilitiesis

generallyprovidedbyotherGAAP.However,Interpretation45doesnotprovidedetailedguidanceon

howtheguarantor’sliabilityforitsobligationsundertheguaranteewouldbemeasuredafteritsinitial

recognition.Theliabilitythatanacquiringentityinitiallyrecognizesasoftheacquisitiondatewould

typicallybereduced(byacredittoearnings)asitisreleasedfromriskundertheguarantee.Insome

instances,thereleasefromtheriskundertheguaranteewillnotoccuruntilexpirationofsettlementof

theguarantee.FSPFIN45-2states:

Aguarantorshouldnotusefairvalueinsubsequentlyaccountingfortheliabilityforitsobligations

underapreviouslyissuedguaranteeunlesstheuseofthatmethodcanbejustifiedundergenerally

acceptedaccountingprinciples,asisthecase,forexample,forguaranteesaccountedforas

derivativesunderFASBStatementNo.133,AccountingforDerivativeInstrumentsandHedging

Activities.





4.22 Atthe2003NationalAICPAConferenceonCurrentSECDevelopments,anSECstaffmember

statedthefollowing:

Sowhatdowebelievetheappropriate“daytwo”accountingfortheobligationtostandready

wouldbe?...Itwouldseemasystematicandrationalamortizationmethodwouldmostlikelybe

theappropriateaccounting....Weunderstandthatsomebelievethatafairvaluemodelforthese

guaranteeliabilitiesandrecourseobligationsistherightaccounting.Howeverwefinditdifficulttosupportsuchanapproachinthecurrentliterature.

4.23 Interpretation45doesnotapplytoguaranteesbetweenparentsandtheirsubsidiaries.Ifan

acquiringentityandanacquireehadpreviouslyenteredintoaguaranteearrangement,suchguarantee

wouldnotberecognizedaspartofthebusinesscombination;however,theacquiringentitymust

determinewhetherthetransactionrepresentsthesettlementofapreexistingrelationship(see 3.32–

3.33).TheacquiringentitywouldbesubjecttothedisclosurerequirementsinInterpretation45.

Loss Contracts and Unfavorable Contracts

4.24 ParagraphA79(b)(1)ofStatement141(R)definesalosscontractasa“contractinwhich

theunavoidablecostsofmeetingtheobligationsunderthecontractexceedtheeconomicbenefits

expectedtobereceivedunderit.”Thisparagraphdefinesanunfavorablecontractas“acontractthatis

unfavorableintermsofcurrentmarketterms.Itisnotnecessarilyalosscontract.”Theacquiringentity

mustrecognizealiabilityeitherforalosscontractoranunfavorablecontractatfairvalueasofthe

acquisitiondate.

4.25 Anacquiringentitymustrecognizeanintangibleassetforafavorableoperatingleasewhenthe

acquireeisthelessee.See5.35forfurtherdiscussion.

Amounts Due to Employees of the Acquiree Upon a Change in Control

4.26 Anacquireemayhavepreexistingarrangementswithitsemployeesthatprovideforpayments

tothemuponachangeincontrol.Thearrangementsmaytakemanyforms,includingpaymentsto

someorallemployeesasoftheacquisitiondateandpaymentstoanemployeeaftertheacquisition

dateifthatemployeevoluntarilyleavesemploymentofthecombinedentitywithinapredetermined

period.Thesearetypicallynotrecognizedasliabilitiesonthebooksoftheacquiree,sincepayments

arecontingentuponachangeincontrol.Sucharrangementsmayneverthelessrepresentanassumed

liabilitytotheacquiringentitythatshouldberecognizedaspartofthebusinesscombination.The

followingexampleisadaptedfromparagraphsA88–A90ofStatement141(R):

Example 4-1

Amounts Due to Employees of the Acquiree Upon a Change in ControlTargetCompany(TC)hiredacandidateasitsnewCEOundera10-yearcontract.ThecontractrequiredTCtopaythecandidate$5millionifTCisacquiredbeforethecontractexpired.ACacquiresTCeightyearslater.TheCEOisstillemployedattheacquisitiondateandwillreceivetheadditionalpaymentundertheexistingcontract.

TCenteredintotheemploymentagreementbeforethenegotiationsofthecombinationbegan,andthepurposeoftheagreementwastoobtaintheservicesoftheCEO.Thus,thereisnoevidencethattheagreementwasarrangedprimarilytoprovidebenefitstoACorthecombinedentity.Thereforetheliabilitytopay$5millionisincludedintheapplicationoftheacquisitionmethod.

Inothercircumstances,TCmightenterintoasimilaragreementwithCEOatthesuggestionofACduringthenegotiationsforthebusinesscombination.Ifso,theprimarypurposeoftheagreementmightbetoprovideseverancepaytoCEO,andtheagreementmayprimarilybenefitACofthecombinedentityratherthanTCoritsformerowners.Inthatsituation,ACaccountsfortheliabilitytopayCEOinitspostcombinationfinancialstatementsseparatelyfromtheapplicationoftheacquisitionmethod.





4.27 Eacharrangementmustbeevaluatedtodeterminewhetherit(1)iscompensationexpenserather

thanapaymentforpastservicesand(2)meetsthecriteriaforbeingpartofthebusinesscombination

transaction.

Liabilities for Exiting an Activity of an Acquired Entity, Involuntary Termination

Benefits, and Relocation Costs4.28 Coststhatanacquiringentityexpectstoincurinthefuturerelatedtoitsplanstoexitanactivity,

involuntarilyterminateemployees,orrelocateemployeesofanacquiree(commonlycalledrestructuring

costs)generallywillnotqualifyasliabilitiesassumedinthebusinesscombination.Toqualifyasliabilities

assumed,suchrestructuringcostsneedtomeettherecognitioncriteriainStatement146asofthe

acquisitiondate.Paragraph4ofStatement146states:

Aliabilityforacostassociatedwithanexitordisposalactivityisincurredwhenthedefinitionofa

liabilityismet.Paragraph35ofFASBConceptsStatementNo.6,ElementsofFinancialStatements,

definesliabilitiesasfollows:

Liabilitiesareprobable[footnoteomitted]futuresacrificesofeconomicbenefitsarisingfrom

presentobligations[footnoteomitted]ofaparticularentitytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents.

Onlypresentobligationstoothersareliabilitiesunderthedefinition.Anobligationbecomesapresent

obligationwhenatransactionoreventoccursthatleavesanentitylittleornodiscretiontoavoid

thefuturetransferoruseofassetstosettletheliability.Anexitordisposalplan,byitself,doesnot

createapresentobligationtoothersforcostsexpectedtobeincurredundertheplan;thus,anentity’s

commitmenttoanexitordisposalplan,byitself,isnottherequisitepasttransactionoreventfor

recognitionofaliability.

4.29 Therefore,ifanacquiringentityexpectstorestructuretheacquiree’soperationsbutitisnot

obligatedtodosoasoftheacquisitiondate,aliabilityfortherestructuringcannotberecognized

aspartofthebusinesscombination.Theacquiringentitywouldaccountfortherestructuringinits

postcombinationfinancialstatements.Itisunlikelythatanacquiringentitywillbeabletomeetthe

recognitioncriteriainStatement146asoftheacquisitiondateunlesstheacquireehadpreviously

recognizedarestructuringliabilityinaccordancewithStatement146initspreacquisitionfinancial

statementsandtheacquirerassumesthatobligation.Anarrangemententeredintobytheacquiree,

oncenegotiationsforthebusinesscombinationhavestarted,shouldbecarefullyexaminedtodetermine

whetheritmeetsthecriteriatoberecognizedaspartofthebusinesscombination.

4.30 TheaccountingforrestructuringcostsunderStatement141(R)representsasignificantchange

frompreviousU.S.GAAP.Previously,Issue95-3allowedanacquiringentitytorecognizeliabilitiesfor

restructuringcostsbasedoncertaincriteriathatwerelessrestrictivethantheStatement146criteria.

Recognition of Liabilities for Contractual Termination Benefits or Changing BenefitPlan Assumptions in Anticipation of a Business Combination

4.31 Issue96-5addressestheaccountingforcontractualterminationbenefitsandcurtailment

lossesinanacquiree’spreacquisitionfinancialstatements.Itstatesthat“aliabilityforthecontractual

terminationbenefitsandcurtailmentlossesunderemployeebenefitplansthatwillbetriggered”bythe

businesscombinationshouldberecognizedwhenthebusinesscombinationisconsummatedrather

thanwhen“itisprobablethatthebusinesscombinationwillbeconsummated.”ThisIssue’sguidance

continuestoberelevantunderStatement141(R).





Exceptions to the Recognition and Measurement Principles

Assets and Liabilities Arising From Contingencies

4.32 Assetsandliabilitiesarisingfromcontingencies(oftenreferredtoas“preacquisition

contingencies”)areanexceptiontotherecognitionprinciple.Paragraph24ofStatement141(R)

providesthefollowingguidanceonaccountingforassetsandliabilitiesarisingfromcontingencies:

TheguidanceinStatement5does not applyindeterminingwhichassetsorliabilitiesarisingfrom

contingenciestorecognizeasoftheacquisitiondate.Instead:

a. Theacquirershallrecognizeasoftheacquisitiondatealloftheassetsacquiredandliabilities

assumedthatarisefromcontingenciesrelatedtocontracts(referredtoascontractual

contingencies ),measuredattheiracquisition-datefairvalues.

b. Forallothercontingencies(referredtoasnoncontractualcontingencies ),theacquirershall

assesswhetheritismore likely than notasoftheacquisitiondatethatthecontingency

givesrisetoanassetoraliabilityasdefinedinConceptsStatement6.Ifthatcriterionismet

asoftheacquisitiondate,theassetorliabilityarisingfromanoncontractualcontingencyshall

berecognizedatthatdate,measuredatitsacquisition-datefairvalue.Ifthatcriterionisnot

metasoftheacquisitiondate,theacquirershallnotrecognizeanassetoraliabilityatthat

date.Theacquirershallinsteadaccountforanoncontractualcontingencythatdoesnotmeet

themore-likely-than-notcriterionasoftheacquisitiondateinaccordancewithotherGAAP,

includingStatement5,asappropriate.

4.33 Fornoncontractualcontingencies,themore-likely-than-notrecognitionthresholdisgenerally

understoodtomeanalikelihoodofmorethan50percent.Inaddition,intheassessmentofwhetheran

arrangementiscontractualornoncontractual,paragraph25ofStatement141(R)acknowledgesthat

“[i]nsomesituations,determiningwhetheracontingencyiscontractualornoncontractualmayrequire

theexerciseofjudgmentbasedonthefactsandcircumstancesofthespecificsituation.”Generally,

litigationatatargetentitywouldbeconsideredanoncontractualcontingency.

Example 4-2


Case A

OnJune30,20X9,CompanyAacquiresCompanyB.Beforetheacquisition,Bwasservedwithaclassactionlawsuitregardingthesafetyofoneofitsproductsthatsoughtdamagesof$5billion.Thefairvalueofthecontingencyis$2billion.Asoftheacquisitiondate,CompanyAbelievesthatthereisonlya30percentchancethatitisliable.Thelawsuitisanoncontractualcontingency.However,becausethemore-likely-than-notrecognitionthresholdisnotmet,Awouldnotrecognizethecontingentliabilityasoftheacquisitiondate.TheentitywouldaccountforthecontingentliabilityinaccordancewithStatement5inpostcombinationperiods.

Case B

AssumethesamefactsasinCaseAexceptthatasoftheacquisitiondateAbelievesthatthereisa55percentchancethatitisliable.Inthiscase,becausethemore-likely-than-notrecognitionthresholdismet,Amustrecordthefairvalueofthecontingentliability($2billion)asoftheacquisitiondate.

Subsequent Measurement of Acquired Contingencies

4.34 Ifnewinformationisobtainedaboutthepossibleoutcomeofacontingentliabilityrecognized

asoftheacquisitiondate,itissubsequentlymeasured(withanychangesrecordedinearnings)atthe

higherofeitherofthefollowing:

• Theacquisition-datefairvalue.

• TheamountthatwouldberecognizedunderStatement5.





4.35 Ifnewinformationisobtainedaboutthepossibleoutcomeofacontingentassetrecognizedas

oftheacquisitiondate,itissubsequentlymeasured(withanychangesrecordedinearnings)atthelower

ofeitherofthefollowing:

• Theacquisitiondatefairvalue.

• Thebestestimateofitsfuturesettlementamount.

4.36 Acontingencymeasuredatfairvalueisdiscounted,whereasacontingencymeasuredin

accordancewithStatement5(i.e.,bestestimateofitsfuturesettlementamount)isgenerallynot.That

alonecouldleadtoanacquiringentityrecognizingaloss(orgain)aftertheacquisition,becausethe

amountforacontingentliabilityrecognizedunderStatement5wouldgenerallybehigherthanitsfair

value.Topreventimmediatelosses,orgainsinthecaseofcontingentassets,theFASBdecidedthata

contingencyshouldnotberemeasureduntilnewinformationisobtainedaboutitspossibleoutcome.

4.37 Anacquiringentitydoesnotderecognizethecontingentassetorliabilityifitsubsequentlyfalls

belowthemore-likely-than-notthreshold.Rather,acontingentassetwouldbederecognizedwhenitis

collectedorsoldorwhentherightsarelost,whereasacontingentliabilitywouldbederecognizedwhenitissettledortheobligationtosettleiscanceledorhasexpired.

Example 4-3


Case C

AssumethesamefactsasinCaseBofExample4-2exceptthatoneyearhaspassedsincetheacquisitiondate.Asaresultofanunfavorablecourtrulingagainstoneofitscompetitors,Anowbelievesthereisa95percentchancethatitwillbefoundliable.Itsbestestimateoftheamountofexposureis$3billion.InaccordancewithStatement141(R),Amustincreasethecontingentliabilityrecordedby$1billion,to$3billion(sincethisrepresentsA’sbestestimateofthepayment),becausetheamountrequiredtoberecordedunderStatement5exceedstheacquisition-datefairvalueof$2billion.





atfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)

guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.

Income Taxes

4.38 Theacquirerrecognizesandmeasuresthedeferredtaxassets,liabilities,andvaluationallowances

ofanacquiredentityinabusinesscombinationthatrelatetotemporarydifferences,taxcarryforwards,

anduncertaintaxpositionsinaccordancewithotherapplicableGAAP,suchasStatement109and

Interpretation48.

4.39 Anyadjustmentstoanacquired entity’s deferredtaxassets,liabilities,valuationallowances,

orliabilitiesrelatedtouncertaintaxpositionsoftheacquireethatoccuroutsideofthemeasurement

period(orwithinthemeasurementperiodifitrelatestonewinformationthatdidnotexistasofthe

acquisitiondate)aregenerallyrecordedasacomponentofincometaxexpense.Inaddition,adjustments





toanacquirer’sdeferredtaxassets,liabilities,andvaluationallowancesthatresultdirectlyfromthe

businesscombinationaregenerallyrecordedasacomponentofincometaxexpenseanddonotaffect

thebusinesscombinationaccounting.

4.40 See Section 8forfurtherdiscussionregardingincometaxes.

Employee Benefits

4.41 Paragraph28ofStatement141(R)requirestheacquirerto“recognizeandmeasurealiability(or

asset,ifany)relatedtotheacquiree’semployeebenefitarrangementsinaccordancewithotherGAAP,

asamendedby[Statement141(R)].”Theparagraphalsonotesthefollowingstandardsthatprovide

recognitionandmeasurementguidanceonemployeebenefits:

a. APBOpinionNo.12,OmnibusOpinion—1967 (deferredcompensationcontracts)

b. FASBStatementNo.43,AccountingforCompensatedAbsences

c. FASBStatementNo.87,Employers’AccountingforPensions [see4.43–4.44]

d. FASBStatementNo.88,Employers’AccountingforSettlementsandCurtailmentsofDefinedBenefitPensionPlansandforTerminationBenefits

e. FASBStatementNo.106,Employers’AccountingforPostretirementBenefitsOtherThan

Pensions[see4.43–4.44]

f. FASBStatementNo.112,Employers’AccountingforPostemploymentBenefits [see4.45]

g. FASBStatementNo.146,AccountingforCostsAssociatedWithExitorDisposalActivities

(one-timeterminationbenefits)

h. FASBStatementNo.158,Employer’sAccountingforDefinedBenefitPensionandOther

PostretirementPlans.

4.42 Statement141(R)providesabroadexceptiontorecognitionandmeasurementforallemployee

benefitobligations.TheFASBdecidednottorequirerecognitionandfairvaluemeasurementforallemployeebenefitsbecausethatwouldrequireacomprehensivereconsiderationoftherequirementsin

thesestandards,whichwasoutsidethescopeofthebusinesscombinationsproject.

Pensions and Other Postretirement Benefits

4.43 Statement141(R)amendsStatements87and106toexcludetheeffectsofanyplanned,but

notexecuted,amendments,terminations,orcurtailmentsinmeasuringthefundedstatusofpension

andotherpostretirementplans.Plannedoranticipatedamendments,terminations,orcurtailments

arenotpartoftheliabilityassumedasoftheacquisitiondate.Suchactionsarerecognizedinthe

postcombinationfinancialstatementsinaccordancewithStatement88.However,whenmeasuring

theprojectedbenefitobligationoraccumulatedpostretirementbenefitobligationofacquiredpension

orpostretirementplans,theacquiringentityshouldbaseitassumptionsonitsassessmentofrelevant

futureevents.See4.31regardingcurtailmentsthataretriggeredasoftheacquisitiondate.

MultiemployerPlans

4.44 Statement141(R)amendsStatements87and106toclarifythatanacquiringentityrecognizes

awithdrawalliabilityasoftheacquisitiondateinaccordancewithStatement5ifitisprobablethat,as

ofthatdate,theacquiringentitywillwithdrawfromamultiemployerplan.Therefore,theprovisions

formultiemployerplansandsingleemployerplansarenotthesame.TheFASBconsideredamending

Statements87and106torequirerecognitionofwithdrawalliabilitiesintheperiodthatthewithdrawal

fromthemultiemployerplanoccurs.However,theFASBobservedthateventhoughtheprovisions





forwithdrawalofliabilitiesfrommultiemployerplansandsingleemployerplansseeminconsistent,

theresultsareactuallysomewhatcomparable.Thatisbecausetheliabilitythatisrecognized

uponwithdrawalfromamultiemployerplanrelatestothepreviouslyunrecognizedportionofthe

accumulatedbenefitobligation,whichisrecognizedinasingleemployerplan.

Postemployment Benefits

4.45 Statement112appliestoalltypesofpostemploymentbenefitsotherthanpensions,

postretirementbenefits,deferredcompensationarrangements,orterminationbenefits,whichare

addressedinotherstandards.Itrequiresthataliabilityforpostemploymentbenefitsbeaccountedforin

accordancewithStatement5.However,theBasisforConclusionsinStatement112alsostatesthatan

entitymayrefertotheguidanceinStatements87and106formeasuringaliabilityforpostemployment

benefitobligations.Thus,theamendmentstoStatements87and106wouldapplytoexcludethe

effectsofanyplannedamendments,terminations,orcurtailmentsinmeasuringtheassumedobligation

inabusinesscombination.

Indemnification Assets

4.46 Inabusinesscombination,theformerownersofanacquireemaycontractuallyagreeto

indemnifytheacquiringentityforuncertaintiesrelatedtospecificassetsorliabilities.Commonexamples

relatetolawsuitsanduncertaintaxpositions.Suchanindemnificationrepresentsanassetacquiredin

thebusinesscombination.

4.47 Therecognitionandmeasurementoftheindemnificationassetisbasedonwhetherthe

indemnifieditemisrecognizedandhowitismeasured.Incertainsituations,theindemnificationasset

mayrelatetoanassetorliabilitythatisanexceptiontotherecognitionormeasurementprinciples

(seesummaryin3.15).Paragraph30ofStatement141(R)requiresthatinsuchsituations,the

indemnificationassetberecognizedonlyiftherelatedassetorliabilitysubjecttoindemnificationis

recognizedinthebusinesscombination.Ifrecognized,theindemnificationassetismeasuredonthesamemeasurementbasisastheindemnifieditem,subjecttomanagement’sassessmentofcollectibility

andanycontractuallimitations.Thus,indemnificationassetsmaybeanexceptiontoeitherorbothof

therecognitionandmeasurementprinciplesofStatement141(R).

Example 4-4


OnJune15,20X9,CompanyAacquired100percentofCompanyB.Beforetheacquisition,Bhada$100liabilityrelatedtoB’suncertaintaxpositionthatwasrecognizedinaccordancewithInterpretation48.Inapplyingtheacquisitionmethodofaccounting,AmustfollowInterpretation48and,therefore,recognizea$100liabilityrelatedtoB’suncertaintaxposition.(Thatis,AagreedwithB’sanalysisoftheuncertaintaxposition.)Aspartoftheacquisition,theformerownersof

BagreedtoindemnifyAforanylossesrelatedtothetaxposition(includingthe$100liabilityrecognizedbyA).Statement141(R)requiresthatArecognizeanindemnificationassetatthesameamountastheliability,$100(assumingthatcollectibilityisnotindoubt),eventhoughthisamountmostlikelydoesnotrepresentitsfairvalue(i.e.,themeasurementrequirementsofInterpretation48arenotfairvalue).

Subsequent Accounting for Indemnification Assets

4.48 Paragraph64ofStatement141(R)requiresthataftertheacquisition,anindemnificationasset

continuestobemeasuredonthebasisoftheindemnifieditem,subjecttomanagement’sassessmentof

collectibilityandanycontractuallimitations.Anacquiringentityonlyderecognizestheindemnification

asset“whenitcollectstheasset,sellsit,orotherwiselosestherighttoit.”





Share-Based Payment Awards

4.49 Thefairvalueofallshare-basedpaymentawardsinabusinesscombinationiscalculatedin

accordancewithStatement123(R).ThemeasurementguidanceinStatement123(R)isfair-value-

based,notfairvalue.Afair-value-basedmeasureexcludessomeassumptions(e.g.,thegrant-date

estimatedfairvaluedoesnottakeintoaccounttheeffectonfairvalueofthevestingconditionsand

otherrestrictionsthatapplyonlyduringtherequisiteserviceperiod)thatwouldbeincludedinafair

valuemeasurement.Thus,share-basedpaymentawardsareanexceptiontothefairvaluemeasurement

principle.See6.05–6.19formoredetailsaboutthereplacementofanacquiree’sshare-basedpayments

awards.

Assets Held for Sale

4.50 Paragraph33ofStatement141(R)requiresthat“anacquiredlong-livedasset(ordisposal

group)thatisclassifiedasheldforsaleattheacquisitiondate[bemeasured]atfairvaluelesscoststo

sell.”Thelong-livedassetordisposalgroupmustmeetthecriteriainparagraph30ofStatement144

tobeclassifiedasheldforsale,exceptforthe“one-year”criterioninparagraph30(d).Foranewly

acquiredlong-livedassetordisposalgroup,anacquiringentityisallowed“ashortperiodfollowingthe

acquisition(usuallywithinthreemonths)”tomeetallofthecriteria.Ifthelong-livedassetordisposal

groupcannotbeclassifiedasheldforsale,itwouldbemeasuredinaccordancewiththerequirementsin

Statement141(R),whichwouldgenerallybefairvalue.

4.51 TheBasisforConclusionsinStatement141(R)describestheexceptionforassetsheldforsaleas

a“temporaryexception.”TheFASBhadconsideredamendingStatement144torequirethatassetsheld

forsalebemeasuredatfairvalueratherthanatfairvaluelesscoststosell.However,theFASBhassince

takenthatprojectoffitsagenda.



Section 5 — Recognizing and MeasuringAcquired Intangible Assets and Goodwill

Intangible Assets

5.01 Paragraph3ofStatement141(R)definesanintangibleassetasanasset(otherthanafinancialasset)thatlacksphysicalsubstance(excludinggoodwill).Suchanassetisidentifiableifiteither:

(1) Isseparable,thatis,capableofbeingseparatedordividedfromtheentityandsold,

transferred,licensed,rented,orexchanged,eitherindividuallyortogetherwitharelated

contract,identifiableasset,orliability,regardlessofwhethertheentityintendstodoso;or

(2) Arisesfromcontractualorotherlegalrights,regardlessofwhetherthoserightsare

transferableorseparablefromtheentityorfromotherrightsandobligations.

Examples of Intangible Assets That Are Identifiable

5.02 Becausetheacquireegenerallyexpensesinternallydevelopedintangiblesasincurred,not

allidentifiableintangibleassetswillberecordedintheacquiree’sbalancesheet.Thefollowinglist

(notall-inclusive)ofexamplesofidentifiableintangibleassetsrecognizedinabusinesscombination

isextractedfromparagraphsA30,A31,A36,A44,A46,andA51ofStatement141(R)(paragraph

referencesareinbracketsbelow).NotethattheFASBhascautionedthatsomeoftheseexamplesmay

havecharacteristicsofassetsotherthanintangibleassetsandthattheacquirershouldaccountforsuch

assetsonthebasisoftheasset’ssubstance.SeeparagraphsA29–A56ofStatement141(R)foradditional

discussionregardingtheseexamples.

Intangibleassetsdesignatedwiththesymbol#arethosethatarisefromcontractualorotherlegal

rights.Thosedesignatedwiththesymbol*donotarisefromcontractualorotherlegalrightsbutare

separable.Intangibleassetsdesignatedwiththesymbol#mightalsobeseparable,butseparabilityis

notanecessaryconditionforanassettomeetthecontractual-legalcriterion.[A30]

Marketing-RelatedIntangibleAssets

a. Trademarks,tradenames,servicemarks,collectivemarks,certificationmarks#

b. Tradedress(uniquecolor,shape,packagedesign)#

c. Newspapermastheads#

d. Internetdomainnames#

e. Noncompetitionagreements.#[A31]

Customer-RelatedIntangibleAssets

a.Customerlists*[See5.12–5.14.]

b.Orderorproductionbacklog#[See5.15]

c.Customercontractsandrelatedcustomerrelationships#[See5.16–5.18.]

d.Noncontractualcustomerrelationships.*[A36;see5.22–5.23.]

Artistic-RelatedIntangibleAssets

a.Plays,operas,ballets#

b.Books,magazines,newspapers,otherliteraryworks#

c.Musicalworkssuchascompositions,songlyrics,advertisingjingles#

d.Pictures,photographs#

e.Videoandaudiovisualmaterial,includingmotionpicturesorfilms,musicvideos,television

programs.#[A44]





Contract-BasedIntangibleAssets

a.Licensing,royalty,standstillagreements#

b.Advertising,construction,management,serviceorsupplycontracts#

c.Leaseagreements(whethertheacquireeisthelesseeorthelessor)#

d.Constructionpermits#

e.Franchiseagreements#

f.Operatingandbroadcastrights#

g.Servicingcontractssuchasmortgageservicingcontracts#

h.Employmentcontracts#

i.Userightssuchasdrilling,water,air,timbercutting,androuteauthorities.#[A46]

Technology-BasedIntangibleAssets

a.Patentedtechnology#

b.Computersoftwareandmaskworks#

c.Unpatentedtechnology*

d.Databases,includingtitleplants*

e.Tradesecrets,suchassecretformulas,processes,recipes.#[A51]

5.03 IncorrespondencetotheFASBstaffdatedAugust16,2001,thenSECChiefAccountantLynnE.

Turnernotedthefollowing:

AppendixAofSFASNo.141indicatesthatthelistofidentifiableintangibleassetsisillustrative.The

SECstaffbelievesthereisarebuttablepresumptionthatanyintangibleassetidentifiedinthelisting

willbevaluedinapurchasebusinesscombination.Initsreviewoffilings,thestaffmaylooktosuch

documentationasthesalesagreement,memorandums,presentationsbythetargettothebuyer,

minutesoftheBoardofDirectorsMeetings,etc.fordiscussionsandevidenceofassets,including

intangibles,beingpurchased.

WhiletheSECstaff’scommentsreferredtoStatement141,thelistofintangibleassetsitdescribeswas

carriedforwardtoStatement141(R),andthereforetheviewsexpressedremainapplicable.

5.04 Inadditiontothedocumentationlistedabove,considerationofthefollowingshouldbeincluded

inasearchforthepresenceofacquiredintangibleassets:

• Otheracquisitionsbytheacquirerinthesamelineofbusiness.

• Otheracquisitionsinthesameindustry.

• Historicalfinancialstatementsanddisclosuresoftheacquiredentityfordisclosure,discussion,

orboth,ofanypreviouslyrecognizedorunrecognizedintangibles.

5.05 Companiesthathaverecordedsignificantamountsofgoodwillinabusinesscombinationare

frequentlyaskedbytheSECstaffwhythegoodwillwasnotattributedtoparticularintangibleassets.

DuringsuchinquiriestheSECstaffoftenrequestsadditionalinformationfromcompanies,including

itemssuchas(1)themergeragreement(includinganydisclosurestatement),(2)memorandums

preparedinconnectionwiththemerger,(3)marketingmaterialspreparedbythetarget(including

presentations),and(4)minutesoftheboardofdirectorsofthebuyeraboutthemerger.TheseSEC

inquiriesoftenresultincompanieshavingtodiscloseadditionalfactorsthatcontributedtoalarge

goodwillbalanceand,insomeinstances,therecognitionofadditionalintangibleassets.





Intangible Assets That Are Not Identifiable

5.06 Statement141containedexamples(listedbelow)ofintangibleassetsthatdonotmeetthe

criteriaforrecognitionapartfromgoodwill.WhileStatement141(R)didnotcarryforwardthese

examples,theyarestillconsideredrelevant:

• Customerbase—agroupofcustomersthatarenotknownoridentifiabletotheentity(e.g.,

customersofafast-foodfranchise).

• Customerservicecapability.

• Presenceingeographicmarketsorlocations.

• Nonunionstatusorstronglaborrelations.

• Ongoingtrainingorrecruitingprograms.

• Outstandingcreditratingsandaccesstocapitalmarkets.

• Favorablegovernmentrelations.

• Potentialcontractscurrentlybeingnegotiated.• Assembledworkforce(see5.07).

Assembled Workforce

5.07 ParagraphA25ofStatement141(R)describesanassembledworkforceas“[a]nexistingcollection

ofemployeesthatpermitstheacquirertocontinuetooperateanacquiredbusinessfromtheacquisition

date.”ParagraphB178ofStatement141(R)explainswhyanassembledworkforceisnotanidentifiable

intangibleassettoberecognizedseparatelyfromgoodwillinabusinesscombination:

Becauseanassembledworkforceisacollectionofemployeesratherthananindividualemployee,

itdoesnotarisefromcontractualorlegalrights.Althoughindividualemployeesmighthave

employmentcontractswiththeemployer,thecollectionofemployees,asawhole,doesnothave

suchacontract.Inaddition,anassembledworkforceisnotseparable,eitherasindividualemployees

ortogetherwitharelatedcontract,identifiableasset,orliability.Anassembledworkforcecannot

besold,transferred,licensed,rented,orotherwiseexchangedwithoutcausingdisruptiontothe

acquirer’sbusiness.Incontrast,anentitycouldcontinuetooperateaftertransferringanidentifiable

asset.

5.08 ForacquisitionsofnetassetsoutsideofthescopeofStatement141(R)(i.e.,netassetsthatare

determinednottobeabusiness),itisnecessarytoassesswhetheranassembledworkforceintangible

assetispresent;ifpresent,suchanassetwouldberecognized(see1.13).

Intangible Assets the Acquirer Intends Not to Use or to Use in a Way Other ThanTheir Highest and Best Use

5.09 Inabusinesscombinationoranassetacquisition,anentitymayacquireanintangibleassetthat

itdoesnotintendtoputtoitshighestandbestuse.Forexample,anentitymayacquireacompetitor,

includingitstradename,inbusinesscombination.Insuchsituations,theacquirermaydecidenottouse

theacquiredentity’stradenamebecauseitdirectlycompeteswithitsowntradename.Iftheacquirer

intendstopreventothersfromusingtheacquiredtradename,theassethasvaluebecauseitenhances

thevalueoftheacquirer’sowntradename(suchassetsarecommonlyreferredtoas“defensivevalue

assets”).





5.10 ParagraphA59ofStatement141(R)requirestheacquiringentitytorecognizeatfairvalue

anintangibleassetthatitdoesnotintendtoputtoitshighestandbestuse.Aftertheissuanceof

Statement141(R),questionsaroserelatedtotheinitialandsubsequentaccountingforsuchassets.

Whilenotaddressingmeasurementissues,theEITFprovidedclarifyingguidanceoncertainaspectsof

theinitialandsubsequentaccountingfordefensivevalueassetsinIssue08-7.Specifically,theTaskForce

noted:

Adefensiveintangibleassetcouldincludeanassetthattheacquirerwillneveractivelyuse,aswellas

anassetthatwillbeusedbytheacquirerduringatransitionperiodwhentheintentionoftheacquirer

istodiscontinuetheuseofthatasset.

Thedeterminationofwhetheranintangibleassetisadefensiveintangibleassetisbasedonthe

intentionsofthereportingentityandthatdeterminationmaychangeasthereportingentity’s

intentionschange(forexample,anintangibleassetthatwasaccountedforasadefensiveintangible

assetonthedateofacquisitionwillceasetobeadefensiveassetifanacquirersubsequentlydecides

toactivelyusetheasset)....

Adefensiveintangibleassetshouldbeaccountedforasaseparateunitofaccounting.Itshouldnot

beincludedaspartofthecostoftheacquirer’sexistingintangibleasset(s)becausethedefensive

intangibleassetisseparatelyidentifiable.

Inaddition,theTaskForceprovidedthefollowingexamples(notall-inclusive)ofdefensivevalueassets

thatfallwithinthescopeofIssue08-7:

Example 1

CompanyA,aconsumerproductsmanufacturer,acquiresanentitythatsellsaproductthat

competeswithoneofCompanyA’sexistingproducts.CompanyAplanstodiscontinuethesaleof

thecompetingproductwithinthenextsixmonths,butwillmaintaintherightstothetradename,at

minimalexpectedcost,topreventacompetitorfromusingthetradename.Asaresult,CompanyA’s

existingproductwillexperienceanincreaseinmarketshare.CompanyAdoesnothaveanycurrent

planstoreintroducetheacquiredtradenameinthefuture.

Analysis:BecauseCompanyAdoesnotintendtoactivelyusetheacquiredtradename,butintendsto

holdtherightstothetradenametopreventitscompetitorsfromusingit,thetradenamemeetsthe

definitionofadefensiveintangibleasset.

Example 2

CompanyAacquiresagroupofassets,oneofwhichisbillingsoftwaredevelopedbytheselling

entityforitsownuse.Afterasixmonthtransitionperiod,CompanyAplanstodiscontinueuseofthe

internallydevelopedbillingsoftware.Invaluingthebillingsoftwareinconnectionwiththeacquisition,

CompanyAdeterminesthatamarketparticipantwouldusethebillingsoftware,alongwithother

assetsintheassetgroup,foritsfullremainingeconomiclife(thatis,CompanyAdoesnotintend

tousetheassetinawaythatisatitshighestandbestuse).Duetothespecializednatureofthe

software,CompanyAdoesnotbelievethesoftwarecouldbesoldtoathirdpartywithouttheother

assetsacquired.Analysis:AlthoughCompanyAdoesnotintendtoactivelyusetheinternallydevelopedbilling

softwareafterasixmonthtransitionperiod,CompanyAisnotholdingtheinternallydeveloped

softwaretopreventitscompetitorsfromusingit.Therefore,theinternallydevelopedsoftwareasset

doesnotmeetthedefinitionofadefensiveintangibleasset.

Example 3

CompanyAacquiresaresearchanddevelopmentintangibleassetinabusinesscombination.The

reportingentitydoesnotintendtocompletetheacquiredresearchanddevelopmentprojectbecause

iftheprojectwascompleted,thetechnologydevelopedwouldcompetewithoneofCompanyA’s

existingproducts.Instead,CompanyAintendstoholdtheprojecttopreventitscompetitorsfrom





obtainingaccesstothetechnology.CompanyAbelievesthatholdingtheprojectwilldelaythe

developmentofacompetingproduct,allowingCompanyAtokeepitscurrentmarketsharefora

longerperiodthanitwouldifthecompetingprojectwascompleted.

Analysis:BecauseCompanyAdoesnotintendtoactivelyusetheresearchanddevelopment

intangibleasset,butintendstoholdtherightstotheassettopreventitscompetitorsfromusingit,

theintangibleresearchanddevelopmentassetmeetsthedefinitionofadefensiveintangibleasset.

Example 4

CompanyAacquiresaresearchanddevelopmentintangibleassetinabusinesscombination.The

projectunderdevelopmentissimilartoanexistingprojectofCompanyAandCompanyAdoesnot

intendtoimmediatelypursuetheacquiredproject.However,ifCompanyA’sexistingprojectisnot

successfulinthenextsixmonths,CompanyAintendstoresumeworkontheacquiredproject.If

CompanyA’sexistingprojectissuccessful,theacquiredprojectwillbeabandonedandCompanyA

wouldnotbeconcernedifathirdpartygainedaccesstothatproject.

Analysis:CompanyAisnotholdingtheintangibleresearchanddevelopmentassettopreventits

competitorsfromusingit.Instead,CompanyAisholdingtheassetasanalternativetoitsexisting

researchanddevelopmentproject.Therefore,theresearchanddevelopmentintangibleassetdoesnot

meetthedefinitionofadefensiveintangibleasset.

See10.28–10.29forsubsequentaccountingconsiderationsregardingacquiredintangibleassetsthatare

recognizedasoftheacquisitiondateandwillnotbeputtotheirhighestandbestuse.

Grouping Complementary Assets

5.11 Statement141(R)offersthefollowingthreeexamplesofacquiredassetsgroupedforfinancial

reporting:

• Abrandorbrandnameconsistingofa“trademark(orservicemark)anditsrelatedtradename,

formulas,recipes,andtechnologicalexpertise.”SeeparagraphA34ofStatement141(R).

• Alicensetoownandoperateanuclearpowerplant.SeeparagraphA20(b)ofStatement141(R).

• Anartistic-relatedcopyright“andanyrelatedassignmentsorlicenseagreements.”See

paragraphA45ofStatement141(R).

Ineachexample,afactorcitedinsupportofgroupingtheassetsforfinancialreportingwasthatthe

individualassetshavesimilarusefullives.Inaddition,whetherthegroupingofassetsisappropriate

dependsonwhethertheassetshavesimilarmethodsofamortization,sincethiswouldensureasimilar

effectonfinancialreporting.

Customer Lists


Acustomerlistconsistsofinformationaboutcustomers,suchastheirnamesandcontactinformation.

Acustomerlistalsomaybeintheformofadatabasethatincludesotherinformationaboutthe

customers,suchastheirorderhistoriesanddemographicinformation.Acustomerlistgenerally

doesnotarisefromcontractualorotherlegalrights.However,customerlistsarefrequentlyleased

orexchanged.Therefore,acustomerlistacquiredinabusinesscombinationnormallymeetsthe

separabilitycriterion.





5.13 Whilemostentitiespossesssomeinformationabouttheircustomers,whichwouldestablishthe

existenceofacustomer-listintangibleasset,thespecificinformationpossessedandtheresultingvalue

ofthisassetwillvary.Inaddition,insomeinstances,restrictionsonthesaleortransferofcustomerlists

couldpreventtheseparabilitycriterionfrombeingmetaltogether.

5.14 Thefollowingdecisiontreeassiststheacquiringentityindeterminingwhetheranintangibleasset

existsrelatedtoacustomerlist:

Order or Production Backlog

5.15 Typically,acquiredentitiespossessorderorproductionbacklogs(e.g.,purchaseandsalesorders).

ParagraphA38ofStatement141(R)providesthat“[a]norderorproductionbacklogacquiredina

businesscombinationmeetsthecontractual-legalcriterionevenifthepurchaseorsalesordersare

cancelable.”(Seefurtherdiscussionin5.17.)

Customer Contracts and Related Customer Relationships


Ifanentityestablishesrelationshipswithitscustomersthroughcontracts,thosecustomerrelationships

arisefromcontractualrights.Therefore,customercontractsandtherelatedcustomerrelationships

acquiredinabusinesscombinationmeetthecontractual-legalcriterion,evenifconfidentialityor

othercontractualtermsprohibitthesaleortransferofacontractseparatelyfromtheacquiree.

5.17 Anentityisnotrequiredtohaveanexistingcontractwithacustomerasoftheacquisitiondate

foranintangibleassettoberecognized.Rather,iftheacquiredentityroutinelysignscontractswithits

customers(e.g.,salesandpurchaseorders),theacquiringentitywouldrecognizeseparateintangible

assetsforthefollowing:

• Customercontractsexistingasoftheacquisitiondate.

• Customerrelationships,regardlessofwhetheracontractexistsasoftheacquisitiondate.

AlthoughStatement141(R)doesnotdefinetheterm“contractual,”itstatesthatbothoftheabove

itemswouldsatisfythecontractual-legalcriterion.Therefore,theabsenceofenforceablerightsby

thepartiestoaparticularagreementwouldnotappeartoprecluderecognition.TheSECstaffhas

historicallyagreedwiththisview.

Iscustomerinformation,suchasnameandcontactnumber,known?

No Nofurtheranalysisrequired.Nointangibleassetexistsrelatedtoacustomerlist.

Yes

Dotermsofconfidentialityorotheragreementsprohibitanentityfromselling,leasing,orotherwiseexchanginginformationaboutsomeorallofitscustomers?

Yes Nofurtheranalysisrequired.Criteriaforrecognitionapartfromgoodwillnotmet.

No

Forcustomersthatdonotprohibitselling,leasing,orotherwiseexchanginginformation,customerlistintangiblemeetscriteriaforrecognitionapartfromgoodwill.





5.18 Statement141(R)nullifiedIssue02-17butcarriedforwardtheEITF’spriordecisionsabout

customercontractsandrelatedcustomerrelationships.Issue02-17offeredthefollowingillustration,

whichisstillconsideredrelevantundertheguidanceinStatement141(R):

CompanyXacquiresCompanyYinabusinesscombinationonDecember31,20X2.CompanyY

doesbusinesswithitscustomerssolelythroughpurchaseandsalesorders.AtDecember31,20X2,

CompanyYhasabacklogofcustomerpurchaseordersin-housefrom60percentofitscustomers,allofwhomarerecurringcustomers.Theother40percentofCompanyY’scustomersarealsorecurring

customers;however,asofDecember31,20X2,CompanyYdoesnothaveanyopenpurchaseorders,

orothercontracts,withthosecustomers.

Evaluation: Thepurchaseordersfrom60percentofCompanyY’scustomers(whethercancelable

ornot)meetthecontractual-legalcriterionand,therefore,mustberecordedatfairvalueapart

fromgoodwill.Additionally,sinceCompanyYhasestablisheditsrelationshipwith60percentofits

customersthroughacontract,thosecustomerrelationshipsmeetthecontractual-legalcriterionand

mustalsoberecordedatfairvalueapartfromgoodwill.

BecauseCompanyYhasapracticeofestablishingcontractswiththeremaining40percentofits

customers,thosecustomerrelationshipsalsoarisethroughcontractualrightsand,therefore,meetthe

contractual-legalcriterion.CompanyXmustrecordthecustomerrelationshipfortheremaining40

percentofCompanyY’scustomersatfairvalueapartfromgoodwill,eventhoughCompanyYdoes

nothavecontractswiththosecustomersatDecember31,20X2.

Customer Loyalty Programs

5.19 Customerloyaltyprogramsgenerallyallowcustomerstoearncurrentorfuturediscounts,free

productsorservices,orotherbenefitsonthebasisofcumulativepurchasesfromtheoperatorofthe

program.Manyairlines,casinos,hotels,andretailersoffersuchprograms.Theprogram’senrollment

processisoftendesignedtobeeasytocomplete,withtheparticipantgenerallyagreeingtotheterms

andconditionsoftheprogramatthetimeofenrollment.Participantsinsuchprogramsgenerallyhave

noobligationtocompletefuturepurchasesofproductsorservices,andoperatorsofsuchprograms

generallyreservetherighttomodifyorcanceltheprogramatanytime.Despitetheabsenceofenforceablerightsbetweenthepartiesastofuturepurchasesorfulfillmentofaccruedbenefits,such

arrangementsaredeemed“contractual”asthattermisusedinStatement141(R),becausetheparties

haveagreedtocertaintermsandconditions,havehadapreviouscontractualrelationship(see5.17–

5.18),orboth.Anyliabilityaccruals,orrevenuedeferrals,bytheoperatorarealsoevidencethatthe

arrangementis“contractual”asthattermisusedinStatement141(R).

5.20 Notethatanacquiringentity,inadditiontoevaluatingtherecognitionandmeasurementofan

acquiredcustomer-relatedintangibleasset,mustseparatelyevaluatetherecognitionandmeasurement

ofassumedliabilitiesrelatedtoacustomerloyaltyprogramoftheacquiredentityasoftheacquisition

date.

Overlapping Customers

5.21 Inabusinesscombination,itisnotuncommonthatcertaincustomersoftheacquiringentity

arealsocustomersoftheacquiredentity(“overlappingcustomers”).Thisraisesanissueregardingthe

recognitionandmeasurementofanacquiredcustomercontractandarelatedcustomer-relationship

intangibleasset.Whileanacquiredentity’scustomercontractswouldbeinstrumentaltotheacquiring

entity,somehaveassertedthattherelatedcustomerrelationshipisnotinstrumentaltotheacquiring

entityandthushasnovaluetotheacquiringentity.Atthe2005AICPANationalConferenceonCurrent

SECandPCAOBDevelopments,anSECstaffmember(PamelaR.Schlosser),inpreparedremarks,





offeredthefollowingexamplethattookexceptiontotheviewthatnovaluetotheacquiringentitywas

presentuponacquisitioninsuchasituation:

CompanyA,whichsellsapparelproductstoretailcustomers,acquiresCompanyB,whichsellstoy

productstothosesameretailcustomers.Thequestionis:atwhatamountthecustomerrelationships

ofCompanyBshouldberecognized,consideringthefactthatCompanyAalreadyhadrelationships

withthoseverysamecustomers,albeitfordifferentproductsales?

Somehavearguedthatinthissituation,novalueshouldbeattributedtotheseintangibleassetssince

CompanyAalreadysolditsapparelproductstoCompanyB’scustomerbase,andthusalreadyhad

pre-establishedrelationshipswiththem.However,wehavefoundthisargumentdifficulttoaccept.

Becauseoftheacquisition,CompanyAnowhastheabilitytosellnewproducts(thatis,toyproducts)

toitsretailcustomersthatitwasunabletosellpriortotheacquisitionofCompanyB.Andevenif

thetwocompaniessoldcompetingproductstothesameretailcustomers,forinstancebothsoldtoy

products,thefactthatCompanyAhasincreasedits“shelfspace”ateachofitscustomers’retail

locationswouldbeindicativeofvaluetothoserelationships.

Noncontractual Customer Relationships

5.22 Theacquiredentitymaynothavecontractualrelationshipswithitscustomers(see5.16).Nevertheless,theacquiringentitymayberequiredtorecognizeanintangibleassetrelatedtoacquired

customerrelationshipsiftheseparabilitycriterionissatisfied.ParagraphA41ofStatement141(R)

providesthefollowingthreecriteriathatcanindicatearelationshipbetweenanentityanditscustomer:

• Theacquiredentitymaintainscurrentcustomerinformation.

• Theacquiredentitycontactsitscustomersregularly.

• Customerscandirectlycontacttheacquiredentity.


Acustomerrelationshipacquiredinabusinesscombinationthatdoesnotarisefromacontractmay

neverthelessbeidentifiablebecausetherelationshipisseparable.Exchangetransactionsforthesame

assetorasimilarassetthatindicatethatotherentitieshavesoldorotherwisetransferredaparticular

typeofnoncontractualcustomerrelationshipwouldprovideevidencethatthenoncontractual

customerrelationshipisseparable.Forexample,relationshipswithdepositorsarefrequently

exchangedwiththerelateddepositsandthereforemeetthecriteriaforrecognitionasanintangible

assetseparatelyfromgoodwill.

Considerations Regarding Valuation Techniques and Assumptions to Be Used inMeasuring Fair Value of Customer-Relationship Intangible Assets

5.24 Paragraph18ofStatement157providesthat“[v]aluationtechniquesconsistentwiththemarket

approach,incomeapproach,and/orcostapproachshallbeusedtomeasurefairvalue.”(See3.56–3.58.)Inthemeasurementofthefairvalueofacustomer-relationshipintangibleasset,theuseofamarket

approachisgenerallynotpossiblebecauseoftheabsenceofmarkettransactionsinvolvingidentical

orcomparableassets.Regardinguseofthecostapproachwhenmeasuringcustomer-relationship

intangibleassets,thepreparedremarksofanSECstaffmember(ChadA.Kokenge)atthe2003AICPA

NationalConferenceonCurrentSECDevelopmentsindicated:

[T]he[cost]approachonlyfocusesontheentity’sspecificcoststhatarenecessaryto“establish”

therelationship.Suchanapproachwouldnotbesensitivetothevolumeofbusinessthatmightbe

generatedbythecustomer,otherrelationshipaspects,suchasreferralcapability,orotherfactors





thatmaybeimportanttohowamarketplaceparticipantmightassesstheasset.Ifthesefactors

aresignificant,webelievetheuseofsuchanapproachwouldgenerallybeinconsistentwiththe

Statement142definitionoffairvalue[supersededbyparagraph5ofStatement157].

5.25 Atthe2006AICPANationalConferenceonCurrentSECandPCAOBDevelopments,the

preparedremarksofanSECstaffmember(JosephB.Ucuzoglu)furtheraddressedthetopicofvaluing

customer-relationshipintangibleassetsinabusinesscombination:

Thefactthattheacquiredentityhasacontractualrelationshipwiththecustomermayalsogiveriseto

avaluablecustomerrelationshipwhichmustbeconsideredinthepurchasepriceallocationpursuant

toStatement141[supersededbyStatement141(R)].[Footnote2]Thisprovidesanicesegueinto

mynexttopic.Theissueofvaluingcustomerrelationshipintangibleassetsseemstohavebecomean

annualtopicattheSECconference.

SomehavesuggestedthattheSECstaffalwaysrequirestheuseofanincomeapproachtovalue

customerrelationshipintangibleassets.Thestaffhasevenheardsomesuggestthat,aslongasa

registrantcharacterizesitsvaluationmethodasanincomeapproach,thespecificassumptionsused

orresultsobtainedwillnotbechallengedbythestaff,becauseonehascompliedwithaperceived

brightlinerequirementtouseanincomeapproach.Letmeassureyou,thesestatementsaresimply

false.Whileanincomeapproachoftenprovidesthemostappropriatevaluationofacquiredcustomerrelationshipintangibleassets,circumstancesmaycertainlyindicatethatadifferentmethodprovides

abetterestimateoffairvalue.Ontheflipside,evenwhenaregistrantconcludesthatanincome

approachisthemostappropriatevaluationmethodology,thestaffmayneverthelessquestionthe

resultobtainedwhentheunderlyingassumptions,suchascontributoryassetcharges,donotappear

reasonableinlightofthecircumstances.

Whendeterminingtheappropriatevaluationofacustomerrelationshipintangibleasset,Ibelieve

thatthefirststepintheprocessshouldbetoobtainathoroughunderstandingofthevaluedrivers

intheacquiredentity.Thatis,whyisitthatcustomerscontinuallyreturntopurchaseproductsor

servicesfromtheacquiredentity?Insomecases,thenatureoftherelationshipmaybesuchthat

customersarenaturally“sticky,”andtendtostaywiththesamevendorovertimewithoutfrequently

reconsideringtheirpurchasingdecisions.Inthatcircumstance,itwouldappearthatasignificant

portionoftheongoingcashflowsthattheacquiredentitywillgeneratecanbeattributedtothestrengthofitscustomerrelationships.

Attheotherendofthespectrum,relationshipsmaybealesssignificantvaluedriverinan

environmentwherecustomersfrequentlyreassesstheirpurchasingdecisionsandcaneasilyswitchto

anothervendorwithalowerpriceorasuperiorproduct.Inthatenvironment,ifcustomerscontinually

returntobuyproductsfromtheacquiredentity,perhapstheydosoinlargepartduetofactorsother

thantherelationship,suchasawell-know[n]tradename,strongbrands,andproprietarytechnologies.

Asaresult,thevalueofthecustomerrelationshipintangibleassetmaybelessthanwouldbethe

caseinacircumstancewheretherelationshipisstronger.However,thestaffwouldgenerallyexpect

thattheamountattributedtootherintangibleassetswouldbecommensuratelyhigher,reflectingthe

increasinglyimportantroleofthoseassetsingeneratingcashflows.

Footnote2referstoparagraphA14(b)ofStatement141,whichwassupersededbyparagraphA36ofStatement141(R).

In-Process Research and Development Assets

5.26 Priortoabusinesscombination,anacquiredentitymayincurresearchanddevelopment(R&D)

expendituresthatcouldresultinthedevelopmentofcertainintangibleassetsbytheacquiredentitythat

wouldbeexpensedasincurredinaccordancewithStatement2(unlesstheyhadanalternativefuture

use).Inotherwords,anacquiredentitywouldprobablynotrecordanyassetsonitsbooksbeforethe

consummationofabusinesscombinationrelatedtoR&D.Totheextentthattheacquiredentitywas

using,orwasplanningtouse,theseunrecognizedassetsforR&Dactivities,theassetswouldrepresent

acquiredin-processresearchanddevelopment(IPR&D)totheacquirer.





5.27 UnderStatement141(R)andStatement142(asamendedbyStatement141(R)),theacquiring

entityrecognizesIPR&Datfairvalueasoftheacquisitiondate,andsubsequentlyaccountsforitasan

indefinite-livedintangibleassetuntilcompletionorabandonmentoftheassociatedR&Defforts.See

10.39–10.40foradditionalguidancerelatedtothesubsequentaccountingforIPR&Dintangibleassets.

5.28 IfanentityacquiresIPR&Dinabusinesscombinationthatitdoesnotintendtousetoitshighest

andbestuse(e.g.,ithasplanstodiscontinuetheR&Dprojectaftertheacquisitioneventhough

amarketplaceparticipantwouldcontinuetheR&Defforts),itwouldberequiredtorecognizean

intangibleassetatfairvalueinitsacquisitionmethodaccounting(see5.09–5.10).

5.29 Statement141(R)doesnotaffecttheaccountingforR&Dexpendituresincurredoutsideofa

businesscombination.Therefore,theacquiringentitywouldgenerallyexpenseresearchand

developmentcostsincurredaftertheacquisitiondatethatrelatetoanacquiredIPR&Dprojectin

accordancewithStatement2.

Example 5-1

Acquired IPR&DOnJune30,20X9,CompanyA,acalendaryear-endcompany,acquiresCompanyBinatransactionaccountedforasabusinesscombination.Beforetheacquisition,CompanyBhadincurredsignificantcostsrelatedtotheR&Dofanewlineofproducts,allofwhichitexpensedasincurredunderStatement2.CompanyAplanstocontinuetheseR&Deffortsinhopesofreleasingthenewlineofproductsintothemarketinthefuture.

Aspartoftheacquisitionmethodaccounting,andinamannerconsistentwiththefairvaluemeasurementguidanceinStatement157,CompanyAcalculatesthefairvalueoftheacquiredIPR&Dassetsas$10million.Therefore,asoftheacquisitiondate,CompanyAwouldrecordanindefinite-livedintangibleassetfor$10million.

Subsequenttotheacquisitiondate,CompanyAwouldaccountforalladditionalcostsitincursrelatedtothisprojectunderStatement2(i.e.,suchcostswouldgenerallybeexpensedasincurred).

5.30 Historically,theSEChasexpressedconcernsoverthesignificanceofacquiredIPR&D.In2001,the

AICPArespondedbypublishingaPracticeAid,AssetsAcquiredinaBusinessCombinationtoBeUsed

inResearchandDevelopmentActivities:AFocusonSoftware,ElectronicDevices,andPharmaceutical

Industries .Itstates:

ThisPracticeAididentifieswhatthetaskforcemembersperceiveasbestpracticesrelatedtodefining

andaccountingfor,disclosing,valuing,andauditingassetsacquiredtobeusedinR&Dactivities,

includingspecificIPR&Dprojects.

AlthoughthePracticeAidisavaluableresourceforunderstandingandapplyingvaluationtechniquesfor

intangibleassets,entitiesshouldusecautionwhenreferringtoitbecauseithasnotyetbeenupdatedto

reflectcertainchangesinfairvalueguidanceresultingfromtheissuanceofStatement157.ThePractice

AidshouldonlybeusedwhenitdoesnotconflictwithStatement157orotherauthoritativeGAAP,asithasnotbeenapproved,disapproved,orotherwiseacteduponbyanyseniortechnicalcommitteeofthe

AICPAortheFASBandthushasnoofficialorauthoritativestatus.TheAICPArecentlyindicatedthatit

intendstorevisittheguidanceinthePracticeAidsoon.

DifferencesbetweenStatement157andthePracticeAidincludethefollowing(notall-inclusive):

• UnderStatement157,anestimateoffairvaluewouldconsiderallpotentialmarketparticipants

(i.e.,strategicbuyersandfinancialbuyers).ThePracticeAidindicatesthatonlystrategicbuyers

arerelevant.





• UnderStatement157,anassetisvaluedusingeitherthe“in-use”orthe“in-exchange”

valuationpremise.ThePracticeAidindicatesthatthesevaluationpremisesshouldnotbeused

inthedeterminationoffairvalueinabusinesscombinationbecausetheyarenotrepresentative

offairvalueforfinancialreporting.

• UnderStatement157,anintangibleassetmayhaveafairvalue,underamarketparticipant

approach,eveniftheacquiringentityintendstoretiretheintangibleasset(e.g.,adefensivevalueasset).Incontrast,thePracticeAidindicatesthataretiredintangibleassetwouldhaveno

valuesinceitdoesnotprovidetheacquiringentitywithafutureeconomicbenefit.

Reacquired Rights

5.31 Inabusinesscombination,theacquirermayreacquirearightthatitpreviouslygrantedtothe

acquiree(e.g.,alicenseorfranchise).Paragraph31ofStatement141(R)stipulatesthatreacquiredrights

areintangibleassetsthattheacquirermustrecognizeapartfromgoodwill.Theacquirermeasuresthe

valueofthereacquiredrightinaccordancewithStatement157,butwithoneexception:thevalueof

theintangibleassetislimitedtoitsremainingcontractualterm(i.e.,thecontractualtermthatremains

untilthenextrenewaldate),regardlessofwhethermarketparticipantswouldassumerenewalorextensionoftheexistingtermsofthearrangement.Therefore,reacquiredrightsarenotconsideredtrue

“fairvalue”measurementsinaccordancewithStatement157.

5.32 Inamannerconsistentwiththeirinitialmeasurementofreacquiredrights,entitiesmust

subsequentlyamortizeintangibleassetsrelatedtoreacquiredrightsonthebasisoftheirremaining

contractualterms.

Example 5-2

Reacquired Rights

Case A

CompanyBsellsproductsinEuropeunderalicenseagreementwithCompanyA.CompanyAacquiresCompanyBinatransactionaccountedforasabusinesscombination.Asoftheacquisitiondate,thelicenseagreementhasaremainingcontractualtermofthreeyears,andcanberenewedattheendofthecurrenttermandindefinitelyeveryfiveyearsthereafter.Thepricingofthelicenseagreementisat-market,andtheagreementdoesnothaveexplicitsettlementprovisions.CompanyAhascalculatedthefollowingvaluesforthelicenseagreement:

• $75—valuefortherighttousethetechnologyfortheremainingthree-yearcontractualterm.

• $200—fairvaluefortherighttousethetechnology,calculatedusingtheprinciplesofStatement157,whichconsidersfuturerenewalsbymarketparticipants.

Inthisexample,CompanyAwouldrecognizeanintangibleassetfor$75,anditwouldamortizethisamountovertheremainingthree-yearcontractualterm.

5.33 Ifthetermsofthecontractgiverisetoareacquiredrightthatisfavorableorunfavorable

relativetosimilarmarkettransactionsforsimilarrights,theacquirerrecognizesasettlementgainor

loss.ParagraphA79ofStatement141(R)providesguidanceforcalculatingthesettlementgainorloss,

statingthatitshouldberecordedasthelesserof:

(1) Theamountbywhichthecontractisfavorableorunfavorablefromtheperspectiveofthe

acquirerwhencomparedwithpricingforcurrentmarkettransactionsforthesameorsimilar

items[,or]

(2) Theamountofanystatedsettlementprovisionsinthecontractavailabletothecounterparty

towhomthecontractisunfavorable.





Example 5-3

Reacquired Rights

Case B

AssumethesamefactsasinExample5-2,exceptthatunderthetermsofthelicenseagreement,CompanyBpaysalicensefeethatisbelow-marketrelativetothatofitscompetitorswithsimilarlicensingagreements.Inaddition,Company

Anowmeasuresthevalueofthelicense,fortheremainingthree-yearcontractualterm,at$100.(Notethatthisamountisgreaterthanthe$75valuecalculatedinExample5-2foranat-marketcontract.)

CompanyAwouldrecordanintangibleassetof$75forthereacquiredlicense(theat-marketvalueforsimilaragreements)andrecognizeasettlementlossintheincomestatementfor$25.Ineffect,thesettlementlossrepresentsadditionalconsiderationCompanyAwouldberequiredtogiveCompanyBtoterminatetheexistingagreement,whichwasunfavorabletoCompanyA.(See3.28.)

5.34 Anacquirermaysubsequentlysellareacquiredrighttoathirdparty.Thecarryingamountofthe

recognizedintangibleasset(i.e.,reacquiredright)wouldthusbeincludedinthegainorlossonsale.

Favorable or Unfavorable Operating Leases When the Acquiree Is the Lessee

5.35 Theacquirercannotrecognizeassetsandliabilitiesrelatedtoanacquiredoperatingleaseinwhichtheacquireeisthelesseeexceptwhen(1)theleaseisfavorableorunfavorablerelativetocurrent

marketratesor(2)marketparticipantswouldplacevalueonanat-the-moneycontract.

ParagraphA17ofStatement141(R)describesthefirstexceptionasfollows:

Regardlessofwhethertheacquireeisthelesseeorthelessor,theacquirershalldeterminewhether

thetermsofeachofanacquiree’soperatingleasesarefavorableorunfavorablecomparedwith

themarkettermsofleasesofthesameorsimilaritemsattheacquisitiondate.Theacquirershall

recognizeanintangibleassetifthetermsofanoperatingleasearefavorablerelativetomarketterms

andaliabilityifthetermsareunfavorablerelativetomarketterms.

Foradiscussionrelatedtothesecondexception,see5.36below.

Valuing “At-the-Money” Contracts


Anidentifiableintangibleassetmaybeassociatedwithanoperatinglease,whichmaybeevidenced

bymarketparticipants’willingnesstopayapricefortheleaseevenifitisatmarketterms.For

example,aleaseofgatesatanairportorofretailspaceinaprimeshoppingareamightprovide

entryintoamarketorotherfutureeconomicbenefitsthatqualifyasidentifiableintangibleassets,

forexample,asacustomerrelationship.Inthatsituation,theacquirershallrecognizetheassociated

identifiableintangibleasset(s).

Althoughtheaboveexamplereferstooperatingleases,byanalogyanacquirercanapplythisguidance

tocertainothertypesofcontracts(e.g.,at-marketcontractswithcustomers).

Intangible Assets Associated With Income-Producing Real Estate

5.37 Income-producingrealestate,suchasanofficeorapartmentbuildingthatisoccupiedbytenants

onthedateofacquisition,representstotheacquireracollectionoftangibleandintangibleassetsand,

incertaininstances,liabilities.Whencalculatingthefairvalueofsuchincome-producingrealestate,it

isnecessarytoseparatelyidentifyandmeasurethetangibleandintangibleassetsandliabilitiespresent.





Thefollowingtableidentifiesexamplesoftangibleandintangibleassetsandliabilitiesthatmaybe

presentintheacquisitionofincome-producingrealestate,alongwithmeasurementconsiderations.

Measurement Considerations

Land,Buildings,andOtherTangibleAssets(e.g.,

Equipment)

RecognizedatfairvalueunderStatement157.Acquiring

entitymustdeterminethehighestandbestuseoftheassetorgroupofassets(i.e.,in-useorin-exchange)fromthepointofviewofamarketparticipant.Buildingsaretobevalued“asifvacant”toavoidincludingmeasurementvaluethatmaybeattributabletootherassetsandliabilitiesdiscussedbelow.

FavorableorUnfavorableIn-PlaceLeases In-placeleasesmaybefavorableorunfavorableattheacquisitiondaterelativetocurrentmarketrates.Favorableleasesfromtheperspectiveoftheacquiringentityrepresentassets,whileunfavorableleasesfromtheperspectiveoftheacquiringentityrepresentliabilities(orbalancesheetcredits).Separateclassificationofassetsandliabilities(orbalancesheetcredits)isrequired.

In-PlaceLeases—IntangibleAsset In-placeleasesprovidevaluetotheacquiringentityinthatcashoutflowsnecessarytooriginateleases(suchasmarketing,salescommissions,legalcosts,andleaseincentives)areavoided.Also,in-placeleasesenabletheacquiringentitytoavoidlostcashflowsduringanotherwiserequiredlease-upperiod.Measurementofin-placeleasesshouldthereforereflectboththebenefitstotheacquiringentityofavoidedcashoutflowsotherwisenecessarytooriginatesuchleasesaswellascashinflows(netofservicecoststotenantssuchassecurityandmaintenance)resultingfromnothavingtoincuranotherwiserequiredlease-upperiod.

CustomerContractsandRelatedCustomerRelationships

—IntangibleAsset

Existingtenantsmayalsoprovidevaluetotheacquiring

entitythroughrenewalsofexistingleasesorotherbenefits(suchaspurchasesofadditionalservicesorrentalsofadditionalspace).

Thelistofexamplesisnotall-inclusive.Forexample,otherintangibleassetsmaybepresentina

particularacquisitionofincome-producingrealestatesuchasacustomerlist,managementcontract,or

tradename.

Goodwill

Measurement of Goodwill

5.38 Goodwillisanunidentifiableasset(i.e.,notcontractualorseparable)and,assuch,canonlybe

measuredasaresidual.Paragraph34ofStatement141(R)states:

Theacquirershallrecognizegoodwillasoftheacquisitiondate,measuredastheexcessof(a)over(b)

below:

a. Theaggregateof:

(1) TheconsiderationtransferredmeasuredinaccordancewiththisStatement,which

generallyrequiresacquisition-datefairvalue(paragraph39)[seeSection 6]

(2) Thefairvalueofanynoncontrollinginterestintheacquiree[see7.07–7.09]





(3) Inabusinesscombinationachievedinstages,theacquisition-datefairvalueofthe

acquirer’spreviouslyheldequityinterestintheacquiree[see5.41]

b. Thenetoftheacquisition-dateamountsoftheidentifiableassetsacquiredandtheliabilities

assumedmeasuredinaccordancewiththisStatement.

5.39 AnunderlyingpremiseofStatement141(R)isthatanentity’sacquisitionofcontrolofabusiness

makestheacquiringentityaccountableandresponsibleforalloftheacquiree’sassetsandliabilities,

regardlessofitsownershippercentage.Becausegoodwillisanasset,itisrecognizedlikeanyother

assetorliability.Therefore,thetotalamountofgoodwillconsistsnotonlyoftheportionrelatingto

theacquiringentity,butalsotheportionrelatingtoanynoncontrollinginterest(referredtoasthe“full

goodwill”approach).Eventhoughgoodwillrelatestoboththeacquiringentityandanynoncontrolling

interest,goodwillispresentedonthebalancesheetasasingleline-item.

Example 5-4

Calculation of Goodwill

OnJune15,20X9,CompanyXpurchasesanadditional55percentofCompanyYfor$700incash(whichincludesa

controlpremium).Immediatelybeforetheacquisition,Xhelda25percentinterestinY,whichhadcarryingvalueof$200andafairvalueof$225.CompanyXagreestopaythesellingshareholders$80ifcertainperformancetargetsaremetbyDecember31,20Y0.Thefairvalueofsucharrangementasoftheacquisitiondateis$50.Thefairvalueofthe20percentnoncontrollinginterestis$180.Thefairvalueof100percentofY’sidentifiableassetsacquired,netofliabilitiesassumed,is$800.

Thecalculationofgoodwillisasfollows:

CashtransferredbyX

Fairvalueofcontingentconsiderationarrangement

TotalconsiderationtransferredbyX

Fairvalueofthenoncontrollinginterest

FairvalueofX’spreviouslyheldinterestinY

SubtotalFairvalueofthenetassetsacquired

Goodwill

$ 700

50

750

180*

225**

1,155 (800)

$ 355

* Thefairvalueofthe20percentnoncontrollinginterestincludesaminoritydiscountforlackofcontrol.

** CompanyXwouldrecognizea$25gain($225fairvalue–$200carryingvalue)relatedtotheremeasurementtofairvalueofitspreviouslyheldinterestinCompanyY.

5.40 Generally,goodwillismeasuredonthebasisofconsiderationtransferred.However,insome

acquisitions,eithernoconsiderationistransferredortheconsiderationtransferredislessreliably

measurablethanadirectmeasurementofthebusinessacquired(e.g.,businesscombinationsresulting

fromtheexchangeofequityinterests).Paragraph35ofStatement141(R)statesthatwhenonlyequityinterestsareexchanged,goodwillshouldbecalculatedbyusingthefairvalueoftheacquiree’sequity

interestsiftheyaremorereliablymeasurablethanthefairvalueoftheacquirer’sequityinterests.In

acquisitionsinwhichnoconsiderationistransferred,theacquiringentityusesthefairvalueofthe

acquirer’sinterestintheacquiree,whichisdeterminedbyusingappropriatevaluationtechniquesinstead

ofthefairvalueoftheconsiderationtransferred.





5.41 Forbusinesscombinationsachievedinstages,paragraph48ofStatement141(R)states:

Inabusinesscombinationachievedinstages,theacquirershallremeasureitspreviouslyheldequity

interestintheacquireeatitsacquisition-datefairvalueandrecognizetheresultinggainorloss,ifany,

inearnings.Inpriorreportingperiods,theacquirermayhaverecognizedchangesinthevalueofits

equityinterestintheacquireeinothercomprehensiveincome(forexample,becausetheinvestment

wasclassifiedasavailableforsale).Ifso,theamountthatwasrecognizedinothercomprehensiveincomeshallbereclassifiedandincludedinthecalculationofgainorlossasoftheacquisitiondate.

Notethataftertheacquirerobtainscontrolofabusinesssubsequentincreasesordecreasesinits

ownershipinterest,aslongascontrolisretained,areaccountedforasequitytransactions(see7.20–

7.23).

Bargain Purchases

5.42 Thoughuncommon,abargainpurchasecouldoccurwhentheaggregatefairvalueof(1)the

considerationtransferred,(2)anynoncontrollinginterestsintheacquiree,and(3)anypreviouslyheld

equityinterestintheacquireeislessthanthefairvalueofthenetassetsacquired.

5.43 Statement141(R)requirestheacquiringentitytodouble-checkitscalculationsbeforeconcluding

thatabargainpurchaseexists.Ifthesameresultisreached,anyfurtherexcessisrecognizedasagainin

earningsasoftheacquisitiondate.Paragraph38ofStatement141(R)statesthefollowing:

Beforerecognizingagainonabargainpurchase,theacquirershallreassesswhetherithascorrectly

identifiedalloftheassetsacquiredandalloftheliabilitiesassumedandshallrecognizeanyadditional

assetsorliabilitiesthatareidentifiedinthatreview.Theacquirershallthenreviewtheprocedures

usedtomeasuretheamountsthisStatementrequirestoberecognizedattheacquisitiondateforall

ofthefollowing:

a. Theidentifiableassetsacquiredandliabilitiesassumed

b. Thenoncontrollinginterestintheacquiree,ifany

c. Forabusinesscombinationachievedinstages,theacquirer’spreviouslyheldequityinterestin

theacquiree

d. Theconsiderationtransferred.

Theobjectiveofthereviewistoensurethatthemeasurementsappropriatelyreflectconsiderationof

allavailableinformationasoftheacquisitiondate.

5.44 Bargainpurchasesmayoccurbecauseofunderpaymentsforthebusinessacquired(e.g.,ina

forcedliquidationordistresssale).Theymayalsooccurbecausenotallassetsacquiredorliabilities

assumedarerecognizedormeasuredatfairvalue.Forexample,acontingentliabilitymaynotbe

recognizedifitdoesnotmeettherecognitioncriteriainStatement141(R)(see4.32).However,the

riskrelatedtothatliabilitymaybereflectedinwhattheacquiringentitypaidfortheacquiree.That

mismatchcouldleadtoabargainpurchase.





Example 5-5

Accounting for a Bargain Purchase

CompanyAacquires100percentofCompanyBfor$150millionincash.CompanyAcalculatesthefairvalueofthenetassetsacquiredasfollows:

Investments

Building

Trademark

Less:liabilities

FairvalueofB’snetassets

$ 90million

50million

50million

(10million)

$ 180million

Afterexaminingthe$180millionfairvalueestimateagain,Aconcludesthatitsmeasurementsappropriatelyreflectconsiderationofallavailableinformationasoftheacquisitiondate.Therefore,underStatement141(R),Awouldrecorda$30milliongain($180million–$150million)inearningsasoftheacquisitiondate.

5.45 Statement141(R)specifiesthatbeforeanentityrecognizesagainrelatedtoabargainpurchase,

theentitymustreassesswhetheralloftheassetsacquiredandliabilitiesassumedinthebusiness

combinationhavebeenappropriatelyrecognizedandmeasured.Statement141(R)alsorequiresretrospectiveapplicationofanyadjustmentsmadeduringthemeasurementperiodtotheprovisional

amountsrecognized(see3.16–3.23).Ifabargainpurchaseoccurs,afterreassessingtherecognitionand

measurementoftheassetsacquiredandliabilitiesassumed,anentitywouldrecognizeagainasofthe

acquisitiondate.Subsequentmeasurementperiodadjustmentswouldresultinadjustment,orpossibly

reversal,ofthegain.Appropriatedisclosuremustbeprovidedindicatingthattheinitialaccountingisstill

provisionalandthereforethegainrecognizedmaybesubjecttofutureadjustments.



Section 6 — Recognizing and Measuringthe Consideration Transferred in aBusiness Combination

6.01 Determiningtheamountofconsiderationtransferredinabusinesscombinationisimportant

becausetheamountdirectlyaffectsthemeasurementofgoodwillor,inmorelimitedinstances,the

amountofthebargainpurchase(seesection5.42–5.45).Theparagraphsbelowdiscusshowanentity

makesthisdetermination.

Consideration Transferred by the Acquiring Entity to the Former Owners of theAcquiree

6.02 ThefairvaluemeasurementandrecognitionprinciplesofStatement141(R)requirethat,with

theexceptionofshare-basedpaymentawards(see6.05–6.19),anacquirermeasureandrecognize

thefairvalueoftheconsiderationtransferredinabusinesscombinationasoftheacquisitiondate.

Acquirerscalculateshare-basedpaymentawardsbyusingafairvalue-basedmeasureinaccordancewith

Statement123(R).Considerationtransferredbytheacquiringentitytotheformerownerscaninclude

assets,liabilitiesincurredbytheacquiringentitytotheformerownersoftheacquiree,andequity

interests.Considerationcantakemanyforms,includingcash,othertangibleorintangibleassets,a

businessorsubsidiaryoftheacquirer,contingentconsideration,andequityinstrumentssuchascommon

orpreferredshares,options,warrants,andshare-basedpaymentawards.

6.03 Sometimestheamountpaidtotheformerownersincludesamountsthatarenotinexchangefor

thebusiness,suchaspaymentstocompensateforservices,useofproperty,orprofitsharing.Payments

thatdonotrepresentconsiderationtransferredfortheacquiredbusinessshouldbeaccountedfor

separatelyfromthebusinesscombinationandexpensedintheappropriateperiods.

Equity Securities Issued as Consideration

6.04 Ifequitysecuritiesareissuedasconsiderationinabusinesscombination,theacquiringentity

measuresthematfairvalueasoftheacquisitiondate .TheaccountingunderStatement141(R)is

significantlydifferentfromtheaccountingunderStatement141andIssue99-12.Issue99-12required

theacquiringentitytomeasurethefairvalueofitsmarketableequitysecuritiesonthebasisoftheir

quotedmarketprice“overareasonableperiodoftimebeforeandafterthetermsoftheacquisitionare

agreedtoandannounced.”A“reasonableperiodoftime”wasgenerallyconsideredtobeafewdays.

Statement141(R)nullifiedIssue99-12.

Share-Based Payment Awards

6.05 Anacquiringentitymayissueshare-basedpaymentawards(referredtoas“replacementawards”

inStatement141(R))totheemployeesoftheacquireetoreplacetheirexistingshare-basedpayment

awardsthatareatleast,inpart,tiedtotheacquiree’scommonstock(e.g.,stockoptions).Exchangesof

share-basedpaymentawardsinabusinesscombinationareconsideredmodifications inaccordancewith

Statement123(R).





6.06 Replacementawardsareoftenissuedbytheacquirertoensurethatemployeesoftheacquiree

areinasimilareconomicpositionimmediatelybeforeandaftertheconsummationofthebusiness

combination.Incontrast,anacquirermayissuereplacementawardsthatalsoincludeanadditional

requirementforemployeestoremainwiththecompanyaftertheacquisition.Therefore,theissuanceof

share-basedpaymentawardsmayrepresentconsiderationtransferredinthebusinesscombination(i.e.,

theawardrelatestopastservicesperformedbytheemployeefortheacquireebeforetheacquisitiondate),compensationforfutureservices(i.e.,postcombination)byanemployee,orboth.

6.07 Thestepsanentityshouldfollowindeterminingtheamounttorecognizeasconsideration

transferredinabusinesscombinationandaspostcombinationcompensationexpensearesummarizedin

thechartbelow.

Allocating Share-Based Payments Between Past Service and Future Service

Istheacquirerobligatedtoreplacetheacquiree’semployee’sawards?(See6.08.)

Yes No

Includealloraportionofthefair-value-basedmeasureoftheacquirer’sreplacementawardsintheconsiderationtransferred.

Ifreplacementawardsareissued,generallyaccountfortheentireawardascompensationexpenseinthepostcombinationfinancialstatements.(See6.09.)

Calculatethefair-value-basedmeasureoftheacquirer’sreplacementawardsandtheacquireeawardsbeingreplaced(replacedawards)asoftheacquisitiondate.(See6.10.)

Ifthefair-value-basedmeasureofthereplacementawardsisgreaterthanthefair-value-basedmeasureofthereplacedawards,expensethedifferenceinpostcombinationearningsinaccordancewithStatement123(R).(See6.10.)

Calculatetheportionofthereplacementawardthatshouldbeattributedtopastservice(i.e.,

considerationtransferred)andtheportionthatshouldbeattributedtopostcombinationservice.(See6.12–6.18.)

6.08 Statement141(R)providesguidanceforcalculatingtheportionofareplacementawardthatis

attributableto(1)pastserviceandincludedintheconsiderationtransferredand(2)futureserviceand

includedinpostcombinationcompensationexpense.Theentitymustfirstanalyzethearrangementto

determinewhethertheacquirerisobligated toreplacetheacquiree’semployees’awards.Iftheacquirer

isobligated toreplacetheawards,thenalloraportionofthefair-value-basedmeasureoftheacquirer’s

replacementawardsisincludedinthemeasurementoftheconsiderationtransferredinthebusiness







Determining the Postcombination Service Period for Replacement Awards With Equal or GreaterService Requirements

6.14 Foracquireeawardsthatwerefullyvestedbeforetheacquisitiondate,andwerereplacedbynew

awardsthatrequireanadditionalfutureserviceperiod,thedeterminationofthetotalserviceperiod

wouldnotincludetheperiodfromthevestingdateoftheacquireeawardstotheacquisitiondate.

Example 6-1

Determining the Total Service Period of the Replacement Award When the Replaced Award isFully Vested

AssumeEmployeehas100stockoptionsofCompanyB’scommonstockthatarefullyvestedonJune30,20X8.Theseawardsoriginallyhadathree-yearserviceperiodassociatedwiththem,buthavenotbeenexercisedyet.OnJanuary1,20X9,CompanyAacquiresCompanyBinatransactionaccountedforasabusinesscombinationandisobligatedtoreplaceEmployee’sawards.Aspartoftheacquisition,AwasobligatedtoreplaceB’sfullyvestedawardswithA’snewawardsthatrequireanadditionalthreeyearsofservice.

ThetotalserviceperiodofA’snewawardsissixyears,whichisthesumoftheserviceperiodforB’soldawardsplustheserviceperiodforA’snewawards.Inotherwords,thetotalserviceperioddoesnotincludetheperiodfromtheoriginalvestingdate(i.e.,June30,20X8)totheacquisitiondate(i.e.,January1,20X9).

Example 6-2

Determining the Total Service Period of the Replacement Award When the Service Period Is theSame as the Replaced Award

CompanyBgrants100stockoptionstoEmployeeonJanuary1,20X7,thatcliff-vestafterfouryears(i.e.,onJanuary1,20Y1).OnJanuary1,20X9,CompanyAacquiresBandwasobligatedtograntEmployee100replacementoptionsthathavethesameservicetermsastheoriginalaward(i.e.,thereplacementawardswillvestattheendoftwoadditionalyears).

Thetotalserviceperiodofthereplacementawardsisfouryears,whichisequaltotheserviceperiodoftheoriginalawards.Inthecalculationoftheportionattributabletoprecombinationservices,theprecombinationserviceperiodwouldequaltwoyears(January1,20X7,toJanuary1,20X9).

6.15 Theportionofthereplacementawardattributabletofutureservicesiscalculatedasfollows:

Acquisitiondatefair-value-basedmeasureoftheacquirer replacement awards

– Amountattributabletoprecombinationservice(see6.12)

= Postcombinationcompensationexpense

Example 6-3

Allocation of Compensation Expense

TargetCompany(TC)issues100stockoptionstoEmployeeonJanuary1,20X8,thatcliff-vestafterthreeyears(i.e.,onJanuary1,20Y1).

OnJanuary1,20X9,ParentCompany(PC)acquiresTCandreplacesthe100optionsonTC’sstockwith100optionsonitsownstock(assumePCisobligatedtoreplaceEmployee’sawards).Thefair-value-basedmeasureofboththePCoptionsandtheTCoptionsonJanuary1,20X9,is$10peroption.ThereplacementoptionsretaintheoriginalvestingconditionsofTCoptions(i.e.,theyvestonJanuary1,20Y1).

Thetotalfair-value-basedmeasureofthereplacementoptionsasoftheacquisitiondateis$1,000,ofwhich$333(oneofthreeyears)isattributabletoprecombinationservicesand$667(twoofthreeyears)isattributabletofutureservices.The$333isincludedintheconsiderationtransferred,andthe$667isrecognizedascompensationcostbyPCastheservicesareperformedbyEmployee(i.e.,fromJanuary1,20X9,toJanuary1,20Y1).Notethatthegrant-datefairvalueassignedtotheoptionsissuedbyTCisnotrelevantasoftheacquisitiondate.





Determining the Postcombination Service Period for Replacement Awards With Reduced ServiceRequirements

6.16 Anacquirer’sdecisiontoimmediatelyvestorreducethefutureserviceperiodofshare-based

paymentawardsheldbyemployeesoftheacquireeaffectsthetimingofwhenthepostcombination

compensationexpenseisrecognized.However,ifshare-basedpaymentawardsoftheacquireebecome

immediatelyvestedonthedateofthebusinesscombinationbecauseofachange-in-controlprovision,theoriginalserviceperiodshouldbeconsideredcompleted.

Example 6-4

Allocation of Compensation Expense

AssumethesamefactsasinExample6-3exceptthatPCdecidestoimmediatelyvestalloutstandingTCoptionsonthedateofthebusinesscombination(January1,20X9).

Insteadofrecognizingthe$667allocatedtothefutureservicesovertheperiodfromJanuary1,20X9,toJanuary1,20Y1,PCwouldimmediatelyexpensethisamountonthedateofthebusinesscombination.

Replacement Awards With Graded Vesting

6.17 ParagraphA95ofStatement141(R)states,“Ifthereplacementawardhasagradedvestingschedule,theacquirershallrecognizetherelatedcompensationcostinaccordancewithitspolicy

electionforotherawardswithgradedvestinginaccordancewithparagraph42ofStatement123(R).”

6.18 Paragraph42ofStatement123(R)states:

Anentityshallmakeapolicydecisionaboutwhethertorecognizecompensationcostforanaward

withonlyserviceconditionsthathasagradedvestingschedule(a)onastraight-linebasisoverthe

requisiteserviceperiodforeachseparatelyvestingportionoftheawardasiftheawardwas,in-

substance,multipleawardsor(b)onastraight-linebasisovertherequisiteserviceperiodfortheentire

award(thatis,overtherequisiteserviceperiodofthelastseparatelyvestingportionoftheaward).

However,theamountofcompensationcostrecognizedatanydatemustatleastequaltheportionof

thegrant-datevalueoftheawardthatisvestedatthatdate.

Impact of Modifications, Changes in Forfeiture Estimates and Other Events Occurring After theAcquisition Date

6.19 Generally,anyeventsthatoccuraftertheacquisitiondatethataffecttheestimatesof

forfeitureorcausemodificationstothereplacementawardswouldbeaccountedforinaccordance

withStatement123(R).Therefore,sucheventswouldaffectpostcombinationcompensationexpense

andwouldnotaffecttheamountofconsiderationtransferredinthebusinesscombination.Theonly

exceptionwouldbeforadjustmentsthataremadeduringthemeasurementperiodandpertainto

detailsthatexistedasoftheacquisitiondate.(See3.16–3.19.)ParagraphA95ofStatement141(R)

states:

Theportionofanonvestedreplacementawardattributabletoprecombinationservice,aswellasthe

portionattributabletopostcombinationservice,shallreflecttheacquirer’sestimateofthenumber

ofreplacementawardsforwhichtherequisiteserviceisexpectedtoberendered.Forexample,ifthe

fair-value-basedmeasureoftheportionofareplacementawardattributedtoprecombinationservice

is$100andtheacquirerexpectsthattherequisiteservicewillberenderedforonly95percentofthe

instrumentsawarded,theamountincludedinconsiderationtransferredinthebusinesscombination

is$95.Changesinthenumberofreplacementawardsforwhichtherequisiteserviceisexpectedto

berenderedarereflectedincompensationcostfortheperiodsinwhichthechangesorforfeitures

occur—notasadjustmentstotheconsiderationtransferredinthebusinesscombination.Similarly,the

effectsofotherevents,suchasmodificationsortheultimateoutcomeofawardswithperformance

conditions,thatoccuraftertheacquisitiondateareaccountedforinaccordancewithStatement

123(R)indeterminingcompensationcostfortheperiodinwhichaneventoccurs.





Gains or Losses on Assets Transferred as Consideration by the Acquiring Entity

6.20 Anacquiringentitymaytransferitstangibleorintangibleassetsorliabilitiesasconsideration

whosecarryingvaluediffersfromthefairvalueoftheassetsorliabilitiesasoftheacquisitiondate.

Examplesincludeinventory,property,intangibleassets,orabusinessorsubsidiary.Ifanentityelects

tomakesuchatransfer,Statement141(R)requiresthattheacquiringentityremeasurethoseassetsor

liabilitiestotheirfairvaluesasoftheacquisitiondateandrecognizetheresultinggainsorlosses,ifany,

inearnings.

Example 6-5

Nonmonetary Asset Transferred as Consideration to the Former Owners of the Acquiree

CompanyBenteredintoanagreementwithCompanyCtoacquireSubsidiarySforconsiderationof$1millioncashandabuilding.Thebuilding’scarryingvalueinB’sfinancialstatementsis$100,000anditsfairvalueis$250,000.

TheconsiderationtransferredforSis$1,250,000,whichincludesthefairvalueofthebuilding($250,000).CompanyBrecognizesagaininearningsonthedisposalofthebuildingasoftheacquisitiondateofSof$150,000($250,000–$100,000).

6.21 Sometimestheconsiderationtransferredincludesassetsorliabilitiesthattheacquiringentity

transferstotheacquireeratherthantoitsformerowners.Iftheassetsorliabilitiesstayinthecombined

entity,theacquiringentitydoesnotlosecontrolofthem.Therefore,suchassetsaremeasuredattheir

carryingamountsimmediatelybeforetheacquisitiondate,andnogainorlossisrecognizedbecausethe

acquiringentitycontrolsthembothbeforeandafterthebusinesscombination.Thesameistrueifthe

acquisitionwereforlessthan100percentoftheequityinterestsintheacquiree.

Example 6-6

Nonmonetary Asset Transferred as Consideration Directly to the Acquiree

CompanyBenteredintoanagreementtoacquirean80percentinterestinCompanyCforconsiderationof$1million

cashandabuilding.ThebuildingwillremainwiththecombinedentityandwillnotbetransferredtotheformerownersofC.Thebuilding’scarryingvalueinB’sfinancialstatementsis$100,000anditsfairvalueis$250,000.Therefore,theconsiderationtransferredforthe80percentinterestinCis$1,100,000($1millioncashplusthe$100,000carryingvalueofthebuilding).

Asoftheacquisitiondate,Chasidentifiablenetassetswithafairvalueof$700,000.Also,thefairvalueofthe20percentnoncontrollinginterestinCasoftheacquisitiondateis$200,000.

Ontheacquisitiondate,thegoodwillrecognizedaspartoftheacquisitioniscalculatedasfollows:

Cash $ 1,000,000

Building 100,000 B’scarryingamount

Noncontrollinginterest 200,000 Acquisition-datefairvalue

1,300,000

Less:assetsacquired Building 100,000

Otheridentifiablenetassets 700,000 Acquisition-datefairvalue

800,000

Goodwill $ 500,000





Contingent Consideration

6.22 Contingentconsiderationistypicallyanobligationoftheacquirertotransferadditionalassetsor

equityinstrumentstotheformerownersoftheacquireeifspecifiedfutureeventsoccurorconditions

aremet.Insomeinstances,however,contingentconsiderationcanalsobeanassettotheacquiring

entityiftheformerownersoftheacquireeareobligatedtoreturnpartoftheconsiderationifcertain

conditionsaremet.

Initial Recognition

6.23 Contingentconsiderationispartofthetotalconsiderationtransferredfortheacquiree

andthereforemustbemeasuredandrecognizedatfairvalueasoftheacquisitiondate.Typical

contingentconsiderationarrangementsarebasedonchangesinsecurityprices,meetingearnings

targets,componentsofearnings,suchasrevenuesorearningsbeforeinterest,taxes,depreciation,

andamortization(EBITDA),andarrangementsbasedonafutureevent,suchasFDAapprovalof

apharmaceuticalproduct.See6.40foradditionalconsiderationsofwhetheranarrangementis

contingentconsiderationorcompensationexpenserelatedtothesellingshareholders’continuing

employmentwiththecombinedentity.

6.24 Oncethecontingentconsiderationisinitiallyrecognized,theacquiringentitymustclassify

itasaliability,anequityinstrument,oranasset.Theinitialclassificationwillgovernitssubsequent

accounting.Itisusuallyclearifcontingentconsiderationisanasset.However,determiningwhether

contingentconsiderationisaliabilityoranequityinstrumentcanbedifficult.Statement141(R)refers

toexistingaccountingstandardsintheclassificationofcontingentconsideration.Suchguidance

includesStatement133,Statement150,Issue00-19,andIssue07-5.Mostcontingentconsideration

arrangementswillmostlikelybeclassifiedasliabilitiesunderthisliterature.

Example 6-7

Determining the Classification of Contingent Consideration as a Liability or Equity — Issuance ofa Variable Number of Equity Securities

CompanyAacquiresCompanyBfor1millionsharesofA’scommonstockandanagreementtoissueadditionalsharesasconsiderationifthequotedmarketpriceofA’scommonstockisbelow$25ontheone-yearanniversaryoftheacquisitiondate.Thenumberofshares,ifany,issuedbyAontheone-yearanniversarydatewillbetheamountnecessarytoguaranteethepriceof$25pershare.

Ontheone-yearanniversaryoftheacquisitiondate,thequotedmarketpriceofA’scommonstockis$20.Accordingly,Aissuesanadditional250,000sharestotheseller.

Onthebasisofitsanalysisofexistingaccountingguidance,Aconcludesthatthisarrangementisaliabilitybecausethenumberofsharesisvariable.

Example 6-8 Determining the Classification of Contingent Consideration as a Liability or Equity — Payment ofAdditional Cash Consideration

CompanyAacquiresCompanyBfor1millionsharesofA’scommonstockandanagreementtopaycashconsiderationifthequotedmarketpriceofA’scommonstockisbelow$25ontheone-yearanniversaryoftheacquisitiondate.Thetotalcash,ifany,paidbyAontheone-yearanniversaryoftheacquisitiondatewillbetheamountnecessarytoguaranteethe$25pershareprice.

Ontheone-yearanniversaryoftheacquisitiondate,thequotedmarketpriceofA’scommonstockis$20.Accordingly,Apaysadditionalcashconsiderationof$5milliontotheformerownersofB.

Onthebasisofitsanalysisofexistingaccountingguidance,Aconcludesthatthisarrangementisaliabilitybecauseofthecashsettlementfeature.





Example 6-9

Determining the Classification of Contingent Consideration as a Liability or Equity — Issuance ofa Fixed Number of Equity Securities

CompanyBacquiresCompanyCfor1millionsharesandanagreementtoissueanadditional250,000sharesiftheearningsofCequalorexceedaspecifiedtargetforthe12-monthperiodaftertheacquisition.IftheearningsofCexceedthespecifiedtarget,Bwillberequiredtoissuethefixedamountofadditionalshares.

Ontheone-yearanniversaryoftheacquisitiondate,itwasdeterminedthattheearningsofCexceededthespecifiedtarget.Accordingly,Bissuedtheadditional250,000shares.

Onthebasisofitsanalysisofexistingaccountingguidance,Aconcludesthatthisarrangementmayqualifyasanequityinstrumentinpartbecausethenumberofsharesisfixed.

Subsequent Accounting

6.25 Ifthecontingentconsiderationisclassifiedasanassetoraliability,itisremeasuredtofairvalue

eachreportingperiod.Theacquiringentityrecognizeschangesinfairvalueinearningseachperiod

unlessthearrangementisahedginginstrumentforwhichStatement133requireschangestobe

recognizedinothercomprehensiveincome.

6.26 Ifthecontingentconsiderationisclassifiedasanequityinstrument,itisnotremeasured.The

initialamountrecognizedforcontingentconsiderationclassifiedasequityisnotadjusted,evenifthefair

valueofthearrangementonthedatethecontingencyisresolvedwouldbedifferent.

6.27 Adjustmentsmadeduringthemeasurementperiodthatpertaintofactsandcircumstancesthat

existedasoftheacquisitiondate(see3.16–3.19)arerecognizedasadjustmentstogoodwill.However,

mostchangesinfairvalueaftertheacquisitiondatewillnotlikelybemeasurementperiodadjustments.

Forexample,earningstargetsthataremet,changesinshareprices,andFDAapprovalsareallchanges

thatoccuraftertheacquisitiondate.Changesinfairvalueresultingfromtheseitemsarerecognizedin

earningsandnotasadjustmentstogoodwill.

Example 6-10

Subsequent Accounting for a Contingent Consideration Arrangement Classified as a Liability

OnJanuary1,20X9,CompanyAacquiresCompanyBfromCompanyXfor$15million.CompanyAagreestopayanadditional$6milliontoXifthecumulativenetincomeofBreaches$10millionwithinthreeyearsoftheacquisitiondate.Thefairvalueofthecontingentconsiderationarrangementisclassifiedasaliabilityandhasanacquisition-datefairvalueof$4million.Attheendofeachreportingperiodaftertheacquisitiondate,thecontingentpaymentisremeasuredtoitsfairvalue,withchangesinfairvaluerecordedinearnings.Forexample,ifthelikelihoodofmeetingthetargetincreases,thefairvalueofthecontingentconsiderationwouldlikelyincrease.Ifthetargetismetandthe$6millioncontingentconsiderationispayable,$2millionwillhavebeenrecordedcumulativelyintheincomestatement(thedifferencebetweenthe$6millionpaymentandthe$4millionoriginallyrecordedinthefairvalueallocation)bythetimethe$6millionispaid.Conversely,ifthecontingencyisnotmetoritsfairvaluedeclines,anyaccruedliabilitywouldbereversedintoincome.

6.28 Whenacontingencyrelatedtocontingentconsiderationisnotmet(e.g.,theearningstargets

specifiedinthearrangementarenotachieved),theacquirershouldconsiderwhetherthisfactor

representsanindicatorthatgoodwillassociatedwiththebusinesscombinationshouldbetestedfor

impairment(see11.25–11.27).

Consideration Held in Escrow Pending Resolution of Representation and Warranty Provisions

6.29 Insomebusinesscombinations,theacquiringentityrequeststhataportionoftheconsideration

beheldinescrowpendingresolutionofrepresentationandwarrantyprovisionscontainedinthe

acquisitionagreement.Iftheconsiderationheldinanescrowaccountissharesorothersecurities,the

arrangementtypicallyprovidesthattherisksandrewardsofownershiparetransferredtothesellers.





Votingrightsandanydividendsrelatedtothesharesorothersecuritiesheldinescrowarealsogenerally

conveyedtothesellersduringtheescrowperiod.Insucharrangements,theescrowedsharesorother

securitiesareameansforanacquiringentitytogainfurtherassurancethattherepresentationsand

warrantiesprovidedintheacquisitionagreementareaccurate.Iftheyarenot,itprovidesareadymeans

toobtainrestitution.Representationandwarrantyprovisionsgenerallylapsewithinashortperiodafter

theacquisitiondate.

6.30 Intheabsenceofevidencetothecontrary,representationandwarrantiesprovidedinthe

businesscombinationagreementareassumedtobeaccurate,andreleaseoftheconsiderationfrom

escrowisthereforedeterminedtobebeyondareasonabledoubt.Accordingly,inclusionofamounts

inescrowinthetotalconsiderationtransferredasoftheacquisitiondateisgenerallyconsidered

appropriate.Eachescrowarrangementmust,however,beevaluatedindividually.

Acquisition-Related Costs of the Business Combination

6.31 Acquisition-relatedcostsarecoststhattheacquirerincurstoeffectabusinesscombination.They

includefinders’fees;advisory,legal,accounting,valuation,andotherprofessionalorconsultingfees;

generaladministrativecosts,includingthecostsofmaintaininganinternalacquisitionsdepartment;

andcostsofregisteringandissuingdebtandequitysecurities.Theacquiringentityshouldaccountfor

acquisition-relatedcostsasexpensesintheperiodsinwhichthecostsareincurredandtheservicesare

received.However,thecoststoissuedebtorequitysecuritiesaspartofabusinesscombinationare

recognizedinaccordancewithotherapplicableGAAP.(See6.34–6.36.)

6.32 TheFASBdecidednottochangecurrentpracticerelatedtothecoststoissuedebtorequity

securitiesanditisconsideringthisissueaspartofitscurrentprojectonliabilitiesandequity.The

accountingforcoststoissuedebtorequitysecuritiesmaychangependingtheoutcomeofthisproject.

6.33 Referalsotothefollowingadditionalguidanceonacquisition-relatedcosts:

• See6.41forguidanceonreimbursementsoftheacquirer’sacquisition-relatedcostspaidtothe

formerownersoftheacquiree.

• See13.13–13.14forthedisclosurerequirementsforacquisitioncostsincurredinabusiness

combination.

• See14.18–14.23forguidanceonacquisitioncostsincurredbeforetheeffectivedateof

Statement141(R).

Costs of Registering and Issuing Equity Securities

6.34 SABTopic5.Aprovidesguidanceonaccountingforthecostsofissuingequitysecurities.Itstates

that“[s]pecificincrementalcostsdirectlyattributabletoaproposedoractualofferingofsecuritiesmay

properlybedeferredandchargedagainstthegrossproceedsoftheoffering.”Therefore,thecoststo

issueequitysecuritiesaregenerallyreflectedasareductionoftheamountthatwouldhaveotherwise

beenrecordedinadditionalpaid-incapital.

6.35 SABTopic5.Agoesontostatethat“managementsalariesorothergeneralandadministrative

expensesmaynotbeallocatedascostsoftheofferinganddeferredcostsofanabortedofferingmay

notbedeferredandchargedagainstproceedsofasubsequentoffering.Ashortpostponement(upto

90days)doesnotrepresentanabortedoffering.”





Debt Issue Costs

6.36 SABTopic2.A.6statesthat“[f]eespaidtoaninvestmentbankerinconnectionwithabusiness

combination,whentheinvestmentbankerisalsoprovidinginterimfinancingorunderwritingservices,

mustbeallocatedbetweendirectcostsoftheacquisitionanddebtissuecosts.”SABTopic2.A.6

furtherindicatesthat“debtissuecostsareanelementoftheeffectiveinterestcostofthedebt,and

neitherthesourceofthedebtfinancingnortheuseofthedebtproceedschangesthenatureofsuchcosts.Accordingly,theyshouldnotbeconsideredadirectcostoftheacquisition.”SABTopic2.A.6

alsoaddressestheamortizationofdebtissuecostsrelatedtointerim“bridgefinancing,”statingthat

“[d]ebtissuecostsshouldbeamortizedbytheinterestmethodoverthelifeofthedebttowhichthey

relate.Debtissuecostsrelatedtothebridgefinancingshouldberecognizedasinterestcostduringthe

estimatedinterimperiodprecedingtheplacementofthepermanentfinancingwithanyunamortized

amountschargedtoexpenseifthebridgeloanisrepaidpriortotheexpirationoftheestimatedperiod.”

Separate Transactions Not Included in the Accounting for a Business Combination

6.37 Paragraph58ofStatement141(R)notesthatsomepaymentstotheformerownersoftheacquireearenotpartoftheconsiderationtransferredfortheacquiree.Theyrepresenttransactionstobe

accountedforseparatelyfromthebusinesscombination(see3.28–3.39).

6.38 Forexample,amountspaidorreceivedtosettlepreexistingrelationshipsbetweenpartiestothe

businesscombinationarenotpartoftheconsiderationtransferred(see3.28–3.34).Suchrelationships

maybeeithercontractual(suchasfranchiseorlicenseagreements,supplyagreements(whetherfixedor

executory))ornoncontractual(suchaslawsuitsorotherdisputes).

Compensation to Employees or Former Owners of the Acquiree for FutureProducts or Services

6.39 Insometransactions,theacquiringentitymayagreetoprovideproductsorservicestothe

sellerinthefuture.Thismayoccur,forexample,whentheacquiredentityisasubsidiaryoftheseller

andthatsubsidiaryprovidedproductsorservicestoitsparentthattheparentwishestocontinueto

receiveafterthesale.Anagreementforfutureproductsorservicestobeexchangedbetweenthe

acquiringentityandthesellermustbeevaluatedtodeterminewhethersuchanagreementrepresents

considerationtransferred.Ananalysisofsuchagreementwouldincludeadeterminationof(1)whether

thearrangementisbasedoncurrentmarketterms,(2)whoinitiatedthearrangement,and(3)whenthe

arrangementwasenteredinto.

Example 6-11

Agreement to Provide Products or Services to a Seller After the AcquisitionCompanyBentersintoanagreementwithCompanyCtoacquireSubsidiaryS.SubsidiarySsuppliesaspecificrawmaterialtoCthatthecompanywantstocontinuetoreceiveafterthesale.CompanyBagreestopay$3millionandprovideapredeterminedamountofrawmaterialstoCforafixedtermatafixedprice($10perpound).AnevaluationoftherawmaterialssupplyagreementindicatesthattheagreementisunfavorabletoBby$750,000.

Indeterminingtheconsiderationtransferredinthebusinesscombination,Bshouldincludethe$750,000relatedtotheunfavorablerawmaterialssupplyagreement.Thatis,thetotalconsiderationtransferredwouldbe$3,750,000($3million+$750,000).





Factors to Consider in Assessing Whether Contingent Payment Is Part of theConsideration Transferred

6.40 Itisoftendifficulttodeterminewhetheranarrangementforpaymentstosellingshareholders

oremployeesrepresentscontingentconsiderationorcompensationexpense.Contingentconsideration

isaccountedforaspartoftheconsiderationtransferred,whereascompensationarrangementsare

accountedforseparatelyasexpenses.ParagraphA87providesthefollowingfactorstoconsiderin

makingthatdetermination:

a. Continuingemployment —Thetermsofcontinuingemploymentbythesellingshareholders

whobecomekeyemployeesmaybeanindicatorofthesubstanceofacontingent

considerationarrangement.Therelevanttermsofcontinuingemploymentmaybeincluded

inanemploymentagreement,acquisitionagreement,orsomeotherdocument.Acontingent

considerationarrangementinwhichthepaymentsareautomaticallyforfeitedifemployment

terminatesiscompensationforpostcombinationservices.Arrangementsinwhichthe

contingentpaymentsarenotaffectedbyemploymentterminationmayindicatethatthe

contingentpaymentsareadditionalconsiderationratherthancompensation.

b. Durationofcontinuingemployment —Iftheperiodofrequiredemploymentcoincideswith

orislongerthanthecontingentpaymentperiod,thatfactmayindicatethatthecontingent

paymentsare,insubstance,compensation.

c. Levelofcompensation —Situationsinwhichemployeecompensationotherthanthe

contingentpaymentsisatareasonablelevelincomparisontothatofotherkeyemployeesin

thecombinedentitymayindicatethatthecontingentpaymentsareadditionalconsideration

ratherthancompensation.

d. Incrementalpaymentstoemployees —Ifsellingshareholderswhodonotbecomeemployees

receivelowercontingentpaymentsonaper-sharebasisthanthesellingshareholderswho

becomeemployeesofthecombinedentity,thatfactmayindicatethattheincremental

amountofcontingentpaymentstothesellingshareholderswhobecomeemployeesis

compensation.

e. Numberofsharesowned —Therelativenumberofsharesownedbythesellingshareholderswhoremainaskeyemployeesmaybeanindicatorofthesubstanceofthecontingent

considerationarrangement.Forexample,ifthesellingshareholderswhoownedsubstantially

allofthesharesintheacquireecontinueaskeyemployees,thatfactmayindicatethatthe

arrangementis,insubstance,aprofit-sharingarrangementintendedtoprovidecompensation

forpostcombinationservices.Alternatively,ifsellingshareholderswhocontinueaskey

employeesownedonlyasmallnumberofsharesoftheacquireeandallsellingshareholders

receivethesameamountofcontingentconsiderationonaper-sharebasis,thatfactmay

indicatethatthecontingentpaymentsareadditionalconsideration.Thepreacquisition

ownershipinterestsheldbypartiesrelatedtosellingshareholderswhocontinueaskey

employees,suchasfamilymembers,alsoshouldbeconsidered.

f. Linkagetothevaluation —Iftheinitialconsiderationtransferredattheacquisitiondate

isbasedonthelowendofarangeestablishedinthevaluationoftheacquireeandthe

contingentformularelatestothatvaluationapproach,thatfactmaysuggestthatthe

contingentpaymentsareadditionalconsideration.Alternatively,ifthecontingentpayment

formulaisconsistentwithpriorprofit-sharingarrangements,thatfactmaysuggestthatthe

substanceofthearrangementistoprovidecompensation.

g. Formulafordeterminingconsideration —Theformulausedtodeterminethecontingent

paymentmaybehelpfulinassessingthesubstanceofthearrangement.Forexample,if

acontingentpaymentisdeterminedonthebasisofamultipleofearnings,thatmight

suggestthattheobligationiscontingentconsiderationinthebusinesscombinationand

thattheformulaisintendedtoestablishorverifythefairvalueoftheacquiree.Incontrast,

acontingentpaymentthatisaspecifiedpercentageofearningsmightsuggestthatthe

obligationtoemployeesisaprofit-sharingarrangementtocompensateemployeesforservices

rendered.





h. Otheragreementsandissues —Thetermsofotherarrangementswithsellingshareholders

(suchasnoncompeteagreements,executorycontracts,consultingcontracts,andproperty

leaseagreements)andtheincometaxtreatmentofcontingentpaymentsmayindicatethat

contingentpaymentsareattributabletosomethingotherthanconsiderationfortheacquiree.

Forexample,inconnectionwiththeacquisition,theacquirermightenterintoaproperty

leasearrangementwithasignificantsellingshareholder.Iftheleasepaymentsspecifiedin

theleasecontractaresignificantlybelowmarket,someorallofthecontingentpayments

tothelessor(thesellingshareholder)requiredbyaseparatearrangementforcontingent

paymentsmightbe,insubstance,paymentsfortheuseoftheleasedpropertythatthe

acquirershouldrecognizeseparatelyinitspostcombinationfinancialstatements.Incontrast,

iftheleasecontractspecifiesleasepaymentsthatareconsistentwithmarkettermsforthe

leasedproperty,thearrangementforcontingentpaymentstothesellingshareholdermaybe

contingentconsiderationinthebusinesscombination.

Reimbursement Made to the Acquiree for the Acquirer’s Acquisition-Related Costs

6.41 Statement141(R)generallyrequiresacquisition-relatedcoststobeexpensedintheperiodthey

areincurred(see6.31).Paymentstoreimbursetheacquireeforpayingtheacquirer’sacquisition-related

costsarenotpartoftheconsiderationtransferredandmustbeaccountedforseparatelyfromthe

businesscombination(i.e.,expensedwhenincurred).



Section 7 — Noncontrolling Interests

7.01 Paragraph25ofARB51,asamendedbyStatement160,statesthatanoncontrollinginterest

(formerlyknownasaminorityinterest)is“theportionofequity(netassets)inasubsidiarynot

attributable,directlyorindirectly,toaparent.”Typically,noncontrollingshareholdersownlessthan

50percentofanentity;however,anoncontrollingshareholderinavariableinterestentityunder

Interpretation46(R)mightownmorethan50percentofthevotingstockoftheentity(evenupto100

percent)becausethecontrollingentityexercisescontrolbyothermeans(see7.36).

7.02 WhileStatement160carriesforwardmuchofARB51’sguidanceonpreparingconsolidated

financialstatements,itsignificantlychangestheaccountingfor(1)noncontrollinginterests,(2)increases

anddecreasesinparentownershipinterestsinsubsidiaries,and(3)deconsolidationsofsubsidiaries(see

Appendix B).Statement160appliestoallentitiesexceptfornot-for-profitorganizations,whichwill

continuetoapplythepre-amendedversionofARB51.

Scope of Statement 160

7.03 Paragraph27ofARB51,asamendedbyStatement160,states,inpart:

Onlyafinancialinstrumentissuedbyasubsidiarythatisclassifiedasequityinthesubsidiary’s

financialstatementscanbeanoncontrollinginterestintheconsolidatedfinancialstatements.A

financialinstrumentissuedbyasubsidiarythatisclassifiedasaliabilityinthesubsidiary’sfinancial

statementsbasedontheguidanceinotherstandardsisnotanoncontrollinginterestbecauseitisnot

anownershipinterest.

7.04 Whileanoncontrollinginterestmayinitiallyresultfromabusinesscombinationaccountedfor

inaccordancewithStatement141(R),itmayalsoresultfromthedilutionofacontrollingshareholder’s

equityinterestinawhollyownedsubsidiary.

Example 7-1

Noncontrolling Interest Resulting From the Sale of Equity Interests

CompanyAhasawhollyownedsubsidiarythatitacquiredonJune30,2007.OnJuly15,2009,CompanyAsoughttoraisecapitalandissuedsharesofthesubsidiary’scommonequitytoanunrelatedthirdparty,whichdiluteditsownershipinterestfrom100percentto90percent.Uponthesaleofequitytothethirdparty,CompanyAwouldnowberequiredtoinitiallyrecognizethenoncontrollinginterest(i.e.,the10percentofthesubsidiaryitnolongerowns).

7.05 Indeterminingtheappropriateclassificationofanoncontrollinginterest,anentitymustlook

tootherrelevantGAAPtodeterminewhetherthefinancialinstrumentissuedbyasubsidiarycanbe

classifiedaspermanentequity.SuchGAAPwouldinclude,butnotbelimitedto:

• Statement133.

• Statement150.

• EITFTopicD-98.

• SECAccountingSeriesReleaseNo.268.





7.06 Morecomplexfinancialinstruments(e.g.,thosewithcertaincall,put,orredemptionfeatures)

mayberequiredtofollowthepresentationrequirementsinotherGAAPand,therefore,couldbe

classifiedineithermezzanine(ortemporary)equityorasliabilities.

Recognizing and Measuring Noncontrolling Interests as of the Acquisition Date

7.07 UnderStatement141(R),noncontrollinginterestsarerecognizedandmeasuredatfairvalueasoftheacquisitiondate.Inaddition,asdiscussedin12.11,Statement160requiresthattheconsolidated

financialstatementspresentthenoncontrollinginterestasaseparatecomponentofshareholders’

equity.Netincomeandcomprehensiveincomeareattributedtothenoncontrollinginterestafter

theacquisitiondate(see7.13).Thenoncontrollinginterestisnotremeasuredtofairvalueafterthe

acquisitiondate.


Anacquirersometimeswillbeabletomeasuretheacquisition-datefairvalueofanoncontrolling

interestonthebasisofactivemarketpricesfortheequitysharesnotheldbytheacquirer.Inother

situations,however,anactivemarketpricefortheequityshareswillnotbeavailable.Inthosesituations,theacquirerwouldmeasurethefairvalueofthenoncontrollinginterestusingother

valuationtechniques.

7.09 Inmanybusinesscombinations,theacquiringentitypaysapremiumovermarkettoobtain

controloftheacquiredentity(commonlyreferredtoasacontrolpremium).Therefore,theper-share

valueoftheacquiringentity’sinterestintheacquiredentitymaybegreaterthanthenoncontrolling

shareholders’per-sharevalueinthatsameentity.

Example 7-2

Impact of Control Premium on Fair Value of the Noncontrolling Interest

CompanyAacquires60percent(600,000shares)ofCompanyBfor$6million(or$10pershare).However,asoftheacquisitiondate,theacquiredentity’ssharesaretradingat$7.50pershare.Theacquireracknowledgesthatapremiumovermarketispaidbecauseofsynergiesitbelievesitwillbeabletoderivefromtheacquiredbusiness.Therefore,aconclusionthatthefairvalueoftheentireacquiredentityis$10millionmaynotbereasonable.Thefairvalueoftheacquiredentitymightbe$9million,calculatedasthe$6millionpaidplus$3millionforthenoncontrollingshares(400,000shares×$7.50pershare).

Example 7-3

Determining the Fair Value of the Noncontrolling Interest

CompanyCannouncesitwillacquire75percent(750,000shares)ofCompanyD,aprivatelyheldentity,for$15millionincash(or$20pershare).Anindependentthird-partyvaluationfirmcalculatesthefairvalueoftheentireacquiredbusiness(i.e.,100percent)as$19millionusingvaluationtechniquesconsistentwiththeguidanceinStatement157.It

maybeappropriateforCompanyCtoderivethefairvalueofthenoncontrollinginterestas$4million(or$16pershare),calculatedasthefairvalueoftheentirebusiness($19million)lessthefairvalueoftheconsiderationtransferredbyCompanyC($15million),whichincludesacontrolpremium.





Measuring Noncontrolling Interests in Reverse Acquisitions

7.10 Insomereverseacquisitions(see2.23–2.31forfurtherdiscussiononreverseacquisitions),certain

shareholdersoftheaccountingacquirer(legalacquiree)maynotexchangetheirinterestsforinterestsin

theaccountingacquiree(legalacquirer),whichwouldcreateanoncontrollinginterestinthecombined

entity.ParagraphA113ofStatement141(R)describestheaccountingforthenoncontrollinginterestina

reverseacquisitionasfollows:

[I]nareverseacquisitionthenoncontrollinginterestreflectsthenoncontrollingshareholders’

proportionateinterestintheprecombinationcarryingamountsofthelegalacquiree’snetassets

eventhoughthenoncontrollinginterestsinotheracquisitionsaremeasuredattheirfairvaluesatthe

acquisitiondate.

Example 7-4

Noncontrolling Interests in a Reverse Acquisition

CompanyA,apublicentity,andCompanyB,aprivateentity,enterintoareverseacquisitionwithinthescopeofStatement141(R).CompanyBisdeemedtobetheaccountingacquirer(legalacquiree).Beforethetransaction,CompanyBhas5millioncommonsharesoutstanding,issuedequityof$150million,andretainedearningsof$100million.In

addition,thefairvalueofCompanyAis$75million(i.e.,thehypotheticalconsiderationtransferredbyCompanyB;see2.24).

Aspartofthetransaction,CompanyAissuescommonsharesinexchangefor4millionoutstandingsharesofCompanyB.Noncontrollingshareholdersholdtheremaining1millionsharesinCompanyB,ora20percentownershipinterest.Thecombinedentitywouldcalculateitspostcombinationshareholders’equityasfollows:.

Retainedearnings

Issuedequity

Noncontrollinginterest

Totalshareholders’equity

$ 80million

195million

50million

$ 325million

$100million×80%

$75million+($150million×80%)

($100millionx20%)+($150million×20%)

Full Goodwill Approach

7.11 Asdiscussedin7.07,thenoncontrollinginterestisrecognizedandmeasuredatfairvalueasof

theacquisitiondate.Therefore,inpartialacquisitions,goodwillrepresentsamountsattributabletoboth

theacquiringentity(parent)andthenoncontrollinginterest.TheFASBdescribesStatement141(R)’s

methodforrecognizingandmeasuringgoodwillasthe“fullgoodwill”approach.

7.12 Notethattheparent’sconsolidatedstatementoffinancialpositionpresentstotalgoodwillona

singlelineitem.See11.58forguidancerelatedtoallocatinggoodwillimpairmentsbetweentheparent

andnoncontrollinginterest.

Attributing Net Income (Loss) and Comprehensive Income (Loss) to the Parent and

Noncontrolling Interest

7.13 ARB51,asamendedbyStatement160,requiresthatentitiesattributenetincomeorlossand

comprehensiveincomeorlosstoboththeparentandnoncontrollinginterest.However,neitherARB51

norStatement160providesdetailedguidanceonmakingthisattribution.InStatement160’sBasisfor

Conclusions,theFASBstated“thatentitiesweremakingattributionsbefore[Statement160]wasissued

andthatthoseattributionsgenerallywerereasonableandappropriate.”





7.14 Entitiesgenerallyallocatenetincomeorlossandcomprehensiveincomeorlosstotheparent

andnoncontrollinginterestonthebasisofrelativeownershipinterests.However,thismaynotbe

appropriateinsomesituations,suchasincertaincontractualarrangements(see7.15)andpartial

acquisitionsenteredintobeforeStatement141(R)becameeffective(see7.16).

7.15 Forexample,acontractualagreementmightspecifyinvestors’allocationsofasubsidiary’sprofits

andlosses,certaincostsandexpenses,distributionsfromoperations,ordistributionsuponliquidation

thataredifferentfromrelativeownershippercentages.Theentityshouldconsiderthesubstanceofsuch

agreementswhendetermininghowanincreaseordecreaseinnetassetsofthesubsidiarywillaffect

cashpaymentstotheparentandthenoncontrollinginterestoverthelifeofthesubsidiaryanduponits

liquidation.

7.16 InabusinesscombinationconsummatedbeforetheeffectivedateofStatement141(R),and

inwhichtheacquirerobtainedlessthana100percentinterest,theacquirerwouldmeasurethe

acquiredentity’sidentifiablenetassetsatfairvalueonlyfortheportionitacquired.Forexample,ifan

acquirerobtaineda75percentinterest,itwouldmeasuretheacquiredentity’sidentifiablenetassets

as75percentfairvalueand25percentcarryovervalue.Becauseofthedisproportionateinterestintheidentifiablenetassets,allocationoftheacquiredentity’spostcombinationamortizationexpense,aswell

asitsdepreciationexpenseandimpairmentcharges,totheparentandnoncontrollinginterestmaynot

bebasedontheirrelativeownershipinterests.ParagraphB38ofStatement160providesthefollowing

example:

[I]fanentityacquired80percentoftheownershipinterestsinasubsidiaryinasingletransaction

beforeStatement141(R)waseffective,itlikelywouldhaverecordedtheintangibleassetsrecognized

intheacquisitionofthatsubsidiaryat80percentoftheirfairvalue(80percentfairvalueforthe

ownershipinterestacquiredplus20percentcarryovervaluefortheinterestsnotacquiredinthat

transaction,whichforunrecognizedintangibleassetswouldbe$0).IftheBoardwouldhave

requirednetincometobeattributedbasedonrelativeownershipinterestsin[Statement160],the

noncontrollinginterestwouldhavebeenattributed20percentoftheamortizationexpenseforthoseintangibleassetseventhoughnoamountoftheassetwasrecognizedforthenoncontrollinginterest.

Before[Statement160]wasissued,theparentgenerallywouldhavebeenattributedallofthe

amortizationexpenseofthoseintangibleassets.

7.17 See14.53–14.54regardingthecalculationofbasicanddilutedearningspersharewhena

noncontrollinginterestispresent.

Losses in Excess of the Carrying Amount of the Noncontrolling Interest

7.18 Paragraph31ofARB51,asamendedbyStatement160,statesthefollowingregardinglosses

incurredbythesubsidiary:

Lossesattributabletotheparentandthenoncontrollinginterestinasubsidiarymayexceedtheir

interestsinthesubsidiary’sequity.Theexcess,andanyfurtherlossesattributabletotheparent

andthenoncontrollinginterest,shallbeattributedtothoseinterests.Thatis,thenoncontrolling

interestshallcontinuetobeattributeditsshareoflossesevenifthatattributionresultsinadeficit

noncontrollinginterestbalance.

7.19 BeforetheadoptionofStatement160,lossesinexcessofthecarryingamountofthe

noncontrollinginterestinthesubsidiarywereallocatedtothecontrollinginterest(parent),unlessthe

noncontrollingshareholdershadanobligationtomakegoodonsuchlosses.SinceStatement160’s

accountingguidanceisentirelyprospective,allocationsofprofitsandlossesbeforetheeffectivedateof







Example 7-6

Acquisition of Noncontrolling Interests in a Subsidiary When There Is No Change in Control

ParentCompanyAowns80percentofitssubsidiary,whichhasanetbookvalueof$100asofDecember31,20X9.Thecarryingamountsofthecontrollingandnoncontrollinginterestsinthesubsidiaryare$80and$20,respectively.Also,thenoncontrollinginterest’scarryingamountincludes$5ofaccumulatedothercomprehensiveincome.OnJanuary1,20Y0,Apurchasestheremaining20percentofthesubsidiaryfor$30.

Whenthistransactionoccurs,thenoncontrollinginterest’scarryingamount(includedasaseparatecomponentofconsolidatedequity)isreducedby$20tozero.CompanyA’sequityisreducedfurtherbyanetof$10througha$15chargetoadditionalpaid-incapitalanda$5credittoaccumulatedothercomprehensiveincome.Theonlychangetoconsolidatedassetsorliabilitiesistherecognitionof$30ofcashpaidfortheadditionalinterest.

ParentCompanyA’sjournalentryonJanuary1,20Y0,isasfollows:

Debit Credit

Noncontrollinginterestinsubsidiary(aseparatecomponentofconsolidatedequity)

Additionalpaid-incapital(acomponentofA’sequity)**

Accumulatedothercomprehensiveincome(acomponentofA’sequity)

Cash

$ 20*

15

$ 5

30

* Amountincludes$5ofaccumulatedothercomprehensiveincomepreviouslyattributabletothenoncontrollinginterest.

**Iftheparentsubsequentlylosescontrolofanddeconsolidatesthissubsidiary,Statement160doesnotpermittheparententitytoreverseprioradjustmentsmadetoitsadditionalpaid-incapitalaccount.

Example 7-7

Sale of an Ownership Interest in a Subsidiary When There Is No Change in Control

ParentCompanyAowns80percentofitssubsidiary.Thesubsidiaryhasanetbookvalueof$100asofDecember31,20X9.Thecarryingamountsofthecontrollinginterest(A)andnoncontrollinginterest(ownedbyCompanyB)inthesubsidiaryare$80and$20,respectively.OnJanuary1,20Y0,thesubsidiaryissuesstocktoanonaffiliatedentity,

CompanyC,for6.25percentinterestandtotalproceedsof$20.Assummarizedinthetablebelow,thistransaction(1)bringsthesubsidiary’stotalbookvalueto$120,(2)dilutesA’sinterestinthesubsidiaryto75percentbutincreasesitscarryingamountby$10to$90,and(3)increasesthetotalcarryingamountofthenoncontrollinginterest(BandC)by$10to$30.

CompanyOriginal Carrying

AmountOriginal Ownership

InterestCarrying Amount

1/1/2010Ownership Interest

1/1/2010

A $ 80 80% $ 90.00 75.00%

B 20 20 22.50 18.75

C — — 7.50 6.25

Total $ 100 100% $ 120.00 100.00%

ParentCompanyA’sjournalentryonJanuary1,20Y0,isasfollows:

Debit Credit

Cashheldbythesubsidiary

Noncontrollinginterestinsubsidiary(aseparatecomponentofconsolidatedequity)

Additionalpaid-incapital(acomponentofA’sequity)*

$ 20

$ 10

10

* Iftheparentsubsequentlylosescontrolofanddeconsolidatesthissubsidiary,Statement160doesnotpermittheparententitytoreverseprioradjustmentsmadetoitsadditionalpaid-incapitalaccount.





Former Parent Retains a Noncontrolling Interest of a Subsidiary After Control IsLost

7.24 Statement141(R)statesthatasignificanteconomiceventoccurswhenanacquiringentity

obtainscontrolofanacquireethatresultsinthe(1)initialrecognitionandmeasurementoftheassets

acquiredandliabilitiesassumedinthatbusinesscombinationatfairvalueand(2)remeasurementto

fairvalueofanypreexistingequityinterestsintheacquiree(e.g.,aless-than-50percentequityinterest).

Similarly,Statement160describesaparent’slossofcontroloverasubsidiaryasasignificanteconomic

event.

7.25 Paragraph35ofARB51,asamendedbyStatement160,providesthefollowingfourexamples

ofeventsthatwouldresultinalossofcontrolandwouldrequireaparentcompanytodeconsolidateits

subsidiary:

1. The“parentsellsallorpartofitsownershipinterestinitssubsidiary,andasaresult,theparent

nolongerhasacontrollingfinancialinterestinthesubsidiary.”

2. “Theexpirationofacontractualagreementthatgavecontrolofthesubsidiarytotheparent.”3. “Thesubsidiaryissuesshares,whichreducestheparent’sownershipinterestinthesubsidiaryso

thattheparentnolongerhasacontrollingfinancialinterestinthesubsidiary.”

4. “Thesubsidiarybecomessubjecttothecontrolofagovernment,court,administrator,or

regulator.”

Thedeconsolidationofasubsidiarythroughanonreciprocaltransfertoowners(e.g.,aspinoff)isnot

withinthescopeofARB51,asamended(see7.34).

7.26 Iftheparentlosescontrolofasubsidiarybutretainsanoncontrollinginterestinthatpreviously

consolidatedsubsidiary,theretainednoncontrollinginterestintheformersubsidiaryisremeasuredto

fairvalue.

7.27 Theparent’sgainorlossondeconsolidationiscalculatedinaccordancewithparagraph36of

ARB51,asamendedbyStatement160,asfollows:

Fairvalueofanyconsiderationreceived

+ Fairvalueofanyretainednoncontrollinginvestmentintheformersubsidiaryasofthedate

thesubsidiaryisdeconsolidated

+ Carryingamountofanynoncontrollinginterestintheformersubsidiary,includingAOCI

attributabletothenoncontrollinginterest,asofthedatethesubsidiaryisdeconsolidated

– Carryingamountoftheformersubsidiary’sassetsandliabilities

= Totalgainorlossondeconsolidation

7.28 Asdiscussedin7.21,theparentaccountsforchangesinitsownershipinterestofasubsidiary

thatdonotresultinachangeofcontrolasequitytransactions,whichoftenresultsinadjustments

totheparententity’sadditionalpaid-incapitalaccount.Iftheparentsubsequentlylosescontrolof

anddeconsolidatesasubsidiary,Statement160doesnotpermittheparententitytoreverseprior

adjustmentsmadetoitsadditionalpaid-incapitalaccount.





Example 7-8

Parent Retains an Investment in Its Former Subsidiary

ParentCompanyowns80percentofasubsidiarywithabookvalueof$100and(1)thecarryingamountsofthecontrolling(ParentCompany)andnoncontrollinginterestsare$80and$20,respectively;(2)ParentCompanyreducesitsinterestintheformersubsidiaryto10percentbysellingstockfor$105;and(3)thefairvalueofthe10percentretainedinterestis$15.

Thegainonthesalewouldbecomputedasfollows:

Fairvalueofconsiderationreceived(cashproceeds)

Fairvalueofretainednoncontrollinginterestinthesubsidiary

Carryingvalueofnoncontrollinginterest

Less:subsidiary’sbookvalue

Gainonsale

$ 105

15

20

140

100

$ 40

Thejournalentrywouldbeasfollows:

Debit Credit

Cash

Investmentinformersubsidiary

Noncontrollinginterestinformersubsidiary

Netassetsofformersubsidiary

Gainonsale

$ 105

15

20

$ 100

40

7.29 Intheexampleabove,theformerparentisrequiredtodisclosetheportionofthe$40gainthat

relatestotheremeasurementofitsretained10percentinteresttofairvalue(see13.40).

7.30 Ifanentity’saccountingforasubsidiarychangesfromconsolidationtotheequitymethod,

theentitymustapplytheequitymethodofaccountingprospectivelyfromthedatecontroloverthesubsidiaryisrelinquished.Applicationoftheequitymethodofaccountingasifthelossofcontrol

occurredatthebeginningofthecurrentfiscalperiodoryearisprohibited.Inaddition,theentityshould

notreviseitspresentationofprior-yearbalances.ParagraphC2(b)ofStatement144deletedparagraph

12ofARB51,eliminatingtheoptiontopresenttheinvestmentasifthelossofcontroloccurredat

thebeginningoftheyearofthechange(e.g.,fromconsolidationtoequitymethod).Thisguidanceis

furthersupportedbyStephanieL.Hunsaker,anassociatechiefaccountantintheSEC’sOfficeofthe

ChiefAccountant,inherspeechatthe2007AICPANationalConferenceonCurrentSECandPCAOB

Developments.

Multiple Arrangements Accounted for as a Single Disposal Transaction

7.31 UnderStatement160,theparentmayberequiredtoaccountformultiplearrangementsasa

singledisposaltransaction.Therefore,theparentshouldanalyzethetermsandconditionsofmultiple

arrangements,includingtheircombinedeconomiceffect.Thepresenceofoneormoreofthefollowing

fourindicatorsfromparagraph37ofARB51,asamendedbyStatement160,mayindicatethatthe

parentshouldaccountforitsmultiplearrangementsasasingletransaction:

• The“arrangementsareenteredintoatthesametimeorincontemplationofoneanother.”

• Thearrangementsaredesignedtoachieveanoverallbusinessplan.

• Oneofthearrangementsdependsonthesuccessofoneormoreotherarrangements.





• Anysinglearrangementisnoteconomicallyjustifiable;however,thisparticulararrangementis

economicallyjustifiablewhenallotherarrangementsaretakenintoaccount.

7.32 Statement160addedtheaboveguidancetopreventabusebycompaniesattemptingto

minimizeearningsimplicationswhendisposingofasubsidiary.

Example 7-9

Multiple Arrangements Accounted for as a Single Disposal Transaction

CompanyAintendstosellitswhollyownedsubsidiary,SubsidiaryB,foraloss.ThecurrentcarryingvalueofSubsidiaryBis$100.CompanyAstructuresthesaleintotwoarrangements.Inthefirstarrangement,Asellsa49percentinterestfor$40onJuly1,20X9.Inthesecondarrangement,Asellstheremaining51percentinterestfor$41onSeptember1,20X9.

ThefollowingillustratesthetotallossthatAwouldrecordinitsconsolidatedstatementofincomeifthemultiplearrangementswereaccountedfor(1)separatelyor(2)asasingletransaction.

Disposal arrangements are accounted for:

SeparatelyAs a singletransaction

Arrangement1

Arrangement2

TotallossrecognizedbyA

$ 0*

10

$ 10

$ 9

10

$ 19**

CompanyAshouldevaluateallofthefactsandcircumstances,aswellastheguidanceandindicatorsinparagraph37ofARB51,asamendedbyStatement160,todeterminewhetherthemultiplearrangementsshouldbeaccountedforasasingletransaction.

* BecausethefirstarrangementdidnotcauseAtoloseitscontroloverB,Awouldaccountforitasanequitytransactionwithnogainorlossrecordedinearnings(see 7.21).

** Becausebotharrangementsareaccountedforasasingletransaction,Awouldfollowthedeconsolidationguidanceinparagraphs35–37ofARB51,asamendedbyStatement160,andrecordtheentirelossinearnings(see 7.27).

7.33 AsnotedinparagraphB57ofStatement160,theFASBobservedthattheriskofconcealinglossesisfurtherreducedbytheimpairmentguidanceinStatements142and144.Underthisguidance,

amore-likely-than-notexpectationtosellordisposeofareportingunit,orasignificantportionofa

reportingunit,oralong-livedasset(assetgroup)wouldtriggerarequirementtoperformimpairment

testingforgoodwill(underStatement142)andintangibleandlong-livedtangibleassets(under

Statement144).

Nonreciprocal Transfers to Owners

7.34 Nonreciprocaltransferstoowners(e.g.,spinoffs)arenotwithinthescopeofARB51,as

amendedbyStatement160.Paragraph36ofARB51,asamendedbyStatement160,states:

Ifaparentdeconsolidatesasubsidiarythroughanonreciprocaltransfertoowners,suchasaspinoff,

theaccountingguidanceinAPBOpinionNo.29,AccountingforNonmonetaryTransactions ,applies.

7.35 Paragraph23ofOpinion29,whichprovidesguidancefornonreciprocaltransferstoowners,

statesthefollowing:

Accountingforthedistributionofnonmonetaryassetstoownersofanenterpriseinaspin-offor

otherformofreorganizationorliquidationorinaplanthatisinsubstancetherescissionofaprior

businesscombinationshouldbebasedontherecordedamount(afterreduction,ifappropriate,foran

indicatedimpairmentofvalue)[footnoteomitted]ofthenonmonetaryassetsdistributed.Aprorata

distributiontoownersofanenterpriseofsharesofasubsidiaryorotherinvesteecompanythathas





beenorisbeingconsolidatedorthathasbeenorisbeingaccountedforundertheequitymethodis

tobeconsideredtobeequivalenttoaspin-off.Othernonreciprocaltransfersofnonmonetaryassets

toownersshouldbeaccountedforatfairvalueifthefairvalueofthenonmonetaryassetdistributed

isobjectivelymeasurableandwouldbeclearlyrealizabletothedistributingentityinanoutrightsale

atornearthetimeofthedistribution.

Example 7-10 Spin Off of a Business to the Parent Company

CompanyAmanufacturescomputer-relatedcommunicationapplications.CompanyAacquiredCompanyBinabusinesscombinationapproximatelytwoyearsago.CompanyBwasengagedincustomsoftwaredevelopment.AfteritsacquisitionbyA,Bdevelopedanoff-the-shelfsoftwareproductsbusiness.CompanyAispreparingafilingforaninitialpublicofferingofB;however,BwilldistributethecustomsoftwarebusinesstoAbeforetheoffering.

ThetransferofassetstoAisadistributiontotheownersintheformofanonreciprocaltransfer,asdiscussedinparagraph23ofOpinion29.Asaresult,thetransactionisrecordedatbookvalue,withnogainorlossonthetransaction.

Considerations for a Primary Beneficiary of a Variable Interest Entity

7.36 Thedefinitionofa“parent”inAppendixBofARB51,asamendedbyStatement160,includes

theprimarybeneficiaryofavariableinterestentity(VIE).Also,aVIEthatisconsolidatedbyaprimary

beneficiaryisincludedinthedefinitionofa“subsidiary”inARB51,asamended.Therefore,afterits

initialconsolidationoftheVIE,theprimarybeneficiary(parent)shouldprepareconsolidatedfinancial

statementsinaccordancewithARB51,asamendedbyStatement160,withoneexceptionrelatedto

feesorothersourcesofincomeandexpensebetweenaprimarybeneficiaryandaVIEasdescribedin

paragraph22ofInterpretation46(R),asamendedbyStatement160:

TheprinciplesofconsolidatedfinancialstatementsinARB51applytoprimarybeneficiaries’

accountingforconsolidatedvariableinterestentities.Aftertheinitialmeasurement,theassets,

liabilities,andnoncontrollinginterestsofaconsolidatedvariableinterestentityshallbeaccounted

forinconsolidatedfinancialstatementsasiftheentitywereconsolidatedbasedonvotinginterests.

Anyspecializedaccountingrequirementsapplicabletothetypeofbusinessinwhichthevariableinterestentityoperatesshallbeappliedastheywouldbeappliedtoaconsolidatedsubsidiary.The

consolidatedenterpriseshallfollowtherequirementsforeliminationofintercompanybalancesand

transactionsandothermattersdescribedinparagraphs6–39ofARB51andexistingpracticesfor

consolidatedsubsidiaries.Feesorothersourcesofincomeorexpensebetweenaprimarybeneficiary

andaconsolidatedvariableinterestentityshallbeeliminatedagainsttherelatedexpenseorincome

ofthevariableinterestentity.Theresultingeffectofthateliminationonthenetincomeorexpense

ofthevariableinterestentityshallbeattributedtotheprimarybeneficiary(andnottononcontrolling

interests)intheconsolidatedfinancialstatements.

Example 7-11

Primary Beneficiary’s Accounting for a VIE

CompanyAhasa5percentequityinterestinEntityX(aVIE).CompanyAistheprimarybeneficiaryofXand,therefore,consolidatesXinaccordancewithInterpretation46(R).TheprofitsandlossesofXareallocatedbetweentheparent(A)andthenoncontrollinginterestonthebasisoftheguidanceinARB51,asamendedbyStatement160,andparagraph22ofInterpretation46(R)(see7.13and7.14).

OnJuly1,20Y1,Aacquiresanadditional10percentequityinterestinX.Afterthistransaction,AremainstheprimarybeneficiaryofX.BecauseitretainscontrolofX,Arecordsthisasanequitytransactioninaccordancewithparagraphs32–34ofARB51,asamendedbyStatement160(see7.21).

OnSeptember1,20Y2,afterarequiredreconsiderationassessment,AisnolongerdeemedtobetheprimarybeneficiaryofX.Thatis,AnolongercontrolsX.Therefore,AdeconsolidatesXinaccordancewithparagraphs35–37ofARB51,asamendedbyStatement160,andrecognizesagainorlossondeconsolidation(see 7.27).



Section 8 — Income Tax Considerations

Income Taxes — General

8.01 Paragraph26ofStatement141(R)highlightsthattheaccountingforincometaxesisanexceptiontothegeneralrecognitionandmeasurementprinciplesofthatStatement.Paragraph26

states,“Theacquirershallrecognizeandmeasureadeferredtaxasset[DTA]orliability[DTL]arisingfrom

theassetsacquiredandliabilitiesassumedinabusinesscombinationinaccordancewithFASBStatement

No.109,AccountingforIncomeTaxes ,asamendedbythisStatement.”

8.02 Paragraph30ofStatement109,asamendedbyStatement141(R),establishestheprinciplesfor

taxaccountinginabusinesscombination.Paragraph30states:

Asoftheacquisitiondate,adeferredtaxliabilityorassetshallberecognizedinaccordancewiththe

requirementsofthisStatementforanacquiredentity’staxableordeductibletemporarydifferences

(excepttheportionofgoodwillforwhichamortizationisnotdeductiblefortaxpurposes,leveragedleases,andacquiredOpinion23differences[footnoteomitted])oroperatinglossortaxcredit

carryforwards.Forexample,taxableordeductibletemporarydifferencesarisefromdifferences

betweenthetaxbasesandtherecognizedvaluesofassetsacquiredandliabilitiesassumedina

businesscombination.(Refertoparagraphs259–272foradditionalguidance).Anacquirershallassess

theneedforavaluationallowanceasoftheacquisitiondateforanacquiredentity’sdeferredtax

assetinaccordancewiththisStatement.

Tax Treatment of Business Combinations

Tax Status of the Enterprise

8.03 Determiningthetaxstatusofanenterpriseisanimportantinitialstepintheaccountingfora

businesscombination,sinceitaffectstheaccountingforthetemporarydifferencesassociatedwiththe

transaction.Theenterprisecanbetaxableornontaxable.

Fortaxable enterprises,deferredtaxesmustbeprovidedonthetaxableanddeductibletemporary

differencesthatarisefromadifferencebetweenthetaxbasisofanassetoraliabilityanditsreported

amountinthefinancialstatements,unlessaspecificexceptioninStatement109existsforthetemporary

difference.

Whiletheassetsandliabilitiesofapartnership(i.e.,anontaxable enterprise)mightgiverisetotaxable

ordeductibletemporarydifferences,nodeferredtaxesarerecordedinthepartnership’sfinancial

statementsbecausethetaxconsequenceswillbebornebyitspartners.Ifthepartnersaretaxable

enterprises,theymustprovidedeferredtaxesonanytemporarydifferenceassociatedwiththe

partnershipinterest.

Taxable and Nontaxable Transactions

8.04 Therearetypicallytwotypesofbusinesscombinations—taxableandnontaxable.

Inataxable businesscombination,newtaxbasesforacquiredassetsandassumedliabilitiesare

determinedonthebasisofthefairmarketvalueoranotherremeasurementtechniquerequiredby

thetaxlaw.Inotherwords,theacquirer“stepsup”theacquiree’shistoricaltaxbasesintheassets





acquiredandliabilitiesassumedtofairmarketvalue.NotethatundertheU.S.federalincometaxlaw,

certainstockpurchasescanbetreatedastaxablebusinesscombinationsifanelectiontotreatthestock

purchaseasataxableassetpurchaseisfiled.(SeeSection338oftheInternalRevenueCode.)

Inanontaxable businesscombination,theacquirerassumesthehistoricaltaxbasisoftheacquired

assetsandassumedliabilities.Inthiscase,theacquirerretainsthe“historic”or“carryover”taxbases

intheacquiree’sassetsandliabilities.Generally,stockacquisitionsaretreatedasnontaxablebusiness

combinations(unlessaSection338electionismade).Nontaxablebusinesscombinationsgenerally

resultinsignificantlymoretemporarydifferencesthandotaxablebusinesscombinationsbecauseofthe

carryoverofthetaxbasesoftheassetsacquiredandliabilitiesassumed.Tosubstantiatetherelevant

taxbasesoftheacquiredassetsandassumedliabilities(i.e.,inaccordancewithInterpretation48),the

acquirershouldreviewtheacquiredentity’staxfilingsandrelatedbooksandrecords.Thisinformation

shouldbeevaluatedwithintheacquisition’smeasurementperiod,asdiscussedin3.16–3.19.

Thetaxstatusoftheenterprisedoesnotaffectwhetherabusinesscombinationisconsideredtaxableor

nontaxable;rather,thesecommonlyusedtermsrefertowhethertheacquirerrecordsthetaxbasesof

assetsandliabilitiesoftheacquiredentityonthebasisoftheirhistoricaltaxbasisoratfairmarketvalueoranotherremeasurementtechniquerequiredbythetaxlaw.AsdiscussedinSection 3,mostassets

andliabilitiesaremeasuredatfairvalueasoftheacquisitiondateforfinancialreportingpurposes.

8.05 RecognitionofDTAsandDTLsforthetaxconsequencesoftemporarydifferencesand

carryforwardsacquiredinabusinesscombination,asrequiredbyStatement109,appliestoboth

taxableandnontaxablebusinesscombinations.Inbothtaxableandnontaxablebusinesscombinations,

theamountsassignedtotheindividualassetsacquiredandliabilitiesassumedforfinancialreporting

purposesareoftendifferentfromtheamountsassignedorcarriedforwardfortaxpurposes.

The Basic Model — Tax Effects of Basis Differences

The Basic Model

8.06 ThesummaryofStatement109states,inpart,“Theobjectivesofaccountingforincometaxes

aretorecognize(a)theamountoftaxespayableorrefundableforthecurrentyearand(b)deferred

taxliabilitiesandassetsforthefuturetaxconsequencesofeventsthathavebeenrecognizedinan

enterprise’sfinancialstatementsortaxreturns.”Deferredtaxesareprovidedontemporarydifferences.

8.07 Paragraph289ofStatement109definesatemporarydifferenceas:

AdifferencebetweenthetaxbasisofanassetorliabilitycomputedpursuanttoFASBInterpretation

No.48,AccountingforUncertaintyinIncomeTaxes ,anditsreportedamountinthefinancial

statementsthatwillresultintaxableordeductibleamountsinfutureyearswhenthereportedamountoftheassetorliabilityisrecoveredorsettled,respectively.


Theacquirershallaccountforthepotentialtaxeffectsoftemporarydifferences,carryforwards,and

anyincometaxuncertaintiesofanacquireethatexistattheacquisitiondateorthatariseasaresultof

theacquisitioninaccordancewithStatement109,asamended,andrelatedinterpretativeguidance,

includingFASBInterpretationNo.48,AccountingforUncertaintyinIncomeTaxes .





Impact of Tax Planning and Business Integration Steps

8.09 Deferredtaxesrecognizedinabusinesscombinationshouldreflectthestructureofthecombined

entityasitexistsontheacquisitiondate.Thetaxeffectsofsubsequenttransactionstepsthatmay

beconsideredacquisition-relatedintegrationstepsareaccountedforseparatelyandapartfromthe

businesscombination(i.e.,outsidethebusinesscombination).Thosetransactionsareaccountedfor

underStatement109butarenotincludedinthebusinesscombinationaccounting.Underparagraphs

57,58,andA77ofStatement141(R)(see3.28–3.30),whendeterminingwhetheranindividual

transactionstepispartoftheacquisition,theacquirershouldconsider:

• Theunderlyingrationaleforthetransactionandwhichpartybenefitsfromit(theacquirerand

combinedentityortheacquireeanditsformerowners).

• Whethertheacquireroracquiree(oritsformerowners)initiatedthetransaction.

• Thetimingofthetransaction(s).

Push-Down of Acquisition Accounting

8.10 WhileStatement141(R)andrelatedinterpretiveguidancedoesnotalwaysrequiretheacquirer

to“pushdown”theacquisitionaccountingintoeachacquiredentity(seeSection 9),paragraph17

ofStatement109requiresthat“[d]eferredtaxesshallbedeterminedseparatelyforeachtax-paying

component...ineachtaxjurisdiction.”Therefore,todeterminethetemporarydifferencesthatarise

asoftheacquisitiondateandtoapplyStatement109accurately,anenterprisemustpushdown(i.e.,

actualornotionalpush-down)theamountsassignedtotheindividualassetsacquiredandliabilities

assumedforfinancialreportingpurposestoeachtax-payingcomponent.Thenotionofpush-down

accountingforincometaxesisdifferentfromthefinancialreportingrequirements.

Process for Recording Deferred Taxes

8.11 Theprocessforrecordingdeferredtaxesfortheacquiredentity’staxableanddeductible

temporarydifferencesisessentiallythesamefortaxableandnontaxablebusinesscombinations.

Deferredtaxesarerecordedfortemporarydifferences,unlessanexceptionapplies.Atemporary

differenceexistswhenthereisataxableordeductibledifferencebetween(1)thecarryingamount

ofanassetorliabilityforfinancialreportingpurposesand(2)thetaxbasisofthatassetorliability

inaccordancewithInterpretation48.Thecarryingamountforfinancialreportingpurposesisthe

same,regardlessoftheformofthebusinesscombination.Thereisadifferenceinhowthetaxbasisis

determineddependingonwhetherthebusinesscombinationistaxableornontaxable.

8.12 Innontaxablebusinesscombinations,atleasttwoapproachesarecommonlyusedforrecording

deferredtaxes:the“denovo”approachandthe“layering-on”approach.Theobjectiveofthetwoapproachesisthesame:toaccountforallacquiredtemporarydifferencesinaccordancewithStatement

109,asamendedbyStatement141(R).

De Novo Approach

8.13 Inthedenovoapproach,allexistingdeferredtaxesareremovedfromtheacquiredentity’s

booksandnewtemporarydifferencesarecalculatedonthebasisofthedifferencesbetweenbook(i.e.,

fairvalue)andtaxbases(whichdependsonthetypeofacquisition)inacquiredassetsandassumed

liabilities.Thisisthepreferredapproachforrecordingdeferredtaxesontemporarydifferencesarisingin

abusinesscombination,becauseitismorepreciseandthuslesslikelytoresultinerrors.





Layering-On Approach

8.14 Inanontaxablebusinesscombination,theacquirersometimesabbreviatesthedenovoapproach

bylimitingitsexaminationtothechangeinbookbasesfromhistoricallyreportedamounts.This

methodisoftendescribedasthelayering-onapproachbecausethenewbookbasesarerecordedasan

incrementaladjustmenttothehistoricalbookbases.Thechangefromoldtonewbookbasesisadded

to(orsubtractedfrom)thehistoricaltemporarydifferences.

8.15 Thesameamountofdeferredtaxesmustberecordedunderthelayering-onapproachasunder

thedenovoapproach.However,thelayering-onapproachcanproduceflawedresultsbecauseofthe

following:

• Thebasicassumptionthatthehistoricaldeferredtaxesarecorrectmaynotbeappropriateand

mayinappropriatelylimittheduediligenceusedinevaluatinghistoricalinformation.

• Itmaybedifficulttosubstantiatethehistoricaldeferredtaxbalances.

• Allexceptionstodeferredtaxaccountingmustbereevaluated.Forexample,Statement109

requiresthattheacquirerremoveany(1)existingDTLsresultingfrompreexistingtax-deductiblegoodwillinaccordancewithparagraph9(d)ofStatement109and(2)anyprepaidtaxaccounts

ordeferredcreditsrecordedinaccordancewithparagraph9(e)ofStatement109.

• Afocusonthechangeinthetemporarydifferencemaylimittheacquiringentity’sprocess

ofassessingacquiredDTAsforrealizabililty(i.e.,valuationallowance)becausethehistorical

deferredtaxesareassumedtobecorrect.

Editor’s Note:Deferredtaxesontemporarydifferencesresultingfromabusinesscombinationare

determinedseparatelyforeachtax-payingcomponentineachtaxjurisdiction.

Example 8-1Processes for Recording Deferred Taxes in a Business Combination

ACpays$1,000toacquireTargetCompany(TC)stockinanontaxablebusinesscombination.Thefairvalueoftheidentifiableassetsis$700($500tangible,$200intangible).TChasnoliabilitiesexceptforitsDTLs.TChadsomehistoricalgoodwillfromapriortaxablebusinesscombination.Thehistoricalbookandtaxbasesoftheacquiredassets,alongwiththehistoricalDTL,arepresentedinthetablebelow.Assumea40percenttaxrate.

A

Fair Value

B

HistoricalBook Bases

C

HistoricalTax Bases

D

ExistingDeferred Tax

Layer

E

New

Deferred TaxLayer

(A–B) × 40%

F

De NovoCalculationof Deferred

Taxes(A–C) × 40%

Assets $ 500 $ 300 $ 75 $ (90) $ (80) $ (170)

Identifiableintangibles 200 150 25 (50) (20) (70)

Goodwill 50 (20) 20* 0

DTL (160)

TotalDTLrecorded (80) (240)

Note:D+E(taxlayer)=thelayering-onapproach





Example 8-1 (cont inued)

Processes for Recording Deferred Taxes in a Business Combination

Entrytorecordthebusinesscombination:

Debit Credit

Assets $ 500

Identifiableintangibles 200

Goodwill 540**

Cash $ 1,000

DTL 240

*ThehistoricalDTLrelatedtotax-deductiblegoodwillmustberemoved.

**Representsthe$300ofgoodwill($1,000purchasepricelessthe$700assignedtothefairvalueoftangibleandintangibleassets)plusthe$240ofDTL.NoDTLisrecognizedfortheexcessoffinancialreportinggoodwillovertax-deductiblegoodwillbecausesuchrecognitionisprecludedbyStatement109.(See 8.49.)

Basis Differences

8.16 Abasisdifferenceariseswhenthereisadifferencebetweenthefinancialreportingamountof

anassetorliabilityanditstaxbasis,asdeterminedbyreferencetotherelevanttaxlawsineachtax

jurisdiction.Therearetwocategoriesofbasisdifferences:insidebasisdifferencesandoutsidebasis

differences.

Inside Basis Differences

8.17 Aninsidebasisdifferenceisatemporarydifferencebetweenthecarryingamountforfinancial

reportingpurposesofindividualassetsandliabilitiesandtheirtaxbasesthatwillgiverisetoatax

deductionortaxableincomewhentherelatedassetisrecoveredorliabilityissettled.Deferredtaxes

arealwaysrecordedontaxableanddeductibletemporarydifferencesunlessanexceptionapplies.The

determinationofwhetheranexceptionappliesismadeasoftheacquisitiondateandthereafterinaccordancewithStatement109.

Example 8-2


Assumethefollowing:

• ACpurchasesTargetCompany’s(TC’s)stockfor$1,000incashinanontaxablebusinesscombination.

• TChastwosubsidiaries(S1andS2).

• AlloftheentitiesaredomesticcorporationswithrespecttoAC.

• Assumea40percenttaxrate.

• TC’sonlyassetsareitssharesofS1andS2,asillustratedinthefollowingtable:

Identifiable Assets TC’s Stock S1 S2

Fairvalue $ 1,000 $ 750 $ 250

TC’staxbasisinitsassets(i.e.,thesharesofS1andS2stock) N/A 600 200

S1’sandS2’staxbasesintheirunderlyingidentifiableassets(assumenotaxgoodwill) N/A 300 100





Example 8-2 (cont inued)


Initial Acquisition Accounting Entries:

TorecordAC’sinvestmentinTC TorecordTC’sinvestmentinS1andS2

AC TCDebit Credit Debit Credit

InvestmentinTC $ 1,000 InvestmentS1 $ 750

Cash $ 1,000 InvestmentS2 250

Equity $ 1,000

TorecorddeferredtaxesonthetemporarydifferencesinsideS1andS2

S1 S2

Debit Credit Debit Credit

Assets(buildings) $ 750 $ 250

Goodwill 180* 60*

DTL $ 180** $ 60†

Equity 750 250

Note:Entrieshavebeenrecorded(pusheddown)tothesubsidiaries’booksbecause,inaccordancewithparagraph17ofStatement109,“deferredtaxes[are]determinedseparatelyforeachtax-payingcomponent...ineachtaxjurisdiction.”

* NoDTLisrecordedfortheamountofgoodwillforfinancialreporting($180or$60)inexcessofthetaxbasisofgoodwill($0).(See8.49.)

** (750–300)×0.40.

† (250–100)×0.40.

Outside Basis Difference

8.18 Thedifferencebetweenaparent’staxbasisinaninvestmentinasubsidiaryanditsfinancialreportingbasisresultsinanoutsidebasisdifference.Deferredtaxesarealwaysrecordedontaxable

anddeductibletemporarydifferencesunlessaspecificexceptionapplies.Theexceptionthatmayapply

underStatement109dependsonwhethertheoutsidebasisdifferencesresultsinaDTLoraDTA.DTLs

arerecordedonalloutsidebasisdifferencesthataretaxabletemporarydifferencesunlessoneofthe

exceptionsinparagraph31or33ofStatement109applies.Thedeterminationofwhetheroneofthese

exceptionsappliesismadeasoftheacquisitiondateandthereafterinaccordancewithStatement109.

Underparagraph34ofStatement109,noDTAsshouldberecordedonoutsidebasisdifferencesthat

aredeductibletemporarydifferencesunlessitisapparentthatthetemporarydifferencewillreversein

theforeseeablefuture(e.g.,generallywithinthenext12months).

8.19 Underparagraph33ofStatement109,outsidebasisdifferencesindomesticentities(i.e.,the

holderoftheinvestmentistaxableinthesamejurisdictionastheinvestee)wouldnotbetreatedas

taxabletemporarydifferencesif(1)thetaxlawprovidesatax-freemeanstorecoverthereported

amountoftheinvestmentand(2)theholderoftheinvestmentexpectstorecovertheinvestmentin

thatmanner.TheholderoftheinvestmentmustmeetbothcriteriatoavoidrecordingtheDTL.Outside

basisdifferencesinforeignentities(i.e.,theholderoftheinvestmentistaxableinajurisdictiondifferent

fromtheinvestee’s)aretaxabletemporarydifferences.See 8.65foradiscussionofoutsidebasis

differencesinforeignentitiesandtherelatedexceptionforpermanentlyreinvestedearnings.







Contingent Environmental Liability — Taxable Business Combination

8.23 Thereareuniquetaxconsiderationsforsituationsinwhichabuyeracquirestheassetsof

anentitywithcontingentenvironmentalliabilities.Presumably,thebuyerhasfactoredanyknown

remediationrequirementsintotheamountthatitwouldpayforthepropertyorfortheproperty’s

impactonthefairvalueofthebusinessinabusinesscombination.

8.24 Intaxablebusinesscombinations,assumedcontingentliabilities(includingcoststoremediatean

environmentalliability)typicallyarenottax-deductiblewhenpaid.Forfinancialreportingpurposes,the

assetrequiringremediationisrecordedatfairvalue,assumingfullremediation,andaliabilityisrecorded

torecognizethecostsofremediation.Fortaxpurposes,theassetisrecordedatitsunremediated

value.Asaresult,theacquirerwillrecordaDTL.TreasuryRegulationSection1.338–5(b)(2)(iii)givesthe

followingexampleillustratingwhentoadjustthetaxbasisforthecontingentenvironmentalliability:

T,anaccrualbasistaxpayer,isachemicalmanufacturer.InYear1,Tisobligatedtoremediate

environmentalcontaminationatthesiteofoneofitsplants.Assumethatalltheeventshave

occurredthatestablishthefactoftheliabilityandtheamountoftheliabilitycanbedetermined

withreasonableaccuracybuteconomicperformancehasnotoccurredwithrespecttotheliabilitywithinthemeaningofsection461(h).PacquiresallofthestockofTinYear1andmakesasection

338electionforT.Assumethat,ifacorporationunrelatedtoThadactuallypurchasedT’sassets

andassumedT’sobligationtoremediatethecontamination,thecorporationwouldnotsatisfythe

economicperformancerequirementsuntilYear5....TheincurrenceoftheliabilityinYear5under

theeconomicperformancerulesisanincreaseintheamountofliabilitiesproperlytakenintoaccount

inthebasisandresultsintheredeterminationofAGUB[adjustedgrossed-upbasis].

Therefore,abuyerthathasassumedacontingentenvironmentalliabilityrecordsanincreaseinthe

goodwilltaxbasisandacorrespondingDTAwhentheliabilitybecomesfixedanddeterminableand

economicperformancewithrespecttotheliabilityoccurs.

Assets Held for Sale8.25 Asdiscussedin4.50 and4.51,paragraphs34and35ofStatement144requirethatlong-lived

assetsthatareclassifiedasheldforsaleasoftheacquisitiondateunderthatStatementbemeasured

atfairvaluelesscoststosell.Consequently,inataxablebusinesscombination,thetaxbasesofassets

heldforsale(fairvalue)shouldexceedthebookbasesofthoseassets(fairvaluelesscoststosell).ADTA

shouldbeestablishedforthistemporarydifferenceaspartofthebusinesscombination.

Preexisting Relationships Between Parties to a Business Combination and Reacquired Rights

Preexisting Relationships Between Parties to a Business Combination

8.26 Asdiscussedin3.31–3.33,preexistingrelationshipsmayexistbetweenpartiestoabusiness

combination.TheimplementationguidanceinparagraphA79ofStatement141(R)states,“Ifthe

businesscombinationineffectsettlesapreexistingrelationship,theacquirerrecognizesagainor

loss....”Thegainorlossrecognizedonthepreexistingrelationshipunderparagraph58ofStatement

141(R)isconsideredatransactionthatisseparateandapartfromthebusinesscombination(i.e.,not

tobeincludedinbusinesscombinationaccounting).Thefollowingexampleshavebeenadaptedfrom

paragraphsA82–A85ofStatement141(R)toillustratethetaxeffectsforapreexistingrelationship

betweenpartiestoabusinesscombination.





Example 8-4

Effective Settlement of a Supply Contract as a Result of a Business Combination

ACacquiresTCinataxablebusinesscombination.TheacquisitionincludesasupplycontractunderwhichACpurchaseselectroniccomponentsfromTCatfixedratesoverafive-yearperiod.Currently,thefixedratesarehigherthantheratesatwhichACcouldpurchasesimilarelectroniccomponentsfromanothersupplier.ThesupplycontractallowsACtoterminatethecontractbeforetheendoftheinitialfive-yeartermonlybypayinga$60penalty.Withthreeyears

remainingunderthesupplycontract,ACpays$500toacquireTC.ThisamountisthefairvalueofTCandisbasedonwhatothermarketparticipantswouldbewillingtopayfortheenterprise(inclusiveoftheabovemarketcontract).

ThetotalfairvalueofTCincludes$80relatedtothefairvalueofthesupplycontractwithAC.The$80representsa$30componentthatis“at-market”becausethepricingiscomparabletopricingforcurrentmarkettransactionsforthesameorsimilaritems(e.g.,sellingeffort,customerrelationships)anda$50componentforpricingthatisunfavorabletoACbecauseitexceedsthepriceofcurrentmarkettransactionsforsimilaritems.TChasnootheridentifiableassetsorliabilitiesthatarerelatedtothesupplycontract,andAChasnotrecognizedanyassetsorliabilitiesrelatedtothesupplycontractbeforethebusinesscombination.Theremainingfairvalueof$420relatestomachineequipment.Thetaxrateis40percent.Assumeataxabletransactioninajurisdictionthatallowsfortax-deductiblegoodwill.

ACwillrecordthefollowingentriesontheacquisitiondate:

Debit Credit

Machineequipment $ 420

Goodwill 30

Lossonunfavorablesupplycontract 50

Cash $ 500

InapplyingparagraphA79(b)ofStatement141(R),Arecognizesalossof$50(thelesserofthe$60statedsettlementamountinthesupplycontractortheamountbywhichthecontractisunfavorabletotheacquirer)separatelyfromthebusinesscombination.The$30at-marketcomponentofthecontractispartofgoodwill.

Debit Credit

DTA $ 20

Incometaxexpense $ 20

Typically,thesupplycontractwillnotbeviewedasaseparatetransactionfortaxpurposes.Thelossonthesupplycontractforaccountingpurposeswillbeatemporarydifferencebecausetheamountexpensedforfinancialreportingwouldbe

includedintax-deductiblegoodwill.Thelossof$50istax-affectedintheincomestatement,sinceStatement141(R)clarifiesthatthesettlementisconsideredaseparatetransactionforfinancialreportingpurposes.TheresultingDTAwouldbereversedwhenthegoodwillisdeductedonthetaxreturn(aslongastherearenorealizationconcerns).

Note:Ifthistransactionwasstructuredasanontaxablebusinesscombination(ACacquiresthestockofTC),thebasisdifferencethatariseswhenthelossisexpensedwouldgenerallybeassessedbyreferencetotheoutsidebasisdifferenceguidance.(See8.18–8.20.)





Example 8-5

Effective Settlement of a Supply Contract Between the Acquirer and Acquiree in Which theAcquirer Recognized a Liability Before the Business Combination

AssumethesamefactsasinExample8-4(e.g.,ataxablebusinesscombinationandtax-deductiblegoodwill),exceptthatAChadrecordeda$60liabilityanda$24DTArelatedtothesupplycontractwithTCbeforethebusinesscombination.

ACwillrecordthefollowingentriesontheacquisitiondate: Debit Credit

Machineequipment $ 420

Goodwill 30

Liability 60

Cash $ 500

Gain 10

ACrecognizesa$10settlementgainonthecontractinearningsasoftheacquisitiondate(reversalofthe$60liabilityoffsetbytheactual$50loss,whichresultsinanetbookgainof$10).

Debit Credit


DTA $ 24

Reversalofthe$24pre-acquisitionDTAisrelatedtothereversalofthe$60contractliabilityintheentryabove.

Debit Credit

DTA $ 20


Typically,thesupplycontractwillnotbeviewedasaseparatetransactionfortaxpurposes.The$50lossonthesupplycontractforaccountingpurposeswillbeatemporarydifferencebecausetheamountexpensedforfinancialreportingwouldbeincludedintax-deductiblegoodwill.Thelossof$50istax-affectedintheincomestatement,sinceStatement141(R)clarifiesthatthesettlementisconsideredaseparatetransactionforfinancialreportingpurposes.TheresultingDTAwouldbereversedwhenthegoodwillisdeductedonthetaxreturn(aslongastherearenorealization

concerns).

Note:Ifthistransactionwasstructuredasanontaxablebusinesscombination(ACacquiresthestockofTC)thebasisdifferencethatariseswhenthe$50lossisexpensedwouldgenerallybeassessedbyreferencetotheoutsidebasisdifferenceguidance.(See8.18–8.20.)

Reacquired Rights

8.27 Asdiscussedin5.31–5.34,theacquirermayreacquirearightthatitpreviouslygrantedtothe

acquiree(e.g.,alicenseorfranchise).Paragraph31ofStatement141(R)stipulatesthatreacquired

rightsareintangibleassetsthattheacquirermustrecognizeapartfromgoodwill.Inaddition,the

intangibleassetismeasured(andsubsequentlyamortized)onthebasisoftheremainingcontractual

termonly,regardlessofwhethermarketparticipantswouldtakeintoaccountrenewalsinthefairvaluedetermination.Theinitialmeasurement(acquisition-datemeasurement)ofreacquiredrightsisoneof

thelimitedexceptionstothemeasurementprincipleinStatement141(R).Becauserenewalsarenot

takenintoconsiderationinthedeterminationofthefairvalueofreacquiredrights,theseintangible

assetsarenotmeasuredatfairvalueinaccordancewithStatement157.Therefore,thereacquired

right’staxbasisanditsfinancialreportingbasisasoftheacquisitiondatewillgenerallydifferandaDTA

shouldberecognizedforthedifferencesbetweentheassignedvalues(financialreportingamountvs.

thetaxbasis).Examples 5-2and5-3havebeenadaptedtoillustratethetaxeffectsforareacquired

rightbetweenpartiestoabusinesscombination.





Example 8-6

Reacquired Rights

Case A

CompanyBsellsproductsinEuropeunderalicensingagreementwithCompanyA.CompanyAacquiresCompanyBfor$1,000inataxablebusinesscombination.Asoftheacquisitiondate,thelicensingagreementhasaremaining

contractualtermofthreeyearsandcanberenewedattheendofthecurrenttermandindefinitelyeveryfiveyearsthereafter.Assumethatthepricingofthelicenseagreementisat-marketandthattheagreementdoesnothaveexplicitsettlementprovisions.Thetaxrateis40percent.CompanyAhascalculatedthefollowingvalues:

• $75—Valueofthelicensefortheremainingthree-yearcontractualterm(financialreportingvalueinaccordancewithStatement141(R)).

• $200—Fairvalueofthelicenseagreement.

• $600—Othertangibleassets.

Thefollowingillustratesthebookandtaxbasesoftheassets:

Book Basis New Tax Basis

Othertangibleassets $ 600 $ 600

Licenseagreement 75 200

Goodwill 275 200

ThefollowingentrieswillberecordedbyCompanyAontheacquisitiondate:

Debit Credit

Othertangibleassets $ 600

Licenseagreement 75

Goodwill 325

Cash $ 1,000

CompanyArecognizesthelicenseagreementatitsremainingthree-yearcontractualvalueof$75.

Debit Credit

DTA $ 50

Goodwill $ 50

CompanyArecognizesaDTArelatedtothelicensingagreement’stax-over-bookbasisof$50[(200–75)×.40%].Inaccordancewithparagraph9(d)ofStatement109,noDTLisrecordedforthe$75book-over-tax-basisgoodwill.

Case B

AssumethesamefactsasinCaseA,exceptthatunderthelicensingagreement,Bpaysabelow-current-marketlicensefeecomparedwiththoseofitscompetitorswithsimilarlicensingagreements.Inaddition,Anowcalculatesthevalueofthelicensefeetobe$100fortheremainingthree-yearcontractualterm.Notethatthisamountisgreaterthanthe$75valuecalculatedinCaseAforanat-marketcontract.

Thefollowingillustratesthebookandtaxbasesoftheassets:

Book Basis New Tax Basis

Othertangibleassets $ 600 $ 600

Licenseagreement 75 200

Goodwill 260 200






Reacquired Rights

ThefollowingentrieswillberecordedbyCompanyAontheacquisitiondate:

Debit Credit

Othertangibleassets $ 600

Licenseagreement 75

Goodwill 300

Lossonunfavorablelicensingagreement 25

Cash $ 1,000

CompanyAwouldrecordanintangibleassetof$75forthereacquiredlicense(theat-marketvalueforthecontractualterm)andwouldrecognizea$25settlementlossintheincomestatement(paragraphA79(b)ofStatement141(R)).Ineffect,thesettlementlossrepresentsadditionalconsiderationthatAwouldberequiredtoprovidetoBtoterminatetheexistingagreement,whichwasunfavorabletoA.

Debit Credit

DTA $ 50

Goodwill $ 40

Incometaxexpense 10

CompanyArecognizesaDTArelatedtothelicenseagreement’stax-over-bookbasisof$50[(200–75)×.40%],ofwhich$40isaDTArecordedinacquisitionaccounting(asareductioningoodwill).Theremaining$10oftheDTAisassociatedwithandfollowsthe$25financialreportinglossasaseparatetransaction(i.e.,separateandapartfromtheacquisitionaccounting).Inaddition,paragraph9(d)ofStatement109prohibitstherecognitionofaDTLforthe$60book-over-tax- basisgoodwill.

Tax Rates

8.28 Paragraph17ofStatement109states,inpart:

Deferredtaxesshallbedeterminedseparatelyforeachtax-payingcomponent(anindividualentityorgroupofentitiesthatisconsolidatedfortaxpurposes)ineachtaxjurisdiction.

8.29 Inaddition,paragraph18ofStatement109states,inpart:

Theobjectiveistomeasureadeferredtaxliabilityorassetusingtheenactedtaxrate(s)expectedto

applytotaxableincomeintheperiodsinwhichthedeferredtaxliabilityorassetisexpectedtobe

settledorrealized.

Tax Holidays

8.30 Deferredtaxesarenotrecognizedfortheexpectedtaxableordeductibleamountsoftemporary

differencesthatarerecoveredorsettledduringataxholiday.Paragraph183ofStatement109states:

TheBoardconsideredwhetheradeferredtaxassetevershouldberecognizedfortheexpectedfuture

reductionintaxespayableduringataxholiday.Inmostjurisdictionsthathavetaxholidays,thetax

holidayis“generallyavailable”toanyenterprise(withinaclassofenterprises)thatchoosestoavail

itselfoftheholiday.TheBoardviewsthatsortofexemptionfromtaxationforaclassofenterprisesas

creatinganontaxablestatus(somewhatanalogoustoS-corporationstatusunderU.S.federaltaxlaw)

forwhichadeferredtaxassetshouldnotberecognized.

Therefore,deferredtaxesarerecognizedfortheexpectedtaxableordeductibleamountsoftemporary

differencesthatarerecoveredorsettledoutsideofthetaxholiday.Insomesituations,atemporary

differenceassociatedwithaparticularassetorliabilitymayreverseduringboththetaxholidayand





periodsinwhichtheentityistaxedattheenactedrates.Accordingly,itmaybenecessarytouse

schedulingtodeterminetheappropriatedeferredtaxestorecordinconnectionwiththebusiness

combination.

State Tax Footprint

8.31 Theacquirer’sstatetaxfootprintforanentitycanchangebecauseofabusinesscombination.Forexample,anacquirerthatisoperatinginNevadawithnodeferredstatetaxesbutsubstantialtemporary

differencesacquiresatargetcompanyinCalifornia.Asaresultofthisacquisition,theacquirerisnow

requiredtofileacombinedCaliforniataxreturnwiththetargetcompany.Therefore,theacquirermust

recorddeferredtaxesforCaliforniastatetaxwhennostatetaxeswerepreviouslyrecognized.When

calculatingtheimpactofthischangeonthestatetaxfootprint,anentitymustaccountfortheincome

taxeffectsofitsassetsandliabilitiesbeforethecombinationseparatelyfromthosethatwereacquiredas

partofthebusinesscombination.

Anychangeinthemeasurementofexistingdeferredtaxitemsoftheacquirerasaresultofthis

acquisitionarerecorded“outside”ofthebusinesscombinationaccountingasacomponentofincome

taxexpenseoranotherappropriatefinancialstatementcomponent.Theinitialrecognitionofdeferred

taxitemsofthetargetcompanybytheacquirerisaccountedforaspartofthebusinesscombination.

Costs of the Business Combination

8.32 CostsofabusinesscombinationareexpensedasincurredunlesstheyaresubjecttootherU.S.

GAAPandrelatetotheissuanceofequitysecuritiesordebtinstrumentsinconnectionwiththebusiness

combination.Allothergeneralandindirectcostsrelatedtoabusinesscombinationareexpensedas

incurred.

Acquisition-Related Costs

8.33 Asdiscussedin6.31,acquisition-relatedcostsincurredasaresultofabusinesscombination

(e.g.,dealfeesforattorneys,accountants,investmentbankers,andvaluationexperts)mustbe

expensedasincurredunderparagraph59ofStatement141(R).ThisisunlikepreviousGAAP,inwhich

theseacquisition-relatedcostswereincludedintheconsiderationpaidforanacquiredentity.ForU.S.

taxpurposes,acquisition-relatedcostsmayormaynotbedeductible.Atemporarydifferenceexists

ifacquisition-relatedcostsaredeductiblefortaxpurposesandifthatdeductionoccursinaperiod

differentfromthatinwhichtheyareexpensedforfinancialreportingpurposes.Becauseacquisition-

relatedcostsarenotconsideredpartoftheacquisitionandareexpensedasincurredforfinancial

reportingpurposes,therelateddeferredtaxes(ifany)willberecordedasacomponentofincometax

expense(i.e.,outsidethebusinesscombination).





Example 8-7

Taxable Business Combination Acquisition-Related Costs

ACacquiresTargetCompanyinataxablebusinesscombinationfor$1,000andincurs$200ofcostsrelatedtotheacquisition.Theidentifiableassetshaveafairvalueof$700.Forfinancialreportingpurposes,ACexpensesthe$200acquisition-relatedcosts.Fortaxpurposes,ACaddsthe$200acquisition-relatedcoststothetotalamountthatisallocatedtoassets,resultingintax-deductiblegoodwillof$500.Assumea40percenttaxrate.

ACwouldrecordthefollowingentriesontheacquisitiondate:

Debit Credit

Assets $ 700

Goodwill 300

Cash $ 1,000

Acquisitionexpenses $ 200

Cash $ 200

DTA $ 80*


Note:Becausethetax-deductiblegoodwillinthisexamplerelatessolelytotheacquisitioncoststhatareexpensedforfinancialreportingpurposes,thesimultaneousequationdiscussedinparagraphs262and263ofStatement109,asamendedbyStatement141(R),isnotrequiredbecausethetaximpactofacquisitioncostsisreflectedintheincomestatement.

*$200(acquisition-relatedcoststhatarecapitalizedfortaxpurposes)×40%.

Example 8-8

Nontaxable Business Combination Acquisition-Related Costs

ACacquiresTargetCompany(TC)inanontaxablebusinesscombinationfor$1,000andincurs$200ofcostsrelatedtotheacquisition.Theidentifiableassetshaveafairvalueof$700andataxbasisof$250.Forfinancialreportingpurposes,

ACexpensesthe$200acquisition-relatedcosts.Fortaxpurposes,ACaddsthe$200acquisition-relatedcoststothebasisoftheTCstock.Assumea40percenttaxrate.

ACwouldrecordthefollowingentriesontheacquisitiondate:

Debit Credit

Assets $ 700

Goodwill 480

DTL $ 180*

Cash 1,000

Acquisitionexpenses $ 200

Cash $ 200

IncontrasttoExample8-7,theacquisitionexpensesmaynotbetax-affectedinanontaxablebusinesscombination.Theacquisition-relatedcostsareincludedintheoutsidetaxbasisofAC’sinvestmentinTC.Therefore,theDTAwouldhavetobeassessedinaccordancewithparagraph34ofStatement109.Providedthattheinvestmentisessentiallypermanentindurationanditisnotapparentthatthetemporarydifferencewillreverseintheforeseeablefuture,noDTAisrecorded.

*($700fairvalue–$250taxbasis)×40%.





Acquisition-Related Costs Incurred in a Period Before the Business Combination

8.34 Whenacquisitioncostsareincurredinaperiodbeforetheacquisitiondateofabusiness

combinationandthosecostsarenotimmediatelydeductiblefortaxpurposes,theacquirerwillneedto

assesswhetherthatdifferenceisatemporarydifferencethatwillresultintherecognitionofaDTA.To

determinetheexpectedtaxconsequencesoftheacquisition-relatedcosts,theacquirermayuseeitherof

thefollowingtwoapproaches:

1. Iftheacquisition-relatedcostswouldresultinafuturetaxdeductionifthebusinesscombination

didnotoccur,thenitisadeductibletemporarydifferenceandaDTAshouldberecordedwhen

theexpenseisrecognizedforfinancialreportingpurposes.Uponconsummationofthebusiness

combination,theacquirerwillneedtoreassesstheDTAtodeterminewhetheritcontinuesto

beappropriate(i.e.,whetheritisataxableornontaxablebusinesscombination).Ifnolonger

appropriate,theDTAshouldbereversedtotheincomestatement.

2. TheacquirercanrecordaDTAif,onthebasisoftheexpectedtaxstructureofthebusiness

combination,theacquisition-relatedexpenseswouldresultintherecordingoftheDTA.

Thisapproachisbasedonthetaxstructureofthebusinesscombination.Examples 8-7and8-8illustratehowthisviewwouldbeapplied.Example 8-7assumesataxablebusiness

combinationthatwouldgenerallyresultintherecordingoftheDTA.Example 8-8assumesa

nontaxablebusinesscombinationthatwouldnotresultintherecordingoftheDTAbecauseof

theexceptioninparagraph34ofStatement109.Thisapproachrequirestheacquirertomake

assumptionsabouthowthetransactionwouldbestructuredfromataxperspectiveandabout

theprobabilitythatthebusinesscombinationwillbeconsummatedtodeterminewhetherto

recordalloraportionofDTAfortheacquisitionexpenses.Asaresultofthisapproach,the

entitywouldconformitsfinancialreportingtoits“expectation”asofeachreportingdate(i.e.,

theDTAmayberecognizedandsubsequentlyderecognizedifexpectationschangefromone

reportingperiodtothenext).

Aswithallaccountingpolicyelections,onceselectedthepolicyshouldbeappliedconsistently.

Debt Issue Costs

8.35 Asdiscussedin6.36,debtissuancecostsshouldbeexcludedfrombusinesscombination

accounting.Generally,entitiesshouldcapitalizeandamortizedebtissuancecostsbyusingtheeffective

interestmethodoverthetermoftherelateddebt(unlessStatement159applies).Deferredtaxesshould

berecordedifthereisadifferencebetweenthebookandtaxapproachestorecognizingdebtissue

costsandthedifferencegivesrisetoataxableoradeductibletemporarydifference.

Costs of Registering and Issuing Equity Securities

8.36 Likedebtissuancecosts,andasdiscussedin6.34–6.35,costsofregisteringandissuingequity

securitiesareexcludedfromtheconsiderationtransferredinabusinesscombinationandarenotpart

ofbusinesscombinationaccounting.Forexample,whenequitysecuritiesareissuedtoconsummatea

businesscombination,therelatedout-of-pocketregistrationandissuancecostsaregenerallytreatedas

areductioninadditionalpaid-incapitalinaccordancewithSABTopic5.A.Iftheregistrationcostshave

notbeenpaidbytheacquisitiondate,thecostsshouldbeaccruedasaliability,withacorresponding

reductioninadditionalpaid-incapital(APIC).ForU.S.taxpurposes,thecostsofregisteringandissuing

equitysecuritiesaregenerallyneitherdeductiblenoramortizable.Accordingly,notemporarydifferences







Example 8-10

Acquirer Replacement Awards That Require Postcombination Services Exchanged for AcquireeAwards for Which Employees Have Rendered the Requisite Service as of the Acquisition Date

ACexchangesreplacementawardsthatrequireoneyearofpostcombinationserviceforshare-basedpaymentawardsofTargetCompany(TC)forwhichemployeeshadcompletedtherequisiteserviceperiodbeforethebusinesscombination.Thefair-value-basedmeasureofbothawardsis$100ontheacquisitiondate.Whenoriginallygranted,TC’sawardshada

requisiteserviceperiodoffouryears.Asoftheacquisitiondate,TC’semployeesholdingunexercisedawardshadrenderedatotalofsevenyearsofservicesincethegrantdate.EventhoughTC’semployeeshadalreadyrenderedalloftherequisiteservice,ACattributesaportionofthereplacementawardtopostcombinationcompensationcostinaccordancewithparagraph46ofStatement141(R)becausethereplacementawardsrequireoneyearofpostcombinationservice.Thetotalserviceperiodisfiveyears—therequisiteserviceperiodfortheoriginalacquireeawardcompletedbeforetheacquisitiondate(fouryears)plustherequisiteserviceperiodforthereplacementaward(oneyear).

Theportionattributabletoprecombinationservicesequalsthefair-value-basedmeasureoftheacquireeaward($100)multipliedbytheratiooftheprecombinationserviceperiod(fouryears)tothetotalserviceperiod(fiveyears).Thus,$80($100×4÷5years)isattributedtotheprecombinationserviceperiodandthereforeisincludedintheconsiderationtransferredinthebusinesscombination.Theremaining$20isattributedtothepostcombinationserviceperiodandthereforeisrecognizedascompensationcostinAC’spostcombinationfinancialstatementsinaccordancewithStatement123(R).Assumea40percenttaxrate.

Journalentriesontheacquisitiondateareasfollows:

Debit Credit

Goodwill $ 80

APIC $ 80

DTA $ 32

Goodwill $ 32

Journalentriesintheyearimmediatelyfollowingtheacquisitiondateare:

Debit Credit

Compensationexpense $ 20

APIC $ 20

DTA $ 8






Example 8-11

Acquirer Replacement Awards That Require Postcombination Services Exchanged for AcquireeAwards for Which Employees Have Not Rendered All of the Requisite Service as of theAcquisition Date

ACexchangesreplacementawardsthatrequireoneyearofpostcombinationserviceforshare-basedpaymentawardsofTargetCompany(TC)forwhichemployeeshadnotyetrenderedalloftherequiredservicesasoftheacquisitiondate.

Thefair-value-basedmeasureofbothawardsis$100ontheacquisitiondate.Whenoriginallygranted,TC’sawardshadarequisiteserviceperiodoffouryears.Asoftheacquisitiondate,TC’semployeeshadrenderedtwoyearsofservice,andtheywouldhavebeenrequiredtorendertwoadditionalyearsofserviceaftertheacquisitiondatefortheirawardstovest.Accordingly,onlyaportionoftheTCawardsisattributabletoprecombinationservice.

Thereplacementawardsrequireonlyoneyearofpostcombinationservice.Becauseemployeeshavealreadyrenderedtwoyearsofservice,thetotalrequisiteserviceperiodisthreeyears.Theportionattributabletoprecombinationservicesequalsthefair-value-basedmeasureoftheacquireeaward($100)multipliedbytheratiooftheprecombinationserviceperiod(twoyears)tothegreaterofthetotalserviceperiod(threeyears)ortheoriginalserviceperiodofTC’saward(fouryears).Thus,$50($100×2÷4years)isattributabletoprecombinationserviceandthereforeisincludedintheconsiderationtransferredfortheacquiree.Theremaining$50isattributabletopostcombinationserviceandthereforeisrecognizedascompensationcostinAC’spostcombinationfinancialstatements.Assumea40percenttaxrate.


Debit CreditGoodwill $ 50

APIC $ 50

DTA $ 20

Goodwill $ 20

Journalentriesintheyearimmediatelyfollowingtheacquisitiondateare:

Debit Credit

Compensationexpense $ 50

APIC $ 50

DTA $ 20






Example 8-12

Acquirer Replacement Awards for Which No Postcombination Services Are Required Exchangedfor Acquiree Awards for Which Employees Have Not Rendered All of the Requisite Service as ofthe Acquisition Date

Assumethesamefactsasin Example8-11above,exceptthatACexchangesreplacementawardsthatrequirenopostcombinationserviceforshare-basedpaymentawardsofTCforwhichemployeeshadnotyetrenderedallofthe

requisiteserviceasoftheacquisitiondate.ThetermsofthereplacedTCawardsdidnoteliminateanyremainingrequisiteserviceperioduponachangeincontrol.(IftheTCawardshadincludedaprovisionthateliminatedanyremainingrequisiteserviceperioduponachangeincontrol,theguidanceinExample8-9wouldapply.)Thefair-value-basedmeasureofbothawardsis$100.Becauseemployeeshavealreadyrenderedtwoyearsofserviceandthereplacementawardsdonotrequireanypostcombinationservice,thetotalserviceperiodistwoyears.

Theportionofthefair-value-basedmeasureofthereplacementawardsattributabletoprecombinationservicesequalsthefair-value-basedmeasureoftheacquireeaward($100)multipliedbytheratiooftheprecombinationserviceperiod(twoyears)tothegreaterofthetotalserviceperiod(twoyears)ortheoriginalserviceperiodofTC’saward(fouryears).Thus,$50($100×2÷4years)isattributabletoprecombinationserviceandthereforeisincludedintheconsiderationtransferredfortheacquiree.Theremaining$50isattributabletopostcombinationservice.Becausenopostcombinationserviceisrequiredtovestinthereplacementaward,ACrecognizestheentire$50immediatelyascompensationcostinthepostcombinationfinancialstatements.


Debit Credit

Goodwill $ 50

Compensationexpense 50

APIC $ 100

DTA $ 40

Goodwill $ 20

Incometaxexpense 20


8.38 Asdiscussedin6.22–6.24,forfinancialreportingpurposes,theacquirerisrequiredtorecognize

contingentconsiderationaspartoftheconsiderationtransferredinabusinesscombination.The

obligationisrecordedatitsacquisition-datefairvalueandclassifiedasaliabilityorasequitydepending

onthenatureoftheconsideration.

• Contingentconsiderationclassifiedasequity(e.g.,contingentpaymentofafixednumberof

shares)isnotremeasured.Alldeferredtaxconsequencesresultingfromtheresolutionofthe

contingencyarechargedorcrediteddirectlytoequity.

• Contingentconsiderationclassifiedasaliability(e.g.,fixedamountthatispayableina

variableamountofsharesorcash)isremeasuredtofairvalueoneachreportingdate.Allpost-

measurement-periodadjustmentsarerecordedthroughearnings.

Editor’s Note: Ifthecontingentconsiderationisconsideredahedginginstrumentforwhich

Statement133applies,thenthechangesinfairvalueareinitiallyrecognizedinothercomprehensive

income(seeparagraph65(d)ofStatement141(R)).

Fortaxpurposes,theacquirerisprecludedfromrecognizingcontingentconsiderationaspartofthe

considerationuntilthecontingencyissettledortheamounthasbecomefixedanddeterminablewith

reasonableaccuracy.





Initial Measurement of Deferred Taxes as of the Acquisition Date

8.39 Ontheacquisitiondate,theacquirershoulddeterminetheexpectedtaxconsequencesof

settlingthecontingentconsiderationatitsinitialreportedamountinthefinancialstatements.Thetax

consequenceswillinpartdependonhowthebusinesscombinationisstructuredfortaxpurposes(i.e.,

ataxableornontaxablebusinesscombination).Deferredtaxesshouldberecognizedaspartofthe

businesscombination,providedthattheamountrecognizedforcontingentconsiderationwillbepaid.

Thetaxstructurewilldeterminetheexpectedtaxconsequences.

• Inanontaxablebusinesscombination,theexpectedtaxconsequencesareincreasedtaxbases

inthestockoftheacquiredcompany.Ontheacquisitiondate,thereisgenerallynodifference

betweentheparent’sinvestmentintheoutsidebasisoftheacquiredcompany’sstockandits

taxbasisafterthecontingentconsiderationistakenintoaccount.

• Inataxablebusinesscombination,theexpectedtaxconsequencesareincludedinthetaxbases

intheacquiredcompany’sassets(e.g.,goodwill)suchthattherewilltypicallybenodifference

betweenthefinancialreportingandtaxbasisingoodwillafterthecontingentconsiderationis

takenintoaccount.

Accounting for Deferred Taxes After the Acquisition Date

8.40 Contingentconsiderationclassifiedasaliabilityisremeasuredoneachsubsequentreporting

date,withthechangesinfairvaluerecognizedinearnings(i.e.,outsidethebusinesscombination).

Theacquirershoulddeterminethetaxconsequencesexpectedtoresultfromthechangeinfairvalue

ofthecontingentconsiderationand,inaccordancewithfinancialreportingrequirements,recognize

thedeferredtaxconsequencesofsuchchangesthatareclassifiedasaliabilityoutsideofthebusiness

combination(i.e.,asacomponentofincometaxexpense).

• Inanontaxablebusinesscombination,anincreaseoradecreaseinthecontingentconsideration

liabilitywouldresultinanadjustmentoftheexpectedtaxbasisoftheacquiredcompany’s

stock.Inmanycases,anexceptiontorecordingdeferredtaxesonoutsidebasisdifferences

willapply(e.g.,seeparagraphs31(a)and33ofStatement109forDTLsandparagraph34for

DTAs).

• Inataxablebusinesscombination,anincreaseoradecreaseinthecontingentconsideration

liabilitywouldcauseanadjustmenttothetaxbasesoftheacquiredassets.ADTAorDTLwould

berecordedthroughthetaxprovisionfortheexpectedtaxconsequences.Ifthesettlement

amountexceedstheamountrecordedasaliabilityonthebooks,aDTAwillberecordedin

connectionwithexpectedadditionaltax-deductiblegoodwill.Forfinancialreportingpurposes,

thisgoodwillistreatedasunrelatedtotheacquisition(attributedtoexpense);therefore,aDTA

resultsinaprovisionbenefitratherthanareductioningoodwill.Ifthecontingencyissettledforanamountlessthantheliabilityrecordedonthebooks,thereisafavorableadjustmentto

pretaxbookincome.Thispretaxbookincomeiseliminatedfromtaxableincome(e.g.,byan

M-1adjustmentforU.S.federaltax).Thistaxdeductionistreatedasadeductiontocomponent

1amortizablegoodwill.Inthiscase,aDTLisrecognizedandtherelatedincometaxexpenseis

recorded.(SeeExample 8-13below.)





Example 8-13


OnJune1,20X9,ACpurchasestheassetsofTargetCompany(TC)for$450andacontingentpayment(classifiedasaliability)withafairvalueof$50inataxablebusinesscombination.Theidentifiableassetshaveafairvalueof$450andaninitialtaxbasisof$450.OnSeptember30,20X9,subsequentfactsandcircumstancesindicatethatthecontingentconsiderationhasafairvalueof$30.OnDecember31,20X9,ACsettlesthecontingentconsiderationfor$110(fair

value).Assumea40percenttaxrate.

June 1, 20X9:

Debit Credit

AC:

InvestmentinTC $ 500

Cash $ 450

Contingentconsiderationliability 50

Target (assuming push-down accounting is applied):

Identifiableassets $ 450

Goodwill 50Equity $ 500

ACdeterminesthattheexpectedtaxconsequencesofsettlingthe$50contingentconsiderationliabilitywouldbetoincreasethebasisofitsidentifiableassetsandgoodwilltoequalthebookamounts.Therearenodifferencesbetweenthebookbasesandtheexpectedtaxbasesintheacquiredassets,sonodeferredtaxesarerecordedontheacquisitiondate.

September 30, 20X9:

Debit Credit

AC:

Contingentconsiderationliability $ 20

Remeasurementincome $ 20


DTL $ 8

OnSeptember30,20X9,thefairvalueofthecontingentconsiderationdecreasesto$30.The$20decreasewouldreducetheexpectedtax-deductiblecomponent1goodwill(see 8.47)by$20.Accordingly,an$8DTLisrecognized,withanoffsettingentrytoincometaxexpense.

December 31, 20X9,settlement—fairvalueofcontingentconsiderationis$110:

Debit Credit

AC:

Remeasurementexpense $ 80

Contingentconsiderationliability 30

Cash $ 110

DTA $ 32


Atsettlement,thefairvalueofthecontingentconsiderationincreasesto$110.The$80increasegivesrisetoanequalamountoftax-deductiblegoodwillthatcorrespondstothe$80pretaxbookexpense.Accordingly,a$32DTAis





Acquirer’s Valuation Allowance

Change in an Acquirer’s Valuation Allowance as a Result of a BusinessCombination

8.41 Paragraph266ofStatement109(beforebeingamendedbyStatement141(R))onacquirers’

valuationallowances(VAs)statedthatinsomecircumstances,reversalsofanacquirer’sVAthatresultedfromthebusinesscombinationwouldbeincludedinthebusinesscombinationaccounting.Statement

141(R)amendsparagraph266andclarifiesthatreversalsofacquirers’VAsarenotpartofthebusiness

combinationaccounting.Accordingly,alladjustmentstoanacquirer’sVAaftertheeffectivedateof

Statement141(R)willberecordedtoincometaxexpenseandarenotincludedinbusinesscombination

accounting,regardlessofwhenthebusinesscombinationwasconsummated.Statement141(R)

amendedparagraph266ofStatement109tostate:

Thetaxlawinsometaxjurisdictionsmaypermitthefutureuseofeitherofthecombiningenterprises’

deductibletemporarydifferencesorcarryforwardstoreducetaxableincomeortaxespayable

attributabletotheotherenterprisesubsequenttothebusinesscombination.Ifthecombined

enterpriseexpectstofileaconsolidatedreturn,anacquirermaydeterminethatasaresultofthebusinesscombinationitsvaluationforitsdeferredtaxassetsshouldbechanged.Forexample,the

acquirermaybeabletoutilizethebenefitofitstaxoperatinglosscarryforwardsagainstthefuture

taxableprofitoftheacquiree.Insuchcases,theacquirerreducesitsVAbasedontheweightof

availableevidence.However,thatreductiondoesnotenterintotheaccountingforthebusiness

combinationbutisrecognizedasanincometaxbenefit(orcrediteddirectlytocontributedcapital

(refertoparagraph26)).

Acquired Uncertain Tax Position Measurement and Recognition


Theacquirershallaccountforthepotentialtaxeffectsoftemporarydifferences,carryforwards,and

anyincometaxuncertaintiesofanacquireethatexistattheacquisitiondateorthatariseasaresultoftheacquisitioninaccordancewithStatement109,asamendedandrelatedinterpretativeguidance,

includingFASBInterpretationNo.48,AccountingforUncertaintiesinIncomeTaxes .

8.43 Uncertaintaxpositionsareanexceptiontotherecognitionandmeasurementguidancein

Statement141(R).Therefore,incometaxuncertaintiesoftheacquiredentityrecognizedbytheacquirer

asoftheacquisitiondateshouldbebasedonthe measurement and recognition provisions of

Interpretation 48, not on the acquisition-date fair value.Thatis,asoftheacquisitiondate,

uncertaintaxpositionsarerecognizediftheymeetthemore-likely-than-notrecognitionthresholdand

aremeasuredatthelargestamountofbenefitthatisgreaterthan50percentlikelytoberealizedupon

settlementwithataxingauthoritythathasfullknowledgeofallrelevantinformation.

Editor’s Note: IncometaxesareoneexceptiontotheprospectiveapplicationofStatement141(R)’s

transitionprovisions.Uponanentity’sadoptionofStatement141(R),anysubsequentchangesto

theentity’sacquireduncertaintaxpositionsoccurringafterthemeasurementperiodwillnolonger

beappliedtogoodwill,regardlessoftheacquisitiondateoftheassociatedbusinesscombination.

Rather,suchchangeswilltypicallyberecognizedasanadjustmenttoincometaxexpense.Formore

discussionaboutStatement141(R)’sincometaxtransitionprovisions,see8.66–8.73.





Uncertain Tax Positions — Seller Indemnification

8.44 Thesellerinabusinesscombinationmaycontractuallyindemnifythebuyeragainstlossesfor

certainincometaxuncertainties.Paragraph29ofStatement141(R)requiresanacquirertorecordan

indemnificationassetwhenitrecognizestheindemnifieditem,inthiscasetheuncertaintaxposition

(see4.46).Theindemnificationassetmustbemeasured on the same basis as the indemnified

item,subjecttoanycontractuallimitationsorreserverequiredforamountsconsidereduncollectible.

SinceincometaxuncertaintiesarerecognizedandmeasuredinaccordancewithInterpretation48,the

indemnificationassetisrecognizedandmeasuredonthesamebasisastheuncertaintaxposition(the

indemnifieditem),asstatedinparagraph30ofStatement141(R):

Insomecircumstances,theindemnificationmayrelatetoanassetoraliabilitythatisanexception

totherecognitionormeasurementprinciples.Forexample,anindemnificationmayrelatetoa

noncontractualcontingencythatisnotrecognizedattheacquisitiondatebecauseitdoesnotsatisfy

themore-likely-than-notcriterionatthatdate.Alternatively,anindemnificationmayrelatetoan

assetorliability,forexample,onethatrelatesfromanuncertaintaxpositionthatismeasuredon

abasisotherthanacquisition-datefairvalue(paragraphs26and27).Inthosecircumstances,the

indemnificationassetshallberecognizedandmeasuredusingassumptionsconsistentwiththose

usedtomeasuretheindemnifieditem,subjecttomanagement’sassessmentofthecollectibilityof

theindemnificationassetandanycontractuallimitationsontheindemnifiedamount.Paragraph64

providesguidanceonthesubsequentaccountingforanindemnificationasset.

Goodwill

Goodwill Components

8.45 Paragraph3ofStatement141(R)states,“Goodwillisanassetrepresentingthefutureeconomic

benefitsarisingfromotherassetsacquiredinabusinesscombinationthatarenotindividuallyidentified

andseparatelyrecognized.”Forfinancialreportingpurposesandinaccordancewithparagraph28

ofStatement142,goodwillisnotamortizedbutistestedforimpairmentatleastannually,orearlier

ifcertaineventsarise.Differencesintaxlawsandfinancialreportingrulesusuallyresultindifferent

goodwillamountsbeingrecordedfortaxandbookpurposes.

Editor’s Note: Section197oftheInternalRevenueCodeidentifiesitemsthatshouldbeclassified

asintangiblesfortaxpurposesinataxableacquisitionandassignsa15-yearamortizationperiodto

them.Incertaincases,itemsconsideredtobeseparateintangiblesfortaxpurposes,suchasworkforce

inplace,areincludedaspartofgoodwillforbookpurposes.Toensurethatthegoodwillcomponents

anddeferredtaxesarecalculatedappropriately,entitiesshouldreviewvaluationstodetermine

whethertaxallocationsbetweenSection197intangiblesandgoodwillareappropriate.

8.46 Inataxableacquisition,goodwilliseithertax-deductibleornondeductible.Paragraph30ofStatement109notesthatdeferredtaxesondifferencesbetweenthebookcarryingamountandthetax

basisofgoodwilldependonwhetherthegoodwillisdeductibleunderthetaxlaw.Intaxjurisdictions

inwhichamortizationofgoodwillisdeductible,goodwillforfinancialreportingpurposesandtax-

deductiblegoodwillmustbeseparatedintotwocomponentsasoftheacquisitiondate,inaccordance

withparagraph262ofStatement109.Thisallocationisnecessarytocalculatetheappropriateamount

ofdeferredtaxes.





8.47 Thefirstcomponentofgoodwill(component1goodwill)equalsthelesserof(1)goodwill

forfinancialreportingpurposesor(2)tax-deductiblegoodwill.Thesecondcomponentofgoodwill

(component2goodwill)equals(1)thegreateroffinancialreportinggoodwillortax-deductiblegoodwill

less(2)theamountcalculatedascomponent1goodwill.

Editor’s Note: Thiscalculationmustbedonebyentity,byjurisdiction.

8.48 Thefollowingchartpresentstheconceptofcomponent1andcomponent2goodwill:

Book Greater Than Tax Tax Greater Than Book

Component2 Component2

Component1 Component1

Book Tax Book Tax

Goodwill Goodwill Goodwill Goodwill

Inanontaxableacquisition,theacquiredentitymightstillhavesometaxbasisingoodwillonaccountof

havingataxabletransactioninitshistoryforwhichthereisremainingunamortizedtax-basisgoodwill.

Inthiscase,theacquirerwouldincludethishistoricaltaxbasisingoodwillinitsanalysis,resultingina

reductionincomponent2goodwillandtherecognitionofcomponent1goodwill.

Book Basis Exceeds Tax Basis

8.49 Insometransactions,thevalueassignedtogoodwillforfinancialreportingexceedstax-

deductiblegoodwill.Forexample,forbookpurposesthevalueassociatedwiththein-placeworkforceis

includedaspartofgoodwill,whichisnotamortized.Fortaxpurposes,insomejurisdictions,thisasset

isconsideredanintangibleandisamortizedover15years.Whentheamountassignedtogoodwillfor

financialreportingpurposesexceedsthetaxbasis,nodeferredtaxliabilityisrecordedforthisexcess

bookbasis.Intheory,thedifferencebetweenthebookandthetaxbasisofgoodwillisatemporary

differenceanddeferredtaxesshouldberecorded;however,Statement109prohibitstherecognition

ofadeferredtaxliabilityforsuchdifferences.Statement109containsdifferentguidanceonbasis

differencesthatresultinaDTA(excesstax-deductiblegoodwill)oraDTL(excessbookgoodwill).In

accordancewithparagraph9(d)ofStatement109,enterprisesareprohibitedfromestablishinga

deferredtaxliabilitywhengoodwillrecordedforfinancialreportingisnottax-deductibleorinexcessof

tax-deductiblegoodwill.PartoftherationaleforthisexceptioninStatement109isthatthecalculationwouldbeiterative.Recordingthisdeferredtaxliabilitywouldincreasethegoodwill,whichwouldthen

requireanotheradjustmenttotheDTL,etc.Recordingthisiterativeadjustmentwouldresultinagross-

uponthebalancesheet.Inparagraph131ofStatement109,theFASBconcludedthiswouldnotbe

meaningfulorrelevanttoreadersofthefinancialstatements.

Tax Basis Exceeds Book Basis

8.50 Recognitionofdeferredtaxesondifferencesbetweenthebookandtaxbasisofgoodwill

dependsonwhethergoodwillisdeductibleunderthetaxlaw(paragraph30ofStatement109).








Tax Basis Exceeds Book Basis — Tax-Deductible Goodwill

On Acquisition Date:

(1) Preliminarycalculationofgoodwillcomponents:

Book Tax

Component1goodwill $ 800 $ 800

Component2goodwill — 200

Totalgoodwill $ 800 $ 1,000

(2) CalculationoftheDTA:

DTA=(0.40÷(1–0.40))×$200

DTA=$133

(3) EntrytorecordtheDTA:

Debit Credit

Deferredtaxassets $ 133

Goodwill $ 133

(Note:“final”financialreportinggoodwillis$667.)

Accounting in Years 1 through 3:

(1) Calculationoftaxespayable:

Year 1 Year 2 Year 3

Bookincome(pretax) $ 10,000 $ 11,000 $ 12,000

Taxamortization 500 500 0

Taxableincome $ 9,500 $ 10,500 $ 12,000

Taxespayable(40%) $ 3,800 $ 4,200 $ 4,800

(2) Calculationofdeferredtaxes:

Goodwillisnotamortizedforfinancialreportingpurposes.Eachyear,aDTLmustbecalculatedandrecognizedforthedifferencebetweenthecomponent1financialreportinggoodwillandthecomponent1taxgoodwill.ThisDTLwillreversewhenthecompanyimpairs,sells,ordisposesoftherelatedassets.

January 1, End of End of End of 20X9 Year 1 Year 2 Year 3

Financialreportingbasis—goodwill $ 667 $ 667 $ 667 $ 667

Taxbasis—component1goodwill 667 334 0 0

Taxbasis—component2goodwill 333 166 0 0

Totaltaxbasisingoodwill $ 1,000 $ 500 $ 0 $ 0

Temporarydifference— component1goodwill $ 0 $ 333 $ 667 $ 667

Temporarydifference— component2goodwill $ 333 $ 167 $ 0 $ 0

DTL—component1goodwill $ 0 $ 133 $ 267 $ 267

DTA—component2goodwill $ 133 $ 67 $ 0 $ 0

Deferredincometaxexpense $ 200 $ 200 $ 0






Tax Basis Exceeds Book Basis — Tax-Deductible Goodwill

(3) Realizationofthetaxbenefit:

Ataxbenefitwillberealizedforthetaxdeductionassociatedwithgoodwill.

Entries Years 1 and 2:

Debit Credit


DTL $ 133

DTA 67*

(4) Profitandlosssnapshot:

Year 1 Year 2 Year 3

Bookincome(pretax) $ 10,000 $ 11,000 $ 12,000

Incometaxexpense:

Current 3,800 4,200 4,800

Deferred 200 200 0 Totalincometaxexpense 4,000 4,400 4,800

Netincome $ 6,000 $ 6,600 $ 7,200

*Representsdeferredtaxesassociatedwiththecomponent2goodwilltemporarydifferenceamortizedovertwoyears([$333÷2]×40%).

Bargain Purchases

8.56 Asdiscussedin5.42–5.45,abargainpurchaseoccurswhenthenetofthefairvalueofthe

identifiableassetsacquiredandtheliabilitiesassumed,includingthedeferredtaxconsequencesarising

inthebusinesscombination,exceedsthesumof:

1. Theacquisition-datefairvalueoftheconsiderationtransferred,includingthefairvalueofthe

acquirer’spreviouslyheldinterest(ifany)intheacquiree(i.e.,abusinesscombinationachieved

instages),and

2. Thefairvalueofanynoncontrollinginterestintheacquiree.

8.57 Theacquirerrecognizestheexcess(i.e.,thebargainpurchaseelement)asagainonthe

acquisitiondate.Thecalculationofthegainonthebargainpurchaseismadeafterthe“inside”deferred

taxesarerecordedontheacquiredentity’sassetsandliabilities.Thisrecognizedgainincreasesthe

acquirer’sinvestmentintheacquiredentityandcausesacorrespondingincreaseintheacquiredentity’s

equity.Ifdeferredtaxesarerecordedontheoutsidebasisdifferencecausedbythebargainpurchase

gain,thetaxeffectswouldberecordedoutsidethebusinesscombinationasacomponentofincometax

expense.





8.58 Thefollowingexampleillustratesthetaxeffectsofatypicalbargainpurchasebusiness

combination:

Example 8-15

Taxable Business Combination — Bargain Purchase

ACpays$800toacquiretheassetsofTargetCompany(TC)inataxablebusinesscombination.Thefairvalueoftheidentifiableassetsis$1,000.ACrecognizes$120ofgainasaresultofthebargainpurchase.Assumea40percenttaxrate.

Insidebasisdifference:ADTLof$80isrecordedonthedifferencebetweenthebookbasis($1,000)andtaxbasis($800)oftheacquiredassets.

Entriestorecordtheacquisition,gainonbargainpurchase,andresultingdeferredtaxes:

Debit Credit

TC’s entry:

Assets $ 1,000

Equity $ 920*

DTL 80

AC’s entry:


Cash $ 800

Gainonbargainpurchase 120

Outsidebasisdifference:Asaresultoftherecognitionof$120ofgain,AC’sinvestmentinTCwillincreaseby$120,withacorrespondingincreaseinTC’sequity.

AC’sinvestmentinTC:

Book Basis Tax Basis

TCstock $ 800 $ 800

Gainonbargainpurchase 120 0

Total $ 920 $ 800

Inaccordancewithparagraph33ofStatement109,ACcoulddeterminethattheoutsidebasisdifferenceinTCstockisnotataxabletemporarydifferencebecausethetaxbasisintheTCstockisequaltothenettaxbasisinTC’sassets,aslongasthetaxlawprovidesameansbywhichthereportedamountofthatinvestmentcanberecoveredtax-freeandtheacquirerexpectsitwillultimatelyusethatmeans.

*$800considerationplus$120gain.

8.59 Thefollowingexampleillustratesthatnobargainpurchasegainisrecognizedasaresultofthe

recordingofaDTLinthebusinesscombination:





Example 8-16

Nontaxable Business Combination — No Bargain Purchase Gain Recognized as a Result of the DTL

ACpays$800toacquirethestockofTargetCompany(TC)inanontaxablebusinesscombination.Thefairvalueoftheidentifiableassetsis$1,000.Assumethatthetaxbasesoftheidentifiableassetsare$400.Assumea40percenttaxrate.

Torecordtheacquisitionandresultingdeferredtaxes:

Debit Credit

TC’s entry:

Assets $ 1,000

Goodwill 40

Equity $ 800

DTL 240

AC’s entry:


Cash $ 800

Thecalculationofgainonthebargainpurchaseismadeafterdeferredtaxesarerecorded.ACrecognizesnogainonthebargainpurchasebecausethefairvalueoftheidentifiableassetsacquiredandliabilitiesassumed(net$760)doesnotexceedtheconsiderationtransferred.ThereisnobargainpurchaseaftertheDTLisrecordedforthedifferencebetweenthebookbasisof$1,000andtaxbasisof$400fortheassetsacquired.

Example 8-17

Nontaxable Business Combination — Bargain Purchase

AssumethesamefactsasinExample 8-16,exceptthatthetaxbasesoftheidentifiableassetsare$700ratherthan$400.

ADTLof$120isrecordedonthedifferencebetweenthebookbasisof$1,000andtaxbasisof$700fortheassetsacquired.Entriestorecordtheacquisitiongainonbargainpurchaseandresultingdeferredtaxes:

Debit Credit

TC’s entry:

Assets $ 1,000

Equity $ 880

DTL 120

AC’s entry:


Cash $ 800

Gainonbargainpurchase 80

ACrecognizes$80gainasaresultofthebargainpurchase.

Asaresultoftherecognitionofan$80gain,AC’sinvestmentinTCwillincreaseby$80,withacorrespondingincreaseinTC’sequity.Thiscreatesanoutsidebasisdifferencebetweenthebookbasisof$880andtaxbasisof$800forTC’sstock.ACdeterminesthattheoutsidebasisdifferenceinTC’sstockisataxabletemporarydifferenceandrecordsaDTL.

Debit Credit

AC’s entry:

Deferredtaxexpense $ 32

DTL $ 32

TheDTLrepresentsan$80basisdifferenceatataxrateof40percent.Goodwillisnotaffectedbecausetheoutsidebasisdifferenceisrelatedtothegainrecognizedandthereforeisunrelatedtothebusinesscombinationaccounting.





Business Combinations Achieved in Stages

8.60 Asdiscussedin1.28–1.30,abusinesscombinationachievedinstagesoccurswhenanacquirer

holdsanoncontrollinginvestmentintheacquiredcompany(the“originalinvestment”)beforeobtaining

controloftheacquiredcompany.Whentheacquirerobtainscontroloftheacquiredcompany,it

remeasurestheoriginalinvestmentatitsacquisition-datefairvalue.Theresultinggainorlossisreported

inearnings.Anyamountsrecordedinothercomprehensiveincomefortheoriginalinvestmentare

reclassifiedandincludedinthecalculationofgainorloss.

8.61 Theacquisition-datefairvalueoftheoriginalinvestmentisaddedtothetotalamountof

considerationtransferredinthebusinesscombination(andthefairvalueofanynoncontrollinginterest)

forpurposesofdeterminingthetarget’sopeningequity(whichinturndrivesthemeasurementof

goodwill).

8.62 Theremeasurementoftheoriginalinvestmentisrecordedoutsideofthebusinesscombination

accountingaseitheragainorlossintheincomestatement.Similarly,inaccordancewithparagraphs

31–34ofStatement109,thedeferredtaxeffectsoftheremeasurementarerecordedoutsideofthebusinesscombinationasacomponentofincometaxexpense,unlessanexceptionapplies.

Example 8-18


Case A

ACpurchased20percentofTargetCompany(TC)inyear1.AChasa$200bookbasisand$100taxbasisinitsequitymethodinvestmentandhasrecordedaDTLof$40ontheoutsidebasisdifference.Assumea40percenttaxrate.

Debit Credit

AC’s entries:

Year1


Cash $ 100

Year2


Equityearnings $ 100


DTL $ 40

Inanontaxablebusinesscombination,ACpurchasestheremaining80percentofTCfor$2,000.Thefairvalueofalltheidentifiableassetsis$2,000andtheirtaxbasisis$500.

ACremeasuresits20percentinvestmentinTCto$500andrecognizes$300ofgain(ignoringanycontrolpremium).

Remeasuremententries—torecordtheremeasurementoftheoriginalinvestment:

Debit Credit

AC’s entries:


Gainonremeasurement $ 300


DTL $ 120

ACrecordsaDTLontheremeasurementgainbecauseitdeterminesthattheoutsidebasisdifferenceisataxabletemporarydifference(i.e.,noexceptionsapply).








Debit Credit

AC’s entry:

InvestmentinTC $ 2,000

Cash $ 2,000

TC’s entry:

Assets $ 2,000

Goodwill 1,100

DTL $ 600

Equity 2,500

ADTLof$600isrecordedonthebook-greater-than-taxbasis($2,000–$500)intheidentifiableassets.NoDTLisrecordedonthebook-greater-than-taxbasis($1,100–$0)ingoodwill,inaccordancewithparagraph9(d)ofStatement109.

Case B

AssumethesamefactsasinCaseA,exceptthatinapplyingparagraphs31–33ofStatement109,ACdeterminesthatitsoutsidebasisdifferenceintheacquiredentityisnotatemporarydifference,sonodeferredtaxesarerecorded.

Remeasuremententries—torecordtheremeasurementoftheoriginalinvestment:

Debit Credit

AC’s entries:


Gainonremeasurement $ 300

DTL $ 40

Deferredtaxbenefit $ 40

ACreleasesaDTLontheremeasurementgainbecauseitdeterminesthattheoutsidebasisdifferenceisanotatemporarydifference.

Editor’s Note:Fortheacquisitionofaforeignentity,paragraph288(f)ofStatement109requirestheacquiringentitytocontinuetorecordthetemporarydifferenceforitsshareoftheundistributedearningsoftheacquireebeforethedateitbecameasubsidiarytotheextentthatdividendsfromthesubsidiarydonotexceedtheacquirer’sshareofthesubsidiary’searningafterthedateitbecameasubsidiary.IfTCwasaforeignsubsidiaryinthisexample,thisguidancemaybeapplicable.


Debit Credit

AC’s entry:

InvestmentinTC $ 2,000

Cash $ 2,000

TC’s entry:

Assets $ 2,000

Goodwill 1,100

DTL $ 600

Equity 2,500





International Tax Considerations

Inside Basis Differences in a Foreign Acquired Entity

8.63 Statement141(R)doesnotexplicitlyrequiretheacquirerto“pushdown”theacquisition

accountingtoeachacquiredentity.Paragraph17ofStatement109makesitclear,however,that

temporarydifferenceshavetobedeterminedattheentitylevel.Paragraph17states,“Deferredtaxesaredeterminedseparatelyforeachtax-payingcomponentineachtaxjurisdiction.”Therefore,

theamountsassignedtotheindividualassetsacquiredandliabilitiesassumedforfinancialreporting

purposesandtherelatedvaluationsofassetsmustbe“pusheddown”(actualornotionalpush-down)

toeachtax-payingcomponentintherelevantfunctionalcurrencytocorrectlyapplyStatement109.

8.64 Deferredtaxesareprovidedfordifferencesbetween(1)theamountsassignedtotheindividual

assetsacquiredandliabilitiesassumedforfinancialreportingpurposes(the“foreigncurrencyfinancial

reportingamount”)and(2)thelocaltaxbasis(the“foreigncurrencytaxbasis”).Thetemporary

differenceismultipliedbytheforeigntaxrateandthentranslatedintothereportingcurrency(e.g.,U.S.

dollars)atthespotrateontheacquisitiondate.

Outside Basis Differences in a Foreign Acquired Entity

8.65 Paragraph31(a)ofStatement109providesanexceptiontorecordingDTLsoninvestmentsin

foreignsubsidiaries.Thisexceptionmustbeevaluatedforeachforeignentityacquiredinthebusiness

combination.Ifthepermanentreinvestmentassertionisnotappropriateforaparticularacquiredforeign

entity,DTLsshouldberecordedonthatinvestmentaspartofthebusinesscombination.

Transition Provisions

8.66 IncometaxesareanexceptiontotheprospectiveapplicationofStatement141(R)’stransition

provisions.Uponanentity’sadoptionofstatement141(R),anysubsequentchangestotheentity’sacquireduncertaintaxpositionsandVAsassociatedwithacquiredDTAswillnolongerbeapplied

togoodwill,regardlessoftheacquisitiondateoftheassociatedbusinesscombination.Rather,such

changeswilltypicallyberecognizedasanadjustmenttoincometaxexpense.

8.67 BeforeStatement141(R),anychangesinanacquiredentity’suncertaintaxpositionsandreversals

ofVAsassociatedwithacquiredDTAsgenerallywouldbeappliedtogoodwill,regardlessofwhether

suchchangesoccurredduringtheallocationperiodorafterit.Incontrast,Statement141(R)requires

anyadjustmentstoanacquiredentity’suncertaintaxpositions,orVAsassociatedwithacquiredDTAs

thatoccurafterthemeasurementperiod(andadjustmentsduringthemeasurementperiodthatrelate

tofactsandcircumstancesthatdidnotexistasoftheacquisitiondate),toberecordedpursuantto

Interpretation48andStatement109.Accordingly,anychangesafterthemeasurementperiodwillgenerallybereflectedinincometaxexpense.ThetransitionprovisionsofStatement141(R)clarify

thatthisnewrequirementappliestoalltaxuncertaintiesandVAsrecognizedasaresultofabusiness

combination,includingthosethataroseinbusinesscombinationsconsummatedbeforeStatement

141(R)’seffectivedate.(See A15–A16.)





Acquired Uncertain Tax Positions

8.68 Historically,underIssue93-7,anychangesinanacquiredentity’suncertaintaxpositionbalances

weregenerallyrecognizedasadjustmentstogoodwill.Statement141(R)nullifiedIssue93-7andstates

thatincometaxuncertaintiesacquiredinabusinesscombinationshouldbeaccountedforinaccordance

withInterpretation48.Statement141(R)alsoamendedInterpretation48toaddparagraph12B,which

states:

Theeffectofachangetoanacquiredtaxposition,orthosethatariseasaresultoftheacquisition,

shallberecognizedasfollows:

a. Changeswithinthemeasurementperiodthatresultfromnewinformationaboutfacts

andcircumstancesthatexistedasoftheacquisitiondateshallberecognizedthrougha

correspondingadjustmenttogoodwill.However,oncegoodwillisreducedtozero,the

remainingportionofthatadjustmentshallberecognizedasagainonabargainpurchasein

accordancewithparagraphs36–38ofStatement141(R).

b. Allotherchangesinacquiredincometaxpositionsshallbeaccountedforinaccordancewith

thisInterpretation.

Therefore,ifanacquiredentity’sunrecognizedtaxbenefitforataxpositionisadjustedduringthe

measurementperiodbecauseofnewinformationaboutfactsandcircumstancesthatexistedasof

theacquisitiondate,goodwillshouldbeadjusted.However,evenduringthemeasurementperiod,if

theadjustmenttotheacquiredentity’sunrecognizedtaxbenefitistheresultofanidentifiableevent

thatoccurredafterthebusinesscombination’sacquisitiondate,theadjustmentisgenerallyrecorded

toincometaxexpense.NotethatInterpretation48statesthatjudgmentsmaybechangedonlyafter

theevaluationofnewinformation—notonthebasisofanewevaluationornewinterpretationof

informationthatwasavailableinpreviousfinancialreportingperiods.Afterthemeasurementperiod,

allchangesintheacquiredentity’sunrecognizedtaxbenefitwillberecordedinaccordancewith

Interpretation48.

8.69 Paragraph12BofInterpretation48iseffectiveforallbusinesscombinations(regardlessofwhen

thebusinesscombinationwasconsummated)onoraftertheeffectivedateofStatement141(R).

Example 8-19

Acquired Uncertain Tax Positions

Case A

OnJanuary15,2005,CompanyXacquired100percentofCompanyY.Aspartofthepurchaseaccounting,Xrecognizedaliabilityassociatedwithanunrecognizedtaxbenefit.OnDecember31,2006,Xincreasedtheliabilityasaresultofnewinformationtoreflectachangeinitsbestestimateoftheultimatesettlementwiththetaxingauthority.InaccordancewithIssue93-7,Xrecordedthisadjustmentasanincreasetogoodwill.AfteritadoptsStatement141(R),Xwillbe

requiredtorecordanyadditionaladjustmentstotheliability(relatedtonewinformation)asacomponentofincometaxexpense.

Case B

CompanyXpurchases100percentofCompanyYonJuly15,2008,andthetransactionisaccountedforunderStatement141.CompanyXhasrecordedanunrecognizedtaxbenefitof$100relatedtoY’sstatetaxnexusissues.CompanyXhasacalendaryear-endandwilladoptStatement141(R)onJanuary1,2009.OnMarch15,2009,Xconcludes,onthebasisofnewinformationrelatedtothefactsandcircumstancesaftertheacquisitiondate,thatY’s$100unrecognizedtaxbenefitisnolongerneeded.FollowingthetransitionalprovisionsofStatement141(R),Xwillreversetheliabilityfortheunrecognizedtaxbenefitandcreditincometaxexpense.





Acquired Deferred Tax Asset Valuation Allowances

8.70 Underparagraph30ofStatement109,anacquiredentity’sDTAs,oroperatinglosscarryforwards

thatwerenotinitiallyrealizableasoftheacquisitiondate(partialorfullVAagainsttheacquiredentity’s

DTAs)butthatareconsideredrealizableaftertheacquisitiondate,weregenerallyappliedtogoodwill.

Statement141(R)amendedStatement109toaddparagraph30A,whichstates:

Theeffectofachangeinavaluationallowanceforanacquiredentity’sdeferredtaxassetshallbe

recognizedasfollows:

a. Changeswithinthemeasurementperiod[footnote8a]thatresultfromnewinformation

aboutfactsandcircumstancesthatexistedattheacquisitiondateshallberecognizedthrough

acorrespondingadjustmenttogoodwill.However,oncegoodwillisreducedtozero,an

acquirershallrecognizeanyadditionaldecreaseinthevaluationallowanceasabargain

purchaseinaccordancewithparagraphs36–38ofStatement141(R).

b. Allotherchangesshallbereportedasareductionorincreasetoincometaxexpense(ora

directadjustmenttocontributedcapitalasrequiredbyparagraph26).

[Footnote8astatesthat]themeasurementperiodinthecontextofabusinesscombinationis

describedinparagraphs51–56ofStatement141(R).

Therefore,subsequentchangesinanacquiredentity’sDTAVAthatwasestablishedasofthe

businesscombination’sacquisitiondatewouldgenerallyberecordedtoincometaxexpenseunless

suchadjustmentsoccurredinthemeasurementperiodandrelatedtoinformationaboutfacts

andcircumstancesthatexistedasoftheacquisitiondate.Iftheadjustmentoccurredduringthe

measurementperiodandrelatestonewinformationaboutfactsandcircumstancesthatexistedasof

theacquisitiondate,theadjustmentwouldberecordedtogoodwill.

WhenanentityadoptsStatement141(R),paragraph30Aiseffectiveforallbusinesscombinations

regardlessofwhentheywereconsummated.

Example 8-20

Acquired Deferred Tax Asset Valuation Allowances

OnJuly15,2006,CompanyXacquired100percentofCompanyY.Aspartofthepurchaseaccounting,XestablishedafullvaluationallowanceonY’sDTAfornetoperatinglosses(NOLs)of$100.OnSeptember30,2007,Xdeterminedthat$40ofY’sNOLswillberealizableandreverseditsVA,withacorrespondingentrytogoodwillinaccordancewithparagraph30ofStatement109.CompanyXhasacalendaryear-endandwilladoptStatement141(R)onJanuary1,2009.OnJune15,2009,XconcludesthatunderStatement109,Y’sremaining$60NOLDTAisrealizableandtheVAisnolongernecessary.FollowingthetransitionalprovisionsofStatement141(R),Xwillreverseitsremaining$60VAandrecordacorrespondingcredittoincometaxexpense.

Deferred Tax Asset for Deductible Tax Goodwill in Excess of Financial Reporting

Goodwill

8.71 Statement141(R)alsoamendsStatement109concerningtherecognitionofaDTAforthe

excessoftax-deductiblegoodwillovergoodwillforfinancialreporting.UnderStatement141(R),the

recognitionofaDTAfortax-deductiblegoodwillinexcessoffinancialreportinggoodwillisnolonger

prohibited.Thatis,allDTAsfortax-deductiblegoodwillfrombusinesscombinationsaftertheadoption

ofStatement141(R)willberecordedasoftheacquisitiondate.Paragraph262ofStatement109,as

amendedbyStatement141(R),states,inpart:

Ifthatsecondcomponentisanexcessoftax-deductiblegoodwilloverthereportedamountof

goodwill,thetaxbenefitforthatexcessisatemporarydifferenceforwhicha[DTA]isrecognized

basedontherequirementsofthisStatement(refertoparagraph263).





SeeExample 8-14foranillustrationofhowtheDTAfordeductibletaxgoodwillinexcessoffinancial

reportinggoodwilliscalculatedforallbusinesscombinationsaccountedforunderStatement141(R).

8.72 Forexcesstax-deductiblegoodwillfrombusinesscombinationsaccountedforunderStatement

141,paragraphs262and263ofStatement109(beforebeingamendedbyStatement141(R))stillapply

aftertheeffectivedateofStatement141(R).Thatis,forbusinesscombinationsconsummatedbeforethe

effectivedateofStatement141(R),goodwillwillcontinuetobeadjustedasthetax-deductiblegoodwill

(“secondcomponent”)isrealizedonthetaxreturn.

8.73 Thefollowingexamplefromparagraph263ofStatement109(beforebeingamendedby

Statement141(R))hasbeenadaptedtoillustratetheaccountingthatstillapplies(evenaftertheeffective

dateofStatement141(R))forexcesstax-deductiblegoodwillfrombusinesscombinationsconsummated

underStatement141.

Example 8-21

Excess Tax-Deductible Goodwill Accounting for Business Combinations Consummated Under

Statement 141Theassumptionsareasfollows:

• AsoftheacquisitiondateonJanuary1,2008,thereportedamountandtaxbasisofgoodwillare$600and$800,respectively.

• Fortaxpurposes,amortizationofgoodwillwillresultintaxdeductionsof$400ineachofyears1and2.Thosedeductionsresultincurrenttaxbenefitsinyears2008and2009.

• Forsimplicity,theconsequencesofothertemporarydifferencesareignoredforyears2008–2011.

• Theentityhasacalendaryear-endandwilladoptStatement141(R)onJanuary1,2009.

• Incomebeforeincometaxesis$1,000ineachyearfrom2008–2011.

• Thetaxrateis40percentforallyears.

Incometaxespayableforyears2008–2011are: 2008 2009 2010 2011

Incomebeforeamortizationofgoodwill $ 1,000 $ 1,000 $ 1,000 $ 1,000

Taxamortizationofgoodwill 400 400 0 0

Taxableincome $ 600 $ 600 $ 1,000 $ 1,000

Incometaxpayable $ 240 $ 240 $ 400 $ 400

Atthecombinationdate,goodwillisseparatedintotwocomponentsasfollows:

Reported Amount Tax Basis

Firstcomponent $ 600 $ 600

Secondcomponent — 200

Totalgoodwill $ 600 $ 800

ADTLisrecognizedforthetaxamortizationofgoodwillforyears2008and2009fortheexcessofthefinancialreportingamountoverthetaxbasisofthefirstcomponentofgoodwill.Whenthesecondcomponentofgoodwillisrealizedonthetaxreturnforyears2008and2009,thetaxbenefitisallocatedtoreducefinancialreportinggoodwill.

Note: ThisexampleisonlyapplicableforbusinesscombinationsthatwereoriginallyaccountedforunderStatement141andnotthoseaccountedforunderStatement141(R).






Excess Tax Deductible Goodwill Accounting for Business Combinations Consummated UnderStatement 141

Thesecondcomponentofgoodwillisdeductibleat$100peryearinyears2008and2009.Thosetaxdeductionsprovide$40($100at40percent)oftaxbenefitsthatarerealizedinyears2008and2009.Therealizedbenefitsreducethefirstcomponentofgoodwillandproduceadeferredtaxbenefitbyreducingthetaxabletemporarydifferencerelatedtothat

componentofgoodwill.Thus,thetotaltaxbenefitallocatedtoreducethefirstcomponentofgoodwillinyear2008and2009isthesumof(1)the$40realizedtaxbenefitallocatedtoreducegoodwilland(2)thedeferredtaxbenefitfromreducingtheDTLrelatedtogoodwill.Thattotaltaxbenefit(TTB)isdeterminedasfollows:

TTB=realizedtaxbenefitplus(taxratetimesTTB)

TTB=$40+(0.40×TTB)

TTB=$67

Goodwillforfinancialreportingforyears2008–2011is:

2008 2009 2010 2011

Balanceatbeginningofyear $ 600 $ 533 $ 466 $ 466

Totaltaxbenefitallocatedtoreducegoodwill 67 67 0 0

Balanceatendofyear $ 533 $ 466 $ 466 $ 466

TheDTLforthefirstcomponentofgoodwillandtherelatedamountofdeferredtaxexpense(benefit)foryears2008–2011are:

2008 2009 2010 2011

Reportedamountofgoodwillatendofyear $ 533 $ 466 $ 466 $ 466

Taxbasisofgoodwill(firstcomponent) 300 0 0 0

Taxabletemporarydifference $ 233 $ 466 $ 466 $ 466

Deferredtaxliability:

Atendofyear(40percent) $ 93 $ 186 $ 186 $ 186

Atbeginningofyear 0 93 186 186

Deferredtaxexpensefortheyear $ 93 $ 93 $ 0 $ 0

Incomeforfinancialreportingforyears2008–2011is:

2008 2009 2010 2011

Incomebeforeincometax $ 1,000 $ 1,000 $ 1,000 $ 1,000

Incometaxexpense:

Current 240 240 400 400

Deferred 93 93 0 0

Benefitappliedtoreducegoodwill 67 67 0 0

Incometaxexpense 400 400 400 400

Netincome $ 600 $ 600 $ 600 $ 600





Income Tax Disclosures for Business Combinations

8.74 Statement141(R)amendedsomeofthefinancialstatementdisclosuresinStatement109and

Interpretation48.Forexample,paragraph45ofStatement109,asamendedbyStatement141(R),

states:

Thesignificantcomponentsofincometaxexpenseattributabletocontinuingoperationsforyearpresentedshallbedisclosedinthefinancialstatementsornotesthereto.Thosecomponentswould

include,forexample:

a. Currenttaxexpenseorbenefit

b. Deferredtaxexpenseofbenefit(exclusiveoftheeffectsofothercomponentslistedbelow

c. Investmenttaxcredits

d. Governmentgrants(totheextentrecognizedasareductionofincometaxexpense)

e. Thebenefitsofoperatinglosscarryforwards

f. Taxexpensethatresultsfromallocatingcertaintaxbenefitseitherdirectlytocontributed

capitalortoreducegoodwillorothernoncurrentintangibleassetsofanacquiredentity

g. Adjustmentsofadeferredtaxliabilityorassetforenactedchangesintaxlawsorratesora

changeinthetaxstatusoftheenterprise

h. Adjustmentsofthebeginning-of-the-yearbalanceofavaluationallowancebecauseofa

changeincircumstancesthatcauseschangeinjudgmentabouttherealizabilityoftherelated

deferredtaxassetinfutureyears.Forexample,anyacquisition-dateincometaxbenefitsor

expensesrecognizedfromchangesintheacquirer’svaluationallowanceforitspreviously

existingdeferredtaxassetsasaresultofabusinesscombination(paragraph266).

8.75 Paragraph48ofStatement109,asamendedbyStatement141(R),states:

Anenterpriseshalldisclose(a)theamountsandexpirationdatesofoperatinglossandtaxcredit

carryforwardsfortaxpurposesand(b)anyportionofvaluationallowancefordeferredtaxassetsfor

whichsubsequentlyrecognizedtaxbenefitswillbeallocatedtoreducegoodwillorothernoncurrentintangibleassetsofanacquiredentityorcrediteddirectlytocontributedcapital(paragraphs30and

36).

8.76 Subsequentbusinesscombinationadjustmentstoincometaxaccountscouldhaveaneffecton

Interpretation48disclosurerequirements.Paragraph21(a)ofInterpretation48states:

Anenterpriseshalldisclosethefollowingattheendofeachannualreportingperiodpresented:

a. Atabularreconciliationofthetotalamountsofunrecognizedtaxbenefitsatthebeginning

andendofperiod,whichshallincludeataminimum:

(1) Thegrossamountsofincreasesanddecreasesinunrecognizedtaxbenefitsasaresult

oftaxpositionstakenduringtheperiod(2) Thegrossamountofincreasesanddecreasesinunrecognizedtaxbenefitsasaresult

oftaxpositionstakeninthecurrentyear

(3) Theamountsofdecreasesintheunrecognizedtaxbenefitsrelatingtosettlementswith

taxingauthorities

(4) Reductionstounrecognizedtaxbenefitsasaresultofalapseofapplicablestatuteof

limitations



Section 9 — Push-Down Basis of Accounting

9.01 FortransactionswithinthescopeofStatement141(R),anewbasisisestablishedwithinthe

consolidatedfinancialstatementsoftheacquiringentityfortheassetsacquiredandliabilitiesassumed,

regardlessofwhethertheacquiredentitywillremainasaseparatecorporateentityaftertheacquisition.

Statement141(R)doesnotaddresswhether,iftheacquiredentityistoremainseparate,theseparate

stand-alonefinancialstatementsoftheacquiredentityshouldreflectthenewbasisofaccounting

resultingfromtheacquisitionthroughwhatisreferredtoas“push-downaccounting.”Intheabsence

ofguidanceinStatement141(R),theapplicabilityofpush-downaccountingtoaspecificsetoffactsand

circumstancesshouldbebasedon:

•SABTopic5.J.1

•EITFTopicD-97.2

•SelectedspeechesandinformalcommentsonthetopicbytheSECstaff.

Evaluating the Applicability of Push-Down Accounting

9.02 Thefollowingflowchartcanbeusedtoevaluatetheapplicabilityofpush-downaccountingto

specificsituations.

1 S ee14.37regardingpossiblefutureupdatestoSECguidanceasaresultofStatement141(R).Thispublicationwillbeupdatedafteranyneworamendedguidanceisissuedby

theSEC.

2 Seefootnote1.





No

No

Yes

Yes

No

No

Yes

No

Doestheacquiredentityhavepubliclyhelddebtoutstandingthatqualifiesforthepublicdebtexception?(See9.21–9.23.)

Yes

Push-downaccountingispermittedbutisnotrequired.

Istheoutstandingpubliclyhelddebtdeterminedtobesignificant?(See9.21–9.23.)

Doestheacquiredentityhavepreferredstockoutstandingthatissuitableforthepreferredstockexception?(See9.24.)

Ispercentageoftheentityacquiredbetween80percentand95percent?(See9.17–9.20.)

Yes

Istheoutstandingpreferredstock

determinedtobesignificant?(See9.24.)

Push-downaccountingispermittedbutnotrequired.

Push-downaccountingisrequired.

No

Yes

No

NoWilltheacquiredentityremainasaseparatecorporateentityafterthedateofacquisition?(See9.03—Question1.)

Push-downaccountingconsiderationsarenotnecessary.

Willtheacquiredentityremainingasa

separatecorporateentityafterthedateofacquisitionbeanSECregistrant?(See9.03–9.06.)

Push-downaccounting

considerationsarenotrequired.Doestheacquiringentity,however,wishtoevaluatetheelectiveapplicationofpush-downaccounting?

Areanyneworpreexisting(orrollover)investorsconsideredpartofacollaborativegrouppursuanttoTopicD-97?(See9.07–9.16.)

Evaluateandaggregateneworpreexisting(orrollover)investors,ifnecessary,underTopicD-97.(See9.07–9.16.)

Ispercentageoftheentityacquiredlessthan80percent?(See9.17–9.20.)

Push-downaccountingisnotrequired.

Yes

No

Yes

Yes

Yes

No

Push-downaccountingisprohibited.





SEC Staff Accounting Bulletin Topic 5.J — Push-Down Basis of Accounting Requiredin Certain Limited Circumstances

9.03 SABTopic5.Jprovidesthefollowingseriesoffacts,questions,andinterpretiveresponses:

Facts: CompanyA(orCompanyAandrelatedpersons)acquiredsubstantiallyallofthecommon

stockofCompanyBinoneoraseriesofpurchasetransactions.

Question 1: MustCompanyB’sfinancialstatementspresentedineitheritsownorCompanyA’s

subsequentfilingswiththeCommissionreflectthenewbasisofaccountingarisingfromCompanyA’s

acquisitionofCompanyBwhenCompanyB’sseparatecorporateentityisretained?

Interpretive Response: Yes.Thestaffbelievesthatpurchasetransactionsthatresultinanentity

becomingsubstantiallywhollyowned(asdefinedinRule1-02(aa)ofRegulationS-X)establishanew

basisofaccountingforthepurchasedassetsandliabilities.

Whentheformofownershipiswithinthecontroloftheparentthebasisofaccountingforpurchased

assetsandliabilitiesshouldbethesameregardlessofwhethertheentitycontinuestoexistoris

mergedintotheparent’soperations.Therefore,CompanyA’scostofacquiringCompanyBshould

be“pusheddown,”i.e.,usedtoestablishanewaccountingbasisinCompanyB’sseparatefinancial

statements.[Footnote5]

Question 2: Whatisthestaff’spositionifCompanyAacquiredlessthansubstantiallyallofthe

commonstockofCompanyBorCompanyBhadpubliclyhelddebtorpreferredstockatthetime

CompanyBbecamewhollyowned?

Interpretative Response: Thestaffrecognizesthattheexistenceofoutstandingpublicdebt,

preferredstockorasignificantminorityinterestinasubsidiarymightimpacttheparent’sabilityto

controltheformofownership.Althoughencouragingitsuse,thestaffgenerallydoesnotinsiston

theapplicationofpushdownaccountinginthesecircumstances.

Question 3: CompanyAborrowsfundstoacquiresubstantiallyallofthecommonstockof

CompanyB.CompanyBsubsequentlyfilesaregistrationstatementinconnectionwithapublic

offeringofitsstockordebt.[Footnote6]ShouldCompanyB’snewbasis(“pushdown”)financial

statementsincludeCompanyA’sdebtrelatedtoitspurchaseofCompanyB?

Interpretive Response: ThestaffbelievesthatCompanyA’sdebt,[footnote7]relatedinterest

expense,andallocabledebtissuecostsshouldbereflectedinCompanyB’sfinancialstatements

includedinthepublicoffering(oraninitialregistrationundertheExchangeAct)if:(1)CompanyBis

toassumethedebtofCompanyA,eitherpresentlyorinaplannedtransactioninthefuture;(2)the

proceedsofadebtorequityofferingofCompanyBwillbeusedtoretireallorapartofCompanyA’s

debt;or(3)CompanyBguaranteesorpledgesitsassetsascollateralforCompanyA’sdebt.

OtherrelationshipsmayexistbetweenCompanyAandCompanyB,suchasthepledgeofCompany

B’sstockascollateralforCompanyA’sdebt.[Footnote8]Whileinthislattersituation,itmaybeclear

thatCompanyB’scashflowswillserviceallorpartofCompanyA’sdebt,thestaffdoesnotinsist

thatthedebtbereflectedinCompanyB’sfinancialstatementsprovidingthereisfullandprominent

disclosureoftherelationshipbetweenCompaniesAandBandtheactualorpotentialcashflow

commitment.Inthisregard,thestaffbelievesthatStatements5and57aswellasInterpretation45

requiresufficientdisclosuretoallowusersofCompanyB’sfinancialstatementstofullyunderstandthe

impactoftherelationshiponCompanyB’spresentandfuturecashflows.Rule4-08(e)ofRegulation

S-Xalsorequiresdisclosureofrestrictionswhichlimitthepaymentofdividends.Therefore,thestaff

believesthattheequitysectionofCompanyB’sbalancesheetandanyproformafinancialinformation

andcapitalizationtablesshouldclearlydisclosethatthisarrangementexists.[Footnote9]

RegardlessofwhetherthedebtisreflectedinCompanyB’sfinancialstatements,thenotesto

CompanyB’sfinancialstatementsshouldgenerallydisclose,ataminimum:(1)therelationship

betweenCompanyAandCompanyB;(2)adescriptionofanyarrangementsthatresultinCompany

B’sguarantee,pledgeofassets[footnote10]orstock,etc.thatprovidessecurityforCompanyA’s

debt;(3)theextent(intheaggregateandforeachofthefiveyearssubsequenttothedateofthe





latestbalancesheetpresented)towhichCompanyAisdependentonCompanyB’scashflowsto

serviceitsdebtandthemethodbywhichthiswilloccur;and(4)theimpactofsuchcashflowson

CompanyB’sabilitytopaydividendsorotheramountstoholdersofitssecurities.

Additionally,thestaffbelievesCompanyB’sManagement’sDiscussionandAnalysisofFinancial

ConditionandResultsofOperationsshoulddiscussanymaterialimpactofitsservicingofCompany

A’sdebtonitsownliquiditypursuanttoItem303(a)(1)ofRegulationS-K.

Footnote5states,“TheTaskForceonConsolidationProblems,AccountingStandardsDivisionofthe

AmericanInstituteofCertifiedPublicAccountantsissuedapaperentitled‘PushDown’Accounting,

October30,1979.Thispaperaddressestheissuesrelatingto‘pushdown’accounting,cites

authoritativeliteratureandindicatesthatasubstantialchangeinownershipjustifiesanewbasisof

accounting.”

Footnote6states,“TheguidanceinthisSABshouldalsobeconsideredforCompanyB’sseparate

financialstatementsincludedinitspublicofferingfollowingCompanyB’sspin-offorcarve-outfrom

CompanyA.”

Footnote7states,“TheguidanceinthisSABshouldalsobeconsideredwhereCompanyAhasfinanced

theacquisitionofCompanyBthroughtheissuanceofmandatoryredeemablepreferredstock.”

Footnote8states,“ThestaffdoesnotbelieveCompanyB’sfinancialstatementsmustreflectthedebtin

thissituationbecauseintheeventofdefaultonthedebtbyCompanyA,thedebtholder(s)wouldonly

beentitledtoB’sstockheldbyCompanyA.OtherequityordebtholdersofCompanyBwouldretain

theirprioritywithrespecttothenetassetsofCompanyB.”

Footnote9states,“Forexample,thestaffhasnotedthatcertainregistrantshaveindicatedontheface

ofsuchfinancialstatements(aspartofthestockholder’sequitysection)theactualorpotentialfinancing

arrangementandtheregistrant’sintenttopaydividendstosatisfyitsparent’sdebtservicerequirements.

Thestaffbelievessuchdisclosuresareusefultohighlighttheexistenceofarrangementsthatcouldresult

intheuseofCompanyB’scashtoserviceCompanyA’sdebt.”

Footnote10states,inpart,“Amaterialassetpledgeshouldbeclearlyindicatedonthefaceofthe

balancesheet.Forexample,ifallorsubstantiallyalloftheassetsarepledged,the‘assets’and‘total

assets’captionsshouldincludeparenthetically:‘pledgedforparentcompanydebt—SeeNoteX.’”

Additional SEC Staff Views — Applicability of EITF Topic D-97 to CertainTransactions

9.04 Atthe2005AICPANationalConferenceonCurrentSECandPCAOBDevelopments,Professional

AccountingFellowPamelaSchlosserpresentedherviewsondeterminingtheappropriateaccounting

modelforcertain“newbasis”questions.Inherpreparedremarks,Ms.Schlosserreferredtoasituation

encounteredbytheSECstaffandofferedinsightontheapproachthestaffmayapplywhenanalyzing

push-downaccountingquestions:

InMs.Schlosser’sexample,CompanyA(OLDCO)wasacquiredforcashbyCompanyB

(NEWCO),anewentitythatwasformedtoeffectuatethetransaction.Shestatedthat

“NEWCOwasconsidered[tobe]theaccountingacquirersinceitwasdeemedsubstantive;

itacquiredasingleoperatingcompanyforcash;andtheentireownershipof[OLDCO]had

changed.”Thetransactionresultedin100%step-upofOLDCO’sbasis.





Ms.Schlosserclarifiedthatinsituationssuchastheonedescribedabove,therequirement

toapplypush-downaccountingmustbeassessedattheOLDCOlevel.Sincetheentire

ownershipofOLDCOhadchangedaspartofthetransaction,push-downaccounting

wouldberequired.Therefore,assessingwhetherthenewinvestorsofNEWCOrepresent

acollaborativegroupinaccordancewithTopicD-97(see9.07–9.16)isnotrelevantin

determiningwhetherpush-downaccountingshouldbeappliedatOLDCO.

Applicability of Push-Down Accounting to Companies That Are Not SEC Registrants

9.05 InIssue86-9,theEITFreachedaconsensusthat“push-downaccountingisnotrequiredfor

companiesthatarenotSECregistrants.”Push-downaccountingforcompaniesthatarenotSEC

registrantsisnotaddressedinIssue86-9,butisacceptableundercurrentpracticewhenthesame

acquisitionthresholdsareusedasthoseappliedbytheSECstaff.(See9.17–9.20fordiscussionofthe

thresholdstousewhendeterminingwhetheracompanyhasbecomesubstantiallywhollyowned.)

9.06 ForcompaniesthatbecomeSECregistrants,theSECstaffrequirespush-downaccountingto

beappliedretrospectivelytotheextentthatitwouldhavebeenrequiredunderTopicD-97andSAB

Topic5.J.

Collaborative Groups — Topic D-97

9.07 TopicD-97statesthefollowingregardingacollaborativegroup:

InapplyingSAB54[Topic5.J]tospecificfactsandcircumstances,aregistrantmustdistinguish

betweentransactionsresultinginonlyasignificantchangein(recapitalizationof)acompany’s

ownership(forexample,astheresultofaninitialpublicofferingforwhichpush-downaccountingis

notrequired)andpurchasetransactionsinwhichthecompanybecomessubstantiallywhollyowned

andforwhichpush-downaccountingisrequired.

Forpurposesofdeterminingwhetheracompanyhasbecome“substantiallywhollyowned”astheresultofasingletransactionoraseriesofrelatedandanticipatedtransactionsinwhichinvestors

acquireownershipinterests,theSECstaffbelievesthatitisappropriatetoaggregatetheholdingsof

thoseinvestorswhoboth “mutuallypromote”theacquisitionand“collaborate”onthesubsequent

controloftheinvesteecompany(thecollaborativegroup).[Footnote1]Thatis,theSECstaffbelieves

thatpush-downaccountingisrequiredifacompanybecomessubstantiallywhollyownedbya

groupofinvestorswhoacttogetheraseffectivelyoneinvestorandareabletocontroltheformof

ownershipoftheinvestee.

TheSECstaffbelievesthatundera“mutualpromotionandsubsequentcollaboration”model,a

memberofacollaborativegroupwouldbeanyinvestor[footnote2]thathelpstoconsummate

theacquisitionandworksorcooperateswiththesubsequentcontroloftheacquiredcompany.For

purposesofassessingwhetheraninvestorispartofacollaborativegroup,theSECstaffbelieves

thatarebuttablepresumptionexiststhatanyinvestorinvestingatthesametimeasorinreasonable

proximitytothetimeothersinvestintheinvesteeispartofthecollaborativegroupwiththeother

investor(s).Determinationofwhethersuchapresumptionisrebuttednecessarilywillinvolvethe

considerationofallpertinentfactsandcircumstances.AmongthefactorsconsideredbytheSECstaff

[footnote3]thatwouldbeindicativeofaninvestornot beingpartofacollaborativegroupinclude:

I. Independence

• Theinvestorissubstantive.Forexample,theinvestorisanentitywithsubstantialcapital(that

is,comparabletothatexpectedforasubstantivebusinesswithsimilarrisksandrewards)

andotheroperations.Incontrast,aninvestorthatisaspecialpurposeentitywhoseonly

substantiveassetsoroperationsareitsinvestmentintheinvesteegenerallywouldnotbe

consideredsubstantive.





• Theinvestorisindependentofandunaffiliatedwithallotherinvestors.

• Theinvestor’sinvestmentintheinvesteeisnotcontingentuponanyotherinvestormaking

investmentsintheinvestee.

• Theinvestordoesnothaveotherrelationshipswithanyotherinvestorthatarematerialto

eitherinvestor.

II. Risk of Ownership• Theinvestorisinvestingatfairvalue.

• Theinvestorinvestsfundsfromitsownresources.

• Theinvestorfullyshareswithallotherinvestorsintherisksandrewardsofownershipinthe

investeeinproportiontoitsclassandamountofinvestment.Thatis,theinvestor’sdownside

riskorupsiderewardarenotlimited,andtheinvestordoesnotreceiveanyotherdirector

indirectbenefitsfromanyotherinvestorasaresultofinvestingintheinvestee.[Footnote4]

• Thefundsinvestedbytheinvestorarenotdirectlyorindirectlyprovidedorguaranteedbyany

otherinvestor.

• Theinvestorisatriskonlyforitsowninvestmentintheinvesteeandnotanother’sinvestment

intheinvestee.Thatis,theinvestorisnotprovidingorguaranteeinganypartofanother

investor’sinvestmentintheinvestee.[Refertofootnote4.]

III. Promotion

• Theinvestordidnotsolicitotherpartiestoinvestintheinvestee.

IV. Subsequent Collaboration

• Theinvestorisfreetoexerciseitsvotingrightsinanyandallshareholdervotes.

• Theinvestordoesnothavedisproportionateorspecialrightsthatotherinvestorsdonothave,

suchasaguaranteedseat(s)ontheinvestee’sboard,requiredsupermajorityvotingrightsfor

majororsignificantcorporatedecisions,guaranteedconsentrightsovercorporateactions,

guaranteedorspecifiedreturns,andsoforth.

• Theinvestor’sabilitytosellitsinvesteesharesisnotrestricted,exceptasprovidedbythe

securitieslawsorbywhatisreasonableandcustomaryinindividuallynegotiatedinvestmenttransactionsforcloselyheldcompanies(forexample,arightoffirstrefusalheldbythe

investeeontheinvestor’ssharesintheeventofabonafideofferfromathirdparty).

TheSECstaffhasconsideredtheapplicabilityofpush-downaccountingintransactionsinwhich

financialinvestors,actingtogethereffectivelyasoneinvestor(thatis,asacollaborativegroup),

acquireownershipinterestsinacompany.Theinvesteecompanyexperiencesasignificantchangein

ownership,butnosinglefinancialinvestorobtainssubstantiallyalloftheownershipinterestinthe

company.Considerthefollowingexample:

InvestorCformulatesaplantoacquireandconsolidatecompaniesinahighlyfragmented

industryinordertoachieveeconomiesofscale.InvestorCapproachesInvestorsAandB

withtheplan,andtheyagreetoinvestwithInvestorCintheacquisitionandconsolidation

plan.InvestorsA,B,andC(theInvestors)areeachsubstantiveentities,withnooverlapof

employeesbutwithanumberofpriorjointinvestmentsandotherbusinessrelationshipsthatareindividuallymaterialtotheInvestors.Furthermore,uponcompletionofthecurrentplan,

theresultingentityisexpectedtobematerialtoeachindividualinvestor.

Shortlythereafter,CompanyDisidentifiedasanacquisitioncandidateintheindustry.The

InvestorsnegotiatealegallybindingagreementwithCompanyDtoacquire100percentof

theoutstandingcommonstockofCompanyD(tobeheld40percent,40percent,and20

percentbyInvestorsA,B,andC,respectively)forcash.Inconnectionwiththechangein

ownership,CompanyD’sbylawsareamendedtoprovidethattheInvestorseachhavethe

righttoelectanequalnumberofmembersofCompanyD’sboardofdirectors.CompanyD’s

boardofdirectorsalsoistoincludeCompanyD’schiefexecutiveofficerandtwoindependent

directors.Inaddition,thebylawsareamendedtoprovidethatnoactionrequiringboardof





directors’approvalmaybeapprovedwithoutconsentofamajorityoftheboardaswellasa

majorityoftheInvestorAdirectors,theInvestorBdirectors,andtheInvestorCdirectors,each

votingasaseparateclass.Effectively,anysignificantcorporateactionbyCompanyDwould

requiretheapprovalofeachinvestor.

StockheldbytheInvestorsistoberestrictedastotransferforfiveyears,afterwhicheach

oftheInvestorshasarightoffirstrefusalandtag-alongrightsifsomepartofthegroupof

Investorsdecidestosellitsinterests.

Thefundsinvestedbyeachinvestorcomefromtherespectiveinvestor’sresources;however,

InvestorsAandBprovideInvestorCcertainlimitedfirst-lossguaranteesofitsinvestment.

Inthecontextofthisexample,theSECstaffconcludedthatInvestorsA,B,andCdidnotovercome

thepresumptionthattheyweremembersofacollaborativegroupofinvestors.Furthermore,sincethe

collaborativegroupofInvestorsacquired100percentoftheoutstandingcommonstockofCompany

D,theSECstaffconcludedthatpush-downaccountingwasrequiredtobeappliedinCompany

D’sfinancialstatements.ThefactorstheSECstaffconsideredinreachingitsconclusionthatthe

presumptionwasnotrebuttedincluded,amongothers,thefollowing:

• InvestorsA,B,andCactedinconcerttonegotiatetheirconcurrentinvestmentsinCompany

D,whichweremadepursuanttothesamecontract.

• TheinvestmentsbyInvestorsA,B,andCwerebeingmadeinconnectionwithabroaderstrategicinitiativethethreeinvestorswerepursuingtogether.

• TherewereanumberofpriorbusinessrelationshipsbetweentheInvestorsthatwerematerial

totheInvestors.

• InvestorCdoesnotsharefullyintherisksandrewardsofownershipduetothelimitedfirst-

lossguaranteesprovidedbyInvestorsAandB.

• NosingleInvestorcontrolledtheboardofdirectors,andduetotheamendmentstothe

bylawsregardingboardrepresentationandvoting,anyofthethreeInvestorscouldunilaterally

blockanyboardaction.Inotherwords,InvestorsA,B,andCwerecompelledtocollaborate

onthesubsequentcontrolofCompanyD.

• TherearerestrictionsoneachInvestor’sabilitytotransferitsshares.

Footnote1states,“Acollaborativegroupisnotnecessarilythesameasacontrolgroupasdefinedin

IssueNo.88-16,‘BasisinLeveragedBuyoutTransactions.’”

Footnote2states,“Preexisting,orrollover,investorsshouldbeevaluatedforinclusioninthe

collaborativegrouponthesamebasisasnewinvestors.”

Footnote3states,“Inanassessmentofwhetherthepresumptionisovercome,anysinglefactorshould

notbeconsideredinisolation.”

Footnote4states,“Putoptions,calloptions,tag-alongrights,anddrag-alongrightsshouldbecarefully

evaluated.Theymayacttolimitaninvestor’sriskandrewardsofownership,effectivevotingrights,orabilitytosellitsinvesteeshares.Atag-alongrightgrantsashareholdertheoptiontoparticipateinasale

ofsharesbythecontrollingshareholderorcollaborativegroup,generallyunderthesametermsandin

thesameproportion.Adrag-alongrightgrantsthecontrollingshareholderorcollaborativegroupthe

optiontocompelshareholderssubjecttothedrag-alongprovisiontoselltheirsharesinatransaction

inwhichthecontrollingshareholderorcollaborativegrouptransferscontrolofthecompany,generally

underthesametermsandinthesameproportion.”





Additional Considerations in Determining the Presence of a Collaborative GroupUnder Topic D-97

9.08 TopicD-97referstotheSECstaff’spositionthat“arebuttablepresumptionexiststhatany

investorinvestingatthesametimeasorinreasonableproximitytothetimeothersinvestinan

investeeispartofthecollaborativegroupwiththeotherinvestor(s).”Inattemptingtoovercomethis

presumption,aninvestorshouldconsiderthefactorscitedbytheSECstaffinTopicD-97aswellasall

relevantfactsandcircumstances.

9.09 Inherspeechatthe2005AICPANationalConferenceonSECandPCAOBDevelopments,

ProfessionalAccountingFellowPamelaSchlosseraddressedfactorstheSECstaffconsidersinadditionto

thoseinTopicD-97whendeterminingwhetheracollaborativegroupexists.Ms.Schlosserstated:

ThestaffhasnogoldenrulesinapplyingTopicD-97.Rather,thetotalityofallofthefactorsshouldbe

evaluatedinconcludingwhethertheinvestorsrepresentacollaborativegroup.However,thefollowing

aresomeofthequestionsthatthestaffmayaskingainingabetterunderstandingoftherelationship

amongtheinvestors,andthuswhetheracollaborativegroupexists:

• Howdidthevariousinvestorscometogethertomakethisinvestment?

• Hypothetically,ifoneoftheinvestorswouldhavebackedoutofthedeal,wouldthedealstill

havebeendone?

• Howareboardseatsdeterminedandcanthenumberofseatschangeovertime?

• Whatisthenatureofdecisionsthatrequireunanimousormajorityapprovaloftheinvestors?

• [W]hatevidencesupportsthatsalerestrictionsareconsideredreasonableandcustomary?

9.10 TheSECstaffhasindicated,bothformallyandinformally,thatentitiesshouldconsiderthe

additionalitemsbelowwhenapplyingTopicD-97.

Risk of Ownership — Tag-Along Rights, Drag-Along Rights, or Both

9.11 SECstaffcommentshavesuggestedthattag-alongordrag-alongrightsinanyformnotonly

raiserisk-of-ownershipissues,butmayalsoindicatesubsequentcollaboration.Footnote4ofTopicD-97

addressesthefactorsintheRiskofOwnershipsectionofTopicD-97andindicatesthatdrag-alongrights

andtag-alongrightsshouldbecarefullyevaluated.Inaddition,thefollowinginformationshouldbe

considered:

• Drag-AlongRights—Adrag-alongrightgrantsashareholderorgroupofshareholdersthe

optiontocompelothershareholderssubjecttothedrag-alongprovisiontoselltheirsharesin

atransactioninwhichtheholderoftherightsellsitsshares,generallyunderthesameterms

andinthesameproportion.Forexample,InvestorAandBareinvestinginEntityX.Investor

AcanrequireInvestorBtosellitsinterestinEntityXifInvestorAweretosellitsinterestonafuturedate.Thatis,InvestorAcandragInvestorBintothesaletransaction.SECstaffmembers

haveindicatedthatthepresenceofdrag-alongrightsamonginvestorsrepresentssubsequent

collaborationandwilllikelycausethoseinvestorstobeconsideredpartofthecollaborative

group.

• Tag-AlongRights—Atag-alongrightgrantsashareholdertheoptiontoparticipateinasale

ofsharesbythecontrollingshareholderorcollaborativegroup,generallyunderthesameterms

andinthesameproportion.Forexample,InvestorCandDareinvestinginEntityY.InvestorC

canparticipateinanytransactionwithInvestorDifInvestorDdecidestosellitsinterestinEntity

Yonafuturedate.Thatis,InvestorCcantagalongwithInvestorDinthesaletransaction.





SECstaffmembershaveindicatedthatthepresenceoftag-alongrightsamonginvestorsmay

representsubsequentcollaborationandmaycausethoseinvestorstobeconsideredpartofthe

collaborativegroup.

Subsequent Collaboration — Disproportionate or Special Rights

9.12 SECstaffcommentshavesuggestedthatanyright,includingoneconsideredaprotectiverightunderIssue96-16,mayrepresentaspecialrightindicatingsubsequentcollaboration.SECstaff

commentshavealsoindicatedthatcontractualtermsthatprovideneworpreexistinginvestorswith

guaranteedboardseats,evenwhentheseatsareproportionatetotheequityheld,maybedeemeda

specialrightindicatingsubsequentcollaboration.

Subsequent Collaboration — Transferability Restrictions

9.13 SECstaffcommentshavesuggestedthatanytransferrestrictions,otherthanthoseprovidedby

securitieslaw,mayindicatesubsequentcollaboration.

Advisory or Management Committees

9.14 TheSECstaffhasquestionedwhetheradvisorygroupsormanagementcommitteesestablishedtoadviseentities,ortootherwisebeinvolvedwiththemafterapurchasetransactionthatresultedina

TopicD-97analysis,indicatedsubsequentcollaborationbytheinvestors.

Other Considerations

9.15 WhilethefollowingitemswerenotdiscussedwithmembersoftheSECstaff,theyshouldalsobe

consideredwhendeterminingwhichinvestorstoanalyzeunderTopicD-97:

• StubInvestors—Footnote2ofTopicD-97states,“Preexisting,orrollover,investorsshouldbe

evaluatedforinclusioninthecollaborativegrouponthesamebasisasnewinvestors.”Insome

transactions,certainparties(e.g.,managementoftheinvestee)holdsharesintheentitybefore

thetransactionandcontinuetoholdsharesintheentityafterthetransaction.Thesepartiesaresometimesreferredtoas“stub”investors.Certainstubinvestorsmaybeviewedasmutually

promotingthetransaction.Forexample,stubinvestorsthatholdmanagementpositionsin

theentitybothbeforeandafterthetransactioncouldbeperceivedashavingpromotedthe

transactionbecausetheymayhavebeenterminatediftheyhadnotactedtogetherwiththe

newinvestorstopromotethetransaction.

• LegalAgreementandContracts—Investorsmustcarefullyanalyzethelegalagreementsand

contractsthatdefinethetermsoftransactionsthatfallwithinthescopeofTopicD-97.For

example,investorsmustthoroughlyreviewshareholderagreementstoaccuratelydetermine

whetheracollaborativegroupispresent.Contractsthatshouldalsobeanalyzedincludemerger

orpurchaseandsalesagreements,monitoringormanagementagreements,registrationrights

agreements,proxyortenderofferstatements,LLCagreements,employmentagreements,and

othersrelevanttotheanalysis.IfatransactioninvolvingaTopicD-97analysisisreviewedbythe

SECstaff,thestaffmayrequestandreviewallcontractsassociatedwiththetransaction.

9.16 NotethattheSECstaffmayalsorequestatimelineindicatingwhenandhoweachinvestor

becameinvolvedinatransaction,aswellaswhenothereventsthatarerelatedtothetransaction

occurred(e.g.,whenfinancingwasobtainedandotheragreementsweresigned).





Determining Whether a Company Has Become Substantially Wholly Owned

9.17 TopicD-97statesthat“[i]ndeterminingwhetheracompanyhasbecomesubstantiallywholly

owned,theSECstaffhasstatedthatpush-downaccountingwouldberequiredif95percentormore

ofthecompanyhasbeenacquired(unlessthecompanyhasoutstandingpublicdebtorpreferredstock

thatmayimpacttheacquirer’sabilitytocontroltheformofownershipofthecompany),permittedif

80percentto95percenthasbeenacquired,andprohibitediflessthan80percentofthecompanyis

acquired.”

9.18 SECRegulationS-X,Rule1-02(aa),statesthat“[t]heterm‘whollyownedsubsidiary’means

asubsidiarysubstantiallyallofwhoseoutstandingvotingsharesareownedbyitsparentsand/orthe

parent’sotherwhollyownedsubsidiaries.”Althoughtheterm“substantiallywhollyowned”isdefined

inSECregulationsinthecontextofoutstandingvotingsecurities,theSECstaffmayrequireaparent’s

investmentinasubsidiaryotherthanthroughoutstandingvotingsecurities(e.g.,throughnonvoting

securitiesorinstrumentsthatareconvertibleintovotingsecurities)tobeanalyzedinthedetermination

ofwhetherpush-downaccountingshouldbeappliedonanif-convertedbasis.

9.19 BecausetheSECstaff’sviewsonthissubjectareuncertain,consultationwithprofessionals

whofrequentlyanalyzebusinesscombinationtransactionsisencouragedforaparentthatholdsother

outstandingequityordebtsecuritiesorwhenrightstoequityordebtsecuritiesandtheconsideration

ofsuchinstrumentsmayleadtoadifferentconclusionabouttheapplicationofpush-downaccounting

onthebasisofthethresholdsnotedin9.02.Apre-filingconsultationwiththeSECstaffmayalsobe

advisable.

9.20 Ifregistrantsengageinaplannedacquisitionofvotingsharesofacompanyoveraperiodof

time,ananalysisshouldbeperformedaftereachacquisitionofvotingsharestodeterminewhetherthe

companyhasbecomesubstantiallywhollyowned.

Example 9-1

Determining When a Company Becomes Wholly Owned

RegistrantMhasanoptionwithCompanyW(alsoanSECregistrant)toacquirea20percentinterestinCompanyWeachyearforthenextfiveyears.Uponacquisitionoftheinitial20percentinterest,RegistrantMwillaccountforitsinterestinCompanyWasanequitymethodinvestment.Uponacquisitionofthesecond20percentinterest,RegistrantMwillcontinuetoaccountfortheinvestmentasanequitymethodinvestment(cumulativeinterestof40percent).Uponacquisitionofthethird20percentinterest(i.e.,thechangeincontrol),RegistrantMwillaccountforthetransactionasabusinesscombinationinaccordancewithStatement141(R)andwillbegintoconsolidateCompanyW(cumulativeinterestof60percent).InaccordancewithStatement160,therewillbenoincrementalstep-uptofairvalueofthenetassetsupontheacquisitionofthefourth20percentinterest.Further,Mhasnotyetelectedtoapplypush-downaccounting.Uponconsummationoftheremaining20percent,RegistrantMwillberequiredtoapplypush-downaccountingintheseparatefinancialstatementsofCompanyWsinceitisnowsubstantiallywhollyowned(i.e.,cumulativeinterestisequal

toorgreaterthan95percent).





Evaluating the Availability of the Public Debt Exception

9.21 Thefollowinggeneralguidelinesshouldbeconsideredintheevaluationofwhetheroutstanding

publicdebtoftheacquiredentityqualifiesforconsiderationundertheexceptiondiscussedinQuestion

2ofSABTopic5.J.

• Toqualify,thepublicdebtmustbeissuedbytheacquiredentitybeforethedateofacquisition

andmustremainoutstandingafterthedateofacquisition.Publicdebtissuedincontemplation

oftheacquisition,evenifitreplacesotherpublicdebtthenoutstanding,isnotlikelytoqualify

fortheexception.

• Ifthepublicdebtqualifyingfortheexceptionissubsequentlyredeemedandnoothercondition

preventingtheapplicationofpush-downaccountingisthenpresent,push-downaccounting

mustbereflectedretrospectively.

9.22 Whenreferringtotheexistenceofoutstandingpublicdebt,SABTopic5.Jdoesnotusethe

term“significant.”Atthe1999AICPANationalConferenceonCurrentSECDevelopments,anSEC

staffmember(EricW.Casey)addressedtheapplicationofpush-downaccountingwhenpublicdebtisoutstanding.Inpreparedremarks,Mr.Caseyindicatedthat“whileSAB54[SABTopic5.J]doesnot

explicitlyrefertosignificanceofpublicdebt,thestaffbelievesthatitisreasonableandconsistent

withthegeneralprinciplesofSAB54[SABTopic5.J]toconsiderthesignificanceofpublicdebtin

assessingtheapplicabilityofpushdownaccounting.”Mr.Caseyfurthernotedthat“[i]nevaluatingthe

significanceofpublicdebt,thestaffbelievesthatitisreasonabletoconsiderboththequantitativeand

qualitativesignificanceofthepublicdebt.”Mr.Caseyofferedthefollowingillustrationofaquantitative

andqualitativeanalysisofpubliclyhelddebt,concludingthatthedebtwasneitherquantitatively

norqualitativelysignificantandthusdidnotconstituteareason,initself,nottoapplypush-down

accountingasotherwiserequired:

Quantitatively,thedebtamountedtoapproximately5percentofthesubsidiary’snetbookvalueandlessthan1percentofthesubsidiary’sfairvalue.Thedebtholders,intheaggregate,wouldhold

anapproximately1percentinterestinthesubsidiaryonanas-if-convertedbasis.Qualitatively,the

debtholdershadvirtuallynoabilitytocontrolorinfluencetheformoftheparent’sownershipof

itssubsidiary,nordidthedebtholdershaveconsentrightsregardingthebuyingoutoftheexisting

minorityinterests,issuingsubsidiaryequity,orthesubsidiarypayingdividends.

9.23 Asindicatedabove,qualitativefactorstheSECstaffhashistoricallyconsideredincludethe

percentageof(1)publicdebtinrelationtothesubsidiary’snetbookvalue,(2)publicdebtinrelationto

thesubsidiary’sfairvalue,and(3)commonownershipthatconvertiblepublicdebtorpreferredstock

wouldequatetoonan“ifconverted”basis.

Evaluating the Availability of the Preferred Stock Exception

9.24 Thesamegeneralguidelinesin 9.21shouldbefollowedwhenevaluatingwhetheroutstanding

preferredstockqualifiesforconsiderationundertheexceptiondiscussedinQuestion2ofSABTopic5.J.

Aswithoutstandingpublicdebt,referencestotheexistenceofpreferredstockinSABTopic5.Jdonot

includetheterm“significant.”ByanalogytotheSECstaff’sremarksonoutstandingpublicdebt(see

9.22),foroutstandingpreferredstocktoqualifyfortheexception,thepreferredstockmustbedeemed

significant.TheSECstaffdoesnotappeartohavecommentedonwhetherthedeterminationof

significanceshouldbebasedsolelyonaquantitativeanalysisoronbothaquantitativeandaqualitative

analysis.





Subsequent Application of Push-Down Accounting

9.25 AttheApril2005AICPASECRegulationsCommitteeJointMeetingWiththeSECStaff,theSEC

staffnotedachangeinitspositionregardingwhetheraregistrantcouldapplypush-downaccounting

afteraninitialelectionnottoapplyit.Ifanentitysubsequentlyelectstoapplypush-downaccounting,

theSECstaffstatedthatapreferabilityletterwouldberequiredandthattheelectionofsuch“changein

entity”accountingwouldrequireretroactiveapplication.ThispositionwasreiteratedbyAssociateChief

AccountantLeslieOvertonoftheSEC’sDivisionofCorporationFinanceatthe2006AICPANational

ConferenceonCurrentSECandPCAOBDevelopments.

9.26 TheSECstafffurtherstatedthatifaregistrantweretoapplypush-downaccountinginaninterim

periodaftertheissuanceofannualfinancialstatements,theninfuture1933Actfilings,theregistrant

wouldberequiredtorestatethoseannualfinancialstatementsincludedorincorporatedbyreferencein

sucharegistrationstatementoraproxystatement.

Push-Down of Goodwill to a Subsidiary of an Acquired Company

9.27 Ifanacquirerchoosestoapplypush-downaccountingtotheassetsandliabilitiesofasubsidiary

ofacompany(parent)itpurchases,thenitshouldalsopushdownthegoodwillthatresultedfrom

thepurchasetotheparent’ssubsidiary.Itisinappropriatetorecordtheassetsacquiredandliabilities

assumedatfairvaluewithoutrecordingthegoodwillthatresultedfromthetransaction.Whileallofthe

goodwillfromsuchanacquisitionwouldhavetobepusheddowntothesubsidiary,itmaybeassigned

todifferentreportingunits.

Example 9-2

Push Down of Goodwill to a Subsidiary of an Acquired Company

OnJuly1,20X7,CompanyA,anSECregistrant,acquired100percentofCompanyDfor$5million.CompanyDhastwowhollyownedoperatingsubsidiaries,SubsidiaryXandSubsidiaryY.CompanyDisaholdingcompanywithnosubstantiveoperations.

AspartofthebusinesscombinationaccountingfortheacquisitionofD(andestablishmentofanewbasisofaccounting),Arecorded$1.5millionofgoodwill.WhenpreparingD’sseparatefinancialstatements,ApusheddownitscostofacquiringDtotheacquiredassetsandassumedliabilitiesofDinaccordancewithSABTopic5.J.ThiscostwasfurtherpusheddowntoXandYinthepreparationoftheirseparatefinancialstatements.Inaddition,thegoodwillwasrecognizedintheseparateGAAPfinancialstatementsofXandYbecauseAbelievesthegoodwillwasgeneratedattheXandYlevels.



Section 10 — Subsequent Accounting forIntangible Assets (Other Than Goodwill)

Finite Useful Life Versus Indefinite Useful Life

10.01 InAppendixFofStatement142,“intangibleassets”aredefinedas“[a]ssets(notincludingfinancialassets)thatlackphysicalsubstance.”Amongintangibleassetsrecognizedapartfromgoodwill

inabusinesscombinationoracquiredindividuallyorwithagroupofotherassets,intangibleassetsthat

aresubjecttoamortization(finite-lived)aredistinguishedunderStatement142fromthosethatarenot

subjecttoamortization(indefinite-lived)onthebasisoftheintangibleasset’sexpectedusefullifetothe

reportingentity.Theterm“intangibleassets”referstointangibleassetsotherthangoodwill.

10.02 Thefollowingtablehighlightssomedifferencesbetweenfinite-livedandindefinite-lived

intangibleassets.

Finite-Lived Intangible Assets Indefinite-Lived Intangible Assets

Characteristics Expectedusefullifetothereportingentityislimited.

Nolegal,regulatory,contractual,competitive,economic,orotherfactorslimittheusefullifetothereportingentity.

Amortization period Overtheexpectedusefullifetothereportingentity.

Notapplicable.

Amortization method Onthebasisofthepatterninwhichtheeconomicbenefitsareconsumedorotherwiseusedup.Ifthatpatterncannotbereliablydetermined,astraight-lineamortizationmethodshouldbeused.

Notapplicable.

Impairment testing TestedforimpairmentinaccordancewithStatement144.

Testingrequiredwhenevereventsorcircumstancesindicatethatthecarryingamountofalong-livedasset(assetgroup)maynotberecoverable.Impairmentlossisrecognizedifthecarryingamountoftheassetorassetgrouptestedisnotrecoverableanditscarryingamountexceedsitsfairvalue(two-steptest).

TestedforimpairmentinaccordancewithStatement142.

Testingrequiredannuallyormorefrequentlyifeventsorchangesincircumstancesindicatethattheassetmightbeimpaired.Impairmentlossisrecognizedifthecarryingamountoftheassetexceedsitsfairvalue(one-steptest).Issue02-7providesguidanceontheunitofaccountingtoapply(see10.45–10.50).

Internally Developed Intangible Assets

10.03 Generally,researchanddevelopmentcostsareexpensedasincurredforinternallydeveloped

intangibles.Paragraph10ofStatement142statesthat“[c]ostsofinternallydeveloping,maintaining,

orrestoringintangibleassets(includinggoodwill)thatarenotspecificallyidentifiable,thathave

indeterminatelives,orthatareinherentinacontinuingbusinessandrelatedtoanentityasawhole,

shallberecognizedasanexpensewhenincurred.”Seediscussionin5.26onguidancerelatedto

theaccountingforin-processresearchanddevelopmentintangibleassetsacquiredinabusiness

combination.





Determining the Useful Life of an Intangible Asset

10.04 Paragraph11ofStatement142,asamendedbyFSPFAS142-3,states,inpart:

Theaccountingforarecognizedintangibleassetisbasedonitsuseful life tothereportingentity.An

intangibleassetwithafiniteusefullifeisamortized;anintangibleassetwithanindefiniteusefullifeis

notamortized.Theusefullifeofanintangibleassettoanentityistheperiodoverwhichtheassetisexpectedtocontributedirectlyorindirectlytothefuturecashflowsofthatentity.[Footnoteomitted]

Theestimateoftheusefullifeofanintangibleassettoanentityshallbebasedonananalysisofall

pertinentfactors,inparticularthefollowingfactorswithnoonefactorbeingmorepresumptivethan

theother:

a. Theexpecteduseoftheassetbytheentity[see10.07–10.08]

b. Theexpectedusefullifeofanotherassetoragroupofassetstowhichtheusefullifeofthe

intangibleassetmayrelate[see10.09]

c. Anylegal,regulatory,orcontractualprovisionsthatmaylimittheusefullife[see10.10–10.11]

d. Theentity’sownhistoricalexperienceinrenewingorextendingsimilararrangements

(consistentwiththeintendeduseoftheassetbytheentity),regardlessofwhetherthose

arrangementshaveexplicitrenewalorextensionprovisions.Intheabsenceofthatexperience,theentityshallconsidertheassumptionsthatmarketparticipantswoulduseaboutrenewalor

extension(consistentwiththehighestandbestuseofassetbymarketparticipants),adjusted

forentityspecificfactorsinthisparagraph.[see10.12–10.16]

e. Theeffectsofobsolescence,demand,competition,andothereconomicfactors(suchasthe

stabilityoftheindustry,knowntechnologicaladvances,legislativeactionthatresultsinan

uncertainorchangingregulatoryenvironment,andexpectedchangesindistributionchannels)

[see10.17–10.18]

f. Thelevelofmaintenanceexpendituresrequiredtoobtaintheexpectedfuturecashflowsfrom

theasset(forexample,amateriallevelofrequiredmaintenanceinrelationtothecarrying

amountoftheassetmaysuggestaverylimitedusefullife).[Footnoteomitted][see10.19–

10.20]

10.05 Entitiescommonlyuseanincomeapproachtomeasurethefairvalueofanintangibleasset.This

valuationtechniqueincorporatesassumptionsabouttheasset’sexpectedcashflows,whichtheentity

shouldconsiderwhendeterminingtheusefullifeofanintangibleasset,adjustedasappropriateforthe

entity-specificfactorsinparagraphs11(a)–(f)notedabove.Dependingontheintangibleasset’slegal,

regulatory,andcontractualprovisions,theanalysismaybenefitfromtheassistanceofspecialists.

10.06 Thefollowingfactorsarenot,inthemselves,sufficienttosupportauseful-lifedetermination:

• ExamplesinStatement142—TheimplementationguidanceonintangibleassetsinAppendix

AofStatement142includesexamplesthatdescribe“anacquiredintangibleassetandthe

factsandcircumstancessurroundingthedeterminationofitsusefullifeandthesubsequentaccountingbasedonthatdetermination.”Intheseexamples,anindefiniteusefullifeis

determinedforanacquiredbroadcastlicense,anacquiredairlinerouteauthority,andan

acquiredtrademark.However,paragraphA1ofAppendixAstatesthat“[t]hefactsand

circumstancesuniquetoeachacquiredintangibleassetneedtobeconsideredinmakingsimilar

determinations.”Therefore,theexamplesdonotnecessarilyapplytoothersituations.

• RelianceonIndustryorOtherPractices—Intangibleassettypesmaybecommontoentities

ingeneral(e.g.,atradename)ortoentitiesinaspecificindustry(e.g.,newspapermastheads,

operatingandbroadcastingrights).Sinceparagraph11ofStatement142statesthat“[t]he

usefullifeofanintangibleassettoanentityistheperiodoverwhichtheassetisexpectedto





contributedirectlyorindirectlytothefuturecashflowsofthatentity,”useful-lifeassessments

madebyoneentitywouldnotnecessarilyapplytoanother.

• Useful-LifeDeterminationBasedonAnotherIntangibleAssetWithintheSameIntangible

AssetClass—AppendixFofStatement142defines“intangibleassetclass”as“[a]group

ofintangibleassetsthataresimilar,eitherbytheirnatureorbytheiruseintheoperations

ofanentity.”Intangibleassetclassescouldbe,foraspecificentity,tradenames,newspapermastheads,operatingrights,orbroadcastrights.Sincepertinentfactorsmayvary,theuseful-life

determinationforanintangibleassetinaspecificintangibleassetclassisnotdeterminativefor

anyotherintangibleassetwithinthatclass.

Analyzing the Expected Use of the Asset

10.07 Accordingtoparagraph11(a)ofStatement142,indeterminingtheusefullifeofanintangible

asset,anentitymustanalyzethe“expecteduseoftheasset.”

10.08 Example9inparagraphA1ofStatement142illustratestheimpactofachangeintheexpected

useofanassetonthedeterminationofusefullifebyanentityholdingthatasset:

A trademark for a line of automobiles that was acquired several years ago in an acquisition

of an automobile company. Thelineofautomobileshadbeenproducedbytheacquiredentityfor

35yearswithnumerousnewmodelsdevelopedunderthetrademark.Attheacquisitiondate,the

acquiringentityexpectedtocontinuetoproducethatlineofautomobiles,andananalysisofvarious

economicfactorsindicatedtherewasnolimittotheperiodoftimethetrademarkwouldcontribute

tocashflows.Becausecashflowswereexpectedtocontinueindefinitely,thetrademarkwasnot

amortized.Managementrecentlydecidedtophaseoutproductionofthatautomobilelineoverthe

nextfouryears.

Becausetheusefullifeofthatacquiredtrademarkisnolongerdeemedtobeindefinite,the

trademarkwouldbetestedforimpairmentinaccordancewithparagraph17ofthisStatement.

Thecarryingamountofthetrademarkafteradjustment,ifany,wouldthenbeamortizedoverits

remainingfour-yearusefullifefollowingthepatterninwhichtheexpectedbenefitswillbeconsumed

orotherwiseusedup.Becausethetrademarkwillbesubjecttoamortization,inthefutureitwouldbe

reviewedforimpairmentunderStatement144.

Analyzing the Relationship of the Intangible Asset to Other Assets

10.09 Accordingtoparagraph11(b)ofStatement142,determiningtheusefullifeofanintangible

assetrequiresanalysisofthe“expectedusefullifeofanotherassetoragroupofassetstowhichthe

usefullifeoftheintangibleassetmayrelate.”Therelationshipofanintangibleassettoanotherassetor

groupofassetswithashorterusefullifemaylimittheusefullifeofthatintangibleasset.

Example 10-1 Analyzing the Relationship of an Intangible Asset to Other Assets

Case A

Inrecordinganacquisition,CompanyAidentifiedanontransferablerightheldbytheacquiredentitytomanufactureaspecificproductinagivengeographicarea.Theremainingtermis10years,andAintendstousetherightforitsfullremainingterm.However,manufacturingtheproduct,whosesaleshavesteadilydeclinedinrecentyears,requiressignificantinvestmentinspecializedequipment.Theacquiredentityisusingspecializedequipmentwithanestimatedremainingusefullifeofeightyears.Becauseoftheproduct’sdecliningsalesandtheinvestmentnecessaryforreplacementequipment,Adoesnotintendtoreplacethespecializedequipmentattheendofitsestimatedusefullife.Althoughthemanufacturingrighthasaremainingcontractualtermof10years,the8-yeartermofthespecializedequipment,alongwithmanagement’sintentionregardingreplacementequipment,wouldeffectivelylimittheusefullifeoftherighttoaperiodshorterthanitsremainingcontractualterm.






Analyzing the Relationship of an Intangible Asset to Other Assets

Case B

Inrecordinganacquisition,CompanyBidentifiedaperpetualrightheldbytheacquiredentitytoproduceelectricpowerinagivengeographicarea.Pursuanttothisright,Bwillcontinuetoproduceelectricpoweratanexistingplantafterthe

acquisition.CompanyBintendstoreplacethisplantattheendofitsremainingusefullife,whichis30years.EvidencealsoindicatesthatBwillbeabletoconstructareplacementplantwhenneeded.Therefore,althoughtheestimatedusefullifeoftheexistingplantisshorterthantheperiodgrantedbytherighttoproduceelectricpower,theestimatedusefullifeoftherighttoproduceelectricpowerwouldnotbeshortened,becausemanagementhastheintentionandabilitytoconstructareplacementplant.

Analyzing Legal, Regulatory, or Contractual Provisions That May Limit Useful Life

10.10 Accordingtoparagraph11(c)ofStatement142,determiningtheusefullifeofanintangibleasset

requiresanalysisof“[a]nylegal,regulatory,orcontractualprovisionsthatmaylimittheusefullife.”

10.11 Examples4and5inparagraphA1ofStatement142illustratetheanalysisofthispertinent

factor:

An acquired broadcast license that expires in five years.Thebroadcastlicenseisrenewable

every10yearsifthecompanyprovidesatleastanaveragelevelofservicetoitscustomersand

complieswiththeapplicableFederalCommunicationsCommission(FCC)rulesandpoliciesand

theFCCCommunicationsActof1934.Thelicensemayberenewedindefinitelyatlittlecostand

wasrenewedtwicepriortoitsrecentacquisition.Theacquiringentityintendstorenewthelicense

indefinitely,andevidencesupportsitsabilitytodoso.Historically,therehasbeennocompelling

challengetothelicenserenewal.Thetechnologyusedinbroadcastingisnotexpectedtobereplaced

byanothertechnologyanytimeintheforeseeablefuture.Therefore,thecashflowsfromthatlicense

areexpectedtocontinueindefinitely.

Thebroadcastlicensewouldbedeemedtohaveanindefiniteusefullifebecausecashflowsare

expectedtocontinueindefinitely.Therefore,thelicensewouldnotbeamortizeduntilitsusefullifeis

deemedtobenolongerindefinite.Thelicensewouldbetestedforimpairmentinaccordancewith

paragraph17ofthisStatement.

TheFCCsubsequentlydecidesthatitwillnolongerrenewbroadcastlicenses,butratherwillauction

thoselicenses.AtthetimetheFCCdecisionismade,thebroadcastlicensehasthreeyearsuntilit

expires.Thecashflowsfromthatlicenseareexpectedtocontinueuntilthelicenseexpires.

Becausethebroadcastlicensecannolongerberenewed,itsusefullifeisnolongerindefinite.

Thus,theacquiredlicensewouldbetestedforimpairmentinaccordancewithparagraph17ofthis

Statement.Thelicensewouldthenbeamortizedoveritsremainingthree-yearusefullifefollowingthe

patterninwhichtheexpectedbenefitswillbeconsumedorotherwiseusedup.Becausethelicense

willbesubjecttoamortization,inthefutureitwouldbereviewedforimpairmentunderStatement

144.

Analyzing the Entity’s Own Historical Experience With Renewing or ExtendingSimilar Arrangements

10.12 Accordingtoparagraph11(d)ofStatement142,asamendedbyFSPFAS142-3,determiningthe

usefullifeofanintangibleassetrequiresanalysisof:

Theentity’sownhistoricalexperienceinrenewingorextendingsimilararrangements(consistentwith

theintendeduseoftheassetbytheentity),regardlessofwhetherthosearrangementshaveexplicit

renewalorextensionprovisions.Intheabsenceofthatexperience,theentityshallconsiderthe

assumptionsthatmarketparticipantswoulduseabouttherenewalorextension(consistentwiththe

highestandbestuseoftheassetbymarketparticipants),adjustedforentityspecificfactorsinthis

paragraph[see10.04].







Indeterminingtheusefullife,theacquiringentitywouldconsideritsownhistoricalexperiencein

renewingorextendingsimilarcustomerrelationships.Inthiscase,theacquiringentityconcludes

thatitscustomerrelationshipsaredissimilartotheacquiredcustomerrelationshipsand,therefore,

theacquiringentitylackshistoricalexperienceinrenewingorextendingsimilararrangements.

Accordingly,theacquiringentityconsidersturnoverassumptionsthatmarketparticipantswouldmake

abouttherenewalorextensionoftheacquiredcustomerrelationshipsorsimilararrangements.

Analyzing the Effects of Obsolescence, Demand, Competition, and Other EconomicFactors

10.17 Accordingtoparagraph11(e)ofStatement142,anentityestimatestheusefullifeofan

intangibleassetbyanalyzing“[t]heeffectsofobsolescence,demand,competition,andothereconomic

factors(suchasthestabilityoftheindustry,knowntechnologicaladvances,legislativeactionthatresults

inanuncertainorchangingregulatoryenvironment,andexpectedchangesindistributionchannels).”

10.18 Example3inparagraphA1ofStatement142illustratestheanalysisofthispertinentfactor:

An acquired copyright that has a remaining legal life of 50 years.Ananalysisofconsumer

habitsandmarkettrendsprovidesevidencethatthecopyrightedmaterialwillgeneratecashflowsforapproximately30moreyears.

Thecopyrightwouldbeamortizedoverits30-yearestimatedusefullifefollowingthepatterninwhich

theexpectedbenefitswillbeconsumedorotherwiseusedupandreviewedforimpairmentunder

Statement144.

Analyzing the Level of Maintenance Expenditures

10.19 Accordingtoparagraph11(f)ofStatement142,anentityestimatestheusefullifeofan

intangibleassetbyanalyzing“[t]helevelofmaintenanceexpendituresrequiredtoobtaintheexpected

futurecashflowsfromtheasset(forexample,amateriallevelofrequiredmaintenanceinrelationtothe

carryingamountoftheassetmaysuggestaverylimitedusefullife).[Footnote10]”

10.20 Footnote10states,“Asindeterminingtheusefullifeofdepreciabletangibleassets,regular

maintenancemaybeassumedbutenhancementsmaynot.”

Determining Whether an Intangible Asset Has an Indefinite Useful Life

10.21 Paragraph11ofStatement142statesthat“[i]fnolegal,regulatory,contractual,competitive,

economic,orotherfactorslimittheusefullifeofanintangibleassettothereportingentity,theuseful

lifeoftheassetshallbeconsideredtobeindefinite.Thetermindefinite doesnotmeaninfinite.”

10.22 Incertaincasesthetermsoftheentity’suseoftheasset(e.g.,trademark)maybeindefinite,butthecontinuedabilityoftheassettogeneratecashflowsmaynotbeindefinitebecauseoftheeffects

ofpertinentfactorsnotedinparagraph11(a)–(f)ofStatement142(see10.04),suchasobsolescence,

demand,competition,andotherfactors.Foranintangibleassettobeconsideredtohaveanindefinite

usefullife,therecanbenoforeseeablelimitontheperiodoverwhichtheassetisexpectedtocontribute

tothecashflowsofthereportingentity.





Intangible Assets Subject to Amortization

10.23 Paragraph12ofStatement142states:

Arecognizedintangibleassetshallbeamortizedoveritsusefullifetothereportingentityunless

thatlifeisdeterminedtobeindefinite.Ifanintangibleassethasafiniteusefullife,buttheprecise

lengthofthatlifeisnotknown,thatintangibleassetshallbeamortizedoverthebestestimateofitsusefullife.Themethodofamortizationshallreflectthepatterninwhichtheeconomicbenefitsofthe

intangibleassetareconsumedorotherwiseusedup.Ifthatpatterncannotbereliablydetermined,a

straight-lineamortizationmethodshallbeused.Anintangibleassetshallnotbewrittendownoroff

intheperiodofacquisitionunlessitbecomesimpairedduringthatperiod.[Footnote11]

Footnote11providesthat“bothStatement2andInterpretation4requireamountsassignedtoacquired

intangibleassetsthataretobeusedinaparticularresearchanddevelopmentprojectandthathaveno

alternativefutureusetobechargedtoexpenseattheacquisitiondate.”


Theamountofanintangibleassettobeamortizedshallbetheamountinitiallyassignedtothatassetlessanyresidual value.Theresidualvalueofanintangibleassetshallbeassumedtobezerounless

attheendofitsusefullifetotheentitytheassetisexpectedtocontinuetohaveausefullifeto

anotherentityand(a)thereportingentityhasacommitmentfromathirdpartytopurchasetheasset

attheendofitsusefullifeor(b)theresidualvaluecanbedeterminedbyreferencetoanexchange

transactioninanexistingmarketforthatassetandthatmarketisexpectedtoexistattheendofthe

asset’susefullife.

10.25 AppendixFofStatement142defines“residualvalue”as“[t]heestimatedfairvalueofan

intangibleassetattheendofitsusefullifetoanentity,lessanydisposalcosts.”

Determining the Useful Life of an Intangible Asset Subject to Amortization Each

Reporting Period

10.26 Paragraph14ofStatement142statesthat“[a]nentityshallevaluatetheremaininguseful

lifeofanintangibleassetthatisbeingamortizedeachreportingperiodtodeterminewhetherevents

andcircumstanceswarrantarevisiontotheremainingperiodofamortization.”Accordingly,afterthe

initialdeterminationofusefullife,anentitymustidentifyandevaluateeventsorcircumstancesthat,

ifoccurringafterorchangedfromthepreviousdetermination,mayaffecttheremainingusefullife.

Someeventsorcircumstanceswillrepresentdiscreteandeasilyidentifiableeventstowhichtheentity

shouldreadilyrespond(e.g.,achangeinregulation).Othereventsorcircumstancesmaydevelopmore

graduallybutmustbemonitoredbytheentity(e.g.,obsolescence,competition,demand).

Accounting for a Change in Remaining Useful Life of an Intangible Asset Subject toAmortization


Iftheestimateofanintangibleasset’sremainingusefullifeischanged,theremainingcarrying

amountoftheintangibleassetshallbeamortizedprospectivelyoverthatrevisedremainingusefullife.

Ifanintangibleassetthatisbeingamortizedissubsequentlydeterminedtohaveanindefiniteuseful

life,theassetshallbetestedforimpairmentinaccordancewithparagraph17.[Fortherequirements

fortestingofintangibleassetsnotsubjecttoamortization,see10.41.]Thatintangibleassetshallno

longerbeamortizedandshallbeaccountedforinthesamemannerasotherintangibleassetsthat

arenotsubjecttoamortization.





Intangible Assets the Acquirer Intends Not to Use or to Use in a Way Other ThanTheir Highest and Best Use

10.28 Asnotedin5.09,inabusinesscombinationoranassetacquisition,anentitymayacquirean

intangibleassetthatitdoesnotintendtousetoitshighestandbestuse.ParagraphA59ofStatement

141(R)requirestheacquiringentityinabusinesscombinationtorecognizesuchassetsatfairvalue.For

example,anentitymayacquireacompetitor,includingitstradename,inabusinesscombination.In

suchsituations,theacquirermaydecidenottousetheacquiredentity’stradenamebecauseitdirectly

competeswithitsowntradename.Iftheacquirerwouldpreventothersfromusingtheacquiredtrade

name,thenthisassethasdefensivevaluebecauseitenhancesthevalueoftheacquirer’sowntrade

name(suchassetsarecommonlyreferredtoasdefensivevalueassets).

10.29 Issue08-7providesguidanceonthesubsequentaccountingfordefensivevalueassets,andit

requiresthatsuchassetsbeassignedausefullifeinaccordancewithparagraph11ofStatement142.

Webelievethatentitiesshouldaccountfortheusefullivesforacquiredassetsthattheydonotintend

toputtotheirhighestandbestuse,butwillnotactivelydefend,inasimilarmanner.TheTaskForce

providedthefollowingguidancetoassistintheusefullifedetermination:

Adefensiveintangibleassetshallbeassignedausefullifewhichreflectstheentity’sconsumption

oftheexpectedbenefitsrelatedtothatasset.Thebenefitareportingentityreceivesfromholdinga

defensiveintangibleassetisthe[directand]indirectcashflowsresultingfromtheentitypreventing

othersfromrealizinganyvaluefromtheintangibleasset(defensivelyorotherwise).Anentityshall

determineadefensiveintangibleasset’susefullife,thatis,theperiodoverwhichanentityconsumes

theexpectedbenefitsoftheasset,byestimatingtheperiodoverwhichthedefensiveintangible

assetwilldiminishinfairvalue.Theperiodoverwhichadefensiveintangibleassetdiminishesinfair

valueisaproxyfortheperiodoverwhichthereportingentityexpectsadefensiveintangibleassetto

contribute[directlyor]indirectlytothefuturecashflowsoftheentity.

Itwouldberareforadefensiveintangibleassettohaveanindefinitelifebecausethefairvalueofthe

defensiveintangibleassetwillgenerallydiminishovertimeasaresultofalackofmarketexposureoras

aresultofcompetitiveorotherfactors.Inaddition,ifanacquiredintangibleassetmeetsthedefinition

ofadefensiveintangibleasset,itcannotbeconsideredimmediatelyabandoned.

Recognition and Measurement of an Impairment Loss for Intangible Assets Subjectto Amortization


Anintangibleassetthatissubjecttoamortizationshallbereviewedforimpairmentinaccordance

withFASBStatementNo.144,AccountingfortheImpairmentorDisposalofLong-LivedAssets ,

byapplyingtherecognitionandmeasurementprovisionsinparagraphs7–24ofthatStatement.InaccordancewithStatement144,animpairmentlossshallberecognizedifthecarryingamountofan

intangibleassetisnotrecoverableanditscarryingamountexceedsitsfairvalue.Afteranimpairment

lossisrecognized,theadjustedcarryingamountoftheintangibleassetshallbeitsnewaccounting

basis.Subsequentreversalofapreviouslyrecognizedimpairmentlossisprohibited.

10.31 UnderStatement144,long-livedassets(includingfinite-livedintangibleassets)aretestedfor

recoverabilityattheassetgrouplevelwhenevereventsorchangesincircumstancesindicatethattheir

carryingamountsmaynotberecoverable.Paragraph8ofStatement144includesalistoffactorsthat

mayindicatesuchachangeinfactsandcircumstances(see10.42).Atwo-steptestisusedtoassess

long-livedassetsforimpairment.Instep1,recoverabilityoftheassetgroupisdeterminedbycomparing









Example 10-2

In-Process Research and Development Intangible Assets Acquired in a Business Combination

Case A

OnJune30,20X9,CompanyAacquiresCompanyBinatransactionaccountedforasabusinesscombination.Beforetheacquisition,BhadincurredsignificantcostsrelatedtotheR&Dofanewproduct,allofwhichitexpensedasincurredin

accordancewithStatement2.CompanyAplanstocontinuetheseR&Deffortsinhopesofcommercializingtheproductinthefuture.

Usingtheacquisitionmethodofaccounting,andinamannerconsistentwiththefairvaluemeasurementguidanceinStatement157,AcalculatesthefairvalueoftheacquiredIPR&Dassetsas$10million.Therefore,asoftheacquisitiondate,Awouldrecordanindefinite-livedintangibleassetfor$10million.

OnJuly1,20Y2,AconcludesthatdevelopmentofthenewproductisnolongerfeasibleanddecidestoabandonitsprojectbecausethereisnoalternativefutureusefortheacquiredIPR&D.

FromJune30,20X9,toJune30,20Y2,AappropriatelytestedtheacquiredIPR&Dasset($10million)forimpairmentinaccordancewithparagraph17ofStatement142anddidnotrecordanyimpairmentlosses.

Becauseofitsplanstonowabandontheproject,andthefactthattheIPR&Dassetshavenoalternativefutureuse,AwouldexpensetheentireIPR&Dassetbalanceof$10milliononJuly1,20Y2(thedateofabandonment),intheincomestatement.

Case BAssumethesamefactsasinCaseAbutwiththefollowingexception:onJuly1,20Y2,CompanyAsuccessfullycompletesitsIPR&Dprojectandhasdevelopedacommerciallyviableproductthatitintendstosellinthemarketplace.

Pertheexampleabove,fromJune30,20X9,toJuly1,20Y2,AappropriatelytestedtheacquiredIPR&Dasset($10million)forimpairmentinaccordancewithparagraph17ofStatement142anddidnotrecordanyimpairmentlosses.

NowAisrequiredtoassesstheusefullifeoftheacquiredIPR&DassetasofJuly1,20Y2(thedatetheIPR&Dprojectissuccessfullycompleted),andamortizetheassetovertherelatedproducts’usefullives.Inotherwords,theacquiredIPR&Dasset’susefullifeisnowfiniteratherthanindefinite.Inaddition,thereclassificationtoafiniteusefullifetriggersarequiredimpairmenttestinaccordancewithparagraph16ofStatement142(see 10.38)asofJuly1,20Y2.

Recognition and Measurement of an Impairment Loss for Intangible Assets NotSubject to Amortization

10.41 Paragraph17ofStatement142statesthat:

Anintangibleassetthatisnotsubjecttoamortizationshallbetestedforimpairmentannually,ormore

frequentlyifeventsorchangesincircumstancesindicatethattheassetmightbeimpaired.(Paragraph

8ofStatement144includesexamplesofimpairmentindicators.)Theimpairmenttestshallconsistof

acomparisonofthefairvalueofanintangibleassetwithitscarryingamount.Ifthecarryingamount

ofanintangibleassetexceedsitsfairvalue,animpairmentlossshallberecognizedinanamount

equaltothatexcess.Afteranimpairmentlossisrecognized,theadjustedcarryingamountofthe

intangibleassetshallbeitsnewaccountingbasis.Subsequentreversalofapreviouslyrecognized

impairmentlossisprohibited.

10.42 Paragraph8ofStatement144liststhefollowingeventsorcircumstancesthatcanindicatethatanasset’scarryingamountmaynotberecoverable:

a. Asignificantdecreaseinthemarketpriceofalong-livedasset(assetgroup)

b. Asignificantadversechangeintheextentormannerinwhichalong-livedasset(assetgroup)

isbeingusedorinitsphysicalcondition

c. Asignificantadversechangeinlegalfactorsorinthebusinessclimatethatcouldaffectthe

valueofalong-livedasset(assetgroup),includinganadverseactionorassessmentbya

regulator

d. Anaccumulationofcostssignificantlyinexcessoftheamountoriginallyexpectedforthe

acquisitionorconstructionofalong-livedasset(assetgroup)





e. Acurrent-periodoperatingorcashflowlosscombinedwithahistoryofoperatingorcash

flowlossesoraprojectionorforecastthatdemonstratescontinuinglossesassociatedwiththe

useofalong-livedasset(assetgroup)

f. Acurrentexpectationthat,morelikelythannot ,along-livedasset(assetgroup)willbesold

orotherwisedisposedofsignificantlybeforetheendofitspreviouslyestimatedusefullife.

[Footnoteomitted]

10.43 See13.31fordisclosurerequirementsforintangibleassetimpairments.

Timing of the Annual Impairment Test

10.44 Althoughparagraph17ofStatement142doesnotexplicitlyrequireit,entitieswithintangible

assetsnotsubjecttoamortizationareexpectedtoselectarecurringdatefortestingeachindefinite-lived

intangibleassetorunitofaccountingasdeterminedunderIssue02-7.Becauseofthelackofaspecific

requirement,however,ifanentitychangesthisrecurringdate,itdoesnothavetoevaluatethechange

asanaccountingchangeasrequiredbyparagraph26ofStatement142whentheannualtestingdate

forgoodwillischanged(see11.29).

Unit of Accounting for Impairment Testing of Indefinite-Lived Intangible Assets

10.45 Paragraph2ofIssue02-7states:

Questionshavearisenonwhattheappropriateunitofaccountingiswhentestingindefinite-lived

intangibleassetsforimpairment.Someentitiesacquireintangibleassetsinseparatetransactions;

however,thoseindividualassetsarecollectivelyusedinamannerthatsuggeststheyrepresentone

asset.Forexample,anentitymightacquire,inseparatetransactions,contiguouseasementsto

supportdevelopmentofasinglegaspipeline.Infactpatternssuchasthose,thequestioniswhether

thecollectionoflegalrightsshouldbedeemedasingleunitofaccountingforimpairmenttesting

purposes(aneasementsupportingapipeline)orwhethereachindividuallyacquiredlegalright

shouldbeseparatelytestedforimpairment.Questionsalsohavebeenraisedastowhen,ifever,

differentindefinite-livedintangibleassetsshouldbecombinedintoasingle“unitofaccounting”for

impairmenttestingpurposes.Anexampleiswhetheritiseverappropriatetocombine(a)different

tradenames,(b)atradenameandadifferenttypeofindefinite-livedintangibleassetsuchasan

easement,or(c)allindefinite-livedintangibleassetsandtestthecombinedassetforimpairment.

10.46 Paragraph3ofIssue02-7statesthat“[t]heissueiswhattheunitofaccountingshouldbe

forpurposesoftestingindefinite-livedintangibleassetsforimpairmentpursuanttoparagraph17of

Statement142.”


TheTaskForcereachedaconsensusthatseparatelyrecordedindefinite-livedintangibleassets,

whetheracquiredorinternallydeveloped,shouldbecombinedintoasingleunitofaccountingfor

purposesoftestingimpairmentiftheyareoperatedasasingleassetand,assuch,areessentially

inseparablefromoneanother.TheTaskForceagreedthatdeterminingwhetherseveralindefinite-lived

intangibleassetsareessentiallyinseparableisamatterofjudgmentthatdependsontherelevant

factsandcircumstancesandthattheindicatorssetforthbelowshouldbeconsideredinmakingthat

determination.TheTaskForceagreedthatnoneoftheindicatorsshouldbeconsideredpresumptiveor

determinative.





Indicators that two or more indefinite-lived intangible assets should be combined as a single

unit of accounting for impairment testing purposes:

• Theintangibleassetswerepurchasedinordertoconstructorenhanceasingleasset(thatis,

theywillbeusedtogether).

• Hadtheintangibleassetsbeenacquiredinthesameacquisitiontheywouldhavebeen

recordedasoneasset.

• Theintangibleassetsasagrouprepresentthehighestandbestuseoftheassets(forexample,

theyyieldthehighestpriceifsoldasagroup).Thismaybeindicatedif(a)itisunlikelythat

asubstantialportionoftheassetswouldbesoldseparatelyor(b)thesaleofasubstantial

portionoftheintangibleassetsindividuallywouldresultinasignificantreductioninthefair

valueoftheremainingassetsasagroup.

• Themarketingorbrandingstrategyprovidesevidencethattheintangibleassetsare

complementary,asthattermisusedinparagraphA16ofStatement141.

Indicators that two or more indefinite-lived intangible assets should not be combined as a

single unit of accounting for impairment testing purposes:

• Eachintangibleassetgeneratescashflowsindependentofanyotherintangibleasset(as

wouldbethecaseforanintangibleassetlicensedtoanotherentityforitsexclusiveuse).

• Ifsold,eachintangibleassetwouldlikelybesoldseparately.Apastpracticeofsellingsimilar

assetsseparatelyisevidenceindicatingthatcombiningassetsasasingleunitofaccounting

maynotbeappropriate.

• Theentityhasadoptedorisconsideringaplantodisposeofoneormoreintangibleassets

separately.

• TheintangibleassetsareusedexclusivelybydifferentStatement144assetgroups.

• Theeconomicorotherfactorsthatmightlimittheusefuleconomiclifeofoneofthe

intangibleassetswouldnotsimilarlylimittheusefuleconomiclivesofotherintangibleassets

combinedintheunitofaccounting.


TheTaskForcemadethefollowingobservationsabouttheunitofaccountingusedtotestindefinite-

livedintangibleassetsforimpairment.

a. Theunitofaccountingshouldincludeonlyindefinite-livedintangibleassets—thoseassets

cannotbetestedincombinationwithgoodwillorwithafinite-livedasset.

b. Theunitofaccountingcannotrepresentagroupofindefinite-livedintangibleassetsthat

collectivelyconstituteabusiness.

c. Aunitofaccountingmayincludeindefinite-livedintangibleassetsrecordedintheseparate

financialstatementsofconsolidatedsubsidiaries.Asaresult,animpairmentlossrecognized

intheconsolidatedfinancialstatementsmaydifferfromthesumoftheimpairmentlosses(if

any)recognizedintheseparatefinancialstatementsofthosesubsidiaries.

d. Iftheunitofaccountingusedtotestimpairmentofindefinite-livedintangibleassetsis

containedinasinglereportingunit,thesameunitofaccountingandassociatedfairvalue

shouldbeusedforpurposesofmeasuringagoodwillimpairmentlossinaccordancewith

paragraph20ofStatement142.

10.49 Furthermore,paragraph5ofIssue02-7states:

TheTaskForcereachedaconsensusthatif,basedonachangeinthewayinwhichintangibleassets

areused,acompanycombinesasaunitofaccountingforimpairmenttestingpurposesindefinite-

livedintangibleassetsthatwerepreviouslytestedforimpairmentseparately,thoseintangibleassets

shouldbeseparatelytestedforimpairmentinaccordancewithparagraph17ofStatement142prior

tobeingcombinedasaunitofaccounting.





10.50 Exhibit02-7AofIssue02-7providesthefollowingillustrations:

Example 1 — Easements

CompanyXisadistributorofnaturalgas.CompanyXhastwoself-constructedpipelines,the

NorthernpipelineandtheSouthernpipeline.Eachpipelinewasconstructedonlandforwhich

CompanyXownsperpetualeasements.TheNorthernpipelinewasconstructedon50easements

acquiredin50separatetransactions.TheSouthernpipelinewasconstructedon100separateeasementsthatwereacquiredinabusinesscombinationandwererecordedas1asset.Although

eachpipelinefunctionsindependentlyoftheother,theyarecontainedinthesamereportingunit.

Operationofeachpipelineisdirectedbyadifferentmanager.Therearediscrete,identifiablecash

flowsforeachpipeline;thus,eachpipelineanditsrelatedeasementsrepresentaseparateStatement

144assetgroup.WhileCompanyXhasnocurrentplanstosellorotherwisedisposeofanyofits

easements,CompanyXbelievesthatifeitherpipelinewassold,itwouldmostlikelyconveyallrights

undertheeasementswiththerelatedpipeline.

Evaluation:CompanyXwouldhavetwounitsofaccountingforpurposesoftestingtheeasements

forimpairment—thecollectionofeasementssupportingtheNorthernpipelineandthecollection

ofeasementssupportingtheSouthernpipeline.The50easementssupportingtheNorthernpipeline

representasingleunitofaccountingasevidencedbythefactthat(a)theyarecollectivelyused

togetherinasingleStatement144assetgroup,(b)ifacquiredinasingletransaction,theywouldhavebeenrecordedasoneasset,and(c)ifsold,theywouldlikelybesoldasagroupwiththerelated

pipeline.Forthesamereasons,theeasementssupportingtheSouthernpipelinewouldrepresent

asingleunitofaccounting.BecausethecollectivelandeasementsunderlyingtheNorthernand

Southernpipelinesgeneratecashflowsindependentofoneanotherandareusedexclusivelyby

separateStatement144assetgroups,theyshouldnotbecombinedintoasingleunitofaccounting.

Example 2 — Trade Name

CompanyYpurchasesaninternationalvacuumcleanermanufacturer,CompanyA,whichsells

vacuumsunderawell-knowntradename.TheoperationsofCompanyAareconductedthrough

separatelegalentitiesinthreecountriesandeachofthoselegalentitiesownstheregisteredtrade

nameusedinthatcountry.Whenthebusinesscombinationwasrecorded,CompanyYrecorded

threeseparateintangibletradenameassetsbecauseseparatefinancialstatementsarerequiredtobe

preparedforeachseparatelegalentity.Thereareseparateidentifiablecashflowsforeachcountry,andeachcountryrepresentsaStatement144assetgroup.Asinglebrandmanagerisresponsiblefor

theCompanyAtradename,thevalueofwhichisexpectedtoberecoveredfromtheworldwidesales

ofCompanyA’sproducts.

Evaluation:Thethreeseparatelyrecordedtradenameassetsshouldbecombinedintoasingleunit

ofaccountingforpurposesoftestingtheacquiredtradenameforimpairment.Thethreeregistered

tradenameswereacquiredinthesamebusinesscombinationand,absenttherequirementtoprepare

separatefinancialstatementsforsubsidiaries,wouldhavebeenrecordedasasingleasset.Thetrade

nameismanagedbyasinglebrandmanager.Ifsold,CompanyXwouldmostlikelysellallthree

legallyregisteredtradenamesasasingleasset.

Example 3 — Brands

CompanyZmanufacturesanddistributescerealsundertwodifferentbrands,BrandAandBrandB.Bothbrandswereacquiredinthesamebusinesscombination.CompanyZrecordedtwoseparate

intangibleassetsrepresentingBrandAandBrandB.Eachbrandrepresentsagroupofcomplementary

indefinite-livedintangibleassetsincludingthetrademark,thetradedress,andarecipe.BrandA

hastwounderlyingtradenamesforitsHoneyandCinnamoncereals.Thetradenameandrecipeof

CinnamonwereinternallygeneratedsubsequenttotheacquisitionofBrandA.SalesofHoneyhave

decreasedwhilesalesofCinnamonhaveincreasedoverthepastseveralyears.Despitethedeclinein

salesofHoney,thecombinedsalesofHoneyandCinnamonhaveincreasedatthelevelsexpectedby

management.SalesofBrandBalsohaveincreasedatexpectedlevels.Therearediscretecashflows

forHoney,Cinnamon,andBrandB,andeachrepresentsaseparateStatement144assetgroup.Both

HoneyandCinnamonaremanagedbyonebrandmanager.Aseparatebrandmanagerisresponsible





forBrandB;however,therearesomesharedresourcesusedbythesegroups,suchasprocurement.

WhileCompanyZhasnocurrentplanstosellitsbrandsorexitthecerealbusiness,itbelievesifitever

did,itwouldexitthecerealbusinessinitsentirety.

Evaluation:CompanyZwouldhavetwounitsofaccountingforpurposesoftestingtheacquired

brandsforimpairment.BrandA’spurchasedHoneyandinternallygeneratedCinnamontrademarks

shouldbecombinedasasingleunitofaccountingforpurposesofimpairmenttesting.Theintangible

assetassociatedwiththeCinnamontrademarkissimplyavariationofthepreviouslyacquiredBrandAHoneytrademark.AlthoughtheyareassociatedwithdifferentStatement144assetgroups,they

aremanagedbyasinglebrandmanager.CompanyZwouldconsiderBrandBtobeaseparateunitof

accountingforpurposesoftestingimpairmentbecausethatbrandismanagedseparatelyfromBrand

AandisusedexclusivelybyaseparateStatement144assetgroup.

Determining the Carrying Amount of an Indefinite-Lived Intangible Asset WhenRemoving That Asset From a Unit of Accounting


TheTaskForcereachedaconsensusthatseparatelyrecordedindefinite-livedintangibleassets,

whetheracquiredorinternallydeveloped,shouldbecombinedintoasingleunitofaccountingforpurposesoftestingimpairmentiftheyareoperatedasasingleassetand,assuch,areessentially

inseparablefromoneanother.

10.52 Anindefinite-livedintangibleassetmayneedtoberemovedfromasingleunitofaccounting

ifthatintangibleassetissoldseparatelyfromtheunitofaccounting,theunitofaccountingis

reconsidered(suchasinconnectionwithalargerreorganizationoftheentity),ortheentityconcludes

thattheindefinite-livedintangibleassetisnowfinite-lived.TheSeptember29–30,2004,EITFAgenda

CommitteeReportstatesthat“[q]uestionshavearisenabouthowtodeterminethecarryingamount

ofanintangibleassetthatpreviouslywascombinedwithotherindefinite-livedintangibleassetsfor

impairmenttestingpurposes.”Italsostatesthat“[t]heAgendaCommitteedecidednottoaddthisissue

totheEITF’sagenda.”

10.53 Intheabsenceofspecificguidance,anentityshoulddeterminethecarryingamountofan

intangibleassetthatwasremovedfromaunitofaccountingunderIssue02-7onthebasisofthat

intangibleasset’shistoricalcarryingamountwhenplacedintotheunitofaccountinglesstheintangible

asset’sallocationofanyimpairmentssubsequentlyrecognized.Combiningindefinite-livedassetsintoa

unitofaccountingisdonesolelyforimpairmenttesting;eachindividuallyrecordedintangibleassetdoes

notceasetoexistasaseparatelyrecordedassetasaresultofthecombination.Subsequentimpairments

shouldbeallocatedtotheintangibleassetswithintheunitofaccountingonaproratabasisbyusing

therelativehistoricalcarryingamountsoftheindividualintangibleassets.Thisapproachisconsistent

withparagraph14ofStatement144regardingtheallocationofimpairmentlosseswithinanasset

group.Thefollowingexamplesillustratethesegeneralprinciples.





Example 10-3

Readily Available Historical Carrying Amount

CompanyAholdsthreeperpetualeasementsgroupedintoaunitofaccountingforimpairmenttesting.Easements1and2wereacquiredaspartofasingletransactionforconsiderationof$100(noseparateassignmentofcarryingamounttoeacheasementwasmadeatthetimeoftheacquisition).Easement3wasacquiredseparatelyforconsiderationof$150.Noimpairmentinthecarryingamountoftheunitofaccountinghasbeenrecognizedsubsequently.

Easement3wasdisposedofinconnectionwiththesaleoftheunderlyingpropertytowhichtheeasementrelates.Thecarryingamountoftheeasementdisposedof(Easement3)wouldbedeterminedonthebasisofthereadilyavailablehistoricalcarryingamountofthateasement($150).

Note:Issue02-7statesthata“pastpracticeofsellingsimilarassetsseparatelyisevidenceindicatingthatcombiningassetsasasingleunitofaccountingmaynotbeappropriate.”WhileapastpracticeisonlyoneoftheindicatorslistedinIssue02-7,entitiesthatdisposeofanassetorassetswithinaunitofaccountingmustbeabletosupporttheirunitofaccountingconclusionsbothhistoricallyandprospectivelyinaccordancewiththeotherindicatorsinIssue02-7.

Example 10-4

Historical Carrying Amount That Is Not Readily Available

CompanyAholdsthreeperpetualeasementsgroupedintoaunitofaccountingforimpairmenttesting.Easements1and2wereacquiredaspartofasingletransactionforconsiderationof$100(noseparateassignmentofacarryingamounttoeacheasementwasmadeatthetimeoftheacquisition).Easement3wasacquiredseparatelyforconsiderationof$150.Noimpairmentinthecarryingamountoftheunitofaccountinghasbeenrecognizedsubsequently.

Easement1wasdisposedofinconnectionwiththesaleoftheunderlyingpropertytowhichtheeasementrelates.Thehistoricalcarryingamountoftheeasementdisposedof(Easement1)isnotreadilyavailablesincenoseparateassignmentofacarryingamounttoeacheasementwasmadeatthetimeoftheacquisition.Intheabsenceofareadilyavailablehistoricalcarryingamount,Ashoulddevelopareasonableandsupportablemethodtodeterminethehistoricalcarryingamountonthebasisofthebestevidenceofthefactsandcircumstancesexistingatthetimeoftheeasement’sacquisition.

SeeNoteinExample 10-3.

Example 10-5

The Impact of a Subsequent Impairment of the Unit of Accounting

CompanyAholdsthreeperpetualeasementsgroupedintoaunitofaccountingforimpairmenttesting.Easements1and2wereacquiredaspartofasingletransactionforconsiderationof$100(noseparateassignmentofacarryingamounttoeacheasementwasmadeatthetimeoftheacquisition).Easement3wasacquiredseparatelyforconsiderationof$150.Aftertheacquisitionofthethreeeasements,animpairmentof$50wasmeasuredfortheunitofaccounting.

Easement3wasdisposedofinconnectionwiththesaleoftheunderlyingpropertytowhichtheeasementrelates.Thecarryingamountoftheeasementdisposedof(Easement3)wouldbedeterminedonthebasisofthereadilyavailablehistoricalcarryingamountofthateasement($150)netoftheeffectofthesubsequentimpairmentoftheunitofaccounting.Theimpairmentlossshouldbeallocatedtotheintangibleassetsoftheunitofaccountingonaproratabasisbyusingtherelativehistoricalcarryingamountofthoseassets,whichisconsistentwithparagraph14ofStatement144.TheimpairmentlossallocabletoEasement3wouldequal60percent($150dividedby$250)ofthetotalimpairmentlossof$50,or$30,resultinginahistoricalcarryingamountofEasement3equalto$120($150less$30).

SeeNoteinExample 10-3.

Carrying Forward the Fair Value Measurements of Indefinite-Lived IntangibleAssets From One Year to the Next

10.54 Paragraph27ofStatement142providesguidanceoncarryingforwardfairvaluemeasurements

ofreportingunitsfromoneyeartothenext.AlthoughStatement142doesnotcontainguidanceon

carryingforwardfairvaluemeasurementsofidentifiableintangibleassetsnotsubjecttoamortization,

suchananalogyisreasonable.Accordingly,anentitywishingtocarryforwardfromthepreviousyear

thefairvaluemeasurementofanintangibleassetwithanindefiniteusefullifemustcarefullyanalyzethe









Footnote17providesthat“[f]orpurposesofdeterminingreportingunits,anoperatingsegmentisas

definedinparagraph10ofFASBStatementNo.131,DisclosuresAboutSegmentsofanEnterpriseand

RelatedInformation .”

Footnote18statesthat“Statement141(R)includesguidanceondeterminingwhetheranassetgroup

constitutesabusiness.”(See1.08.)

Footnote19providesthat“[s]egmentmanagementconsistsofoneormoresegmentmanagers,asthat

termisdefinedinparagraph14ofStatement131.”

Footnote20statesthat“[p]aragraph17ofStatement131shallbeconsideredindeterminingifthe

componentsofanoperatingsegmenthavesimilareconomiccharacteristics.”

11.06 Paragraph30ofStatement142describeshowtoidentifyreportingunits(see11.05).Guidance

onapplyingparagraph30isspecifiedinTopicD-101,which“summarizestheFASBstaff’sunderstanding

oftheBoard’sintentwithrespecttothedeterminationofwhetheracomponentofanoperating

segmentisareportingunit.”

Thestepsentitiesshouldtakeinidentifyingreportingunitsareasfollows:

• Step 1 — Identify operating segments in accordance with Statement 131.

Paragraph10ofStatement131states,inpart:

Anoperatingsegmentisacomponentofanenterprise:

a. Thatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses

(includingrevenuesandexpensesrelatingtotransactionswithothercomponentsof

thesameenterprise),

b. Whoseoperatingresultsareregularlyreviewedbytheenterprise’schiefoperating

decisionmakertomakedecisionsaboutresourcestobeallocatedtothesegmentandassessitsperformance,and

c. Forwhichdiscretefinancialinformationisavailable.

• Step 2 — Identify the components of each operating segment (paragraph 30 of

Statement 142 defines a “component” as “one level below an operating segment”).

Determine whether each component meets the definition of a reporting unit in steps

2(a)–(c).

• Step 2(a) — Determine whether the component constitutes a business.

TopicD-101states:

Thedeterminationofwhetheracomponentconstitutesabusinessrequiresjudgmentbased

onspecificfactsandcircumstances.TheguidanceinFASBStatementNo.141(revised2007),

BusinessCombinations ,shouldbeconsideredindeterminingwhetheragroupofassets

constitutesabusiness[see1.08].

• Step 2(b) — Determine whether “discrete financial information” is available for the

component.

TopicD-101states:

Thetermdiscretefinancialinformation shouldbeappliedinthesamemannerthatitisapplied

indeterminingoperatingsegmentsinaccordancewithparagraph10ofStatement131.The

Statement131implementationguidanceindicatesthatitisnotnecessarythatassetsbe





allocatedforacomponenttobeconsideredanoperatingsegment(thatis,nobalancesheetis

required).Thus,discretefinancialinformationcanconstituteaslittleasoperatinginformation.

Therefore,inordertotestgoodwillforimpairmentinaccordancewithStatement142,an

entitymayberequiredtoassignassetsandliabilitiestoreportingunits(consistentwiththe

guidanceinparagraphs32and33ofStatement142).

• Step 2(c) — Determine whether segment management regularly reviews the operatingresults of the component.

TopicD-101furthernotes:

Segmentmanagement,asdefinedinparagraph14ofStatement131,iseitheralevelbelow

orthesamelevelasthechiefoperatingdecisionmaker.AccordingtoStatement131,a

segmentmanageris“directlyaccountabletoandmaintainsregularcontactwiththechief

operatingdecisionmakertodiscussoperatingactivities,financialresults,forecasts,orplans

forthesegment.”TheapproachusedinStatement142todeterminereportingunitsissimilar

totheoneusedtodetermineoperatingsegmentsinStatement131;however,Statement142

focusesonhowoperatingsegmentsaremanagedratherthanhowtheentityasawholeis

managed.TheapproachinStatement142isconsistentwiththeBoard’sintentthatreporting

unitsshouldreflectthewayanentitymanagesitsoperations.

• Step 3 — Aggregate components that have similar economic characteristics.

Componentsofanoperatingsegment,whichsteps2(a)–(c)establishedasabusinessforwhich

discretefinancialinformationisavailableandsegmentmanagementregularlyreviewsthe

operatingresultsofthatcomponent,areaggregatedanddeemedasinglereportingunitifthe

componentshavesimilareconomiccharacteristics.

TopicD-101indicates:

Evaluatingwhethertwocomponentshavesimilareconomiccharacteristicsisamatterof

judgmentthatdependsonspecificfactsandcircumstances.Thatassessmentshouldbemore

qualitativethanquantitative.

Indeterminingwhetherthecomponentsofanoperatingsegmenthavesimilareconomiccharacteristics,footnote20toparagraph30ofStatement142statesthattheguidancein

paragraph17ofStatement131shouldbeconsidered.TheBoardintendedthatallofthe

factorsinparagraph17ofStatement131beconsideredinmakingthatdetermination.

However,theBoarddidnotintendthateveryfactormustbemetinorderfortwo

componentstobeconsideredeconomicallysimilar.Inaddition,theBoarddidnotintend

thatthedeterminationofwhethertwocomponentsareeconomicallysimilarbelimitedto

considerationofthefactorsdescribedinparagraph17ofStatement131.Indetermining

whethercomponentsshouldbecombinedintoonereportingunitbasedontheireconomic

similarities,factorsthatshouldbeconsideredinadditiontothoseinparagraph17includebut

arenotlimitedto:

• Themannerinwhichanentityoperatesitsbusinessandthenatureofthoseoperations

• Whethergoodwillisrecoverablefromtheseparateoperationsofeachcomponentbusinessorfromtwoormorecomponentbusinessesworkinginconcert(whichmight

bethecaseifthecomponentsareeconomicallyinterdependent)

• Theextenttowhichthecomponentbusinessesshareassetsandotherresources,as

mightbeevidencedbyextensivetransferpricingmechanisms

• Whetherthecomponentssupportandbenefitfromcommonresearchand

developmentprojects.

Thefactthatacomponentextensivelysharesassetsandotherresourceswithother

componentsoftheoperatingsegmentmaybeanindicationthatthecomponenteitherisnot

abusinessormaybeeconomicallysimilartothoseothercomponents.





Componentsthatsharesimilareconomiccharacteristicsbutrelatetodifferentoperating

segmentsmaynotbecombinedintoasinglereportingunit.Forexample,anentitymight

haveorganizeditsoperatingsegmentsonageographicbasis.Ifitsthreeoperatingsegments

(Americas,Europe,andAsia)eachhavetwocomponents(AandB)thataredissimilartoeach

otherbutsimilartothecorrespondingcomponentsintheotheroperatingsegments,the

entitywouldnot bepermittedtocombinecomponentAfromeachoftheoperatingsegments

tomakereportingunitA.

Equity Method Investments as Reporting Units

11.07 Question2ofFASBStaffImplementationGuide(Statement131)statesthatequitymethod

investmentsmaybeconsideredoperatingsegmentsiftheyqualifyunderthedefinitioninparagraph10

ofStatement131.Thatdefinitiondoesnotrequireanoperatingsegmenttobeabusiness.Therefore,if

anequitymethodinvestmentisanoperatingsegment,itqualifiesasareportingunitinwhichgoodwill

couldbetestedforimpairment.However,ifanequitymethodinvestmentisonlydeterminedtobea

componentofanoperatingsegment,itcannotqualifyasaseparatereportingunitbecauseitwillnot

meetthedefinitionofabusiness(see1.08).

Disclosure Considerations Regarding Reporting Unit Determinations

11.08 See13.33foranSECstaffdiscussionofdisclosureconsiderationsrelatedtotheidentificationof

reportingunits.

Identification of Reporting Units — Examples

11.09 Thefollowingexamplesillustratethereportingunitstructurewhentheprocessforidentifying

reportingunitsisappliedtoahypotheticalandlimitedsetoffacts.Reportingunitstructureswillvary

amongentitiesdependingontheiruniquefactsandcircumstances.

Example 11-1 Identification of Reporting Units

Case A

AssumethataparentcompanyhasthreeoperatingsegmentsandtworeportablesegmentsdeterminedinaccordancewiththeprovisionsofStatement131.

Step 1 — Identify the operating segments in accordance with Statement 131.

Inthiscase,OperatingSegments1,2,and3areidentified.

Step 2 — Identify the components of each operating segment (paragraph 30 of Statement 142 defines a “component”

as “one level below an operating segment”). Determine whether each component meets the definition of a reporting

unit in steps 2(a)–2(c).

Step 2(a) — Determine whether the component constitutes a business.

Step 2(b) — Determine whether “discrete financial information” is available for the component.

Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.

AssumethatOperatingSegments1and2aredeterminedtohavenocomponentsthatmeettheconditionsinsteps2(a)–2(c),whileOperatingSegment3isdeterminedtohavethreecomponents(X,Y,andZ)thatmeettheconditionsinsteps2(a)–2(c).






Identification of Reporting Units

Step 3 — Aggregate components that have similar economic characteristics.

AssumethatComponentsX,Y,andZhavebeendeterminedtohavesimilareconomiccharacteristics.

Conclusion—OperatingSegments1,2,and3arereportingunits.

Case B

AssumethesamefactsasCaseAexceptthatComponentsX,Y,andZhavebeendeterminednottopossesssimilareconomiccharacteristics.

Conclusion—OperatingSegment1,OperatingSegment2,ComponentX,ComponentY,andComponentZarereportingunits.

Case C

AssumethesamefactsasCaseA,exceptthattheeconomiccharacteristicsofComponentYandComponentZaredeterminedtobesimilartoeachotherbutnottothoseofComponentX.

Conclusion—OperatingSegment1,OperatingSegment2,ComponentX,andthecombinationofComponentYandComponentZarereportingunits.

ParentCompany

ReportableSegment

A

ReportableSegment

B

OperatingSegment

1

OperatingSegment

2

OperatingSegment

3

ComponentX

ComponentZ

ComponentY

ParentCompany

ReportableSegment

A

OperatingSegment

1

OperatingSegment

2

OperatingSegment

3

ComponentX

ComponentZ

ComponentY

ReportableSegment

B

ParentCompany

OperatingSegment

1

OperatingSegment

2

ComponentX ComponentY ComponentZ

ReportableSegment

A

ReportableSegment

B

OperatingSegment

3






Identification of Reporting Units

Case D

AssumethataparentcompanyhasthreeoperatingsegmentsandtworeportablesegmentsdeterminedinaccordancewiththeprovisionsofStatement131.

Step 1 — Identify the operating segments in accordance with Statement 131.

Inthiscase,OperatingSegments1,2,and3areidentified.

Step 2 — Identify the components of the operating segment (paragraph 30 of Statement 142 defines “component”

as “one level below an operating segment”). Determine whether each component meets the definition of a

reporting unit in steps 2(a)–2(c).

Step 2(a) — Determine whether the component constitutes a business.

Step 2(b) — Determine whether “discrete financial information” is available for the component.

Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.

AssumeOperatingSegment1hastwocomponents(ComponentWandComponentX)thatmeettheconditionsinsteps2(a)–2(c);OperatingSegment2hastwocomponents(ComponentYandComponentZ)thatmeettheconditionsinsteps2(a)–2(c);andOperatingSegment3hasnocomponentsthatmeettheconditionsinsteps2(a)–2(c).

Step 3 — Aggregate components that have similar economic characteristics.

AssumethattheeconomiccharacteristicsofComponentWofOperatingSegment1aresimilartothoseofComponentYofOperatingSegment2,butnottothoseofComponentXofOperatingSegment1.FurtherassumethattheeconomiccharacteristicsofComponentZofOperatingSegment2aresimilartothoseofComponentXofOperatingSegment1butnottothoseofComponentYofOperatingSegment2.Becausethecomponentswithsimilareconomiccharacteristics(i.e.,W/YandX/Z)arenotinthesameoperatingsegment,thecomponentsarenotaggregatedordeemedtorepresentasinglereportingunit.

Conclusion—Becausetheeconomiccharacteristicsofthecomponentswithineachoperatingsegmentarenotsimilar,ComponentW,ComponentX,ComponentY,ComponentZ,andOperatingSegment3arereportingunits.

Comparison of Conclusions Reached Under Statements 131 and 142 in Identifying

Operating Segments and Reporting Units, Respectively

11.10 TopicD-101notesthefollowingregardingthecomparisonofconclusionsreachedunder

Statement131andStatement142inidentifyingoperatingsegmentsandreportingunits,respectively:

Someconstituentshavenotedthattwooperatingsegmentsmayhavebeenaggregatedintoa

reportablesegmentbyapplyingtheaggregationcriteriainparagraph17ofStatement131,and

haveinquiredaboutwhetheroneormoreofthecomponentsofthoseoperatingsegmentscanbe

reportingunitsunderStatement142.TheFASBstaffbelievesitwouldbepossibleforoneormoreof

thosecomponentstobeeconomicallydissimilarfromtheothercomponentsandthusbeareporting

unitforpurposesoftestinggoodwillforimpairment.Inparticular,theFASBstaffbelievesthatthe

ParentCompany

ReportableSegment

A

ReportableSegment

B

OperatingSegment

1

OperatingSegment

2OperatingSegment

3

ComponentW

ComponentX

ComponentY

ComponentZ







11.14 ParagraphB116ofStatement142states,inpart:

TheBoardconcludedthattheobjectiveoftheassignmentprocessshouldbetoensurethattheassets

andliabilitiesthatareassignedtoareportingunitarethesamenetassetsthatareconsideredin

determiningthefairvalueofthatunit—an“apples-to-apples”comparison.Therefore,totheextent

corporateitemsarereflectedinthevalueofareportingunit,theyshouldbeassignedtothereporting

unit.

Example 11-2

Assigning Corporate-Level Assets and Liabilities to Reporting Units

ThisexampleillustratestheassignmentofassetsandliabilitiesheldatthecorporateleveltoreportingunitsinaccordancewiththeguidanceinStatement142(see 11.11–11.14)onthebasisofahypotheticalandlimitedsetoffactsandcircumstances.Becausefactsandcircumstancesvarybyentity,conclusionsalsowillvary.

Company H Reporting Unit Structure CompanyHhasidentifiedthefollowingthreereportingunits:

CompanyHmaintainsacorporatefunctionthatholdsthefollowingassetsandliabilities:

Assets

Building—Net (a) $ 5,000,000

Trademark—Net (b) 40,000,000

ReceivableFromReportingUnit3 (c) 10,000,000

Liabilities

AccountsPayable (c) $10,000,000EnvironmentalLiability (d) 7,000,000

PensionObligation (e) 6,500,000

Assignment of Corporate-Level Assets and Liabilities to Reporting Units

(a) Building — Net

CompanyHownsa100,000-square-footbuildingthatservesasthemanufacturingfacilityforReportingUnit1.IfHweretosellReportingUnit1,thebuildingwouldmostlikelybeincludedintheoverallsalesagreement.Inaccordancewiththecriteriaofparagraph32ofStatement142(see 11.11),thebuildingwillbeassignedtoReportingUnit1becauseit(a)isemployedintheoperationsofReportingUnit1and(b)wouldbeconsideredinthedeterminationofthefairvalueofReportingUnit1.

(b) Trademark — Net

In1995,CompanyHacquiredatrademarkthatReportingUnit2continuestouse.Inaccordancewiththecriteriaofparagraph32ofStatement142(see11.11),thetrademarkwillbeassignedtoReportingUnit2becauseit(a)isemployedintheoperationsofReportingUnit2and(b)wouldbeconsideredinthedeterminationofthefairvalueofReportingUnit2.

(c) Receivable From Reporting Unit 3 and Related Accounts Payable

CompanyHrecentlyacquiredalargeamountofinventoryforReportingUnit3touseinproducingfinishedgoods.Theinventorypurchaseresultedin$10millionofaccountspayable.WhenReportingUnit3receivedtheinventory,CompanyHrecordedtheaccountpayableandacorrespondingreceivablefromReportingUnit3.ReportingUnit3recordedtheinventoryandacorrespondingpayabletoCompanyH.SincethereceivablefromReportingUnit3andtherelatedaccountspayablerelatetothesamereportingunitandnettozero,noamountsrequireassignment.Inotherwords,iftheaccountspayablewereassignedtoReportingUnit3,thereceivablefromReportingUnit3wouldbeeliminatedalongwiththecorrespondingpayablebyReportingUnit3toCompanyH.Thus,theassignmentwouldhavenoneteffectonReportingUnit3.

Company H

ReportingUnit1 ReportingUnit3ReportingUnit2







assessmentifthatassessmentdoesnotcontemplateaplannedsaleorliquidationthatwillcause

reclassificationofsomeamountoftheCTA.”

11.18 Questionshaveariseninpracticeaboutwhetherthecarryingvalueofareportingunitthathasa

CTAbalanceshouldbecalculatedas(1)assetsnetofliabilitiestranslatedatappropriateexchangerates

or(2)theequityofthereportingunitlesstheeffectoftheCTA.

11.19 Paragraph3ofIssue01-5doesnotspecificallyaddressgoodwillimpairments.However,when

areportingunitincludesorisentirelyaforeignentity,analogizingtothisguidanceresultsinthe

inclusionofanyrelatedCTAbalanceinthecarryingamountofthatreportingunitinthetestingof

goodwillforimpairmentonlywhenthereisaplantosellorliquidatetheinvestmentintheforeign

entity.TheexistenceofsuchaplanwouldresultinreclassificationofsomeoralloftheCTAtonet

incomeinaccordancewithStatement52andInterpretation37.Whennosuchsaleorliquidationofthe

investmentintheforeignentityisplanned,thecarryingvalueofthereportingunitwouldcompriseits

assetsnetofliabilitiestranslatedatappropriateexchangeratesasofthedateofthetest.

Example 11-3 Assigning Accumulated Foreign Currency Translation Adjustments to a Reporting Unit

CompanyAhasReportingUnit1,whichconsistsentirelyofabusinesswhoseoperationsarebasedinaforeigncountry.ThereiscurrentlynoplannedsaleofReportingUnit1.ThebalancesheetofReportingUnit1,translatedintoU.S.dollarsinaccordancewithStatement52,isasfollows:

Cash

PP&E

Goodwill

Totalassets

LiabilitiesAdditionalpaid-incapitalandretainedearnings

Cumulativetranslationadjustment

Totalliabilitiesandequity

$ 300

1,500

200

$ 2,000

$ 200 1,900

(100)

$ 2,000

BecausethereisnoplannedsaleofReportingUnit1,itscarryingvaluewouldbe$1,800,whichiscalculatedas$2,000oftotalassetsless$200ofliabilities,bothattheirappropriatelytranslatedamountsasofthereportingdate.Inaddition,thecarryingvalueofReportingUnit1’sgoodwillis$200,whichisalsoitsappropriatelytranslatedamountasofthereportingdate.

Assigning Goodwill to Reporting Units


Forthepurposeoftestinggoodwillforimpairment,allgoodwillacquiredinabusinesscombination

shallbeassignedtooneormorereportingunitsasoftheacquisitiondate.Goodwillshallbeassigned

toreportingunitsoftheacquiringentitythatareexpectedtobenefitfromthesynergiesofthe

combinationeventhoughotherassetsorliabilitiesoftheacquiredentitymaynotbeassignedtothat

reportingunit.Thetotalamountofacquiredgoodwillmaybedividedamonganumberofreporting

units.Themethodologyusedtodeterminetheamountofgoodwilltoassigntoareportingunit

shallbereasonableandsupportableandshallbeappliedinaconsistentmanner.Inaddition,that

methodologyshallbeconsistentwiththeobjectivesoftheprocessofassigninggoodwilltoreporting

unitsdescribedinparagraph35.






Inconcept,theamountofgoodwillassignedtoareportingunitwouldbedeterminedinamanner

similartohowtheamountofgoodwillrecognizedinabusinesscombinationisdetermined.An

entitywoulddeterminethefairvalueoftheacquiredbusiness(orportionthereof)tobeincluded

inareportingunit—thefairvalueoftheindividualassetsacquiredandliabilitiesassumedthatare

assignedtothereportingunit[footnoteomitted].Anyexcessofthefairvalueoftheacquiredbusiness(orportionthereof)overthefairvalueoftheindividualassetsacquiredandliabilitiesassumedthatare

assignedtothereportingunitistheamountofgoodwillassignedtothatreportingunit.However,if

goodwillistobeassignedtoareportingunitthathasnotbeenassignedanyoftheassetsacquired

orliabilitiesassumedinthatacquisition,theamountofgoodwilltobeassignedtothatunitmightbe

determinedbyapplyinga“withandwithout”computation.Thatis,thedifferencebetweenthefair

valueofthatreportingunitbeforetheacquisitionanditsfairvalueaftertheacquisitionrepresentsthe

amountofgoodwilltobeassignedtothatreportingunit.

Example 11-4

Assigning Goodwill to Reporting Units

Case A

CompanyAacquiresCompanyBfor$100.IdentifiablenetassetsofCompanyBtotal$80.CompanyAhastworeportingunits(RU1andRU2).IdentifiablenetassetsofCompanyBtotaling$50willbeassignedtoRU1,andidentifiablenetassetstotaling$30willbeassignedtoRU2.Thefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU1is$60,whilethefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU2is$40.

Goodwillisassignedtoreportingunitsonthebasisofthedifferencebetweenthefairvalueofthebusiness(orportionthereof)assignedandthefairvalueoftheidentifiablenetassetsassigned.Underthisapproach,goodwillisassignedasfollows:

RU1 RU2 Total

Fairvalueofbusiness(orportionthereof)assigned $ 60 $ 40 $ 100

Fairvalueofidentifiablenetassetsassigned 50 30 80

Goodwillassigned $ 10 $ 10 $ 20

Case B

CompanyAacquiresCompanyBfor$200.IdentifiablenetassetsofCompanyBtotal$160.CompanyAhasthreereportingunits(RU1,RU2,andRU3).IdentifiablenetassetsofCompanyBtotaling$100willbeassignedtoRU1,andidentifiablenetassetstotaling$60willbeassignedtoRU2.NoidentifiablenetassetswillbeassignedtoRU3;however,RU3isexpectedtobenefitfromthesynergiesofthecombination.Thefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU1is$115,andthefairvaluemeasurementofthebusiness(orportionthereof)assignedtoRU2is$75.ThefairvalueofRU3beforetheacquisitionis$200;aftertheacquisition,itis$210.

GoodwillisassignedtoRU1andRU2onthebasisofthedifferencebetweenthefairvalueofthebusiness(orportionthereof)assignedandthefairvalueoftheidentifiablenetassetsassigned.ForRU3,goodwillisassignedonthebasisofa“withandwithout”computation.Underthisapproach,goodwillisassignedasfollows:

RU1 RU2 RU3 Total

Fairvalueofbusiness(orportionthereof)assigned $ 115 $ 75 $ 10 $ 200

Fairvalueofidentifiablenetassetsassigned 100 60 — 160

Goodwillassigned $ 15 $ 15 $ 10 $ 40





Allocation of Goodwill to Reporting Units for a Mining Enterprise

11.22 Issue04-4addresses“whetheranentityintheminingindustryshouldassigngoodwilltoa

reportingunitthatconsistsofanindividualoperatingmine.”Itstates:

Somearguethatassigninggoodwilltoanoperatingmineresultsinaday-twoimpairmentofthe

goodwill.Thatis,thefairvalueofthereportingunitonlyconsistsofthefairvalueoftheoperatingmine(primarilymineraldeposits)and,accordingly,thereisnoadditionalfairvalueinthereporting

unittosupporttherecognitionofgoodwill.Othersacknowledgethatanygoodwillassignedtoan

operatingmineultimatelywillbeimpairedbecauseanoperatingmineisawastingasset.Someargue

thatgoodwillrepresentsthepremiumfortheexplorationanddevelopmentactivitiesandrelatesto

theenterprise’soverallabilitytosustainandreplicateitselfasagoingconcernentityand,therefore,

goodwillshouldnotbeassignedtoindividualoperatingmines.

11.23 Issue04-4furthernotes:

TheTaskForcediscussedthisIssueandobservedthattheguidanceinStatement142isclear—

goodwillshouldbeallocatedtoreportingunitsandanindividualoperatingminemayconstitutea

reportingunit.Further,theTaskForceacknowledgedthattheallocationofgoodwilltoanindividual

operatingminelikelywillresultinaneventualgoodwillimpairmentduetothewastingnatureof

theprimaryassetofthereportingunitandcouldresultinaday-twogoodwillimpairment.However,

theTaskForceagreedthatbecausetheguidanceinStatements131and142isclear,theTaskForce

cannotresolvethisIssue.Accordingly,theTaskForceagreedtodiscontinuediscussionofthisIssueand

toremoveitfromtheTaskForce’sagenda.

Reorganization of Reporting Structure — Reassigning Assets, Liabilities, andGoodwill


Whenanentityreorganizesitsreportingstructureinamannerthatchangesthecompositionofone

ormoreofitsreportingunits,theguidanceinparagraphs32and33shallbeusedtoreassignassets

andliabilitiestoreportingunitsaffected[see11.11–11.13].However,goodwillshallbereassignedto

thereportingunitsaffectedusingarelativefairvalueallocationapproachsimilartothatusedwhen

aportionofareportingunitistobedisposedof(refertoparagraph39)[see11.55].Forexample,if

existingreportingunitAistobeintegratedwithreportingunitsB,C,andD,goodwillinreporting

unitAwouldbeassignedtounitsB,C,andDbasedontherelativefairvaluesofthethreeportionsof

reportingunitApriortothoseportionsbeingintegratedwithreportingunitsB,C,andD.

When to Test Goodwill for Impairment


Goodwillofareportingunitshallbetestedforimpairmentonanannualbasisandbetweenannualtestsincertaincircumstances(refertoparagraph28).[See11.26.]Theannualgoodwillimpairment

testmaybeperformedanytimeduringthefiscalyearprovidedthetestisperformedatthesametime

everyyear.Differentreportingunitsmaybetestedforimpairmentatdifferenttimes.


Goodwillofareportingunitshallbetestedforimpairmentbetweenannualtestsifaneventoccursor

circumstanceschangethatwouldmorelikelythannotreducethefairvalueofareportingunitbelow

itscarryingamount.Examplesofsucheventsorcircumstancesinclude:

a. Asignificantadversechangeinlegalfactorsorinthebusinessclimate

b. Anadverseactionorassessmentbyaregulator








Anentityshallreportachangeinaccountingprinciplethroughretrospectiveapplicationofthenew

accountingprincipletoallpriorperiods,unlessitisimpracticabletodoso.Retrospectiveapplication

requiresthefollowing:

a. Thecumulativeeffectofthechangetothenewaccountingprincipleonperiodspriorto

thosepresentedshallbereflectedinthecarryingamountsofassetsandliabilitiesasofthebeginningofthefirstperiodpresented.

b. Anoffsettingadjustment,ifany,shallbemadetotheopeningbalanceofretainedearnings

(orotherappropriatecomponentsofequityornetassetsinthestatementoffinancial

position)forthatperiod.

c. Financialstatementsforeachindividualpriorperiodpresentedshallbeadjustedtoreflectthe

period-specificeffectsofapplyingthenewaccountingprinciple.

11.31 Entitiesshouldnotassumethatthatachangeintheirgoodwillimpairmenttestingdate,when

appliedtopriorperiods,willnotyieldadifferentfinancialstatementresult.Foranentitytocomply

withtherequirementsofStatement154,itmustdemonstratethatsuchretrospectiveapplication

ofthenewgoodwillimpairmenttestingdatewouldnotyieldadifferentfinancialstatementresultormustotherwiseshowthat,pursuanttoparagraph11ofStatement154,suchadeterminationis

impracticable.

Performing the Two-Step Goodwill Impairment Test

11.32 Paragraphs19–21ofStatement142describethefollowingtwo-stepgoodwillimpairmenttest

basedthefairvaluedeterminedforeachreportingunit(see11.37–11.49).

Step 1

Determinewhetherthefairvalueofthereportingunitislessthanitscarryingamount,including

goodwill.

Ifthefairvalueofthereportingunitisless,proceedtostep2.

Ifthefairvalueofthereportingunitisnotless,furthertestingofgoodwillforimpairmentisnot

performed.

Step 2

Determinetheimpliedfairvalueofgoodwillofthereportingunitbyassigningthefairvalueof

thereportingunitusedinstep1toalltheassetsandliabilitiesofthatreportingunit(includingany

recognizedandunrecognizedintangibleassets)asifthereportingunithadbeenacquiredinabusiness

combination.

Comparetheimpliedfairvalueofgoodwilltothecarryingamountofgoodwilltodeterminewhether

goodwillisimpaired.

Note: Paragraph21ofStatement142providesthattheassignmentprocessinstep 2 “shallbe

performedonlyforpurposesoftestinggoodwillforimpairment;anentityshallnotwriteuporwrite

downarecognizedassetorliability,norshoulditrecognizeapreviouslyunrecognizedintangibleassetas

aresultofthatallocationprocess.”





Example 11-5

Illustration of a Goodwill Impairment Test When the Fair Value of a Reporting Unit Exceeds the CarryingAmount (Step 2 Not Required)

Step 1 Step 2

Reporting Unit Not Required

Cash $ 100

PP&E 800

Goodwill 400

Subtotal 1,300

Liabilities (200)

Carryingamount 1,100

Fairvalueofreportingunit 1,200

Result: Pass step 1* $ 100

*Becausethefairvalueofthereportingunitexceedsthecarryingamount,nofurthertestingofgoodwillforimpairmentisnecessary.

Example 11-6

Illustration of a Goodwill Impairment Test When Step 2 Is Required and Goodwill ImpairmentResults

Step 1 Step 2

Reporting Unit Reporting Unit

Cash $ 100

PP&E 1,100

Goodwill 400

Subtotal 1,600

Liabilities (200)



Result: Fail step 1* $ (200)

Cash $ 100

PP&E 1,200

Trademark* 50

Subtotal 1,350

Liabilities (200)

Netassets 1,150


Impliedfairvalueofgoodwill $ 50

Carryingamountofgoodwill $ 400

Impairmentamount $ 350

*Trademarkrepresentsapreviouslyunrecognizedintangibleasset.





Example 11-7

Illustration of a Goodwill Impairment Test When Step 2 Is Required but No Goodwill ImpairmentResults

Step 1 Step 2

Reporting Unit Reporting Unit

Cash $ 100

PP&E 1,100

Goodwill 400

Subtotal 1,600

Liabilities (200)



Result: Fail step 1* $ (100)

Cash $ 100

PP&E* 950

Subtotal 1,050

Liabilities (200)

Netassets 850



Carryingamountofgoodwill $ 400Impairmentamount $ 0

*EventhoughReportingUnit1failedstep1,nogoodwillimpairmentisrecognizedbecausetheimpliedfairvalueofgoodwillis$450.ThedeclineinfairvalueofthereportingunitisduetothedeclineinfairvalueofPP&E.Beforestep1ofthegoodwillimpairmenttest,thePP&Ewasnotconsideredimpaired.See 11.33–11.35regardingtheorderoftestinglong-livedassetsandgoodwillforimpairment.

Interaction of the Goodwill Impairment Test and the Long-Lived Asset ImpairmentTest

11.33 Calculatingthefairvalueofassetsandliabilitiesunderstep2mayrevealthatanasset’scarrying

valueisgreaterthanitsfairvalueandthatthereforetheassetorgroupofassetsshouldbetestedfor

impairmentunderStatement144.Iftheassetorassetgroupisimpaired,theimpairmentlosswouldbe

recognizedbeforegoodwillistestedforimpairment.Consequently,step1ofthegoodwillimpairment

testwouldneedtobeperformedagain.


Ifgoodwillandanotherasset(orassetgroup)ofareportingunitaretestedforimpairmentatthe

sametime,theotherasset(orassetgroup)shallbetestedforimpairmentbeforegoodwill.For

example,ifasignificantassetgroupistobetestedforimpairmentunderStatement144(thus

potentiallyrequiringagoodwillimpairmenttest),theimpairmenttestforthesignificantassetgroup

wouldbeperformedbeforethegoodwillimpairmenttest.Iftheassetgroupwasimpaired,the

impairmentlosswouldberecognizedpriortogoodwillbeingtestedforimpairment.

11.35 Becausetheimpairmenttestforlong-livedassetsisperformedbeforetheimpairmenttestfor

goodwill,goodwillislesslikelytobeimpairedbecausewritingdownlong-livedassetswillcausethe

carryingvalueofthereportingunittobereduced.





Example 11-8

Interaction Between the Goodwill Impairment Test and the Long-Lived Asset Impairment Test

Step 1 Step 2

Initial Reporting Unit Test Reporting Unit

Cash $ 100

PP&E 1,100

Goodwill 400

Subtotal 1,600

Liabilities (200)



Result: Fail step 1 $ (200)

Cash $ 100

PP&E 800

Subtotal 900

Liabilities (200)

Netassets 700



Carryingamountofgoodwill $ 400

Impairmentamount $ 0

Step2ofthegoodwillimpairmenttestrevealsthatthefairvalueofthecompany’sPP&E($800)isactuallylessthanthecarryingvalue($1,100).ManagementbelievesthatbecausethePP&Eisitsownassetgroup,itmustbetestedforimpairmentinaccordancewithStatement144.Asaresultoftheimpairmenttest,thecompanyrecordsanimpairmentchargeforthePP&Eof$300(assumethatstep1oftheimpairmenttestrequiredbyStatement144wasalsofailed)andperformsstep1ofthegoodwillimpairmenttestagainasshownbelow.

Step 1

Subsequent Reporting Unit Test

Cash $ 100

PP&E 800 ($1,100–$300impairment)

Goodwill 400

Subtotal 1,300

Liabilities (200)Carryingamount 1,100


Result: Pass step 1 $ 100

Becausethefairvalueofthereportingunitisnowgreaterthantheadjustedcarryingamountofthereportingunit,thecompanywouldnotrecordanyimpairmentchargesrelatedtoitsgoodwill.Theexcessofthereportingunit’scarryingamountoveritsfairvalueintheinitialstep1test($200)wascreatedasaresultoftheimpairedPP&E.

Consideration of Assembled Workforce in the Performance of Step 2 of theGoodwill Impairment Test

11.36 Asnotedin5.07,Statement141(R)doesnotallowanentitytorecognizeanintangibleassetforanassembledworkforceacquiredinabusinesscombination.However,anentitymayhaverecognized

anintangibleassetforanassembledworkforceifitacquiredtheworkforcewithagroupofassetsthat

didnotmeetthedefinitionofabusiness.Theassembledworkforceintangibleassetmaybepartof

areportingunitthatissubjectedtostep2ofthegoodwillimpairmenttest.Inperformingstep2,an

entitywouldassignnovaluetotheassembledworkforceintangibleassetbecausesuchassetisnot

recognizableunderStatement141(R).





Fair Value Measurements

11.37 Paragraph23ofStatement142(asamendedbyparagraphE22ofStatement157)states:

Thefairvalueofareportingunitreferstothepricethatwouldbereceivedtoselltheunitasa

wholeinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Quoted

marketpricesinactivemarketsarethebestevidenceoffairvalueandshallbeusedasthebasisforthemeasurement,ifavailable.However,themarketpriceofanindividualequitysecurity(and

thusthemarketcapitalizationofareportingunitwithpubliclytradedequitysecurities)maynotbe

representativeofthefairvalueofthereportingunitasawhole.Substantialvaluemayarisefromthe

abilitytotakeadvantageofsynergiesandotherbenefitsthatflowfromcontroloveranotherentity.

Consequently,measuringthefairvalueofacollectionofassetsandliabilitiesthatoperatetogetherin

acontrolledentityisdifferentfrommeasuringthefairvalueofthatentity’sindividualequitysecurities.

Anacquiringentityofteniswillingtopaymoreforequitysecuritiesthatgiveitacontrollinginterest

thananinvestorwouldpayforanumberofequitysecuritiesrepresentinglessthanacontrolling

interest.Thatcontrolpremiummaycausethefairvalueofareportingunittoexceeditsmarket

capitalization.Thequotedmarketpriceofanindividualequitysecurity,therefore,neednotbethe

solemeasurementbasisofthefairvalueofareportingunit.


Inestimatingthefairvalueofareportingunit,avaluationtechniquebasedonmultiplesofearnings

orrevenueorasimilarperformancemeasuremaybeusedifthattechniqueisconsistentwiththe

objectiveofmeasuringfairvalue.Useofmultiplesofearningsorrevenueindeterminingthefair

valueofareportingunitmaybeappropriate,forexample,whenthefairvalueofanentitythathas

comparableoperationsandeconomiccharacteristicsisobservableandtherelevantmultiplesofthe

comparableentityareknown.Conversely,useofmultipleswouldnotbeappropriateinsituations

inwhichtheoperationsoractivitiesofanentityforwhichthemultiplesareknownarenotofa

comparablenature,scope,orsizeasthereportingunitforwhichfairvalueisbeingestimated.

11.39 AnyvaluationtechniqueshouldincorporatetheprinciplesofStatement157.Oneofthe

Statement’soverallprinciplesisthatthefairvalueofassetsandliabilitiesshouldbedeterminedonthebasisofassumptionsthatmarketparticipantswoulduseinpricingassetsandliabilities.

11.40 Paragraph23ofStatement142(see11.37)indicatesthatmeasuringthefairvalueofareporting

unitbyreferringtothequotedmarketpriceoftheindividualequitysecuritiesofthatreportingunit

(pricetimesquantity)mayrequireadjustmentforacontrolpremium.Statement157doesnotamend

theguidanceinparagraph23ofStatement142regardingacontrolpremium.Accordingly,whenthe

fairvalueofareportingunitismeasuredbyreferencetoquotedmarketpricesofindividualequity

securitiesofthatreportingunit,thepresenceofacontrolpremiummustbeevaluatedand,ifdeemed

appropriate,included.

11.41 Ifindividualreportingunitsdonothaveseparatelytradedequitysecurities,itwouldbe

inappropriatetoallocatethepersharemarketvalueoftheconsolidatedentity’sequitytotheindividual

reportingunits.

11.42 Statement142doesnotrequireacomparisonofanentity’smarketcapitalizationwith

theaggregatesumofthefairvalueofitsreportingunitsaspartofanoverallassessmentofthe

appropriatenessofthefairvaluemeasurementsofindividualreportingunits.However,entitiesoften

performsuchacomparisonbecauseitcansometimesyieldusefulinformationaboutthereasonableness

ofthefairvaluemeasurements.Theexerciseofjudgmentwillberequiredwhenthecomparisonis





reviewedforfactorsthatmayindicateappropriatedifferences(e.g.,acontrolpremium).Additional

estimatesorassumptionsarerequiredwhenportionsofanentity’sbusinessdonothavegoodwill

assignedandthusdonothavearequirementfortheperiodicmeasurementoffairvalue.Inprepared

remarksatthe2008AICPANationalConferenceonCurrentSECandPCAOBDevelopments,anSEC

staffmember(RobertG.FoxIII)addressedthestaff’sviewondeterminingthereasonablenessofcontrol

premiums:

…theamountofacontrolpremiuminexcessofaregistrant’smarketcapitalizationcanrequire

agreatdealofjudgment.ContrarytosomerumorsIhaveheard,thestaffdoesnothave“bright

line”teststhatweuseindeterminingthereasonablenessofacontrolpremium.Instead,webelieve

thataregistrantneedstocarefullyanalyzethefactsandcircumstancesoftheirparticularsituation

whendetermininganappropriatecontrolpremiumandthatthereisnormallyarangeofreasonable

judgmentsaregistrantmightreach.Whileitwouldbeprudenttoreconcilethecombinedfairvalueof

yourreportingunitstoyourmarketcapitalization,Ibelievethatthisshouldnotbeviewedastheonly

factortoconsiderinassessinggoodwillforimpairment.

11.43 TheSECstafffrequentlyreferstomarketcapitalizationofanentitywhencommentingabout

anentity’simpairmenttestingofgoodwill.Whenanenterprise’sbookvalueisgreaterthanitsmarket

capitalization,questionsmayberaisedaboutwhethersuchstatusindicatesthatgoodwillshouldbe

testedforimpairmentor,ifgoodwillwastested,whethergoodwillatoneormorereportingunitsis

impaired.Entitiesshouldbeabletoexplainhowsuchstatusaffectedtheirjudgmentsintheseareas.

11.44 See3.62–3.63fordiscussionabouttheuseofathird-partyspecialisttoassistinthe

measurementoffairvalue.

Determining Fair Value When an Entity Has Only One Reporting Unit

11.45 Whileparagraph23ofStatement142statesthat“[q]uotedmarketpricesinactivemarkets

arethebestevidenceoffairvalue,”itnotesthatthesemarketpricesmaynotberepresentativeoffair

valueasawhole.Therefore,incertaininstanceswhenanentityonlyhasonereportingunit,theuseof

thecurrentquotedmarketpriceofitspubliclytradedsecuritiesmaynotrepresentthefairvalueofthe

entity.Forexample,amarketparticipantmaybewillingtopayapremiumovercurrentmarketpriceto

obtainthesynergiesandotherbenefitsthatcontrolwouldprovide(i.e.,acontrolpremium).

Changing the Method of Determining the Fair Value of a Reporting Unit

11.46 AlthoughStatement142providesguidanceondeterminingthefairvalueofareportingunit,it

doesnotindicatewhetheraconsistentmethodmustbeusedeachtimethegoodwillimpairmenttest

isperformed.Whileentitiesshouldgenerallyuseaconsistentmethodtocalculatethefairvalueofa

reportingunitwhenperformingtheimpairmenttest,theremaybeinstanceswhenadifferentmethod

wouldyieldmorereliableresults.Forexample,areportingunitthatcompletesapublicofferingofits

commonstockmaywishtousethequotedmarketpriceofthecommonstockinsteadofapresent

valuetechnique.Undernocircumstancesshouldentitieschangetheirmethodstoavoidrecognizinga

goodwillimpairmentcharge.Similarly,entitiesshouldnotchangemethodstoacceleratetherecording

ofanimpairmentcharge.





Carrying Forward the Fair Value of a Reporting Unit From One Annual Testing Dateto the Next

11.47 Anentitydoesnotnecessarilyhavetorecalculatethefairvalueofareportingunitdetermined

instep1ofthegoodwillimpairmenttesteachyear.IntegraltotheFASB’sdecisionthatgoodwillshould

betestedforimpairmentannuallywasitsviewthatanannualrequirementshouldnotcallfora“fresh

start”effortwitheveryfairvaluedetermination.Thatis,theBoardnotedthatmanyentitiesshould

beabletoconcludethatthefairvalueofareportingunitisgreaterthanitscarryingamountwithout

recalculatingthefairvalueofthereportinguniteachannualperiod.


Adetaileddeterminationofthefairvalueofareportingunitmaybecarriedforwardfromoneyearto

thenextifallofthefollowingcriteriahavebeenmet:

a. Theassetsandliabilitiesthatmakeupthereportingunithavenotchangedsignificantlysince

themostrecentfairvaluedetermination.(Arecentsignificantacquisitionorareorganization

ofanentity’ssegmentreportingstructureisanexampleofaneventthatmightsignificantly

changethecompositionofareportingunit.)

b. Themostrecentfairvaluedeterminationresultedinanamountthatexceededthecarrying

amountofthereportingunitbyasubstantialmargin.

c. Basedonananalysisofeventsthathaveoccurredandcircumstancesthathavechangedsince

themostrecentfairvaluedetermination,thelikelihoodthatacurrentfairvaluedetermination

wouldbelessthanthecurrentcarryingamountofthereportingunitisremote.

11.49 Anentitywishingtocarryforwardthefairvaluemeasurementofareportingunitfromthe

previousyearmustcarefullyanalyzetheentity’sspecificsituationtodetermineiftheabovecriteriaare

met.See14.31foradditionaltransitionalconsiderationsuponanentity’sinitialadoptionofStatements

141(R)and157.

Applying the Goodwill Impairment Test to a Reporting Unit With a NegativeCarrying Value

11.50 InitsNovember21,2002,report,theEITFAgendaCommitteenotedthatitconsideredthe

followingissueregardingtheapplicationofstep1ofthegoodwillimpairmenttest:

Ifareportingunithasanegativecarryingvalue,thatis,theliabilitiesofthereportingunitexceedits

assets,whetherthereportingunitpassesStep1ofthegoodwillimpairmenttestsolelybasedonits

negativecarryingvalue,assumingitsfairvalueiszeroorgreater.

AlthoughthereportstatedthatthecommitteerecommendedthatthisissuenotbeaddedtotheEITF’s

agenda,itnoted:

[T]heAgendaCommitteeagreedthatparagraph19ofStatement142requiresthat‘Ifthefairvalue

ofareportingunitexceedsitscarryingamount,goodwillofthereportingunitisconsiderednot

impaired,thusthesecondstepoftheimpairmenttestisunnecessary.’WhiletheAgendaCommittee

membersagreedthat[theissue](involvingnegativecarryingvalue)warrantedfurtherconsideration,

theyindicatedthatresolutionofthatIssuewouldrequireBoardinvolvementandperhapsan

amendmenttoStatement142.

Todate,theFASBhasprovidednofurtherguidanceonthisissue.







8. TheTaskForceobservedthatinperformingStep2ofthegoodwillimpairmenttest,the

impliedfairvalueofareportingunit’sgoodwillisdeterminedinthesamemannerthat

theamountofgoodwillrecognizedinabusinesscombinationaccountedforinaccordance

withStatement141isdetermined.Paragraph38ofStatement141indicatesthatadeferred

taxliabilityorassetshallberecognizedfordifferencesbetweentheassignedvaluesand

theincometaxbasesoftherecognizedassetsacquiredandliabilitiesassumedinabusiness

combinationinaccordancewithparagraph30ofStatement109.Totheextentpresent,tax

attributesthatwillbetransferredintheassumedtaxstructure,suchasoperatinglossortax

creditcarryforwards,shouldbevaluedconsistentwiththeguidancecontainedinparagraph

135ofStatement109.

11.52 ExamplesdemonstratingtheconsensusesreachedinIssue02-13aregiveninparagraph9,which

notesthat“theseexamplesmaynotnecessarilybeindicativeofactualincometaxliabilitiesthatwould

ariseinthesaleofareportingunitortherelationshipofthoseliabilitiesinataxableversusnontaxable

structure.”

Reporting Requirements When Step 2 of the Goodwill Impairment Test Is NotComplete


Ifthesecondstepofthegoodwillimpairmenttestisnotcompletebeforethefinancialstatements

areissuedandagoodwillimpairmentlossisprobableandcanbereasonablyestimated,thebest

estimateofthatlossshallberecognizedinthosefinancialstatements.[Footnoteomitted]Paragraph

47(c)requiresdisclosureofthefactthatthemeasurementoftheimpairmentlossisanestimate[see

13.32].Anyadjustmenttothatestimatedlossbasedonthecompletionofthemeasurementofthe

impairmentlossshallberecognizedinthesubsequentreportingperiod.

Goodwill Impairment Testing by a Subsidiary


Allgoodwillrecognizedbyapublicornonpublicsubsidiary(subsidiarygoodwill)initsseparate

financialstatementsthatarepreparedinaccordancewithgenerallyacceptedaccountingprinciples

shallbeaccountedforinaccordancewiththisStatement.Subsidiarygoodwillshallbetestedfor

impairmentatthesubsidiarylevelusingthesubsidiary’sreportingunits.Ifagoodwillimpairmentloss

isrecognizedatthesubsidiarylevel,goodwillofthereportingunitorunits(atthehigherconsolidated

level)inwhichthesubsidiary’sreportingunitwithimpairedgoodwillresidesmustbetestedfor

impairmentiftheeventthatgaverisetothelossatthesubsidiarylevelwouldmorelikelythannot

reducethefairvalueofthereportingunit(atthehigherconsolidatedlevel)belowitscarryingamount

(refertoparagraph28(g)).Onlyifgoodwillofthathigher-levelreportingunitisimpairedwoulda

goodwillimpairmentlossberecognizedattheconsolidatedlevel.

Example 11-9 Goodwill Impairment Testing by a Subsidiary When the Subsidiary Is Public and Has GoodwillRecorded

AssumeCompanyP(Parent)acquired100percentofCompanyB,electingtoretainCompanyBasaseparatecorporateentity(SubsidiaryB).SubsidiaryB,anSECregistrantthroughtheissuanceofpublicdebt,hasgoodwillrecordedonitsbooksentirelyasaresultoftheapplicationofpush-downaccountingbyCompanyP(see Section 9fordiscussionofpush-downaccounting).Inaccordancewithparagraph37ofStatement142,goodwillrecognizedintheseparatefinancialstatementsofSubsidiaryBmustbetestedforimpairmentusingthereportingunitstructureidentifiedforSubsidiaryB.Also,inaccordancewithparagraph37ofStatement142,ifagoodwillimpairmentlossisrecognizedbySubsidiaryB,goodwillofthereportingunitorunitsatCompanyPinwhichSubsidiaryBresidesmustbetestedforimpairmentiftheeventthatgaverisetothelossatSubsidiaryBwouldmorelikelythannotreducethefairvalueofthereportingunitatCompanyPbelowitscarryingamount.Onlyifgoodwillofthathigher-levelreportingunitisimpairedwouldanimpairmentofgoodwillberecognizedattheconsolidatedlevelofCompanyP.





Example 11-10

Goodwill Impairment Testing by a Subsidiary When the Subsidiary Is Nonpublic and Has GoodwillAssigned Under Statement 142

AssumeCompanyP(Parent)acquired100percentofCompanyB,electingtoretainCompanyBasaseparatecorporateentity(SubsidiaryB).SubsidiaryBisnotanSECregistrantandhasnopreexistinggoodwillrecognized.SubsidiaryBhas

beenidentifiedasareportingunitofCompanyP,whichhaselectednottoapplypush-downaccounting(seeSection9fordiscussionofpush-downaccounting).AlthoughSubsidiaryBhasnogoodwillrecognizedinitsseparatefinancialstatements,asareportingunitofCompanyP,CompanyPhasdeterminedanassignmentofgoodwilltothereportingunitisnecessary.FurtherassumethatseparatefinancialstatementsforSubsidiaryBarepreparedinaccordancewithGAAPforstatutoryreportingpurposes.AlthoughSubsidiaryBhasseparatefinancialstatementspreparedinaccordancewithGAAP,goodwilltestingattheseparatesubsidiarylevelisnotrequired,sincegoodwillisnotrecognizedintheseparatefinancialstatementsofSubsidiaryBbutisonlyassignedtoSubsidiaryBasareportingunitofCompanyP.

Disposal of All or a Portion of a Reporting Unit

11.55 Paragraph39ofStatement142statesthat“[w]henareportingunitistobedisposedofinits

entirety,goodwillofthatreportingunitshallbeincludedinthecarryingamountofthereportingunitin

determiningthegainorlossondisposal.”

11.56 Paragraph39ofStatement142furtherstates:

Whenaportionofareportingunitthatconstitutesabusiness[footnoteomitted][see1.08]istobe

disposedof,goodwillassociatedwiththatbusinessshallbeincludedinthecarryingamountofthe

businessindeterminingthegainorlossondisposal.Theamountofgoodwilltobeincludedinthat

carryingamountshallbebasedontherelativefairvaluesofthebusinesstobedisposedofandthe

portionofthereportingunitthatwillberetained.Forexample,ifabusinessisbeingsoldfor$100

andthefairvalueofthereportingunitexcludingthebusinessbeingsoldis$300,25percentofthe

goodwillresidinginthereportingunitwouldbeincludedinthecarryingamountofthebusinessto

besold.However,ifthebusinesstobedisposedofwasneverintegratedintothereportingunitafter

itsacquisitionandthusthebenefitsoftheacquiredgoodwillwereneverrealizedbytherestofthe

reportingunit,thecurrentcarryingamountofthatacquiredgoodwillshallbeincludedinthecarryingamountofthebusinesstobedisposedof.Thatsituationmightoccurwhentheacquiredbusinessis

operatedasastand-aloneentityorwhenthebusinessistobedisposedofshortlyafteritisacquired.

Whenonlyaportionofgoodwillisallocatedtoabusinesstobedisposedof,thegoodwillremaining

intheportionofthereportingunittoberetainedshallbetestedforimpairmentinaccordancewith

paragraphs19–22(usingitsadjustedcarryingamount).

11.57 ParagraphB166ofStatement142states,inpart:

[T]hisStatementrequiresthattherelative-fair-valueallocationmethod[seeparagraph39ofStatement

142and11.55]notbeusedtoallocategoodwilltoabusinessbeingdisposedofifthatbusinesswas

notintegratedintothereportingunitafteritsacquisition.Boardmembersnotedthatthosesituations

(suchaswhentheacquiredbusinessisoperatedasastand-aloneentity)wouldbeinfrequentbecause

someamountofintegrationgenerallyoccursafteranacquisition.

Goodwill Impairment Testing and Disposal of All or a Portion of a Reporting UnitWhen the Reporting Unit Is Less Than Wholly Owned

11.58 Paragraph39AofStatement142states:

Ifareportingunitislessthanwhollyowned,thefairvalueofthereportingunitandtheimplied

fairvalueofgoodwillshallbedeterminedinthesamemannerasitwouldbedeterminedina

businesscombinationaccountedforinaccordancewithStatement141(R).Anyimpairmentloss

measuredinthesecondstepofthegoodwillimpairmenttestshallbeattributedtotheparentand





thenoncontrollinginterestonarationalbasis.Forexample,beforeStatement141(R)waseffective,

generallyonlythegoodwillattributabletotheparentwasrecognized.Ifthereportingunitincludes

onlygoodwillattributabletotheparent,thegoodwillimpairmentlosswouldbeattributedentirely

totheparent[see14.74].However,ifthereportingunitincludesgoodwillattributabletoboththe

parentandthenoncontrollinginterest,thegoodwillimpairmentlosswouldbeattributedtoboththe

parentandthenoncontrollinginterest.Similarly,whenalloraportionofaless-than-whollyowned

reportingunitisdisposedof,thegainorlossondisposalshallbeattributedtotheparentandthe

noncontrollinginterest.

11.59 Whenassetsofareportingunitthatdonotconstituteabusiness(asdeterminedunder

Statement141(R))aredisposedof,noamountofgoodwillisincludedinthecarryingamountofthose

assetssincegoodwillisonlyassociatedwithabusiness.Goodwillofthereportingunitmay,however,

requiretestingforimpairmentifthedisposalisdeterminedtoconstituteaneventorcircumstance

requiringtestingofgoodwillofthereportingunitbetweenannualdates(see11.26).

Assessing the Impact of Goodwill Assignments on the Determination of Gain orLoss on Disposal of a Reporting Unit

11.60 Paragraph39ofStatement142providesthat“[w]henareportingunitistobedisposedofin

itsentirety,goodwillofthatreportingunitshallbeincludedinthecarryingamountofthereporting

unitindeterminingthegainorlossondisposal.”Questionshavearisenconcerningsubsidiaries

(constitutingreportingunits)thatissueseparatefinancialstatementswhenparentshaveassignedan

amountofgoodwilltothosesubsidiaries(reportingunits)thatisdifferentfromtheamountrecorded

inthesubsidiaries’separatefinancialstatements.Whendeterminingthegainorlossondisposal,an

entityshouldincludeonlytheamountofgoodwillallocatedbytheparenttothereportingunittobe

disposedofindeterminingthecarryingvalueofthatreportingunit.Sincetheassignmentofgoodwill

tothereportingunitforStatement142impairmenttestingmaynothaveresultedinaformalentryto

theaccountsofthereportingunit,anadjustmentwillbenecessaryattheparent’sconsolidatedlevelto

reclassifygoodwilltoorfromthereportingunitdisposedoftoproperlycalculatetheparent’sgainorlossondisposal.Example11-11illustratestheseprinciples.







11.62 Ifthecostoftheinvestmentinanequitymethodinvesteeislessthantheacquirer’sunderlying

equityinthenetassets,abargainpurchaseresults.Suchdifferenceshouldbeaccountedforpursuantto

theguidanceinparagraphs36–38ofStatement141(R).

11.63 Inamannerconsistentwiththeprinciplethatgoodwillrelatedtoanequitymethodinvestment

shouldnotbeamortized,aninvestorshouldnotrecognizeamortizationexpenserelatedtoitsportionof

theindefinite-livedintangibleassetsoftheinvestee.Thisisconsistentwiththeguidanceinparagraph16

ofStatement142.Inaddition,investorsshouldnotseparatelytesttheirbasisintheinvestee’sindefinite-

livedintangibleassetsforimpairment.Rather,inaccordancewithparagraph19(h)ofOpinion18,

entitiesshouldcontinuetotestthetotalequitymethodinvestmentforimpairment.

11.64 Issue08-6statesthefollowing:

Anequitymethodinvestorisrequiredtorecognizeother-than-temporaryimpairmentsofanequity

methodinvestmentinaccordancewithparagraph19(h)ofOpinion18.Anequitymethodinvestor

shallnotseparatelytestaninvestee’sunderlyingasset(s)forimpairment.However,anequitymethod

investorshallrecognizeitsshareofanyimpairmentchargerecordedbyaninvesteeinaccordance

withparagraphs19(b)and19(c)ofOpinion18andconsidertheeffect,ifany,oftheimpairmentontheinvestor’sbasisdifferenceintheassetsgivingrisetotheinvestee’simpairmentcharge.

11.65 Whileparagraph37ofStatement142wouldonlyrequireagoodwillimpairmentlossrecognized

atasubsidiaryleveltoberecognizedintheconsolidatedfinancialstatementsifthegoodwillofthe

reportingunitinwhichthesubsidiaryresidesisalsoimpaired,thiswouldnotapplytoequitymethod

investments.Ifanequitymethodinvesteerecognizesagoodwillimpairmentcharge,theinvestorshould

recognizeitsshareoftheimpairmentinitsfinancialstatementsinthesamemannerinwhichother

earningsoftheinvesteearerecognizedbytheinvestor.



Section 12 — Financial StatementPresentation Requirements

Intangible Assets

12.01 Thefinancialstatementpresentationrequirementsforintangibleassets,whetheracquiredindividually,withagroupofotherassets,orinabusinesscombination,arespecifiedinStatement142.

Presentation of Intangible Assets in the Consolidated Statement of FinancialPosition

12.02 Paragraph42ofStatement142providesthat“[a]taminimum,allintangibleassetsshallbe

aggregatedandpresentedasaseparatelineiteminthestatementoffinancialposition.However,that

requirementdoesnotprecludepresentationofindividualintangibleassetsorclassesofintangibleassets

asseparatelineitems.”

Presentation of Intangible Asset Amortization Expense and Impairment Losses inthe Consolidated Income Statement

12.03 Paragraph42ofStatement142states,inpart:

Theamortizationexpenseandimpairmentlossesforintangibleassetsshallbepresentedinincome

statementlineitemswithincontinuingoperationsasdeemedappropriateforeachentity.Paragraphs

14and16requirethatanintangibleassetbetestedforimpairmentwhenitisdeterminedthatthe

assetshouldnolongerbeamortizedorshouldbegintobeamortizedduetoareassessmentofits

remainingusefullife.Animpairmentlossresultingfromthatimpairmenttestshallnotberecognized

asachangeinaccountingprinciple.

12.04 TheSECstaffhasemphasizedthatindeterminingtheappropriateincomestatementclassificationofintangibleassetamortizationexpense,entitiesshouldconsiderboth(1)costofsalesand

(2)selling,general,andadministrativeexpense.Accordingly,classificationunderageneralcaptionsuch

as“amortizationexpense,”evenifwithincontinuingoperations,maynotbedeemedappropriate.

12.05 Factorsforentitiestoconsiderindeterminingtheappropriateincomestatementclassification

ofintangibleassetamortizationexpenseshouldinclude,butarenotlimitedto,thefunctionofthe

intangibleassetandtherequirementsofSECRegulationS-X,Rule5-03.Forexample,iftheentity

acquiresapatentnecessarytoproducegoodsforsale,theamortizationexpenseofthepatentwould

generallybepresentedasacomponentofcostofsalesorasimilarexpensecategory.

12.06 Regardingtheappropriateincomestatementclassificationofamortizationexpenseforintangibleassetsspecifictoacquiredtechnologymarketedtoothers,theSECstaffreferstotheguidancein

Question17ofFASBStaffImplementationGuide(Statement86),whichaddressestheamortization

expensepresentationofcapitalizedsoftwarecosts.Question17providesthat“[s]incetheamortization

relatestoasoftwareproductthatismarketedtoothers,theexpensewouldbechargedtocostofsales

orasimilarexpensecategory.”





Goodwill

12.07 Statement142specifiesthefinancialstatementpresentationrequirementsforgoodwill

recognizedinaccordancewithStatement141(R).

Presentation of Goodwill in the Consolidated Statement of Financial Position

12.08 Paragraph43ofStatement142providesthat“[t]heaggregateamountofgoodwillshallbe

presentedasaseparatelineiteminthestatementoffinancialposition.”Thegoodwilllineiteminthe

statementoffinancialpositionincludesthenoncontrollinginterest’sshareofgoodwill,ifany.

Presentation of Goodwill Impairment Losses in the Consolidated Income Statement


Theaggregateamountofgoodwillimpairmentlossesshallbepresentedasaseparatelineiteminthe

incomestatementbeforethesubtotalincomefromcontinuingoperations(orsimilarcaption)unless

agoodwillimpairmentlossisassociatedwithadiscontinuedoperation.Agoodwillimpairmentloss

associatedwithadiscontinuedoperationshallbeincluded(onanet-of-taxbasis)withintheresultsofdiscontinuedoperations.

Noncontrolling Interest in a Subsidiary

12.10 ARB51,asamendedbyStatement160,providesfinancialstatementpresentationrequirements

fornoncontrollinginterests.UponadoptionofStatement160,entitiesshouldapplysuchpresentation

requirementsretrospectivelyforallpreviouslyrecognizednoncontrollinginterests.

Presentation of Noncontrolling Interests in the Consolidated Statement ofFinancial Position

12.11 Asdiscussedin7.05,entitiesmustlooktootherrelevantGAAPtodeterminewhetherafinancialinstrumentissuedbyasubsidiarycanbeclassifiedinshareholders’equityasrequiredbyARB51,as

amendedbyStatement160.Forinstrumentsthatmeettheequitycriteria,paragraph26ofARB51,as

amendedbyStatement160,states:

Thenoncontrollinginterestshallbereportedintheconsolidatedstatementoffinancialposition

withinequity,separatelyfromtheparent’sequity.Thatamountshallbeclearlyidentifiedandlabeled,

forexample,asnoncontrollinginterestinsubsidiaries(paragraphA3).Anentitywithnoncontrolling

interestsinmorethanonesubsidiarymaypresentthoseinterestsinaggregateintheconsolidated

financialstatements.





12.12 Thefollowingexampleofaconsolidatedstatementoffinancialpositionisbasedonthe

illustrationinparagraphA3ofStatement160:

Example 12-1

XYZ Co.

Consolidated Statement of Financial PositionAs of December 31:

20X9 20X8

Assets:

TotalAssets $ 250,000 $ 225,000

Liabilities:

TotalLiabilities $ 120,000 $ 100,000

Equity:

XYZCo.shareholders’equity:

Commonstock($1parvalue) 10,000 10,000

Additionalpaid-incapital 24,000 24,000

RetainedEarnings 80,000 75,000

Accumulatedothercomprehensiveincome 4,000 5,000

TotalXYZCo.shareholders’equity 118,000 114,000

Noncontrollinginterest 12,000 11,000

TotalEquity 130,000 125,000

Totalliabilitiesandequity $ 250,000 $ 225,000

Presentation of Noncontrolling Interests in the Consolidated Statement of Income

12.13 Paragraph29ofARB51,asamendedbyStatement160,states:

Revenues,expenses,gains,losses,netincomeorloss,andothercomprehensiveincomeshallbe

reportedintheconsolidatedfinancialstatementsattheconsolidatedamounts,whichincludethe

amountsattributabletotheownersoftheparentandthenoncontrollinginterest.

12.14 Paragraph30ofARB51,asamendedbyStatement160,states,inpart:

Netincomeorlossandcomprehensiveincomeorloss,asdescribedinparagraph10ofFASB

Statement130,ReportingComprehensiveIncome ,shallbeattributedtotheparentandthe


12.15 Basicanddilutedearningspershare,ifpresented,arecalculatedsolelyonthebasisofincome

attributedtothecontrollinginterest’sshareofitssubsidiaries’income.Thatis,incomeattributableto

noncontrollinginterestisexcludedfromthecomputation.





12.16 Thefollowingexampleofaconsolidatedstatementofincomeisbasedontheillustrationin

paragraphA4ofStatement160.

Example 12-2

XYZ Co.

Consolidated Statement of Income12-Months Ended December 31:

20X9 20X8 20X7

Revenues $ 750,000 $ 600,000 $ 500,000

Costsandexpenses (525,000) (450,000) (400,000)

Incomefromcontinuingoperations,beforetax 225,000 150,000 100,000

Incometaxes (78,000) (50,000) (35,000)

Incomefromcontinuingoperations 147,000 100,000 65,000

Lossfromdiscontinuedoperations,netoftax (25,000) — —

Netincome 122,000 100,000 65,000

Less:netincomeattributabletothenoncontrollinginterest (27,800) (20,000) (13,500)

NetincomeattributabletoXYZCo. $ 94,200 $ 80,000 $ 51,500

Basic and diluted earnings per share:

IncomefromcontinuingoperationsattributabletoXYZCo.commonshareholders

$ 0.07 $ 0.05 $ 0.05

Lossfromdiscontinuedoperations,netoftax,attributabletoXYZCo.commonshareholders (0.01) — —

NetincomeattributabletoXYZCo.commonshareholders $ 0.06 $ 0.05 $ 0.05

Weighted-averagenumberofsharesoutstanding 2,000,000 1,750,000 1,250,000

Amounts attributable to XYZ Co. common shareholders*

Incomefromcontinuingoperations 132,300 90,000 58,500

Lossfromdiscontinuedoperations,netoftax (22,500) — —

NetIncome $ 109,800 $ 90,000 $ 58,500

*Tablecanbedisplayedonthefaceoftheconsolidatedincomestatementorinthenotestotheconsolidatedfinancialstatements.





Presentation of Noncontrolling Interests in the Statement of ConsolidatedComprehensive Income

12.17 ThefollowingstatementofcomprehensiveincomeisbasedontheillustrationinparagraphA5

ofStatement160.Notethatthisinformationcanalsobepresentedonthefaceoftheconsolidated

statementinwhichcomprehensiveincomeispresented.

Example 12-13

XYZ Co.

Statement of Consolidated Comprehensive Income

12-Months Ended December 31:

20X9 20X8 20X7

NetIncome $ 122,000 $ 100,000 $ 65,000

Othercomprehensiveincome,netoftax:

Unrealizedholding(loss)gainonavailable-for-salesecurities,

netoftax

$ (1,000) $ 3,000 $ 2,000

Foreigncurrencytranslationgains 2,000 1,000 3,000

Totalothercomprehensiveincome,netoftax 1,000 4,000 5,000

Comprehensiveincome 123,000 104,000 70,000

Comprehensiveincomeattributabletothenoncontrollinginterest (28,000) (20,800) (14,500)

ComprehensiveincomeattributabletoXYZCo. $ 95,000 $ 83,200 $ 55,500

Presentation of Noncontrolling Interests in the Consolidated Statement of Changesin Shareholders’ Equity

12.18 Asdiscussedin7.05,aparentmustlooktootherrelevantGAAPtodeterminewhetherafinancialinstrumentissuedbyasubsidiaryandheldbyathirdpartycanbeclassifiedaspermanent

equity.Ifso,thefinancialinstrumentisconsideredanoncontrollinginterestthatiswithinthescope

ofStatement160,andtheparentisrequiredtopresentthefollowinginformationasrequiredby

paragraph38(c)ofARB51,asamendedbyStatement160:

Eitherintheconsolidatedstatementofchangesinequity,ifpresented,orinthenotestothe

consolidatedfinancialstatements,areconciliationatthebeginningandtheendoftheperiodofthe

carryingamountoftotalequity(netassets),equity(netassets)attributabletotheparent,andequity

(netassets)attributabletothenoncontrollinginterest.Thatreconciliationshallseparatelydisclose

(paragraphA6):

(1) Netincome(2) Transactionswithownersactingintheircapacityasowners,showingseparatelycontributions

fromanddistributionstoowners

(3) Eachcomponentofothercomprehensiveincome.

Theparentcanpresenttheaboveinformationintheconsolidatedstatementofchangesinshareholders’

equity,ifpresented,orinthenotestotheconsolidatedfinancialstatements.





Section 13 — Financial StatementDisclosure Requirements

Business Combination Disclosures


Theacquirershalldiscloseinformationthatenablesusersofitsfinancialstatementstoevaluatethe

natureandfinancialeffectofabusinesscombinationthatoccurseither:

a. Duringthecurrentreportingperiod;or

b. Afterthereportingdatebutbeforethefinancialstatementsareissued.

Inaddition,anyadjustmentsrecognizedinthecurrentyearrelatedtobusinesscombinationsthat

occurredinpriorreportingperiodsmustbedisclosedasrequiredbyParagraph71ofStatement141(R).

13.02Paragraph73ofStatement141(R)statesthat“[i]fthespecificdisclosuresrequiredbythis

StatementandotherGAAPdonotmeettheobjectivessetoutinparagraphs67and71,theacquirer

shalldisclosewhateveradditionalinformationisnecessarytomeetthoseobjectives.”

General Disclosures

13.03Paragraphs68(a)–(e)ofStatement141(R)statethatanentitymustdisclosethefollowingfor

eachmaterialbusinesscombinationthatoccursduringthereportingperiod:

a. Thenameandadescriptionoftheacquiree.

b. Theacquisitiondate.[See3.01.]

c. Thepercentageofvotingequityinterestsacquired.

d. Theprimaryreasonsforthebusinesscombinationandadescriptionofhowtheacquirer

obtainedcontroloftheacquiree.

e. Aqualitativedescriptionofthefactorsthatmakeupthegoodwillrecognized,suchas

expectedsynergiesfromcombiningoperationsoftheacquireeandtheacquirer,intangible

assetsthatdonotqualifyforseparaterecognition,orotherfactors.

Consideration Transferred

13.04Paragraph68(f)ofStatement141(R)statesthatanentitymustdisclosethefollowingforeach

materialbusinesscombinationthatoccursduringthereportingperiod:

Theacquisition-datefairvalueofthetotalconsiderationtransferredandtheacquisition-datefairvalue

ofeachmajorclassofconsideration,suchas:[SeeSection 6.]

(1) Cash

(2) Othertangibleorintangibleassets,includingabusinessorsubsidiaryoftheacquirer

(3) Liabilitiesincurred,forexample,aliabilityforcontingentconsideration

(4) Equityinterestsoftheacquirer,includingthenumberofinstrumentsorinterestsissuedor

issuableandthemethodofdeterminingthefairvalueofthoseinstrumentsorinterests.





Contingent Consideration and Indemnification Assets

13.05Paragraph68(g)ofStatement141(R)indicatesthatanentitymustdisclosethefollowingforeach


Forcontingentconsiderationarrangementsandindemnificationassets:[See6.22and4.47.]

(1) Theamountrecognizedasoftheacquisitiondate

(2) Adescriptionofthearrangementandthebasisfordeterminingtheamountofthepayment

(3) Anestimateoftherangeofoutcomes(undiscounted)or,ifarangecannotbeestimated,

thatfactandthereasonswhyarangecannotbeestimated.Ifthemaximumamountofthe

paymentisunlimited,theacquirershalldisclosethatfact.

13.06Inreportingperiodsaftertheacquisitiondate,paragraph72(b)requiresthefollowingdisclosures

relatedtocontingentconsiderationarrangements:

Foreachreportingperiodaftertheacquisitiondateuntiltheentitycollects,sells,orotherwiseloses

therighttoacontingentconsiderationasset,oruntiltheentitysettlesacontingentconsideration

liabilityortheliabilityiscancelledorexpires:

(1) Anychangesintherecognizedamounts,includinganydifferencesarisinguponsettlement

(2) Anychangesintherangeofoutcomes(undiscounted)andthereasonsforthosechanges

(3) Thedisclosuresrequiredbyparagraph32ofStatement157.[See13.25.]

Acquired Receivables

13.07Paragraph68(h)ofStatement141(R)statesthatanentitymustdisclosethefollowingforeach


ForacquiredreceivablesnotsubjecttotherequirementsofAICPAStatementofPosition03-3,

AccountingforCertainLoansorDebtSecuritiesAcquiredinaTransfer :

(1) Thefairvalueofthereceivables

(2) Thegrosscontractualamountsreceivable

(3) Thebestestimateattheacquisitiondateofthecontractualcashflowsnotexpectedtobe

collected.

Thedisclosuresshallbeprovidedbymajorclassofreceivable,suchasloans,directfinanceleasesin

accordancewithStatement13,andanyotherclassofreceivables.

Assets Acquired and Liabilities Assumed by Major Class

13.08Paragraph68(i)ofStatement141(R)providesthatanentitymustdisclosethefollowingforeach


Theamountsrecognizedasoftheacquisitiondateforeachmajorclassofassetsacquiredand

liabilitiesassumed(paragraphA107).

13.09ParagraphA107ofStatement141(R)includesanillustrativeexampleofmanyofthestatement’s

disclosurerequirements,includingthefollowingtablethatdisclosestheamountsrecognizedasofthe

acquisitiondateforeachmajorclassofassetsacquiredandliabilitiesassumed:





Recognized amounts of identifiable assets acquired and liabilities assumed

Financialassets 3,500

Inventory 1,000

Property,plant,andequipment 10,000

Identifiableintangibleassets 3,300

Financialliabilities (4,000)

Liabil itiesarisingfromcontingencies (1,000)

Totalidentifiablenetassets 12,800


13.10Paragraph68(j)ofStatement141(R)statesthatanentitymustdisclosethefollowingforeach


Forassetsandliabilitiesarisingfromcontingencies:[See4.32.]

(1) Theamountsrecognizedattheacquisitiondateoranexplanationofwhynoamountwasrecognized(paragraph24)

(2) Thenatureofrecognizedandunrecognizedcontingencies

(3) Anestimateoftherangeofoutcomes(undiscounted)forcontingencies(recognizedand

unrecognized)or,ifarangecannotbeestimated,thatfactandthereasonswhyarange

cannotbeestimated.

Anacquirermayaggregatedisclosuresforassetsandliabilitiesarisingfromcontingenciesthatare

similarinnature.

13.11Paragraph72(c)requiresthefollowingdisclosuresrelatedtoassetsandliabilitiesarisingfrom

contingenciesinreportingperiodsaftertheacquisitiondate:

Foreachreportingperiodaftertheacquisitiondateuntiltheacquirercollects,sells,orotherwiseloses

therighttorecognizedassetsarisingfromcontingencies,ortheacquirersettlesrecognizedliabilities

oritsobligationtosettlethemiscancelledorexpires:

(1) Anychangesintherecognizedamountsofassetsandliabilitiesarisingfromcontingenciesand

thereasonsforthosechanges

(2) Anychangesintherangeofoutcomes(undiscounted)forbothrecognizedandunrecognized

assetsandliabilitiesarisingfromcontingenciesandthereasonsforthosechanges.

Goodwill

13.12 Paragraphs68(k)–(l)ofStatement141(R)indicatesthatanentitymustdisclosethefollowingfor

eachmaterialbusinesscombinationthatoccursduringthereportingperiod:

k. Thetotalamountofgoodwillthatisexpectedtobedeductiblefortaxpurposes.

l. IftheacquirerisrequiredtodisclosesegmentinformationinaccordancewithFASBStatement

No.131,DisclosuresAboutSegmentsofanEnterpriseandRelatedInformation ,theamount

ofgoodwillbyreportablesegment.Iftheassignmentofgoodwilltoreportingunitsrequired

byStatement142hasnotbeencompletedasofthedatethefinancialstatementsareissued,

theacquirershalldisclosethatfact.







q.Inabusinesscombinationachievedinstages:[See1.28.]

(1)Theacquisition-datefairvalueoftheequityinterestintheacquireeheldbytheacquirer

immediatelybeforetheacquisitiondate

(2)Theamountofanygainorlossrecognizedasaresultofremeasuringtofairvaluethe

equityinterestintheacquireeheldbytheacquirerbeforethebusinesscombination

(paragraph48)andthelineitemintheincomestatementinwhichthatgainorlossis

recognized.

Additional Disclosures by a Public Business Enterprise

13.17Paragraph9ofStatement131defines“publicbusinessenterprises”asfollows:

Publicbusinessenterprisesarethosebusinessenterprisesthathaveissueddebtorequitysecuritiesor

areconduitbondobligorsforconduitdebtsecurities[Footnote1a]thataretradedinapublicmarket

(adomesticorforeignstockexchangeoranover-the-countermarket,includinglocalorregional

markets),thatarerequiredtofilefinancialstatementswiththeSecuritiesandExchangeCommission,

orthatprovidefinancialstatementsforthepurposeofissuinganyclassofsecuritiesinapublic

market.

Footnote1a—Conduitdebtsecuritiesreferstocertainlimited-obligationrevenuebonds,

certificatesofparticipation,orsimilardebtinstrumentsissuedbyastateorlocalgovernmental

entityfortheexpresspurposeofprovidingfinancingforaspecificthirdparty(theconduit

bondobligor)thatisnotapartofthestateorlocalgovernment’sfinancialreportingentity.

Althoughconduitdebtsecuritiesbearthenameofthegovernmentalentitythatissues

them,thegovernmentalentityoftenhasnoobligationforsuchdebtbeyondtheresources

providedbyaleaseorloanagreementwiththethirdpartyonwhosebehalfthesecurities

areissued.Further,theconduitbondobligorisresponsibleforanyfuturefinancialreporting

requirements.

13.18Paragraph68(r)ofStatement141(R)states:

Iftheacquirerisapublicbusinessenterprise,asdescribedinparagraph9ofStatement131:

(1) Theamountsofrevenueandearningsoftheacquireesincetheacquisitiondateincludedin

theconsolidatedincomestatementforthereportingperiod

(2) Therevenueandearningsofthecombinedentityforthecurrentreportingperiodasthough

theacquisitiondateforallbusinesscombinationsthatoccurredduringtheyearhadbeenas

ofthebeginningoftheannualreportingperiod(supplementalproformainformation)

(3) Ifcomparativefinancialstatementsarepresented,therevenueandearningsofthecombined

entityforthecomparablepriorreportingperiodasthoughtheacquisitiondateforallbusiness

combinationsthatoccurredduringthecurrentyearhadoccurredasofthebeginningofthe

comparablepriorannualreportingperiod(supplementalproformainformation).

Ifdisclosureofanyoftheinformationrequiredbythissubparagraphisimpracticable,theacquirer

shalldisclosethatfactandexplainwhythedisclosureisimpracticable.ThisStatementusesthetermimpracticablewiththesamemeaningasimpracticabilityinparagraph11ofStatement154.

13.19“Impracticability”isdefinedinparagraph11ofStatement154asfollows:

Itshallbedeemedimpracticabletoapplytheeffectsofachangeinaccountingprinciple

retrospectivelyonlyifanyofthefollowingconditionsexist:

a. Aftermakingeveryreasonableefforttodoso,theentityisunabletoapplytherequirement.

b. Retrospectiveapplicationrequiresassumptionsaboutmanagement’sintentinapriorperiod

thatcannotbeindependentlysubstantiated.





c. Retrospectiveapplicationrequiressignificantestimatesofamounts,anditisimpossibleto

distinguishobjectivelyinformationaboutthoseestimatesthat:

(1) Providesevidenceofcircumstancesthatexistedonthedate(s)atwhichthoseamounts

wouldberecognized,measured,ordisclosedunderretrospectiveapplication,and

(2) Wouldhavebeenavailablewhenthefinancialstatementsforthatpriorperiodwere

issued.[Footnoteomitted]

13.20Taxbenefitsofnetoperatinglossesofanacquireebeforeabusinesscombinationwouldnot

bereflectedintheproformaresultsofoperationsinthepresentationofthesupplementalproforma

informationrequiredbyParagraph68(r)ofStatement141(R)becausetheywouldberecognizedas

either(1)adeferredtaxassetintheidentificationofassetsacquiredor(2)additionalgoodwillifa

deferredtaxassetisnotrecognizedbecauseitismorelikelythannotthatthetaxbenefitswillnotbe

realized.However,disclosuresofamountsandexpirationdatesofnetoperatinglossesandreasonsfor

significantvariationsinthecustomaryrelationshipsbetweenincometaxexpenseandpretaxaccounting

incomeshouldbeincludedwithpresentationsofproformaresultsofoperations.

Immaterial Business Combinations13.21Paragraph69ofStatement141(R)states:

Forindividuallyimmaterialbusinesscombinationsoccurringduringthereportingperiodthatare

materialcollectively,theacquirershalldisclosetheinformationrequiredbyparagraphs68(e)–68(r)in

theaggregate.[See13.03–13.20.]

13.22MaterialityunderStatement141(R)isnotthesameassignificanceunderRegulationS-X,Rule

3-05.Therefore,registrantsmustseparatelydeterminewhatfinancialstatementdisclosuresarerequired

underStatement141(R)foranindividuallymaterialbusinesscombination(orforindividuallyimmaterial

businesscombinationsthatarecollectivelymaterial)intheperiodpresented.

Business Combinations Completed After the Balance Sheet Date

13.23 Paragraph70ofStatement141(R)providesthat“[i]ftheacquisitiondateofabusiness

combinationisafterthereportingdatebutbeforethefinancialstatementsareissued,theacquirershall

disclosetheinformationrequiredbyparagraph68[see13.03–13.20]unlesstheinitialaccountingfor

thebusinesscombinationisincompleteatthetimethefinancialstatementsareissued.Inthatsituation,

theacquirershalldescribewhichdisclosurescouldnotbemadeandthereasonwhytheycouldnotbe

made.”(See13.24.)

Initial Accounting for the Business Combination Is Not Complete

13.24Paragraph72(a)ofStatement141requiresanacquirertodisclosethefollowinginformationfor

eachmaterialbusinesscombination.Forindividuallyimmaterialbusinesscombinationsthatarematerial

collectivelyandforwhichtheinitialaccountingforthebusinesscombinationisnotcomplete,the

informationmustbedisclosedintheaggregate.Theparagraphstatesasfollows:

Iftheinitialaccountingforabusinesscombinationisincomplete(paragraph51)forparticularassets,

liabilities,noncontrollinginterests,oritemsofconsiderationandtheamountsrecognizedinthe

financialstatementsforthebusinesscombinationthushavebeendeterminedonlyprovisionally:

(1) Thereasonswhytheinitialaccountingisincomplete

(2) Theassets,liabilities,equityinterests,oritemsofconsiderationforwhichtheinitialaccounting





isincomplete

(3) Thenatureandamountofanymeasurementperiodadjustmentsrecognizedduringthe

reportingperiodinaccordancewithparagraph55.[See3.21.]

Statement 157 Disclosure Considerations (Postcombination)

13.25Someassetsacquiredandliabilitiesassumed(e.g.,contingentconsiderationarrangementsclassifiedasliabilities;see13.06)maybemeasuredtofairvalueonarecurringbasisafterthebusiness

combination.Insuchinstances,thefollowingfairvaluedisclosuresfromparagraph32ofStatement157

arerequiredinthepostcombinationfinancialstatements:

Forassetsandliabilitiesthataremeasuredatfairvalueonarecurringbasisinperiodssubsequentto

initialrecognition(forexample,tradingsecurities),thereportingentityshalldiscloseinformationthat

enablesusersofitsfinancialstatementstoassesstheinputsusedtodevelopthosemeasurementsand

forrecurringfairvaluemeasurementsusingsignificantunobservableinputs(Level3),theeffectof

themeasurementsonearnings(orchangesinnetassets)fortheperiod.Tomeetthatobjective,the

reportingentityshalldisclosethefollowinginformationforeachinterimandannualperiod(exceptas

otherwisespecified)separatelyforeachmajorcategoryofassetsandliabilities:

a. Thefairvaluemeasurementsatthereportingdate

b. Thelevelwithinthefairvaluehierarchyinwhichthefairvaluemeasurementsintheirentirety

fall,segregatingfairvaluemeasurementsusingquotedpricesinactivemarketsforidentical

assetsorliabilities(Level1),significantotherobservableinputs(Level2),andsignificant

unobservableinputs(Level3)

c. Forfairvaluemeasurementsusingsignificantunobservableinputs(Level3),areconciliation

ofthebeginningandendingbalances,separatelypresentingchangesduringtheperiod

attributabletothefollowing:[Footnoteomitted]

(1) Totalgainsorlossesfortheperiod(realizedandunrealized),segregatingthosegains

orlossesincludedinearnings(orchangesinnetassets),andadescriptionofwhere

thosegainsorlossesincludedinearnings(orchangesinnetassets)arereportedinthe

statementofincome(oractivities)

(2) Purchases,sales,issuances,andsettlements(net)

(3) Transfersinand/oroutofLevel3(forexample,transfersduetochangesinthe

observabilityofsignificantinputs)

d. Theamountofthetotalgainsorlossesfortheperiodinsubparagraph(c)(1)aboveincluded

inearnings(orchangesinnetassets)thatareattributabletothechangeinunrealizedgainsor

lossesrelatingtothoseassetsandliabilitiesstillheldatthereportingdateandadescriptionof

wherethoseunrealizedgainsorlossesarereportedinthestatementofincome(oractivities)

e. Inannualperiodsonly,thevaluationtechnique(s)usedtomeasurefairvalueandadiscussion

ofchangesinvaluationtechniques,ifany,duringtheperiod.

Interim Financial Information

13.26Statement141(R)doesnotreducethedisclosurerequirementsforinterimfinancialinformation

ofapublicbusinessenterprise.Thoseinparagraphs67–73ofStatement141(R)shouldbeappliedin

theperiodinwhichthebusinesscombinationoccurs.Further,thesupplementalproformainformation

requiredbyparagraph68(r)(see13.18)shouldbepresentedforthecurrentyear,thecurrentinterim

period,andcumulativeinterimperiodsfromtheacquisitiondatethroughtheendofthecurrentyear.





13.27ForSECregistrants,S-X,Rule10-01(b)(4),providesthefollowingguidancerelatedtoproforma

disclosuresformaterialbusinesscombinations:

Whereamaterialbusinesscombinationaccountedforasapurchasehasoccurredduringthecurrent

fiscalyear,proformadisclosureshallbemadeoftheresultsofoperationsforthecurrentyearup

tothedateofthemostrecentinterimbalancesheetprovided(andforthecorrespondingperiod

intheprecedingyear)asthoughthecompanieshadcombinedatthebeginningoftheperiodbeingreportedon.Thisproformainformationshallataminimumshowrevenue,incomebefore

extraordinaryitemsandthecumulativeeffectofaccountingchanges,includingsuchincomeonaper

sharebasis,andnetincomeandnetincomepershare.

Goodwill and Intangible Assets Disclosures

Disclosures in the Period of Acquisition

13.28Paragraph44ofStatement142states:

Forintangibleassetsacquiredeitherindividuallyoraspartofagroupofassets(ineitheranasset

acquisitionorbusinesscombination),thefollowinginformationshallbedisclosedinthenotestothe

financialstatementsintheperiodofacquisition:

a. Forintangibleassetssubjecttoamortization:

(1) Thetotalamountassignedandtheamountassignedtoanymajor intangible asset

class[definedinAppendixFofStatement142as“[a]groupofintangibleassetsthat

aresimilar,eitherbytheirnatureorbytheiruseintheoperationsofanentity”]

(2) Theamountofanysignificantresidualvalue,intotalandbymajorintangibleasset

class

(3) Theweighted-averageamortizationperiod,intotalandbymajorintangibleassetclass

b. Forintangibleassetsnotsubjecttoamortization,thetotalamountassignedandtheamount

assignedtoanymajorintangibleassetclass

c. Theamountofresearchanddevelopmentassetsacquiredinatransactionotherthanabusinesscombinationandwrittenoffintheperiodandthelineitemintheincomestatement

inwhichtheamountswrittenoffareaggregated.

Thisinformationshallbedisclosedseparatelyforeachmaterialbusinesscombinationorinthe

aggregateforindividuallyimmaterialbusinesscombinationsthatarematerialcollectivelyifthe

aggregatefairvaluesofintangibleassetsacquired,otherthangoodwill,aresignificant.

Disclosures, Including Segment Information, in Each Period Presented


Thefollowinginformationshallbedisclosedinthefinancialstatementsorthenotestothefinancial

statementsforeachperiodforwhichastatementoffinancialpositionispresented:

a. Forintangibleassetssubjecttoamortization:

(1) Thegrosscarryingamountandaccumulatedamortization,intotalandbymajor

intangibleassetclass

(2) Theaggregateamortizationexpensefortheperiod

(3) Theestimatedaggregateamortizationexpenseforeachofthefivesucceedingfiscal

years

b. Forintangibleassetsnotsubjecttoamortization,thetotalcarryingamountandthecarrying

amountforeachmajorintangibleassetclass









13.35 Paragraphs38(a)–(c)ofARB51,asamendedbyStatement160,providethefollowingdisclosure

requirementsforaparentwithoneormoreless-than-wholly-ownedsubsidiaries(seeexamplesof

financialstatementpresentationin12.11–12.18):

a. Separately,onthefaceoftheconsolidatedfinancialstatements,theamountsofconsolidated

netincomeandconsolidatedcomprehensiveincomeandtherelatedamountsofeach

attributabletotheparentandnoncontrollinginterest(paragraphsA4andA5).

b. Eitherinthenotesoronthefaceoftheconsolidatedincomestatement,amountsattributable

totheparentforthefollowing,ifreportedintheconsolidatedfinancialstatements(paragraph

A4):

(1) Incomefromcontinuingoperations

(2) Discontinuedoperations

(3) Extraordinaryitems.

c. Eitherintheconsolidatedstatementofchangesinequity,ifpresented,orinthenotesto

consolidatedfinancialstatements,areconciliationatthebeginningandtheendoftheperiod

ofthecarryingamountoftotalequity(netassets),equity(netassets)attributabletothe

parent,andequity(netassets)attributabletothenoncontrollinginterest.Thatreconciliation

shallseparatelydisclose(paragraphA6):

(1) Netincome

(2) Transactionswithownersactingintheircapacityasowners,showingseparately

contributionsfromanddistributionstoowners

(3) Eachcomponentofothercomprehensiveincome.

Changes in a Parent’s Ownership Interest in a Subsidiary

13.36Paragraph38(d)ofARB51,asamendedbyStatement160,providesthefollowingdisclosure

requirement:

Innotestotheconsolidatedfinancialstatements,aseparateschedulethatshowstheeffectsofanychangesinaparent’sownershipinterestinasubsidiaryontheequityattributabletotheparent

(paragraphA7).

13.37 ParagraphA7ofStatement160includesthefollowingexampletohighlightthisdisclosure

requirement:

Additional Disclosure If a Parent’s Ownership Interest in a Subsidiary Changes during the

Period

Thisscheduleillustratestherequirementsinparagraph38(d)thatABCCo.presentinnotestothe

consolidatedfinancialstatementsaseparateschedulethatshowstheeffectsofchangesinABCCo.’s

ownershipinterestinitssubsidiaryonABCCo.’sequity.Thisscheduleisonlyrequirediftheparent’s

ownershipinterestinasubsidiarychangesinanyperiodspresentedintheconsolidatedfinancialstatements.





Example 13-1

ABC Co.

Notes to Consolidated Financial Statements

Net Income Attributable to ABC Co. and Transfers (to) From the Noncontrolling Interest

Year Ended December 31

ThepurposeofthisscheduleistodisclosetheeffectsofchangesinABCCo.’sownershipinterestinitssubsidiaryonABCCo.’sequity.

20X3 20X2 20X1

NetincomeattributabletoABCCo. $ 37,500 $ 22,000 $ 30,000

Transfers(to)fromthenoncontrollinginterest

IncreaseinABCCo.’spaid-incapitalforsaleof2,000SubsidiaryAcommonshares — 10,000 —

DecreaseinABCCo.’spaid-incapitalforpurchaseof1,000SubsidiaryAcommonshares (8,000) — —

Nettransfers(to)fromnoncontrollinginterest (8,000) 10,000 —

ChangefromnetincomeattributabletoABCCo.andtransfers(to)fromnoncontrollinginterest $ 29,500 $ 32,000 $ 30,000

13.38Notethatiftheparent’sownershipinterestchanges,paragraph34ofARB51,asamendedby

Statement160,requiresthattheentityreallocateaccumulatedothercomprehensiveincome,ifany,

betweentheparentandthenoncontrollinginterest.However,theseparateschedule,asillustrated

above,shouldexcludetheeffectsofthisreallocation.

Excess Losses

13.39 Statement160amendsARB51torequirelossestobeattributedtothenoncontrollinginterest

evenifadeficitbalanceresults(see7.18).Paragraph6ofStatement160states:

If,intheyearofadoption,anentity’sconsolidatednetincomeattributabletotheparentwouldhave

beensignificantlydifferenthadthepreviousrequirementinparagraph15ofARB51beenapplied,

theentityshalldiscloseproformaconsolidatednetincomeattributabletotheparentandproforma

earningspershareasifthepreviousrequirementinparagraph15ofARB51hadbeenappliedinthe

yearofadoption.

Other

Deconsolidations

13.40 Aparentdeconsolidatesasubsidiarywhenacontrollinginterestnolongerexists.Paragraph39

ofARB51,asamendedbyStatement160,providesthefollowingdisclosurerequirementsbytheparentwhenasubsidiaryisdeconsolidated:

a. Theamountofanygainorlossrecognizedinaccordancewithparagraph36[see 7.27]

b. Theportionofanygainorlossrelatedtotheremeasurementofanyretainedinvestmentin

theformersubsidiarytoitsfairvalue

c. Thecaptionintheincomestatementinwhichthegainorlossisrecognizedunlessseparately

presentedonthefaceoftheincomestatement.





Underparagraph39(a)theformerparentisnotrequiredtodisclosethegainorlossamountasif

Statement160hadbeenapplied(proforma)fordispositionsbeforeadoptionofStatement160.

See13.34.

Income Taxes

13.41 See8.74–8.76forincometaxdisclosuresrelatedtobusinesscombinations.



Section 14 — Transition Requirementsand Other Adoption Considerations

Statement 141(R)

14.01 Statement141(R)iseffectiveprospectivelyforfiscalyearsbeginningonorafterDecember15,2008.Earlyadoptionisnotpermitted.Paragraph75ofStatement141(R)states:

Assetsandliabilitiesthatarosefrombusinesscombinationswhoseacquisitiondatesprecededthe

applicationofthisStatementshallnotbeadjusteduponapplicationofthisStatement.

14.02 Therefore,Statement141(R)willgenerallyonlyaffecttheaccountingforbusinesscombinations

thatareconsummatedafteritseffectivedate,withtwoexceptions:

• Certainincometaxbalancesrecognizedinpriorbusinesscombinations(see14.03–14.10).

• Businesscombinationsbetweentwoormoremutualentitiesthatwereaccountedforbyusing

thepurchasemethod(see14.39–14.45).

Example 14-1

Effective Date

CompanyA,whichhasaDecember31year-end,obtainscontrolofCompanyXonNovember30,2008,inatransactionaccountedforasabusinesscombinationunderStatement141.CompanyAdoesnotfinalizeitsbusinesscombinationaccountingbeforeitsfiscalyear-endonDecember31,2008.Thatis,A’sallocationperiodextendsinto2009.

BecausetheacquisitiondateofXprecededtheeffectivedateofStatement141(R),AmustaccountforthisbusinesscombinationinaccordancewithStatement141,withanexceptionforcertainincometaxbalances(asdescribedin 14.03–14.10).

Income Taxes

14.03 Paragraph77ofStatement141(R)providesthefollowingtransitionguidanceregardingcertain

incometaxbalances:

Forbusinesscombinationsinwhichtheacquisitiondatewasbeforetheeffectivedateofthis

Statement,theacquirershallapplytherequirementsofStatement109,asamendedbythis

Statement,prospectively.Thatis,theacquirershallnotadjusttheaccountingforpriorbusiness

combinationsforpreviouslyrecognizedchangesinacquiredtaxuncertaintiesorpreviouslyrecognized

changesinthevaluationallowanceforacquireddeferredtaxassets.However,aftertheeffectivedate

ofthisStatement:

a. Theacquirershallrecognize,asanadjustmenttoincometaxexpense(oradirectadjustment

tocontributedcapitalinaccordancewithparagraph26ofStatement109),changesinthevaluationallowanceforacquireddeferredtaxassets.

b. Theacquirershallrecognizechangesintheacquiredincometaxpositionsinaccordancewith

Interpretation48,asamendedbythisStatement.

Changes in the Valuation Allowance for Acquired Deferred Tax Assets

14.04 Insomebusinesscombinations,theacquirerrecognizes,asoftheacquisitiondate,avaluation

allowancerelatedtocertainacquireddeferredtaxassets.





14.05 BeforeStatement141(R),theacquirergenerallyaccountedforanysubsequentdecreasein

thevaluationallowancethatisrelatedtoacquireddeferredtaxassetsasareductionofgoodwill

relatedtotheacquisition,regardlessofwhethersuchadecreaseoccurredduringtheallocationperiod

orthereafter.Ifnogoodwillremainedrelatedtotheacquisition,theacquirerthenreducedother

noncurrentintangibleassetstozeroandrecordedanyremainingcreditasareductionofincometax

expense.IncreasesinvaluationallowancesweregenerallyrecordedasacomponentofincometaxexpenseunderStatement141,whichisconsistentwiththeaccountingunderStatement141(R).

14.06 UponadoptingStatement141(R),theacquirermustrecordalladjustmentsofvaluation

allowancesrelatedtoacquireddeferredtaxassetsinaccordancewithparagraph30A(addedby

Statement141(R))ofStatement109,includingadjustmentstodeferredtaxvaluationallowances

recordedaspartofbusinesscombinationsconsummatedbeforetheeffectivedateofStatement141(R).

Paragraph30AofStatement109requiresthefollowing:

Theeffectofachangeinavaluationallowanceforanacquiredentity’sdeferredtaxassetshallbe

recognizedasfollows:

a. Changeswithinthemeasurementperiod[footnoteomitted][see3.16]thatresultfromnewinformationaboutfactsandcircumstancesthatexistedattheacquisitiondateshall

berecognizedthroughacorrespondingadjustmenttogoodwill.However,oncegoodwillis

reducedtozero,anacquirershallrecognizeanyadditionaldecreaseinthevaluationallowance

asabargainpurchaseinaccordancewithparagraphs36–38ofStatement141(R).[See5.42.]

b. Allotherchangesshallbereportedasareductionorincreasetoincome tax expense(ora

directadjustmenttocontributedcapitalasrequiredbyparagraph26).[Emphasisadded]

Changes in Acquired Income Tax Positions

14.07 Insomebusinesscombinations,theacquirerrecordsaliabilityassociatedwithtaxuncertainties

thatexistatthetimeof,orthatariseinconnectionwith,abusinesscombination.

14.08 BeforeStatement141(R),theacquirergenerallyrecordedsubsequentadjustmentstouncertain

taxpositionsarisingfromabusinesscombinationthroughgoodwill,inaccordancewithIssue93-7,

regardlessofwhethersuchadjustmentsoccurredduringtheallocationperiodorthereafter.Ifgoodwill

attributabletotheacquisitionwasreducedtozero,theacquirerthenreducedothernoncurrent

intangibleassetsrelatedtothatacquisitiontozeroandrecordedanyremainingcreditasareductionof

incometaxexpense.

14.09 UponadoptingStatement141(R),theacquirermustrecordallchangestoacquiredtaxpositions

inaccordancewithparagraph12B(addedbyStatement141(R))ofInterpretation48,including

adjustmentstoacquiredtaxpositionsrecordedaspartofbusinesscombinationsconsummatedbefore

theeffectivedateofStatement141(R).Paragraph12BofInterpretation48states:

Theeffectofachangetoanacquiredtaxposition,orthosethatariseasaresultoftheacquisition,

shallberecognizedasfollows:

a. Changeswithinthemeasurementperiodthatresultfromnewinformationaboutfacts

andcircumstancesthatexistedasoftheacquisitiondateshallberecognizedthrougha

correspondingadjustmenttogoodwill.However,oncegoodwillisreducedtozero,the

remainingportionofthatadjustmentshallberecognizedasagainonabargainpurchasein

accordancewithparagraphs36–38ofStatement141(R).[See5.42.]

b. Allotherchangesinacquiredincometaxpositionsshallbeaccountedforinaccordancewith

thisInterpretation.





14.10 UnderStatement141(R),theacquirergenerallyrecordsallchangesintheacquiredtaxposition

outsideofthemeasurementperiodasareductionorincreasetoincometaxexpense.

Example 14-2

Allocation (Measurement) Period Ends Before the Adoption of Statement 141(R)

CompanyA,acalendar-year-endcompany,acquired100percentofCompanyMonJuly1,2007,inatransactionaccountedforasabusinesscombinationunderStatement141.Aspartofthetransaction,Arecorded(1)goodwillof$500and(2)adeferredtaxassetof$100relatedtoM’soperatinglosscarryforwards,withafullvaluationallowanceof$100.

OnSeptember30,2008,aftertheallocationperiod,Achangeditsestimateofthedeferredtaxassetvaluationallowanceto$75.UnderStatement141,Aadjusteditsbusinesscombinationaccountingbycreditinggoodwillfor$25.

CompanyAadoptsStatement141(R)onJanuary1,2009.OnMarch31,2009,Aagainchangesitsdeferredtaxassetvaluationallowance,thistimeto$30.UnderStatement141(R),Arecordstheentireadjustmentof$45($75–$30)asacredittoincometaxexpense.

Whilethisexampleillustrateschangesinavaluationallowancethatarerelatedtoanacquiredentity’sdeferredtaxassets,thesameapproachwouldbeusedifthebalancewereanuncertaintaxposition(liability).

Example 14-3

Allocation (Measurement) Period Ends After the Adoption of Statement 141(R)

CompanyB,acalendar-year-endcompany,acquired100percentofCompanyNonOctober1,2008,inatransactionaccountedforasabusinesscombinationunderStatement141.ForthefiscalyearendedDecember31,2008,Bdisclosedthatitrecordedprovisionalamountsforgoodwillandanuncertaintaxposition(liability)of$200and$80,respectively.

CompanyBadoptedStatement141(R)onJanuary1,2009.OnMarch31,2009,Bdisclosedinitsinterimfinancialstatementsthatithadfinalizeditsaccountingforthebusinesscombinationanddeterminedtheuncertaintaxpositiontobe$70.BecauseB’sadjustmentwas(1)madeduringtheallocationperiodand(2)aresultofnewinformationaboutfactsandcircumstancesthatexistedasoftheacquisitiondate,Brecordedtheoffsettingcreditof$10($80–$70)togoodwillunderStatement141.

OnNovember30,2009,Bobtainsnewfactsabouttheuncertaintaxpositionindicatingtheappropriatebalancetobe$100.Therefore,Badjuststheuncertaintaxpositionupwardby$30,withtheoffsettingdebitrecordedtoincometax

expense.BecausethemeasurementperiodhasendedfortheacquisitionaccountedforunderStatement141,BmustaccountforallsuchchangesunderStatement141(R),whichresultsinaccountingforsucheffectsthroughincometaxexpense.

Whiletheaboveexampleillustrateschangesinanuncertaintaxpositionthatarisesasaresultofabusinesscombination,thesameapproachwouldbeusedifthebalancewereavaluationallowancerelatedtoanacquiredentity’sdeferredtaxassets.


14.11 UnderStatement141,theacquirergenerallyrecordedthecontingentconsiderationwhenthe

contingencywasresolvedandtheconsiderationwasissuedorbecameissuable.Distributionsupon

resolutionofcontingenciesbasedonearnings(commonlyreferredtoas“earnout”arrangements)

resultedinanadditionalcostoftheacquiredbusiness,whilecontingenciesbasedonsecuritiespricesdid

not.

14.12 UnderStatement141(R),theacquirermustrecordallcontingentconsiderationarrangementsat

fairvalueontheacquisitiondate.Inaddition,theacquirermustremeasureallcontingentconsideration

arrangementsclassifiedasliabilitiestofairvaluethroughtheincomestatementuntiltheirresolution.

Contingentconsiderationarrangementsclassifiedasequityarenotremeasured,andtheamount

recordedisnotreversed,evenifthecontingencyisnotmet.





14.13 Theacquirer’smethodofaccountingforcontingentconsiderationarrangementsdependsonthe

acquisitiondate.Theacquirerwouldaccountforacontingentconsiderationarrangemententirelyunder

Statement141iftheacquisitiondateisbeforetheeffectivedateofStatement141(R).Thisholdstrue

evenifthecontingencyisresolvedandtheconsiderationispaidorpayableaftertheeffectivedateof

Statement141(R).

Example 14-4


OnDecember1,2008,CompanyA(acalendar-year-endcompany)acquired100percentofCompanyBfor$1million.CompanyAagreestopayanadditional$250,000iftheearningsofB(tobeoperatedaftertheacquisitionasaseparatesubsidiaryofA)equalorexceedaspecifiedtargetforthe12-monthperiodaftertheacquisition.BecausethecontingentarrangementwasincludedinatransactionaccountedforinaccordancewithStatement141andbasedonearningsinfutureperiods,Adidnotinitiallyrecordthecontingentconsiderationaspartofthecostofthebusinesscombination.

BecausethebusinesscombinationisconsummatedbeforeA’sadoptionofStatement141(R)(January1,2009),AisnotpermittedtorecordthecontingentconsiderationatfairvalueupontheadoptionofStatement141(R)andwouldcontinuetoapplyStatement141.Thatis,AwouldadjustthecostofacquiringBforanyamountspaidoutuponresolutionofthecontingency.

Restructuring and Exit Costs of the Acquiree

14.14 UnderStatement141,ifthecriteriainIssue95-3weremet,theacquirerrecognizedliabilities

asoftheacquisitiondateforplanstoexitanactivity,involuntarilyterminateemployees,orrelocate

employeesofanacquiree.Inaddition,iftheultimatecostsexpendedwerelessthantherecorded

liability,theacquirercouldadjustthecostofthebusinesscombination(and,mostlikely,goodwill)even

iftheallocationperiodhadended.

14.15 UnderStatement141(R),theacquirercanonlyrecognizeliabilitiesforplanstoexitanactivity

orrelocateemployeesofanacquireeiftheacquireehasacurrentplaninplaceandthecriteriain

Statement146aresatisfiedasoftheacquisitiondate.Thiswouldalsobethecaseforone-timeterminationbenefits(asdescribedinparagraph2(a)ofStatement146)thatarenotpartofanongoing

benefitarrangement.Inaddition,adjustmentstoarecordedliabilitythatarebasedonfactsand

circumstancesarisingaftertheacquisitiondatearerecordedintheincomestatement(see3.19).

14.16 UnderStatement141(R),theacquirermaybeabletorecognizeliabilitiesasoftheacquisition

dateforterminationbenefitstobepaidunderanongoingbenefitarrangementbetweentheacquiree

anditsemployees.Examplesofongoingbenefitarrangementswouldincludepreexistingplansorother

contractualarrangements.Paragraph28ofStatement141(R)providesanexceptiontoitsrecognition

andmeasurementprinciplesforthesetypesofliabilities,whichwouldbewithinthescopeofStatement

88andIssue96-5.

14.17 Theacquirer’saccountingforitsplanstoexitanactivity,involuntarilyterminateemployees,or

relocateemployeesofanacquireedependsontheacquisitiondate.Theacquirerwouldaccountfora

restructuringorexitliabilityentirelyunderStatement141andIssue95-3iftheacquisitiondateisbefore

theeffectivedateofStatement141(R).Thisholdstrueeveniftheultimatecoststosettletheliabilityare

paidorpayableaftertheacquireradoptsStatement141(R).





Example 14-5

Restructuring and Exit Costs of the Acquiree

OnNovember1,2008,CompanyX(acalendar-year-endcompany)acquired100percentofCompanyY.InaccordancewithIssue95-3,Xrecordeda$2millionliabilityasoftheacquisitiondateforitsplanstoexitanactivityofY.

BecausethebusinesscombinationisconsummatedbeforeX’sadoptionofStatement141(R)(January1,2009),Xwould

continuetoapplyIssue95-3.CompanyXcanadjustthecostofthebusinesscombinationiftheultimatecostpaidforitsexitplansislessthanthe$2millionrecordedliability,eveniftheallocationperiodhasendedandXhasalreadyadoptedStatement141(R).Further,uponadoptionofStatement141(R),XshouldnoteliminatetherecognizedexitliabilityevenifthatliabilitydoesnotsatisfytherecognitioncriteriainStatement141(R).

Acquisition-Related Costs Incurred on Current Transactions

14.18 Whenconsummatingabusinesscombination,anacquirerfrequentlyincursincrementaland

directcosts,suchasadvisory,legal,accounting,andvaluationfees.UnderStatement141,suchcostsare

capitalizedasacostofthebusinesscombination.Statement141(R)significantlychangestheaccounting

fortheseacquisition-relatedcostsbyrequiringthattheybeexpensedasincurred.(See6.31.)

14.19 NotethatbecausethecoststoissuedebtorequitysecuritiesinconnectionwithabusinesscombinationarerecognizedinaccordancewithotherapplicableGAAP,Statement141(R)doesnot

modifytheaccountingforthesecosts.Suchcostsaregenerallyrecordedonthebalancesheetunderthe

otherapplicableGAAP.

14.20 Questionshavearisenabouthowanentitythatisincurringacquisition-relatedcosts(before

adoptingStatement141(R))forabusinesscombinationshouldaccountforthesecostswhenthe

acquisitiondateisnotexpectedtooccuruntilthefirstannualreportingperiodbeginningonorafter

December15,2008(i.e.,theeffectivedateofStatement141(R)).Thefollowingaretwoalternativesfor

accountingforthesecosts.

• Alternative A: Expense Acquisition-Related Costs as Incurred—Proponentsofthis

alternativebelievethatsincetheacquisitiondateisexpectedtooccurinthefirstannual

reportingperiodbeginningonorafterDecember15,2008,theacquisition-relatedcostswould

beexpensedasincurredinaccordancewiththeeffectivedateandtransitionguidancein

Statement141(R).

• Alternative B: Defer Acquisition-Related Costs Until the First Annual Reporting Period

Beginning on or After December 15, 2008—Proponentsofthisalternativebelievethat

becauseearlyapplicationofStatement141(R)isprohibited,anyacquisition-relatedcosts

incurredbeforethefirstannualreportingperiodbeginningonorafterDecember15,2008,

shouldbedeferreduntiltheentityadoptsStatement141(R).Viewsdiffer,however,onthe

subsequenttreatmentofthosecosts.SomeholdthatsuchcostsshouldbeexpensedinthefirstannualreportingperiodbeginningonorafterDecember15,2008,whileotherssubscribeto

retrospectiveapplicationandmaintainthatanentityshouldapplytheguidanceinStatement

154onreportingachangeinaccountingprinciple.

14.21 WeunderstandthatonthebasisofthetransitionguidanceinStatement141(R),theSEC

staffwillnotobjecttorecordingacquisitioncostsinamannerconsistentwitheitheroftheabove

alternatives,providedthatanentityappropriatelydisclosesitsaccountingpolicyinaccordancewith

Opinion22andappliesitconsistentlytoallsuchcosts.





14.22 Whilehistoricallymanyacquisition-relatedcostshavebeenbilledattheclosingofthetransaction

orsoonthereafter,anentityshouldascertainthatitisaccruingsuchcostsastheyareincurred.Anentity

mustcontinuetodifferentiateacquisition-relatedcostsfromothercostsincurredinconnectionwithan

acquisition(suchascoststoissuedebtorequitysecurities).Theentityshouldcontinuetoaccountfor

theseothercostsinaccordancewithotherapplicableGAAP.

14.23 Anentitymayneedtousejudgmentindeterminingwhetheratransactionisexpectedtohavean

acquisitiondateinthefirstannualreportingperiodbeginningonorafterDecember15,2008.Anentity

mayneedtoevaluatemanyfactorsaspartofthisdetermination,suchasrequiredshareholderand

regulatoryapprovalaswellastheintentionoftheparties.Judgmentsreachedshouldbeevaluatedand

documented.

Goodwill Impairment Considerations

Identifying Additional Reporting Units

14.24 Statement142requiresanentitytoassignallrecordedgoodwilltoitsreportingunits.Paragraph

30ofStatement142definesareportingunitasfollows:

Areportingunitisanoperatingsegmentoronelevelbelowanoperatingsegment(referredtoas

acomponent).[Footnoteomitted]Acomponentofanoperatingsegmentisareportingunitifthe

componentconstitutesabusiness18

forwhichdiscretefinancialinformationisavailableandsegment

management[footnoteomitted]regularlyreviewstheoperatingresultsofthatcomponent....The

relevantprovisionsofStatement131andrelatedinterpretiveliteratureshallbeusedtodeterminethe

reportingunitsofanentity.

18EmergingIssuesTaskForceIssueNo.98-3,“DeterminingWhetheraNonmonetaryTransaction

InvolvesReceiptofProductiveAssetsorofaBusiness,”includesguidanceondeterminingwhether

anassetgroupconstitutesabusiness.

14.25 BeforeStatement142wasamendedbyStatement141(R),footnote18ofStatement142referredtoIssue98-3,whichrequiredthatabusinessconsistofasetofactivitiesandassetsthatare

self-sustainingandthathaveinputs,processes,andoutputs.Footnote18nowreferstothedefinition

ofabusinessinStatement141(R).ToqualifyasabusinessunderStatement141(R),asetofactivities

andassetsnolongerhastobeself-sustaining;itonlyhastobecapableofproducingoutputs.Thatis,

certaindevelopment-stageentitiesmaynowqualifyasbusinessesunderStatement141(R).

14.26 Statement142alsorequiresthattheentitytestgoodwillforimpairmentatthereporting-unit

levelatleastannually.Paragraph28ofStatement142explainsthat“[g]oodwillofareportingunit

shallbetestedforimpairmentbetweenannualtestsifaneventoccursorcircumstanceschangethat

wouldmorelikelythannotreducethefairvalueofareportingunitbelowitscarryingamount[including

goodwill].”

14.27 WebelievethatalthoughthetransitionprovisionsofStatement141(R)donotexplicitlystateto

doso,anentityadoptingStatement141(R)should,becauseofStatement141(R)’sbroadeneddefinition

ofabusiness,considerwhetheradditionalcomponentsofanoperatingsegment(i.e.,reportingunits)

exist.Paragraph36ofStatement142requiresthatiftheentityidentifiesnewreportingunitsupon

adoptingStatement141(R),itmustdetermine,onthissamedate,whetheranyofitspreviouslyrecorded

goodwillshouldbereassignedtothenewreportingunit(s).Paragraph36statesthat“goodwillshallbe

reassignedtothereportingunitsaffectedusingarelativefairvalueallocationapproach.”





14.28 Becausetheentitymustlookforinterimgoodwillimpairmentindicatorsatthereporting-unit

level,webelievethattheentityshouldidentifyanynewreportingunitsandreallocategoodwillas

necessaryimmediately upon adopting Statement 141(R).Webelievethatonthissamedate,

theentityshouldalsoassesswhethertherelativefairvalueofeachreportingunit(usedtoreallocate

goodwill)isgreaterorlessthanthecarryingamountoftheaffectedreportingunits.Thatis,theentity

shouldevaluatewhetherthereportingunitisimpairedandwhetheritmustperformstep2ofthegoodwillimpairmenttest(see11.32).

Editor’s Note: TheFASBmadeconformingamendmentstoInterpretation46(R)suchthatthe

definitionofabusinessinInterpretation46(R)andStatement141(R)arethesame.Thebroadened

definitionofabusinessmaynowenableavariableinterestentitytoqualifyforthebusinessscope

exemptioninparagraph4(h)ofInterpretation46(R).However,beforeapplyingthebusinessscope

exemption,anenterpriseisstillrequiredtoconsiderifanyoftheconsiderationsinparagraph

4(h)(1)–(4)ofInterpretation46(R)exist(thesewerenotamendedbyStatement141(R)).

Applying Statement 157 to Goodwill Impairment Tests

14.29 Entitiesmusttestgoodwillandindefinite-livedintangibleassetsforimpairmentatleastannually,

asdescribedin11.02 and 10.41,respectively.

14.30 InFebruary2008,theFASBissuedFSPFAS157-2,whichdeferstheeffectivedateofStatement

157forcertainnonfinancialassetsandliabilitiesuntilfiscalyearsbeginningonorafterNovember

15,2008.Reportingunitsmeasuredatfairvalueunderstep1ofthegoodwillimpairmenttestand

indefinite-livedintangibleassetsrecordedatfairvalueinabusinesscombinationorforimpairment

assessmentarewithinthescopeoftheFSPFAS157-2deferral.

14.31 Paragraph27ofStatement142permitsanentitythatmeetscertaincriteriatocarryforwarda

reportingunit’sfairvalueamountfromitsprior-yeargoodwillimpairmenttest(see11.47–11.48).Inasimilarmanner,anentitymayalsobeabletocarryforwardfairvaluemeasurementsofindefinite-lived

intangibleassets(see10.54).Webelievethatduringthefirstannualperiodafteritsfulladoptionof

Statement157,anentity,beforecarryingforwardanyofitsprior-yearcalculations,shouldalsoconsider

whetherthosecalculationsproperlytakeintoaccountthemeasurementprovisionsofStatement

157.However,wedonotbelievethattheinitialandfulladoptionofStatement157,byitself,would

createanimpairmentindicatorthatwouldrequiretheentitytoperformaninterimimpairmenttestfor

goodwillorindefinite-livedintangibleassets.

14.32 Asdiscussedin3.56,Statement157’sfairvaluemeasurementguidancerequiresthattheentity

maximizetheuseofobservableinputs.Anentityshouldconsiderusingthefollowing(notall-inclusive)

whendeterminingwhetherafairvaluemeasurementofthereportingunitisconsistentwiththemeasurementprinciplesofStatement157:

• Avaluationmethodthatisconsistentwiththemarketapproach.Examplesincludethe(1)

guidelinepubliccompanymethod,(2)guidelinetransactionmethod,(3)pastsubjectcompany

transactionmethod,and(4)marketcapitalizationmethod.

• Impliedcontrolpremiums(i.e.,premiumsabovemarketcapitalization)—tocalculatethefair

valueofareportingunit,providedthatthesepremiumsareconsistentwithmarketparticipant

assumptionsandindustryandmarketdata.





• Observablemarketinputs—tocalculatethediscountrateusedinadiscountedcashflow

model.

• Marketparticipantassumptions—tocalculatelong-termgrowthratesusedinadiscounted

cashflowmodel.

Additional Considerations for Less Than Wholly Owned Reporting Units14.33 See14.65–14.75foradditionalgoodwillimpairmentconsiderationsthatanentityshouldtake

intoaccountuponadoptingStatement160.

SAB 74 Disclosures

14.34 SECregistrantsmustcomplywithSABTopic11.M(SAB74),whichrequiresaregistrantto

providecertaindisclosureswhenitsadoptionofanewaccountingstandardisexpectedtohavea

materialeffectonitsfinancialpositionandresultsofoperations.1

14.35 Thenotestothefinancialstatementsshould(1)notifythereaderabouttheissuanceofa

standardthattheregistrantwillberequiredtoadoptinthefutureand(2)helpthereaderassesstheimpactthestandardwillhaveonthefinancialstatementsoftheregistrantwhenitisadopted.

14.36 InthecontextofStatement141(R),theregistrantshouldconsiderprovidingthefollowingSAB

74disclosures:

• AbriefdescriptionofStatement141(R),includingtheregistrant’srequireddateofadoption(see

14.01).

• Theimpactthattheregistrant’sadoptionofStatement141(R)isexpectedtohaveonits

financialstatements,unlessthisimpactisunknownornotreasonablyestimable,inwhichcase

theregistrantshouldstatethisfact.Theregistrantshouldconsiderdisclosingthefollowing

items:

o Anyremainingvaluationallowancesfordeferredtaxassetsacquiredinpriorbusiness

combinationsandtheimpactthatfutureadjustmentstotheseallowanceswillhaveon

theregistrant’sfinancialstatements(see14.04–14.06).

o Anyremaininguncertaintaxpositions(liabilities)relatedtopriorbusiness

combinationsandtheimpactthatfutureadjustmentstotheseliabilitieswillhaveon

theregistrant’sfinancialstatements(see14.07–14.10).

o Anyaccumulatedtransactioncosts,thetransitionmethoditwillapply,andtheoverall

impactonthefinancialstatements(see14.18–14.23).

o AnyadditionalreportingunitsthatmaybeidentifieduponadoptionofStatement

141(R),aswellasanyanticipatedgoodwillimpairments(see14.24–14.28).

o AnyimpactthefulladoptionofStatement157willhaveontheentity’sgoodwill

impairmenttests,aswellasanyanticipatedgoodwillimpairments(see14.29–14.32).

o OtheranticipatedeffectsofStatement141(R)onfuturebusinesscombinationsorstep

2ofthegoodwillimpairmentrest.

• Thepotentialimpactofothersignificantmattersthattheregistrantbelievesmightresultfrom

theadoptionofStatement141(R)(e.g.,plannedorintendedchangesinbusinesspractices).

PrivateentitiesshouldalsogenerallyprovidethedisclosuresrequiredbySAB74.1 SAB74alsoindicatesthateveniftheregistrant’sadoptionofanewstandardisnotexpectedtohaveamaterialeffect,itisencouragedtodisclosethisfact.





SEC Amendments

14.37 Atthe2008AICPANationalConferenceonCurrentSECandPCAOBDevelopments,Craig

C.Olinger,deputychiefaccountantintheSEC’sDivisionofCorporationFinance,acknowledgedina

question-and-answersessionthatcertainguidanceinRegulationS-Xconflictswiththeguidancein

Statements141(R)and160.Heindicatedthatinsuchcases,untiltheSECfinalizesamendmentsto

RegulationS-X,anentityshouldapplytheguidanceinStatements141(R)and160.Inaddition,atthe

July8,2008,SECRegulationsCommitteemeeting,theSECstaffacknowledgedthatthereareanumber

ofconflictsbetweenpublishedSECStaffAccountingBulletinsandStatements141(R)and160thatthe

SECstaffiscurrentlyaddressing.

14.38 OnDecember9,2008,theSEC’sDivisionofCorporationFinancereleasedaFinancialReporting

Manual .ThenewmanualsupersedestheDivision’sAccountingDisclosureRulesandPractices:An

Overview (alsoknownasthe“SECStaffTrainingManual”),whichhadnotbeenupdatedsince2000.

TheFinancialReportingManual provideshelpfulinsightintohowtheSECstaffappliesSECrulesand

regulationscovering,forexample,SECregistrants’andacquiredbusiness’financialstatements,aswell

asproformafinancialstatements.

Mutual Entities

14.39 Paragraph3(m)ofStatement141(R)definesamutualentityas“anentityotherthananinvestor-

ownedentitythatprovidesdividends,lowercosts,orothereconomicbenefitsdirectlytoitsowners,

members,orparticipants.”Examplesofmutualentitiesincludemutualinsurancecompanies,credit

unions,andcooperatives.

14.40 BeforeStatement141(R),mutualentitieswerewithinthescopeofStatements141and147

buttheeffectivedateofthesestatementswasindefinitelydeferredfortheseentities.Therefore,these

entitiesneverappliedStatement141or147anddidnotaccountforgoodwillandintangibleassets

recognizedinbusinesscombinationsunderStatement142.Rather,theyappliedtheguidanceinOpinion

16andStatement72.

14.41 Businesscombinationsbetweentwoormoremutualentitiesarenowwithinthescopeof

Statement141(R).Statement141(R)also(1)nullifiesStatement147;(2)eliminatesthepooling-of-

interestmethodofaccountingforbusinesscombinationsbetweentwoormoremutualentities;(3)

amendsthescopeofStatement142toincludegoodwillandintangibleassetsrecognizedinbusiness

combinationsbetweentwoormoremutualentities;and(4)providestransitionalaccountingguidance

ongoodwillandintangibleassetsrecognizedbyamutualentity,underthepurchasemethod,ina

transactionconsummatedbeforetheeffectivedateofStatement141(R)(see14.01).

14.42 Exceptasdiscussedin14.43,paragraphA134ofStatement141(R)prohibitsmutualentitiesfrom

adjusting“theamountofthepurchasepriceassignedtotheassetsacquiredandliabilitiesassumedina

businesscombinationforwhichtheacquisitiondatewasbefore”theeffectivedateofStatement141(R).

However,paragraphA134allowsforadjustmentstothepurchasepriceallocationfortheresolutionof

contingentconsiderationarrangementsandallocation-periodadjustments.





14.43 ParagraphA132ofStatement141(R)providesthefollowingtransitionalaccountingguidanceon

goodwillandintangibleassetsthatmutualentitiesrecognized,underthepurchasemethod,inbusiness

combinationsconsummatedbeforetheeffectivedateofStatement141(R):

a. Theentityshallreclassifytogoodwill(reclassifiedgoodwill) amountsthatdonotmeet

thecriteriainparagraph3(k)ofthisStatementforrecognitionseparatelyfromgoodwill.

Therefore,theentityshallreclassifytogoodwill:

(1) Thecarryingamountofacquiredintangibleassetsthatdonotmeetthecriteriain

paragraph3(k)ofthisStatementforrecognitionseparatelyfromgoodwill.

(2) Thecarryingamountofunidentifiableintangibleassetsthatdonotmeetthecriteriain

paragraph3(k)ofthisStatementforrecognitionseparatelyfromgoodwill.Statement

72describedunidentifiableintangibleassets astheamountbywhichthefairvalueof

theliabilitiesassumedexceedsthefairvalueoftangibleandidentifiedintangibleassets

acquired.

(3) Anydeferredtaxliabilitiesrelatedtotheintangibleassetsorunidentifiableintangible

assetsalsoshallbereclassifiedtogoodwilliftheamortizationoftheintangibleassets

ortheunidentifiableintangibleassetsisnotdeductiblefortaxpurposes.

b. Theentityshallreclassifytointangibleassetsthecarryingamountofanyintangibleassetthat:

(1) Meetsthedefinitionofidentifiableinparagraph3(k)ofthisStatement

(2) Hasbeenrecognizedbutreportedonthefaceofthestatementoffinancialposition

ingoodwill(orasgoodwillandintangibleassets)orasunidentifiableintangibleassets;

and

(3) Hasbeenseparatelyaccountedfor(thatis,separateaccountingrecordshavebeen

maintained).Anentitywouldbedeemedtohavemaintainedseparateaccounting

recordsifthereisaseparategeneralledgeraccountorothersubsidiaryledger(such

asaspreadsheetorsimilarledgeraccount)towhichperiodicamortizationcharges,

impairmentcharges,andotheraccountingentrieswereposted.Anentityshallnot

“carveout”fromgoodwillanyintangibleassetsthathadnotbeenidentifiedand

measuredatfairvalue(asdefinedordescribedinStatement141orOpinion16)in

theinitialrecordingofthebusinesscombinationandsubsequentlyaccountedfor

separatelyfromgoodwill.

c. Theentityshallwriteoffandrecognizeinearningstheamountofanyunamortizeddeferred

creditrelatedtoanexcessovercostarisingfromeitherabusinesscombinationaccountedfor

beforeapplyingthisStatementoraninvestmentaccountedforbytheequitymethodbefore

applyingthisStatement.

14.44 Mutualentitiesshouldapplythetransitionalimpairmentanddisclosureguidanceinparagraphs

53–61inStatement142,whichincludearequirementtotestindefinite-livedintangibleassetsand

goodwillforimpairmentuponadoptionofStatements141(R)and142(i.e.,fiscalperiodsbeginningon

orafterDecember15,2008).

14.45 Mutualentitieswithlong-termcustomer-relationshipintangibleassetsshouldalsofollowthe

transitionalaccountingguidanceinparagraphA133ofStatement141(R):

[T]heprovisionsofStatement144applytolong-termcustomer-relationshipintangibleassets,except

forservicingassets,recognizedintheacquisitionofafinancialinstitution.Examplesoflong-term

customer-relationshipintangibleassetsincludedepositor-andborrower-relationshipintangibleassets,

creditcardholderintangibleassets,andservicingassets.Servicingassets,however,areaccountedfor

inaccordancewith[Statement140],asamended.





Entities Emerging From Bankruptcy

14.46 TheFASBissuedFSPSOP90-7-1inresponsetotheconflictingguidanceinSOP90-7and

Statements141(R)and160regardingtheearlyadoptionofnewaccountingstandards.Beforethe

effectivedateoftheFSP,SOP90-7requiredanentitythatappliesfresh-startreportingtoearlyadopt

allaccountingstandardsthatwillbecomeeffectivewithin12monthsoftheentity’semergencefrom

bankruptcy.FSPSOP90-7-1,whichbecameeffectiveonApril24,2008,amendsSOP90-7bygivingan

entityemergingfrombankruptcytheoptiontoearlyadoptanewaccountingstandardsaslongasthe

standardpermitsearlyadoption.Therefore,becauseStatements141(R)and160specificallyprohibit

suchearlyadoption,anentityemergingfrombankruptcymaynotearlyadoptthesestatementsinits

fresh-startreporting.

Example 14-6

Emergence From Bankruptcy

CompanyAemergesfrombankruptcyandadoptsfresh-startaccountingonJuly1,2008.Afterallocatingthereorganizationvalue,Adeterminesthatitstax-deductiblegoodwillisinexcessofitsbookgoodwill.

BeforeStatement141(R),nodeferredtaxassetswererecognizedasoftheacquisitiondateiftax-deductiblegoodwillexceededbookgoodwill.Ataxbenefitwasrecognizedforthisdifferenceonlyafteritwasrealizedontheincometaxreturn.However,underStatement141(R),adeferredtaxassetshouldberecognizedforthisdifferenceasoftheacquisitiondate.

BecauseAemergesfrombankruptcybeforetheeffectivedateofStatement141(R),Aisprohibitedfromrecognizingadeferredtaxassetrelatedtotheexcessofitstax-deductiblegoodwilloverbookgoodwill(i.e.,AisprohibitedfromearlyadoptingStatement141(R)underFSPSOP90-7-1).

IfAhademergedfrombankruptcyaftertheeffectivedateofStatement141(R),Acouldhaverecognizedadeferredtaxassetrelatedtotheexcessofitstax-deductiblegoodwilloveritsbookgoodwill.

Statement 160

14.47 Statement160iseffectiveforfiscalyearsbeginningonorafterDecember15,2008.Earlyadoptionisprohibited.AnentitymustapplyStatement160asfollows:

• Accountingprovisions—prospectively.

• Presentationanddisclosureprovisions—retrospectivelyforallperiodspresented.

14.48 Anentityisnotpermittedtorevisetransactionsorallocationsofincomeandlossesbetweenthe

parentandthenoncontrollinginterestthatoccurbeforetheentityadoptsStatement160.

Noncontrolling Interests That Are Within the Scope of Statement 160

14.49 Paragraph25ofARB51,asamendedbyStatement160,definesanoncontrollinginterestas

“[t]heportionofequity(netassets)inasubsidiarynotattributable,directlyorindirectly,toaparent”

(emphasisadded).

14.50 Paragraph27ofARB51,asamendedbyStatement160,states,inpart,“Onlyafinancial

instrumentissuedbyasubsidiarythatisclassifiedasequityinthesubsidiary’sfinancialstatementscan

beanoncontrollinginterestintheconsolidatedfinancialstatements.”

14.51 UponadoptingStatement160,anentitymustconsultotherGAAPtodeterminewhetherthe

financialinstrumentsheldbythenoncontrollingshareholderscanbeclassifiedaspermanentequity.

SuchGAAPmayincludeStatements133and150,TopicD-98,andASR268(FRRSection211).





14.52 Generally,thepresentationrequirementsofStatement160regardingthestatementoffinancial

positionwillonlyaffectlesscomplexfinancialinstrumentsheldbynoncontrollinginterests.More

complexfinancialinstruments(e.g.,thosewithputorcalloptions)arelesslikelytobeaffectedby

Statement160.IfdictatedbyotherGAAP,anentityshouldcontinuetoclassifysuchinstrumentsin

eithermezzanine(ortemporary)equityorliabilitiesunderotherGAAP.

Calculation of Earnings per Share

14.53 Statement160requiresthat(1)thenoncontrollinginterestbeclassifiedasaseparatepartof

shareholders’equityand(2)consolidatednetincomeincludeamountsattributabletoboththeparent

andthenoncontrollinginterest.However,asdescribedinparagraphB75ofStatement160,theFASB

didnotintendtochangethemethodsthatentitiesusetocalculateearnings-per-sharedata.Paragraph

B75states,inpart:

[A]lthoughamountsforboththeparentandthenoncontrollinginterestarereportedinconsolidated

netincome,theBoarddecidedthecalculationofearnings-per-sharedatainconsolidatedfinancial

statementsthatincludesubsidiariesthatarelessthanwhollyownedshouldbebasedonamounts

attributabletotheparent’sowners.Thus,thisStatement[160]amendsStatement128sothatearnings-per-sharedatawillcontinuetobecalculatedthesamewaytheywerecalculatedbeforethis

Statementwasissued,basedonamountsattributabletotheparent’sowners.

14.54 Paragraph9ofStatement128,asamendedbyStatement160,states,inpart:

ForpurposesofcomputingEPSinconsolidatedfinancialstatements(bothbasicanddiluted),ifone

ormoreless-than-wholly-ownedsubsidiariesareincludedintheconsolidatedgroup,incomefrom

continuingoperationsandnetincomeshallexcludetheincomeattributabletothenoncontrolling

interestinsubsidiaries.

Changes in a Parent’s Ownership Interest in a Subsidiary

14.55 Paragraph33ofARB51(addedbyStatement160)requiresthat“[c]hangesinaparent’s

ownershipinterestwhiletheparentretainsitscontrollingfinancialinterestinitssubsidiaryshallbe

accountedforasequity transactions”(emphasisadded).However,Statement160indicatesthata

decreaseinaparent’sownershipinterestthatresultsinalossofcontrolisasignificanteconomicevent

andthatanyretainednoncontrollinginterest(bytheformerparent)isremeasuredatfair valueonthe

datecontrolislost.

14.56 BeforeStatement160’samendments,theparententityaccountedforchangesinitsownership

interestsasfollows:

• Forincreasesinownershipthatresultedintheparent’sobtainingcontrolorincreasingitscontrollinginterest,theparentfollowedtheguidanceinparagraph14ofStatement141,which

requiredittoapplypurchase accountingandstepupthesubsidiary’snetassetstofairvalue

fortheacquiredinterest.Inmanyinstances,theparentrecordedadditionalgoodwillassociated

withthepurchaseofadditionalownershipinterestsevenaftercontrolwasobtained.

• Fordecreasesinownershipthatdidnotresultinalossofcontrol,theparenteither(1)

recognizedagain or lossforthetransactionor(2)recordedthechangeinownershipas

acapitaltransaction.EntitiesoftenreferredtotheguidanceinSABTopic5.H(SAB51)to

determinewhethergainorlossrecognitionwasappropriate.2

2 Referto14.37fordiscussionoftheSECstaff’splanstoupdateSECStaffAccountingBulletinsthatconflictwithStatements141(R)and160.





• Fordecreasesinownershipthatresultedinalossofcontrol,theformerparentrecorded

anyretainednoncontrollinginvestmentonthebasisofthecarryingamountoftheformer

subsidiary.Thatis,theretainednoncontrollinginvestmentwasnotremeasuredtofairvalueon

thedatecontrolwaslost.

14.57 BecauseofStatement160’srevisions,theparent’saccountingforchangesinitsownership

interestinasubsidiarymaydifferbeforeandafteritadoptsStatement160.However,because

Statement160requiresprospectiveapplicationofitsaccountingrequirements,theparentshouldnot

reviseitsaccountingfortransactionsthatoccurredbeforeitadoptedStatement160.

14.58 IftheparentadoptsStatement160andsubsequentlypurchasesanadditionalownershipinterest

initssubsidiary,itcannotfurtherstepupthesubsidiary’snetassetstofairvaluetotheextentofthe

additionalinterestacquired,norcanitrecordadditionalgoodwill(asitpreviouslydidunderStatement

141).Inotherwords,theparentwillneverfullystepuptofairvalueapartialcontrollinginterestinits

subsidiarythatwasacquiredpriortotheadoptionofStatement160.Seesection14.66–14.72fora

discussionoftheimpactofreportingunitsthatarelessthanwhollyownedongoodwillimpairment

testing.

Example 14-7

Parent Purchases Noncontrolling Interest in Its Subsidiary After Adopting Statement 160

BeforeadoptingStatement160,ParentXpurchasedan80percentcontrollinginterestinSubsidiaryY.InaccordancewithStatement141,XrecordedY’snetassetsacquiredat(1)80percentfairvalueand(2)20percentcarryingvalue.

AfteradoptingStatement160,Xpurchasesanadditional20percentinterestinY.Accordingly,Xaccountsforitsincreaseinownershipinterestasanequitytransactionbetweentheparentandthenoncontrollinginterest(see 7.20–7.23).Thatis,XdoesnotapplyadditionalpurchaseaccountingandstepupY’snetassetstofairvaluefortheadditional20percentinterestitacquired.Instead,thedifferencebetweenthecashconsiderationpaidandthecarryingamountofthenoncontrollinginterestisrecordedasanadjustmenttoX’sadditionalpaid-incapital.ParentXisnotpermittedtoadjustthebasisofY’snetassetswhenitpurchasesorsellsownershipinterestsinYbutretainscontroloverY.

Attributing Net Income or Loss to the Parent and the Noncontrolling Interest

14.59 ARB51requiresthatnetincomeorlossandcomprehensiveincomeorlossbeattributedtothe

parentandthenoncontrollinginterest.However,neitherARB51norStatement160providesdetailed

guidanceonhowtheentityshouldattributetheseamountstotheparentandthenoncontrolling

interest.ParagraphB38ofStatement160states,inpart:

TheBoard,therefore,decidedtorequirethatnetincomeandcomprehensiveincomebeattributed

totheparentandthenoncontrollinginterestbutnotprovidedetailedguidanceformakingthe

attribution.TheBoardobservedthatentitiesweremakingattributionsbeforethisStatement[160]

wasissuedandthatthoseattributionsgenerallywerereasonableandappropriate.Therefore,the

Boarddecidedthatdetailedguidancewasnotneeded.

Attribution of Losses That Exceed the Carrying Amount of the NoncontrollingInterest in a Subsidiary

14.60 BeforeStatement160,paragraph15ofARB513stated:

Intheunusualcaseinwhichlossesapplicabletotheminorityinterestinasubsidiaryexceedthe

minorityinterestintheequitycapitalofthesubsidiary,suchexcessandanyfurtherlossesapplicableto

theminorityinterestshouldbechargedagainstthemajorityinterest,asthereisnoobligationofthe

3 Not-for-profitorganizationsarenotwithinthescopeofStatement160andwouldcontinuetoapplytheguidanceinparagraph15ofARB51.





minorityinteresttomakegoodsuchlosses.However,iffutureearningsdomaterialize,themajority

interestshouldbecreditedtotheextentofsuchlossespreviouslyabsorbed.

14.61 Statement160amendsARB51’sguidanceontheallocationoflossestothenoncontrolling

interestinasubsidiary(formerlyreferredtoasthe“minorityinterest”)by(1)deletingparagraph15

ofARB51and(2)addingparagraph31ofARB51,whichrevisesthisguidance.Therevisedguidance

requiresanentitytoallocatelossestothenoncontrollinginterest“evenifthatattributionresultsina

deficitnoncontrollinginterestbalance.”Therefore,whenasubsidiaryhasincurredlosses,theaccounting

fortheallocationofthoselossestothenoncontrollinginterestwilldifferbeforeandafteradoptionof

Statement160ifthelossesexceedthecarryingamountofthenoncontrollinginterest.

14.62 BecauseStatement160requiresprospectiveapplicationofitsaccountingrequirements,an

entityshouldnotreviseitshistoricalallocationsoflosses(orincome)betweentheparentandthe


14.63 IntheyearinwhichitadoptsStatement160,anentityshouldalsoconsiderthefollowing

disclosurerequirementinparagraph6:

If,intheyearofadoption,anentity’sconsolidatednetincomeattributabletotheparentwouldhave

beensignificantlydifferenthadthepreviousrequirementinparagraph15ofARB51beenapplied,

theentityshalldiscloseproformaconsolidatednetincomeattributabletotheparentandproforma

earningspershareasifthepreviousrequirementinparagraph15ofARB51hadbeenappliedinthe

yearofadoption.

Example 14-8

Attribution of Losses That Exceed the Carrying Amount of the Noncontrolling Interest in aSubsidiary — Transition to Statement 160

Case A

ParentXhasnotadoptedStatement160.ParentXholdsan80percentcontrollinginterestinSubsidiaryYandallocatesY’sprofitsandlossestotheparentandthenoncontrollinginterestonthebasisofrelativeownershipinterests,or80percentand20percent,respectively.AsofDecember31,20X1,thecarryingamountofY’sequitywas$120,ofwhich$100isattributabletotheparentand$20isanoncontrollinginterestinY.

During20X2,Yincurredlossesof$180.IfXweretoallocate20percentofY’s20X2losses($36)tothenoncontrollinginterest,thecarryingamountofthenoncontrollinginterestwouldbenegative.Therefore,Xonlyallocated$20,or11percent,ofthe20X2lossestothenoncontrollinginterest.ParentXabsorbedtheremaining$160oflosses,whichincluded$16([180×20%]–$20)oflossesthatwouldhaveotherwisebeenallocatedtothenoncontrollinginterestifthecarryingamounthadnotreached$0.

Incontrast,ifStatement160hadbeenappliedtothisperiod,Xwouldhavebeenrequiredtoallocate$36,or20percent,ofthe20X2lossestothenoncontrollinginterest.However,XcannotreviseitsallocationofprofitsandlossesbetweentheparentandthenoncontrollinginterestthatitmadebeforeadoptingStatement160,includingthe20X2allocationdescribedabove.

14.64 Thecarryingamountofthenoncontrollinginterestwillsometimesbe$0uponadoptionof

Statement160becausetheparenthaspreviouslyabsorbedlossesonbehalfofthenoncontrolling

shareholders.Webelievethatanentitycannot,afteradoptingStatement160,allocatefutureprofits

ofthesubsidiarysothattheparentisfirstcreditedtotheextentofthepreviouslossesitabsorbed.This

issupportedbythefactthatStatement160(1)deletedtheguidanceinparagraph15ofARB51(see

14.61)and(2)requiresprospectiveapplicationofitsaccountingrequirements.





Example 14-9

Attribution of Losses That Exceed the Carrying Amount of the Noncontrolling Interest in aSubsidiary — Transition to Statement 160

Case B

AssumethesamefactsasinExample14-8.Inaddition,assumethatParentXadoptsStatement160onJanuary1,20X3,

andthatYrecordsnetincomeof$80for20X3.InaccordancewiththetransitionprovisionsofStatement160,the20X3profitswouldbeallocatedpursuanttoX’sallocationmethod,whichinthiscaseisbasedonrelativeownershipinterests(i.e.,80percentforthecontrollinginterestand20percentforthenoncontrollingshareholders).Therefore,netincomewouldbeallocatedasfollows:$64toXand$16tothenoncontrollinginterest.ParentXwouldnotrecover(becreditedfor)theextra$16oflossesitabsorbedonbehalfofthenoncontrollingshareholdersduring20X2.

Goodwill Impairment Considerations

Goodwill Impairment Testing When the Reporting Unit Is Less Than Wholly Owned

14.65 Step1ofthegoodwillimpairmenttestistocomparethefairvalueofthereportingunitwithits

carryingamount,includinggoodwill(see11.32).

14.66 BeforeStatement160,thefairvalueandcarryingamountofthereportingunitinstep1generallywouldnotincludetheportionattributabletothenoncontrollinginterest.Forexample,ifthe

parentheldan80percentownershipinterestinareportingunit,itwouldhavereducedtheoverallfair

valueandcarryingamountofthereportingunitforthe20percentinterestheldbythenoncontrolling

shareholders.Also,becauseStatement141prescribedthe“partialgoodwill”method(seeA.26),the

entiregoodwillamountwasattributabletotheparentandwasincludedinthecarryingamountofthe

reportingunitusedinstep1ofthetest.

14.67 UponadoptingStatement160,anentitydeterminesthefairvalueofthereportingunitinthe

samemannerasitwouldinabusinesscombinationaccountedforunderStatement141(R).Thatis,

theentitycalculatesthefull fair valueofthereportinguniteveniftheparentdoesnothavea100

percentownershipinterestinthereportingunit.Similarly,theentityusesthefullcarryingamountofthe

reportingunit.

14.68 Ifanentityhasalessthanwhollyownedreportingunitandcalculatesthedifferencebetween

thefairvalueandcarryingamountofthatreportingunitinstep1immediatelybeforeandafter

adoptionofStatement160,theexcessofthefairvalueoverthecarryingamount(i.e.,“cushion”),

ifany,willbegreateraftertheentityadoptsStatement160.ThiscushionisduetoStatement160’s

revisionstohowthefairvalueandcarryingamountofthatreportingunitarecalculatedinstep1ofthe

goodwillimpairmenttest.Inotherwords,allelsebeingequal,theadoptionofStatement160could

createadditionalcushioninstep1ofthegoodwillimpairmenttest,asillustratedinExample14-10.





Example 14-10

Step 1 of the Goodwill Impairment Test

ParentXisacalendar-year-endcompany.OnDecember31,2008,Xpurchasedan80percentcontrollinginterestinSubsidiaryY(aseparatereportingunit)for$1,000andaccountedforthetransactionunderStatement141.ThefairvalueofY’sidentifiablenetassetswas$800,thebookvalueofY’snetassetswas$500,andthefairvalueofYis$1,250(assumethatthereisnoimpliedcontrolpremium)asoftheacquisitiondate.InaccordancewithStatement141(seeExample A-4),Xrecognizedacquirednetassetsof$740*andgoodwillof$360**asoftheacquisitiondate.

Thefollowingillustratesstep1ofthegoodwillimpairmenttestforYifitwereperformedbeforeandafterXadoptsStatement160onJanuary1,2009.

Step 1Before Statement 160

Fairvalueofreportingunit

Carryingamountofreportingunit

Difference

$ 1,000

1,000

$ 0

ConsiderationpaidbyXforan80percentinterestinY

X’sbasisinY,calculatedas([$800×80%]+$360)

Step 1After Statement 160


Carryingamountofreportingunit

Difference

$ 1,250

1,100

$ 150

Fairvalueoftheentirereportingunit

TotalcarryingamountofY,calculatedas($740+$360)

ParentXhasadditional“cushion”of$150becauseofStatement160’srevisionstohowthefairvalueandcarryingamountofthereportingunitarecalculatedinstep1ofthegoodwillimpairmenttest.

* Calculatedas([$800×80%]+[$500×20%]).

** Calculatedas($1,000–[$800×80%]).

14.69 Ifanentityfailsstep1ofthegoodwillimpairmenttest(i.e.,thecarryingamountofthereporting

unitisgreaterthanitsfairvalue),itmustthenperformstep2.Instep2,theentitycalculatesthe

reportingunit’simpliedfairvalueofgoodwillandcomparesitwiththecarryingamountofgoodwilltomeasuretheamountoftheimpairmentloss(see11.32).

14.70 BeforeStatement160,theentityusedStatement141’spurchasemethodofaccountingto

calculatetheimpliedfairvalueofgoodwill.Theparentallocateditsportionofthefairvalueofthe

reportingunitfromstep1(see11.32)toitsshareofthereportingunit’snetidentifiableassets.Any

residualamountwasconsideredgoodwillattributabletotheparent,whichwasthencomparedwith

thecarryingamountofgoodwill.Statement141prescribedthe“partialgoodwill”method,whichonly

includesgoodwillattributabletotheparent.

14.71 UponadoptingStatement160,theentityusesStatement141(R)’sacquisitionmethod

ofaccountingtocalculatetheimpliedfairvalueofgoodwill.Statement141(R)prescribesthe

“fullgoodwill”approach.Thatis,goodwillincludesamountsattributabletotheparentandthe

noncontrollinginterest.Allelsebeingequal,theimpliedfairvalueofgoodwillwillincreaseupon

adoptionofStatement160whenareportingunitislessthanwhollyowned.

14.72 Note,however,thattherearemanyrecognitionandmeasurementdifferencesbetween

Statement141andStatement141(R),whichmayalsocausetheimpliedfairvalueofgoodwilltodiffer

uponadoptionofStatement160.Forexample,itislikelythatmoreacquiredcontingencieswillbe

includedatfairvalueinthereportingunit’snetidentifiableassetsbalanceinaccordancewith

Statement141(R),whichwillincreasetheimpliedfairvalueofgoodwill.





Example 14-11

Step 2 of the Goodwill Impairment Test

AssumethesamefactsasinExample14-10.Althoughitisnotrequiredtodoso,thefollowingillustrateswhatX’sstep2goodwillimpairmenttestforYwouldlooklikeimmediatelybeforeandafterXadoptsStatement160onJanuary1,2009.

Step 2

Before Statement 160


Fairvalueofreportingunit’sidentifiablenetassets

Impliedfairvalueofgoodwill

$ 1,000

640

$ 360

Fromstep1inExample14-10

Calculatedas($800×80%)

GoodwillrecordedbyParentCo.

Step 2After Statement 160


Fairvalueofreportingunit’sidentifiablenetassets

Impliedfairvalueofgoodwill

$ 1,250

$ 800

$ 450

Fromstep1inExample14-10

Calculatedas($800×100%)*

Allelsebeingequal,Statement160’srevisionstostep2ofthegoodwillimpairmenttestresultinanincreaseintheimpliedfairvalueofgoodwillof$90($450–$360).ThisincreaseisattributabletoX’sapplicationofthe“fullgoodwill”approach,whichincludesgoodwillattributabletothenoncontrollinginterest.NotethatXwouldnotadjustthecarryingamountofitsgoodwilluponadoptingStatement160.

* NotethatthisamountwouldbecalculatedinaccordancewithStatement141(R).Inthisexample,itisassumedthatthefairvalueoftheidentifiablenetassets($800)isthesameunderStatements141and141(R).However,asdiscussedinAppendix A,manyoftherecognitionandmeasurementprovisionsinStatement141and141(R)aredifferent,whichcouldresultindifferentamountsrecordedforthefairvalueoftheidentifiablenetassets.

Attributing Goodwill Impairments to the Parent and the Noncontrolling Interest

14.73 Statement160amendsStatement142’sguidanceonattributinggoodwillimpairmentstothe

parentandthenoncontrollinginterest.Paragraph39AofStatement142(addedbyStatement160)

requiresthat“[a]nyimpairmentlossmeasuredinthesecondstepofthegoodwillimpairmenttestshallbeattributedtotheparentandthenoncontrollinginterestonarationalbasis.”

14.74 ForbusinesscombinationsconsummatedbeforetheeffectivedateofStatements141(R)and

160,theentityonlyrecognizedgoodwillattributabletotheparent.Incasesinwhichareportingunit

containsonlygoodwillassociatedwithapre–Statement141(R)businesscombination,a“rational”

methodgenerallywouldbefortheentitytoattribute100percentofallimpairmentlossestotheparent,

bothbeforeandaftertheentityadoptsStatement160.

14.75 ForbusinesscombinationsconsummatedaftertheeffectivedateofStatements141(R)and160,

theentityrecognizesgoodwillattributabletotheparentandthenoncontrollinginterest.Thatis,the

entityappliesthe“fullgoodwill”approachinStatement141(R).“Rational”methodsforallocatinggoodwillimpairmentlossestotheparentandthenoncontrollinginterestmayincludethefollowing:

• Allocateimpairmentlossesonthebasisoftherelativefairvalues,as of the acquisition date,

oftheparentandthenoncontrollinginterest.Becauseofapossiblecontrolpremium,the

amountofimpairmentlossattributedtotheparent,asapercentageofitsownershipinterest,

maybehigherthantheamountattributedtothenoncontrollinginterest.





• Allocateimpairmentlossesonthebasisoftherelativefairvalues,as of the impairment

testing date,oftheparentandthenoncontrollinginterest.Becauseofapossiblecontrol

premium,theamountofimpairmentlossattributedtotheparent,asapercentageofits

ownershipinterest,maybehigherthantheamountattributedtothenoncontrollinginterest.

• Allocateimpairmentlossesinamannerconsistentwithhowtheentityallocatesnetincome

andlossesofthereportingunit(subsidiary)betweentheparentandthenoncontrollinginterest(e.g.,onthebasisoftherelativeownershipinterestsoftheparentandthenoncontrolling

shareholders).

Additional Considerations

14.76 See14.24–14.32foradditionalgoodwillimpairmentconsiderationsthatanentityshouldtake

intoaccountuponadoptingStatements141(R)and157.

SAB 74 Disclosures

14.77 SECregistrantsmustcomplywithSABTopic11.M(SAB74),whichrequiresaregistrantto

providecertaindisclosureswhenitsadoptionofanewaccountingstandardisexpectedtohaveamaterialeffectonitsfinancialpositionandresultsofoperations.4

14.78 Thenotestothefinancialstatementsshould(1)notifythereaderabouttheissuanceofa

standardthatregistrantswillberequiredtoadoptinthefutureand(2)helpthereaderassesstheimpact

thestandardwillhaveonthefinancialstatementsoftheregistrantwhenitisadopted.

14.79 InthecontextofStatement160,theregistrantgenerallyshouldconsiderprovidingthefollowing

SAB74disclosures:

• AbriefdescriptionofStatement160,includingtheregistrant’srequireddateofadoption(see

14.47).• Theimpactthattheregistrant’sadoptionofStatement160isexpectedtohaveonitsfinancial

statements,unlessthisimpactisunknownornotreasonablyestimable,inwhichcasethis

shouldbestated.Theregistrantshouldconsiderdisclosingthefollowingitems:

o Changesinthepresentationofthenoncontrollinginterestontheconsolidated

statementoffinancialposition,consolidatedincomestatement,andconsolidated

statementofchangesinequity(see12.08–12.18).

o Anychangesinhowtheentityallocatesnetincomeorlossesbetweentheparentand

thenoncontrollinginterest(e.g.,ifthecarryingamountofthenoncontrollinginterest

inanunprofitablesubsidiaryis$0)(see14.60–14.64).

o AnyeffectsthatStatements160and157willhaveontheentity’sgoodwillimpairmenttests,includingfutureallocationsofanygoodwillimpairmentsbetweentheparent

andthenoncontrollinginterest(see14.65–14.75).

o OtheranticipatedimpactsofStatement160onfuturetransactionsbetweenthe

parentandthenoncontrollingshareholders.

• Thepotentialimpactofothersignificantmattersthattheregistrantbelievesmightresultfrom

theadoptionofStatement160(e.g.,plannedorintendedchangesinbusinesspractices).

14.80 PrivateentitiesshouldalsogenerallyprovidethedisclosuresrequiredbySAB74.

4 Seefootnote1.





SEC Amendments

14.81See14.37fortheSEC’splanstoupdateRegulationS-XandvariousSECStaffAccountingBulletins

thatconflictwithStatement160asofthedateofthispublication.Seealso14.38regardingtheSEC’s

recentreleaseofitsFinancialReportingManual .



A.01 ThisAppendixdiscusseskeydifferencesbetweentheguidanceinStatement141(including

relatedinterpretiveguidanceandpractices)andthenewguidanceinStatement141(R).

Scope

A.02 Thetablebelowhighlightsdifferencesbetweenthestandards.

Statement 141 Statement 141(R)

Entitiesfollowedapurchasemodel(i.e.,anacquisitionofnetassetsthatconstituteabusinessoranacquisitionofequityinterestsinabusinessthatresultsincontroloverthatentity).MutualentitiesdidnotfollowtheguidanceinStatement141becauseitseffectivedatewasdeferreduntilinterpretiveguidancewasissuedfortransactionsinvolving

suchentities.

Entitiesfollowacontrolmodel(i.e.,anytransactionoreventinwhichanentityobtainscontroloverabusiness).Mutualentitiesareincludedinitsscope.However,likeStatement141’sscope,itsscopeexcludes(1)formationsofjointventures,(2)assetacquisitionsthatdonotconstituteabusiness,(3)combinationsofentitiesunder

commoncontrol,and(4)combinationsofnot-for-profitorganizationsoracquisitionsofafor-profitbusinessbyanot-for-profitorganization.(SeeSection 1.)

A.03 ThescopechangesinStatement141(R)helpeddrivetheterminologyswitchfrom“purchase

method”to“acquisitionmethod.”UnderStatement141,abusinesscombinationoccurredwhen

anentityacquirednetassetsthatconstitutedabusinessoracquiredequityinterestsofanentityand

obtainedcontrolofthatentity.UnderStatement141(R),abusinesscombinationcanoccurviaany

transactionoreventinwhichtheacquirerobtainscontrolofoneormorebusinesses,notjustviaan

acquisition.Forexample,CompanyAholdsamajorityvotinginterestinCompanyB,butdoesnot

controlthatentitybecauseanotherinvestorhasminorityvetorights.Ifsuchminorityvetorightslapse

andasaresultCompanyAgainscontrolofCompanyB,theacquisitionmethodofaccountingforabusinesscombinationappliesatthattimeinaccordancewithStatement141(R),eventhoughno

considerationwastransferred(seeparagraph49ofStatement141(R)).

A.04 Formutualentities,Statement141essentiallydeferredtheeffectivedateofthestandarduntil

interpretativeguidanceforsuchtransactionswasissued.BeforetheissuanceofStatement141(R),no

suchinterpretiveguidancewasissued.MutualentitiesareexplicitlyincludedinthescopeofStatement

141(R),withnodeferredeffectivedate,andthereforesuchentitiesmustnowaccountforbusiness

combinationsinaccordancewiththatguidance.

Definition of a Business



Issue98-3definedabusinessandprovidedrelatedapplicationguidance.Anentityneededinputs,processes,andoutputstoqualifyasabusiness.

Thedefinitionofabusinessisbroadenedandclarifiedwithadditionalapplicationguidance.Anentitynolongerneedstohaveoutputsorbeself-sustainingtoqualifyasabusiness.Issue98-3isnullified.(See1.08–1.11.)

A.06 Statement141(R)nullifiesIssue98-3andincorporatesitsdefinitionofabusiness,withsome

importantmodifications.Forexample,toqualifyasabusinessunderStatement141(R),anentityno

Appendix A — Differences BetweenStatements 141 and 141(R)





longerhastobe“self-sustaining,”andagroupofassetsnolongerneedstohaveoutputs.Thatis,

development-stageentitiescanbebusinessesunderStatement141(R).Asaresult,sometransactions

thatwouldhavebeenaccountedforasassetacquisitionsunderStatement141willinsteadbebusiness

combinationsunderStatement141(R).

Determining the Acquisition DateA.07 Thetablebelowhighlightsdifferencesbetweenthestandards.


Businesscombinationswereaccountedforonthedatethetransactionclosedorthedatetheacquirerobtainedcontroloftheacquiree.Incertaincircumstances,aconveniencedateexceptionallowedanacquisitiondatetobedesignatedattheendofamonthoraccountingperiod.

Businesscombinationsareaccountedforontheacquisitiondate,whichisthedatetheacquirerobtainscontroloftheacquiree.However,thisdatemaynotnecessarilybetheclosingdateofthetransaction.Thereisnoconveniencedateexception.(See3.01–3.03.)

A.08 LikethoseunderStatement141,businesscombinationsunderStatement141(R)shouldbe

recordedasofthedatetheacquirerobtainscontroloftheacquiree,generallyreferredtoasthe

“acquisitiondate.”

A.09 TheacquisitiondateisimportantbecauseunderStatement141(R),onthisdate:

• Thefairvalueoftheassetsacquired,liabilitiesassumed,andnoncontrollinginterestsis

measured(see3.13).

• Thefairvalueoftheacquiredbusinessismeasured(see5.39).

• Thefairvalueoftheacquirer’sequitysecuritiesissuedtothesellerismeasured(see6.04).

• Theacquirerbeginsconsolidatingtheacquiredbusiness’sbalancesheet,resultsofoperations,

andcashflows.

Measurement Date for Marketable Equity Securities of the Acquirer Issued toEffect a Business Combination



Thevalueoftheacquirer’smarketableequitysecuritiesweremeasuredovertheperiodofafewdaysbeforeandafterthetermsofthebusinesscombinationwereagreedto

andannouncedinaccordancewithIssue99-12.

Theacquirer’sequitysecuritiesissuedasconsiderationinabusinesscombinationaremeasuredatfairvalueasoftheacquisitiondate.(See6.04.)

A.11 Statement141(R)requiresthatequitysecuritiesoftheacquirer,issuedasconsiderationina

businesscombination,berecordedatfairvalueasoftheacquisitiondate.UnderStatement141,in

conjunctionwithIssue99-12,theacquirer’sequitysecuritieswerevaluedoveraperiodofafewdays

beforeandafterthetermsofthebusinesscombinationwereagreedtoandannounced.Becausethe

valueofsecuritiesmaychangesignificantlybetweenthedatethetermsofthetransactionareagreed

toandannouncedandtheacquisitiondate,theamountsrecordedasconsiderationmightdiffer

substantiallyunderStatement141(R)fromthosethatwouldhavebeenrecordedunderStatement141.







whichadjustmentstoprovisionalamountsweregenerallyaccountedforprospectivelyasachangein

accountingestimatewhenthenewinformationwasreceived.

Example A-2

Adjustments to Provisional Measurement Made During the Measurement Period

CompanyAacquires100percentofCompanyMonNovember1,20X9.CompanyAhasafiscalyear-endofDecember31.AspartoftheacquisitionofCompanyM,CompanyAhiredanindependentappraisalfirmtovaluetheassetsacquiredandliabilitiesassumed(the“netassets”).ThisappraisalisnotcompletebeforeCompanyAissuesitsfinancialstatementsfortheyearendedDecember31,20X9.Therefore,CompanyArecordstheassetsacquiredandliabilitiesassumedatprovisionalamountswhenfilingitsDecember31,20X9,financialstatements.Aspartofthisprovisionalallocation,theacquiredproperty,plant,andequipment(PP&E)isassignedavalueof$450,000.ThisPP&Ehasaremainingusefullifeofthreeyearsasoftheacquisitiondateanddepreciationisrecordedonastraight-linebasis.CompanyAreceivesthefinalappraisalofthenetassetsonApril1,20Y0.Intheappraisal,thefairvalueofthePP&Easoftheacquisitiondateisdeterminedtobe$480,000.

UnderStatement141(R),CompanyAisrequiredtoretrospectivelyadjustits20X9financialinformationasfollows:

• PP&EisincreasedonDecember31,20X9,by$28,333,calculatedasthe$30,000increaseinthefairvalueofthePP&E,less$1,667ofadditionaldepreciationexpensethatwouldhavebeenrecordedhadtherevisedfairvaluebeenusedasoftheacquisitiondate.

• Goodwillisdecreasedby$30,000onDecember31,20X9.

• DepreciationexpensefortheyearendedDecember31,20X9,isincreasedby$1,667,representingtheadditionaldepreciationexpensefor20X9onthebasisoftherevisedfairvalueofthePP&E.

UnderStatement141,CompanyAwouldhaverecordedalloftheseadjustmentsonApril1,20Y0,andrecognizedtheincrementaldepreciationexpenseprospectivelyasachangeinaccountingestimate.

Adjustments to Valuation Allowances for Acquired Deferred Tax Assets andUncertain Tax Positions



Adjustmentsweregenerallyrecordedtogoodwill(notsubjecttotheup-to-one-yearallocationperiod).Ifnogoodwillremained,othernoncurrentintangibleassetswouldfirstbereducedtozero,thentheremainingamountrecordedasareductionofincometaxexpense.

Adjustmentsthatoccurafterthemeasurementperiodaregenerallyrecordedasacomponentofincometaxexpense.Adjustmentsduringthemeasurementperiodwouldgenerallyberecordedasacomponentofgoodwillunlesstheadjustmentrelatestoanidentifiableeventthatoccurredafterthebusinesscombination.Inthatcase,theadjustmentwouldberecordedtoincometaxexpense.(See14.03.)

A.16 UnderStatement141,decreasesinavaluationallowanceforacquireddeferredtaxassetsand

allchangesuncertaintaxpositionbalancesweregenerallyrecordedthroughgoodwill,regardlessofwhethersuchchangesoccurredduringtheallocationperiodorthereafter.However,underStatement

141,increasesinvaluationallowanceswererecordedasacomponentofincometaxexpense.Statement

141(R)requiresthatanyadjustmentstoanacquiredentity’svaluationallowancesfordeferredtax

assetsanduncertaintaxpositionbalancesthatoccurafterthemeasurementperiodarerecordedasa

componentofincometaxexpense.ThisrequirementunderStatement141(R)appliestoallbusiness

combinations,regardlessoftheconsummationdate.Inotherwords,thisrequirementistheone

transitionprovisionthatcouldaffectthefutureaccountingforbusinesscombinationsconsummated

beforeStatement141(R)’seffectivedate.





Example A-3

Adjustments to Acquired Deferred Tax Assets

CompanyAacquires100percentofCompanyM.Aspartoftheacquisition,CompanyAacquired$1millionofdeferredtaxassets(DTAs)previouslyrecordedbyCompanyMandrecognizeda$400,000valuationallowanceduetouncertaintyaroundtherealizationoftheDTAs.

Scenario1—Sixmonthsaftertheacquisitionclosesandwithintheallocation/measurementperiod,CompanyAdeterminesthat,basedonfactsandcircumstancesthatexistedattheacquisitiondate,CompanyMshouldhaverecorded$100,000lessofavaluationallowanceagainsttheacquireddeferredtaxassets.


UnderStatement141,decreasestovaluationallowancesonDTAsweregenerallyrecordedtogoodwillregardlessofwhetherthechangesrelatetofactsandcircumstancesexistingattheacquisitiondate.

BecausethedecreasetothevaluationallowanceontheDTAsiswithintheone-yearmeasurementperiodandrelatedtofactsandcircumstancesthatexistedasoftheacquisitiondate,suchadjustmentwasrecordedtogoodwillasfollows:

ValuationallowanceonDTAs $100,000

Goodwill $100,000 ValuationallowanceonDTAs $100,000

Goodwill $100,000

HadtheadjustmenttothevaluationallowancesonDTA’srelatedtoanidentifiableeventoccurringaftertheacquisitiondate,CompanyAwouldhaverecordedthefollowingentry:

ValuationallowanceonDTAs $100,000

Incometaxexpense $100,000

Scenario2—Eighteenmonthsaftertheacquisitioncloses,CompanyAdeterminesthatCompanyMshouldhaverecorded$100,000lessofavaluationallowanceagainsttheacquiredDTAs.


DecreasestothevaluationallowanceonDTAswerenotsubjecttotheup-to-one-yearallocationperiodand

thereforeweregenerallyrecordedagainstgoodwill.Therefore,CompanyArecordedthefollowingentry:

AdjustmentstothevaluationallowanceonDTAsoccurringoutsidetheone-yearmeasurementperiodarerecordedto

theincomestatement.Therefore,CompanyArecordedthefollowingentry:

ValuationallowanceonDTAs $100,000 ValuationallowanceonDTAs $100,000

Goodwill $100,000 Incometaxexpense $100,000

Recognition of Deferred Tax Assets



Nodeferredtaxassetswererecognizedasoftheacquisitiondateiftaxdeductiblegoodwillexceededgoodwillrecordedaspartofthepurchaseaccountingforbookpurposes.

Deferredtaxassetsshouldberecognizedaspartoftheacquisitionaccountingiftaxdeductiblegoodwillexceedsgoodwillrecordedaspartoftheacquisitionaccountingforbookpurposes.(See8.45.)





Acquisition-Related Costs



Directcostsoftheacquisitionwerecapitalizedaspartofthebusinesscombinationaccounting(i.e.,generallyingoodwill).

Directcostsoftheacquisitionareaccountedforseparatelyfromthebusinesscombinationandgenerallyexpensedasincurred.(See6.31.)

A.19 Directandincrementalcostsincurredasaresultofthebusinesscombination(e.g.,dealfees

forlegal,accounting,andinvestmentbankingservices)mustbeexpensedasincurred,whichisa

significantchangefromStatement141.Costsincurredfortheissuanceofdebtorequitysecuritiesto

effectthecombinationarenotwithinthescopeofStatement141(R)andwouldbeaccountedforin

accordancewithotherapplicableGAAP.Statement141(R)alsostipulatesthatanagreementbythe

acquirertoreimbursetheacquireeoritsformerownersforpayingtheacquirer’sacquisition-relatedcosts

isatransactionthatisseparatefromthebusinesscombination.Inotherwords,thesecostsmustbe

expensedandexcludedfromtheacquisitionmethodaccounting.

Partial Acquisitions



Onlythecontrollinginterest’sportionoftheassetsacquiredandliabilitiesassumedwererecordedatfairvalueaspartofpurchaseaccounting.

Whencontrolisobtained,100percentoftheassetsandliabilitiesoftheacquireearerecordedbytheacquireratfairvalue.Thisistrueeveniflessthan100percentoftheacquireeisobtained.(See1.27.)

A.21 Statement141(R)requirescompaniestorecord100percentofthefairvalueofassetsacquired

andliabilitiesassumedwhencontrolisobtained,eveniflessthan100percentofabusinessisacquired.

ThisdiffersfromStatement141anditsrelatedinterpretiveguidance,whichrequiredthatonlythe

controllinginterest’sshareoftheassetsacquiredandliabilitiesassumedberecognizedatfairvalueand

theremainderatbookvalue.TheFASBreasonedthatonceanacquirerobtainscontrolofanentity,it

controlsallofanasset,notjustaportionofit.

A.22 Asabasicexample,ifthefairvalueoftheacquiredbusiness’snetassetswas$10millionand

theacquirerpurchased80percentofthebusiness,Statement141(R)wouldrequiretheacquirer

toconsolidate$10millionworthofnetassetsinitsfinancialstatementsasoftheacquisitiondate.However,ifunderpriorGAAPthenetassetsacquiredhadabookvalueof$6millionasofthe

acquisitiondate,theacquirerwouldconsolidateonly$9.2millionofnetassets(80percentof$10

millionplus20percentof$6million).

A.23 UnderStatement141(R),theacquisitionofaless-than-100percentcontrollinginterestinanother

entitywillmostlikelyresultinagreateramountofdepreciationandamortizationexpenseinthe

postcombinationincomestatementthanwouldhavebeenrecognizedunderStatement141.





Initial Measurement of the Noncontrolling Interest in a Subsidiary



Thenoncontrollinginterest(previously“minorityinterest”)wasrecordedatitscarryingvalue.Nogoodwillwasallocatedtothenoncontrollinginterest.

Thenoncontrollinginterest’sshareofthefairvalueofnetassetsacquiredisrecorded,includingitsshareofgoodwill.(See7.11.)

A.25 Statement141referredtononcontrollinginterestsas“minorityinterests,”butthemeaningof

thetermsisthesame.Anoncontrollinginterestistheportionofasubsidiary’sequitythatisattributable

totheownersofthesubsidiary,otherthanitsparentoritsparent’saffiliates,whenthesubsidiary

iscontrolledbyitsparentandisincludedinitsparent’sconsolidatedfinancialstatements.Typically,

noncontrollinginterestsrepresentlessthana50percentinterestinanentity.However,anoncontrolling

shareholderinavariableinterestentitymightownmorethan50percentofthevotingstockofthe

entity(evenupto100percent)becausethecontrollingentityexercisescontrolbyothermeans.

A.26 Thenoncontrollinginterestwillbemeasuredinitiallyatfairvalue(insteadofbookvalue,as

previouslyrequired),whichrepresentsitsshareinthefairvalueoftheidentifiableassetsacquiredand

liabilitiesassumed,plusitsshareofgoodwill.

Example A-4

Acquisition of a Controlling Interest but Not 100 Percent of an Entity

CompanyAacquires80percentofCompanyBonJune1,20X9for$90.Ontheacquisitiondate,thefairvalueof100percentofCompanyB’snetassetsis$100andthebookvalueis$60.Thefairvalueofthenoncontrollinginterestis$22.


CompanyAwouldhaveconsolidated$92ofnetassets,calculatedasfollows:

Controllinginterest = $100×80% = $80

Noncontrollinginterest = $60×20% = 12

$92

CompanyAwouldhaverecognized$10ofgoodwill($90–[100×80%]).

CompanyAwillconsolidate$100ofnetassetsandwillrecognizegoodwillof$12([$90+22]–100).Thenoncontrollinginterestwillberecordedat$22.

Recognition of Liabilities Associated With Restructuring or Exit Activities of theAcquiree



EstimatedcostswererecordedasaliabilityinthepurchasepriceallocationifthecriteriainIssue95-3weremet.

Generally,onlycoststhatmeetthecriteriainStatement146asoftheacquisitiondateareincludedinthebusinesscombinationaccounting;allothersareaccountedforseparatelyfromthebusinesscombination.(See4.28.)





A.28 Coststhatanacquirerexpectstoincurinthefuturethatarerelatedtoitsplanstoexitanactivity,

involuntarilyterminateemployees,orrelocateemployeesofanacquireewillnotbeassumedliabilities

oftheacquiree.Inthisregard,Statement141(R)significantlychangesStatement141anditsrelated

interpretiveguidance,underwhichacquirersgenerallyrecordedliabilitiesforrestructuringcostsaslong

asthecriteriainIssue95-3weremet.UnderStatement141(R),iftheacquireehasrecordedliabilities

inaccordancewithStatement146relatedtoplansinplacetoexitanactivity,involuntarilyterminateemployees,orrelocateemployees,suchamountswillbeconsideredliabilitiesassumedbytheacquirer.

Reacquired Rights



RightswererecordedasanidentifiableintangibleassetapartfromgoodwillandmeasuredatfairvalueinaccordancewithIssue04-1.

Rightsarerecordedasanidentifiableintangibleassetapartfromgoodwill.Valueisbasedontheremainingcontractualterm(i.e.,valuedoesnottakeintoaccountwhethermarketparticipantswouldconsiderrenewals).Theassetshould

beamortizedovertheremainingcontractualperiod.(See5.31.)

A.30 Inabusinesscombination,theacquirermayreacquirearightthathadpreviouslybeengranted

totheacquiree(e.g.,alicenseorfranchise).Statement141andIssue04-1stipulatedthatreacquired

rightswereidentifiableintangibleassetsthatmustberecognizedapartfromgoodwill.Statement

141(R)incorporatesmuchoftheguidancefromIssue04-1.However,theBoardaddedguidanceto

Statement141(R)statingthattheassetwouldbemeasuredonthebasisoftheremainingcontractual

term,regardlessofwhethermarketparticipantswouldtakeintoaccountrenewalsinthefairvalue

determination.UnderStatement141anditsrelatedinterpretiveguidance,thefairvaluedetermination

mayhaveincludedexpectedrenewalperiods.Therefore,inthesesituations,reacquiredrightsrepresentanexceptiontothefairvaluemeasurementprincipleinStatement141(R).Inaddition,Statement141(R)

requiresthattheasset,onceacquired,beamortizedovertheremainingcontractualperiod.Finally,ifthe

intangibleassetissoldtoathirdparty,thecarryingamountwouldbeincludedinthegainorlosson

sale.

In-Process Research & Development (IPR&D)



ThefairvalueofacquiredIPR&Dwithnoalternativefutureusewasincludedinthepurchasepriceallocationbutwasimmediatelyexpensed.

ThefairvalueofacquiredIPR&Discapitalizedasanindefinite-livedintangibleassetuntilcompletionorabandonmentoftheassociatedproject.Uponprojectcompletion,theIPR&Dassetisaccountedforasafinite-livedintangibleassetandamortizedovertherelatedproduct’sestimatedusefullife.Iftheprojectisabandoned,theassetisexpensedimmediatelyifthereisnoalternativefutureuseforit.Anycostsincurredpostacquisitionareexpensedasincurred.(See5.26–5.30.)





A.32 Researchanddevelopment(R&D)expendituresmayresultinthedevelopmentofcertain

intangibleassetsbytheacquiredentitythatwouldbeexpensedasincurredinaccordancewith

Statement2(unlesstheyhadanalternativefutureuse).Inotherwords,anacquiredentitywould

probablynotrecordanyassetsonitsbooksbeforetheconsummationofabusinesscombinationrelated

toR&D.However,theacquiredIPR&Dmayrepresentanidentifiableintangibleassettotheacquirer.

A.33 Statement141requiredacquiredIPR&Dassetstobevaluedinthepurchasepriceallocation

andthenimmediatelyexpensed.UnderStatement141(R),acquiredIPR&Dassetsarenotimmediately

expensed.Rather,acquiredIPR&Disaccountedforasanindefinite-livedintangibleassetuntilcompletion

orabandonmentoftheassociatedR&Defforts.Therefore,theseassetswouldnotbeamortized,but

wouldbetestedforimpairmentatleastannually.OncetheR&Dactivitiesarecompleted,theassets

wouldbeamortizedovertherelatedproduct’susefullife.Iftheprojectisabandoned,theassetswould

bewrittenoffiftheyhavenoalternativefutureuse.

A.34 Statement141(R)doesnotchangetheaccountingforR&Dexpendituresincurredoutsideofa

businesscombination.Therefore,anyR&Dexpendituresincurredaftertheacquisitiondatethatrelateto

anacquiredIPR&Dprojectwouldgenerallybeexpensedasincurred.

Example A-5

Acquired IPR&D

CompanyAacquiresCompanyBfor$2million.Thefairvalueoftheassetsacquiredandliabilitiesassumedisasfollows:

Investments $ 900,000

Building 500,000

IPR&D 500,000

Liabilities (100,000)

Netassets $ 1,800,000

Cost 2,000,000Goodwill $ 200,000

Theallocationofassetsacquired,liabilitiesassumed,andgoodwillrecordedisthesameunderStatement141andStatement141(R).However,underStatement141,CompanyAwouldhaveimmediatelyexpensedthe$500,000inthepostcombinationincomestatement.UnderStatement141(R),the$500,000wouldnotbeimmediatelyexpensedandtheassetwouldberecordedinpostcombinationperiodsuntilitis(1)fullyamortized,(2)writtenoffbecauseofabandonmentoftheR&Defforts,or(3)deemedimpaired.





Preacquisition Contingencies



Contractual/Noncontractual Contractual

InitialRecognition —Amountswererecognizedatfairvalue,ifdeterminable,duringtheallocationperiod.Iffairvaluewasnotdeterminable,Statement5wasfollowedifitsrecognitioncriteriaweremetasoftheacquisitiondate.

SubsequentAccounting —Nospecificguidancewasprovided.

InitialRecognition —Amountsarerecognizedatfairvalueasoftheacquisitiondate.(See4.32).

SubsequentAccounting —Liabilitiesaremeasuredatthegreaterof(1)theacquisition-datefairvalueor(2)theamountthatwouldberecordedunderStatement5.Assetsaremeasuredatthelowerof(1)theacquisition-datefairvalueor(2)thebestestimateofthefuturesettlementamount.(See4.34–4.35).

Noncontractual

InitialRecognition —Amountsarerecognizedatfairvalueasoftheacquisitiondateifitismorelikelythannotthatthecontingencymeetsthedefinitionofanassetorliability

inConceptsStatement6.(See4.32.)

SubsequentAccounting —Sameaccountingasforcontractualcontingencies.

A.36 UnderStatement141(R),anacquirermustfirstdeterminewhethercontingentassetsacquired

andliabilitiesassumedarecontractualornoncontractual.Allcontractualcontingenciesarerecognizedat

fairvalueasoftheacquisitiondate.Noncontractualcontingenciesarerecognizedatfairvalueonlyifit

ismorelikelythannot,asoftheacquisitiondate,thatthecontingencygivesrisetoanassetorliability,

asdefinedinConceptsStatement6.Inotherwords,anacquirerrecognizesanoncontractualcontingent

liabilityatfairvalueasoftheacquisitiondateifthereisagreaterthan50percentchancethatthe

acquirerhasassumedapresentobligation.AnacquirershouldaccountforanoncontractualcontingencythatdoesnotmeetthiscriterioninaccordancewithotherGAAP(e.g.,Statement5).Statement141

didnotdistinguishbetweencontractualandnoncontractualcontingencies.UnderStatement141,such

preacquisitioncontingenciesweregenerallyaccountedforunderStatement5,whichoftenmeantthat

noamountwasrecordedasoftheacquisitiondate.

A.37 UnderStatement141(R),whennewinformationabouttheoutcomeofacontingencyis

obtained,acontingentliabilityrecognizedasoftheacquisitiondateshouldsubsequentlybemeasured

atthehigheroftheacquisition-datefairvalueortheamountthatwouldberecognizedunder

Statement5.Similarly,acontingentassetrecognizedasoftheacquisitiondateshouldsubsequentlybe

measuredattheloweroftheacquisition-datefairvalueorthebestestimateofitsfuturesettlement

amount.Anacquirerwouldnotderecognizethecontingentassetorliabilityifitsubsequentlyfallsbelowthemore-likely-than-notthreshold.Rather,acontingentassetwouldbederecognizedwhenitis

collectedorsoldorwhenitsrightsarelost,whereasacontingentliabilitywouldbederecognizedwhen

itissettledortheobligationtosettleiscanceledorexpires.









atfairvaluethantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)

guidance.ThisRoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.




InitialRecognition —Amountsthatweredeterminableasoftheacquisitiondatewereincludedinthecostoftheacquiredbusiness.

InitialRecognition —Amountsarerecordedattheiracquisition-datefairvalueregardlessofwhethertheconsiderationisclassifiedasaliabilityorequity.(See6.23.)

SubsequentAccountingforLiabilitiesandEquity —Distributionsuponresolutionofcontingenciesthatwerebasedon(1)earningsresultedinadditionalcostoftheacquiredbusinessor(2)securitiespricesdidnotchangetherecordedcostoftheacquiredbusiness.

SubsequentAccountingforLiabilities—Amountsareremeasuredtofairvalueasofeachreportingdateuntilthecontingencyisresolved.ThechangesinfairvaluearerecognizedinearningsunlessthearrangementisahedginginstrumentforwhichStatement133,asamendedbyStatement141(R),requireschangestoberecognizedinothercomprehensiveincome.(See6.25and6.27.)

SubsequentAccountingforEquity—Amountsarenotremeasured.(See6.26.)

A.39 Contingentconsiderationrepresentsobligationsoftheacquirertotransferadditionalassets

(e.g.,cash)orequityintereststotheformerownersoftheacquiredentityifspecifiedfutureevents

occurorconditionsaremet.UnderStatement141,contingentconsiderationwasgenerallyrecorded

whenthecontingencywasresolved.Therefore,nothingwastypicallyrecordedasoftheacquisitiondate

forcontingentconsiderationarrangements.UnderStatement141(R),thefairvalueofallcontingent

considerationisrecordedintheacquisitionmethodaccountingasoftheacquisitiondate.Arrangements

classifiedasliabilitiesarealsorequiredtoberemeasuredtofairvalueattheendofeachreportingperiod

untiltheirsettlement,withchangesinfairvaluegenerallyrecognizedinearnings.




Lackofguidanceresultedindiverseaccountingforindemnificationassets.

Entitiesgenerallymeasureanindemnificationassetatthesameamountasitsassociatedliability(lessanycontractuallimitationsoranallowanceforcollectibility),evenifthismeasurementisnotfairvalue.(See4.46.)





A.41 Inabusinesscombination,thesellermayindemnifytheacquirerfortheresolutionofa

contingencyoruncertaintythatrelatestoaspecificassetorliability.Forexample,thesellermay

indemnifytheacquirerforspecifiedlossesoveracertaindollarthresholdwhenthelossesareassociated

withalawsuitthatpredatedthebusinesscombination.Insuchacase,theacquirerhasacquiredan

indemnificationassetaspartofthebusinesscombination.Statement141(R)requiresthattheasset

bemeasuredonthesamebasisastheliability(lessanycontractuallimitationsoranallowanceforcollectibility),evenifthismeasureisnotfairvalue.

Example A-6


OnJune15,20X9,CompanyAacquired100percentofCompanyB.Beforetheacquisition,CompanyBhada$1millionliabilityrelatedtoanuncertaintaxpositionthatwasrecognizedinaccordancewithInterpretation48.Inapplyingtheacquisitionmethodofaccounting,CompanyAmustfollowInterpretation48and,therefore,recognizea$1millionliabilityrelatedtoCompanyB’suncertaintaxposition(CompanyAagreedwithCompanyB’sanalysisoftheuncertaintaxposition).Aspartoftheacquisition,theformerownersofCompanyBagreedtoindemnifyCompanyAforanylossesrelatedtothetaxposition(includingthe$1millionliabilityrecognizedbyCompanyA).Statement141(R)requiresthatCompanyArecordanindemnificationassetatthesameamountastheliability:$1million(thisassumesthatcollectibility

isnotindoubt),eventhoughthisamountmostlikelydoesnotrepresentfairvalue(i.e.,themeasurementrequirementsofInterpretation48arenotfair-valuebased).

Step Acquisitions



Anacquirerwithapreexistingequityinterestintheacquireeonlyrecordedthefairvalueoftheincrementalinterestthatwasacquired.Theremainingnoncontrollinginterestwasrecordedathistoricalbookvalue.

Anacquirerrecords100percentofthefairvalueoftheacquireeoncecontrolisobtained.Againorlossisrecognizedonthepreexistingequityinterestheldbytheacquirer.Onceanacquirerobtainscontroloftheacquiree,subsequenttransactionsarerecordedwithinequityanddonotresultinaremeasurementevent.(See5.41.)

A.43 “Stepacquisitions”occurwhencontrolofabusinessisobtainedaftertheacquireralready

ownsanoncontrollinginterestintheacquiree’sequity.UnderStatement141(R),inastepacquisition,

theacquirer’spreexistinginterestintheacquireeisremeasuredtoitsfairvalue,witharesultinggain

orlossrecordedintheincomestatementuponconsummationofthebusinesscombination.Afterthe

preexistinginterestisremeasuredtofairvalue,itisincludedinthefairvalueoftheentirebusiness

acquired.

A.44 Furthermore,oncecontrolisobtained,acquisitionsanddispositionsofnoncontrollinginterestsin

thesubsidiaryareaccountedforasequitytransactionsunderStatement160(i.e.,aslongascontrolis

retained,subsequentacquisitionsanddispositionsofequityinterestswillnotresultinagainorloss).





Example A-7

Step Acquisitions

CompanyApurchasesa35percentinterestinCompanyFfor$2milliononJanuary1,20X8.CompanyAusestheequitymethodtoaccountforits35percentinterestinCompanyF.CompanyA’sequityintheincomeofCompanyFfromJanuary1,20X8,totheendofDecember31,20X9,is$500,000;asaresult,thebookvalueofCompanyA’sinterestinCompanyFasofDecember31,20X9,is$2.5million.

OnDecember31,20X9,CompanyApurchasesanadditional40percentinterestinCompanyFfor$4million.Onthisdate,thetotalfairvalueofCompanyFis$10million(assumingthereisnocontrolpremium)andthefairvalueof35percentofCompanyFis$3.5million.


OnDecember31,20X9,CompanyAaccountsfortheacquisitionofcontrolofCompanyFasabusinesscombinationinwhichthefairvalueoftheadditional40percentinterestacquiredisrecorded.Thepreviouslyheld35percentinterestwasnotremeasuredonthisdate.Theremaining25percentnoncontrollinginterestwasrecordedbyCompanyAatitshistoricalcost.

OnDecember31,20X9,CompanyA’sexisting35percentinterestinCompanyFisremeasuredto$3.5million,resultinginagainof$1million($3.5millionlessthe$2.5millionbookvalue)intheincomestatement.Inaddition,CompanyAwouldthenaccountfortheacquisitionofcontrolofCompanyFasabusinesscombinationinwhichthefairvaluesofthecontrollinginterestandnoncontrollinginterestsare$7.5millionand$2.5million,

respectively.

Valuation Allowance for Assets Recorded at Fair Value



Generally,assetswererecognizedatpresentvaluelessallowancesforuncollectibilityandcollectioncosts.

AssetsarerecognizedatfairvalueinaccordancewithStatement157,withnoseparatevaluationallowance.(See4.03.)

A.46 Separatevaluationallowancesarenotrecognizedonassetsthatarerecordedatfairvalueasof

theacquisitiondate.Statement141(R)requiresthatreceivables,includingloansreceivable,berecorded

atfairvalue.Fairvaluemeasurementsincorporateassumptionsaboutcollectionrisk,obviatingtheneed

foraseparatevaluationallowance.Thus,theimpactofanuncollectiblereceivablebecomingcollectible

aftertheacquisitiondateisnotrecordeduntilreceiptofpayment.

A.47 UnderStatement141,acquiredloansandreceivablesweregenerallyrecordedatthepresent

valueofamountstobereceived,whichweredeterminedusingappropriateinterestrateslessallowances

foruncollectibilityandcollectioncosts,ifnecessary.However,forloanswithinitsscope,SOP03-3may

havelimitedtheamountofanacquiree’sallowanceforloanlossesthatcouldbecarriedforwardinabusinesscombination.





Assets That an Acquirer Intends Not to Use or Use in a Way Other Than TheirHighest and Best Use


Statement 141 Statement 141(R)Practicewasdiverse;typicallyassetswereassignednovalue,ortheirvaluerelatedonlytotheperiodofexpecteduse.

AssetsarerecordedatfairvaluepursuanttoStatement157andaccordingtotheirhighestandbestuse.(See4.02 and 5.09.)

A.49 Anacquirermaydecidenottouseanacquiredassetforcompetitiveorotherreasons.For

example,anacquirermaydecidenottouseanacquiredbrandnamebecauseitbelievesthatitsown

brandisbetterpositionedinthemarketplace.Ifanacquirerdecidesnottouseanacquiredasset,but

woulddefendsuchassetifacompetitorattemptedtousetheasset,itisstillgenerallyrequiredto

recognizetheassetandmeasureitatfairvalueinaccordancewithStatement157.Thisvaluationwould

needtoreflecttheasset’shighestandbestuse,fromamarketparticipant’spointofview,bothasof

theacquisitiondateandinsubsequentimpairmenttests.PracticewasdiverseunderStatement141,

andsuchassetsweretypicallyassignedeithernovalueoravaluethatrelatedonlytotheperiodof

expecteduse.

Bargain Purchase (an Excess of Fair Value of Acquired Net Assets Over Cost)



Theexcessofthefairvalueofthenetassetsacquiredover

thefairvalueoftheconsiderationtransferred(negativegoodwill)reducedcertainnoncurrentassetsonaproratabasis.Anyamountoftheexcessthatremainedaftertheseassetswerereducedtozerowasrecognizedasanextraordinary gain.

Againisrecognizedintheperiodtheacquisitionoccurs.

Thegainiscalculatedastheexcessofthefairvalueofthenetassetsacquiredoverthesumof(1)thefairvalueoftheconsiderationtransferred,(2)thefairvalueofanypreviouslyheldequityinterests,and(3)thefairvalueofanynoncontrollinginterests.Thereisnoproratareductionofcertainnoncurrentassets.(See5.42–5.45.)

A.51 Whilenotexpectedtobecommon,abargainpurchaseoccursunderStatement141(R)when

theaggregateofthefairvalueofthe(1)considerationtransferred,(2)noncontrollinginterestsinthe

acquiree,and(3)acquirer’spreviouslyheldequityinterestintheacquireeislessthanthefairvalueofthe

netassetsacquired.Abargainpurchasemayoccurif,forexample,theacquiredentityispurchasedina

forcedliquidationordistresssale.

A.52 Statement141(R)requirestheacquiringentitytodouble-checkitscalculationsbeforeconcluding

thatabargainpurchaseexists.Ifthesameconclusionisreached,anyfurtherexcessisrecognizedasa

gainintheincomestatementasoftheacquisitiondate.

A.53 UnderStatement141,nogainwasrecordeduntilcertainothernoncurrentassetsacquired(e.g.,

intangible,long-lived,andothernoncurrentassets)werereducedtozero.Also,anygainsfrombargain

purchaseswereclassifiedasextraordinaryundercurrentStatement141,whereasunderStatement

141(R)theyarenotconsideredextraordinarygains.





Example A-8

Bargain Purchase

CompanyAacquiresCompanyBfor$500,000.Thefairvalueoftheassetsacquiredandliabilitiesassumedareasfollows:

Investments $ 900,000

Building 500,000

Trademark 500,000

Liabilities (100,000)

Netassets $ 1,800,000

Cost 500,000

Excess $ 1,300,000

UnderStatement141,CompanyAwouldhavereduced,onaproratabasis,certainnoncurrentassets(i.e.,thebuildingandtrademark)andthenrecordedtheremainingexcess($300,000)asanextraordinarygainasfollows:

Value After ProAccount Fair Value Rata Reduction

Investments $ 900,000 $ 900,000

Building 500,000 0

Trademark 500,000 0

Liabilities (100,000) (100,000)

NetAssets $ 1,800,000 $ 800,000

Cost 500,000 500,000

Excess $ 1,300,000 $ 300,000

UnderStatement141(R),CompanyAwillrecordtheentireexcess($1.3million)asagain.

Note:Thisexampleisnotintendedtoillustratetheexpectedmagnitudeofagainfromabargainpurchase.

Leveraged Buyouts



TheguidanceinIssue88-16wasfollowed. TheacquisitionmethodofaccountinginStatement141(R)isfollowed.(See1.25.)

A.55 WhileStatement141(R)eliminatesthecomplexaccountingforleveragedbuyouts,itdoesnot

impacttheaccountingforaleveragedrecapitalizationtransaction.





Share-Based Payment Awards Exchanged for Awards Held by the Acquiree’sEmployees



Valueofacquirer’sreplacementawardsrecordedaspartoftotalconsiderationtransferred—Calculatedastheamountattributabletoanyserviceperiodthatwasexecutedbeforetheacquisitiondate,regardlessofwhethertheacquirerwasobligatedtoexchangetheawards.Suchamountdidnotincludetheexcessofthefairvalueofthereplacementawardsoverthefairvalueofthereplacedawards.Thisfairvaluewasmeasuredonthebasisofthetermsofthereplacementawards,evenifsuchawardswerenotfullyvestedontheacquisitiondate.

Valueofacquirer’sreplacementawardsrecordedaspartoftotalconsiderationtransferred—Ifanobligationexists,theacquisition-datefairvalueofthereplacedawardsismultipliedbytheratioofthepastserviceperiodtothegreaterof(1)thetotalserviceperiodor(2)theoriginalserviceperiod(see6.12–6.16).

Valueofacquirer’sreplacementawardsrecognizedascompensationcost—Calculatedastheamount

attributabletotheportionoftheserviceperiodthatoccurredaftertheacquisitiondate,aswellasanyexcessofthefairvalueofthereplacementawardsoverthefairvalueofthereplacedawards.

Valueofacquirer’sreplacementawardsrecognizedascompensationcost —Ifanobligationexists,calculatedas

theexcessofthetotalfairvalueofthereplacementawardslesstheamountrecordedaspartofthetotalconsiderationtransferred.Theacquirerrecognizesthisamountascompensationcostoverthepostacquisitionserviceperiod(see6.15).

A.57 Statement141anditsrelatedinterpretationsrequiredexchangesofemployeestockoptions

tobeincludedinthepurchasepriceeveniftheacquirerwasnotobligatedtoexchangetheawards.

Statement141(R)generallylimitsthisaccountingtosituationsinwhichtheacquirerisobligated

toreplacesuchawards.Notethatfairvalueasdescribedaboveisdeterminedinaccordancewith

Statement123(R).

A.58 ThemethodunderStatement141(R)preventsanacquirerthatacceleratesvestingofreplacement

awardsaspartoftheexchangefromreducingtotalcompensationcostinfutureperiods.Anyexcessfair

valueofthereplacementawardswillstillberecordedbytheacquirerascompensationcost.

Pension and Other Postretirement Benefit Obligations



Iftheplanoftheacquireewasexpectedtobeterminated

orcurtailedpostacquisition,suchexpectationsshouldhavebeenconsideredwhentheentitymeasuredtheacquisition-dateprojectedandaccumulatedpostretirementbenefitobligationsthatwereassumedbytheacquirer.

Iftheplanoftheacquireeisexpectedtobeterminatedor

curtailedpostacquisition,suchexpectationsshould notbeconsideredwhentheentitymeasurestheacquisition-dateprojectedandaccumulatedpostretirementbenefitobligationsthatareassumedbytheacquirer.(See4.43.)

A.60 UnderStatement141(R),anychangestoanacquiree’sdefinedbenefitplansthatanacquireris

notrequiredtomakedonotaffecttheamountrecordedintheacquisitionmethodaccounting.Rather,

anysuchamendmentsthataremadebytheacquirertotheacquiree’sdefinedbenefitplansaffectthe

postcombinationfinancialstatements.





Disclosure Additions, Modifications, and Deletions



Specificminimumdisclosurerequirementswerespecifiedinparagraphs51–58.

Overallobjectivesarespecifiedfordisclosureofinformationthatwouldbeusefultousersinevaluatingthefinancialeffectsofabusinesscombination.Specificdisclosuresareindicatedthatwillgenerallyberequiredtomeetthoseobjectives.Seeparagraphs67and71.

Nospecificdisclosureswererequiredforacquiredreceivablesotherthantheamountassignedtoreceivables.

Specificdisclosurerequirementsareindicatedforacquiredreceivables,includingfairvalue,grosscontractualamount,andbestestimateofcontractualcashflowsnotexpectedtobecollected.Seeparagraph68(h).

Basicdisclosureswererequiredfortheamountofcontingentconsideration.Seeparagraph51(f).

Expandeddisclosuresofcontingentconsiderationarerequiredthatincludeadescriptionofthearrangement,basisfordeterminingtheamount,andanestimateofthe

rangeofoutcomes.Seeparagraph68(g).Disclosureofsupplementalproformainformationwasrequiredforpubliccompaniesasifthebusinesscombinationwascompletedatthebeginningoftheearliestreportingperiodpresented.Seeparagraph54.

Disclosureofsupplementalproformainformationisrequiredforpubliccompaniesasifthebusinesscombinationwascompletedatthebeginningoftheannualreportingperiod,currentinterimperiod,andcumulativeinterimperiods.Seeparagraph68(r).

Nospecificdisclosureswererequiredforcontingentassetsorliabilitiesotherthantheamountsassigned.

Specificdisclosuresarerequiredforacquiredcontingencies,includingamountsrecognizedoranexplanationofnorecognition,thenatureofamountsrecognizedorunrecognized,andtheestimatedrangeofoutcomes.Seeparagraph68(j).

Nodisclosureswererequiredforacquisition-relatedcosts. Discloseacquisition-relatedcostsandthelineiteminwhich

theyarerecognized.Seeparagraph68(n).

Noncontrollinginterestswerenotaccountedforatfairvalue.

Thefairvalueofthenoncontrollinginterest,andthevaluationtechniquesandsignificantinputsusedtomeasurethefairvalue,mustbedisclosed.Seeparagraph68(p).

Nospecificdisclosureswererequiredforpreviouslyheldinterestsinacquisitionsachievedinstages.

Specificinformationonthepreviouslyheldinterests,andthegainorlossassociatedwithacquisitionsachievedinstages,mustbedisclosed.Seeparagraph68(q).

Disclosureswererequiredforanextraordinarygainrelatedtoabusinesscombination,includingadescriptionofthenatureoftheprincipalitemsenteringintothedeterminationofanextraordinarygain.Seeparagraph56.

Disclosureisrequiredoftheamountofanygainrecognizedinabargainpurchase,thelineitemintheincomestatementwhereitisrecognized,andadescriptionofthereasonswhythetransactionresultedinagain.Seeparagraph68(o).

Nospecificdisclosureswererequiredfortransactionsthatwererecognizedseparately.

Specificdisclosuresarerequiredfortransactionsthatarerecognizedseparatelyfromthebusinesscombination.Seeparagraph68(m).

DisclosureswererequiredoftheamountofIPR&Dassetsacquiredandwrittenoffintheperiod.Seeparagraph51(g).

IPR&Dassetsareaccountedforasintangibleassets,withdisclosuresasrequiredbyStatement142.

Disclosurerequirementsforinterimperiodswerereduced.Seeparagraph58.

Disclosurerequirementsarenotreducedforinterimperiods.



Appendix B — Differences BetweenPre-Amended ARB 51 and Statement 160

B.01 WhileStatement160amendsARB51’sguidanceonaccountingfornoncontrollinginterests

anddeconsolidations,includingrelatedpresentationanddisclosures,itcarriesforwardwithout

reconsiderationmuchoftheexistingguidanceontheconsolidationmodelandpolicies.Thisappendix

comparesthepreviousguidanceinARB51withthenewguidanceinStatement160.

Presentation of Noncontrolling Interests — Consolidated Statement of FinancialPosition

B.02 Thetablebelowhighlightsthedifferencesbetweenthestandards.

Pre-amended ARB 51 Statement 160

Classifyasaliabilityormezzanine(ortemporary)equity. Classifyasaseparatecomponentofshareholders’equity.(See12.11.)

B.03 Referredtoasa“minorityinterest”inStatement141,anoncontrollinginterestistheportionofa

subsidiary’sequitythatisattributabletotheownersofthesubsidiaryotherthanitsparentoritsparent’s

affiliates.(Thatsubsidiaryiscontrolledbyitsparentandisincludedinitsparent’sconsolidatedfinancial

statements.)Typically,anoncontrollinginterestholderownslessthan50percentofanentity;however,

thereareexceptions.Forexample,inthecaseofavariableinterestentityunderInterpretation46(R),a

noncontrollinginterestholdermightownmorethan50percentofthevotingstockoftheentity(even

upto100percent)becausethecontrollingentityexercisescontrolbyothermeans.

B.04 WhileStatement160requiresthatnoncontrollinginterestsberecordedinpermanentequity,

certainnoncontrollinginterestsmayneedtobeclassifiedoutsideofpermanentequityunderother

accountingliterature(e.g.,Statement150,ASR268(FRRSection211),TopicD-98).(See7.05–7.06.)

Fornoncontrollinginterestsnowconsideredpartofpermanentequity,theparentmustapplyStatement

160’spresentationrequirementsretrospectivelyforallperiodspresented.Thereclassificationof

noncontrollingintereststoshareholders’equitymayaffectkeyfinancialstatementratios(e.g.,debt-to-

equity,return-on-equity).





Example B-1

Consolidated Statement of Financial Position Presentation Under Statement 160

XYZ Co.Consolidated Balance Sheets

(in millions)

December 31, 20X9 December 31, 20X8

ASSETS

Totalassets $ 200 $ 180

LIABILITIES

Totalliabilities $ 120 $ 110

Minority interest 25 20

SHAREHOLDERS’EQUITY

Commonstock 15 15

Additionalpaid-incapital 30 30

Retainedearnings 10 5

TotalXYZCo.shareholders’equity 55 50

Noncontrolling interest 25 20

Totalshareholders’equity 80 70

Totalliabilitiesandshareholders’equity $ 200 $ 180

Presentation of Noncontrolling Interests — Consolidated Statement of Income



Recordthenoncontrollinginterest’sshareofearnings(or

losses)asadeduction(oraddition)usedindeterminingconsolidatednetincome.

Allocateconsolidatednetincometotheparentandthe

noncontrollinginterest.(See12.13.)

B.06 BeforeStatement160,theparentgenerallypresentednetincomeattributabletothe

noncontrollinginterestonasinglelineitemintheconsolidatedstatementofincome,between

thedeductionforincometaxesandincomefromcontinuingoperations.AsshowninExampleB-2

below,Statement160requirestheparenttopresentnetincomeattributabletothenoncontrolling

interestonasinglelineitemafter consolidatednetincomeintheconsolidatedstatementofincome.

Therefore,consolidatednetincomenowincludesamountsattributabletoboththecontrollingandthe

noncontrollinginterests.

B.07 Statement160changesneitherthemethodsusedtoallocatenetincomebetweentheparent

andthenoncontrollinginterest(exceptasindicatedinB.12below)northemethodsforcalculating

earningspershare(EPS)(i.e.,basicanddilutedEPSisstillcalculatedsolelyonthebasisofnetincome

attributedtotheparent).However,becauseofthechangeinpresentation,Statement160nowrequires

theparenttodiscloseitsshareofthefollowingconsolidatedamounts:(1)incomefromcontinuing

operations,(2)discontinuedoperations,and(3)extraordinaryitems.







Example B-3

Changes in the Parent’s Ownership Interest in a Subsidiary When There Is No Change in Control

ParentXowns80percentofSubsidiaryAbeforeenteringintothefollowingtwotransactions.Becausethetransactionsareindependent,Xisnotrequiredtoaccountforthemasasingletransaction.

Year 1 Transaction

• ParentXpurchasesanadditional20percentinterestinAfor$50.

• Immediatelybeforethetransaction,thebookvalueofA’snetassetsis$100,ofwhich$80isallocatedtoXand$20isallocatedtothenoncontrollinginterest.

• Asofthetransactiondate,thefairvalueofA’sidentifiablenetassetsis$200.

ParentXaccountsforthistransactionintheconsolidatedfinancialstatementsasfollows:


FairvalueofA’sassets


Goodwill

Cash

Debit Credit

$20

20

10

$50


APIC

Cash

Debit Credit

$20

30

$50

Torecordthestepuptofairvaluefortheacquisitionoftheremaining20percentnoncontrollinginterest([$200×20%]–$20bookvalue).Goodwilliscalculatedas($50–[$200×20%]).

Torecordthedifferencebetween(1)thecarryingvalueofthenoncontrollinginterestand(2)thecashpaidtoacquirethenoncontrollinginterestasadditionalpaidincapital(APIC).

Year 2 Transaction

• SubsidiaryAissuesadditionalstocktounrelatedpartiesfortotalproceedsof$90.

• Afterthetransaction,X’sownershipinterestinAisdilutedfrom100percentto70percent.

• Afterthetransaction,thebookvalueofA’snetassetsis$200,ofwhich$140(70percent)isallocatedtoXand$60(30percent)isallocatedtothenoncontrollinginterest.

ParentXaccountsforthistransactionintheconsolidatedfinancialstatementsasfollows:


Cash


Gain

Debit Credit

$90

$60

30

Cash


APIC

Debit Credit

$90

$60

30

Torecordthenoncontrollinginterestandgainresultingfromtheissuanceofstock.Thisexampleassumesthatthecriteriaforgainrecognitionaremet.

Torecordthenoncontrollinginterestresultingfromtheissuanceofstock.ThedifferencebetweenthecashreceivedandcarryingvalueoftheinterestinSubsidiaryAisrecordedinAPIC.

Accumulated Net Losses Attributable to the Noncontrolling Interest



Generally,limitedtothecarryingamountofthenoncontrollinginterest.

Nolongerlimitedtothecarryingamountofthenoncontrollinginterest.Noncontrollinginterestcouldhaveanegativecarryingbalance.(See7.18.)





B.13 Unlikethepre-amendedARB51,Statement160allowsaccumulatedlossesattributabletothe

noncontrollinginteresttoexceedtheirequityinterestsinthesubsidiary.Thatis,anoncontrolling

interestcanbeinadebitposition(i.e.,anegativenoncontrollinginterest).Whilethischangeis

prospective,Statement160requiresproformadisclosures,intheyearofadoption,ofanysignificant

impactthischangewouldhavehadonthecontrollinginterest’sshareofnetincomeandearningsper

share.(See14.63.)

Parent Deconsolidates a Subsidiary but Retains a Noncontrolling Investment



Noremeasurementofretainednoncontrollinginvestment. Remeasureretainednoncontrollinginvestmenttofairvalueonthedatecontrolislost.(See7.24.)

B.15 Insomeinstances,aparentdeconsolidatesasubsidiarybutretainsanoncontrollinginvestment

inthatformersubsidiary(e.g.,aparentsellsonly75percentofawhollyownedsubsidiary).BeforeStatement160,theformerparentmeasureditsretainednoncontrollinginvestmentasapercentage

ofthesubsidiary’sbookvalueonthedatecontrolwaslost.Inotherwords,theformerparent’snew

investmentbalancewasderivedfromthecarryingvalueoftheformersubsidiaryandnogainorloss

wasrecognizedinconnectionwiththeretainedinvestment.UnderStatement160,theformerparent’s

retainednoncontrollinginvestmentisremeasuredtofairvalueonthedatecontrolislost,thereby

affectingtheoverallgainorlossondeconsolidationoftheformersubsidiary.

Example B-4

Parent Deconsolidates a Subsidiary but Retains a Noncontrolling Investment

OnJanuary1,20X9,ParentXsells75percentofitswhollyownedsubsidiary(Y)toanunrelatedthirdpartyfor$250.Assumethat(1)thebookvalueofYis$100immediatelybeforethetransaction;(2)X’sretained25percentinvestmentinYhasafairvalueof$75asofJanuary1,20X9;and(3)thefairvalueof100percentofYis$325asofJanuary1,20X9.

Thetablebelowillustrateshowtheguidanceinthepre-amendedARB51woulddifferfromthatinStatement160regarding(1)calculationofthegain/lossondeconsolidationand(2)measurementofthecarryingvalueofX’sretainedinvestmentasofthetransactiondate.


Cashproceeds $ 250 $ 250

RetainednoncontrollinginvestmentinY 25 75

275 325

Less:CurrentbookvalueofY (100) (100)

Gain on Sale $ 175 $ 225

Carrying value for former parent’s retained investment

B.16 Inaddition,Statement160requirestheparenttoconsiderwhethermultiplearrangements

shouldbeaccountedforasasingletransaction.(See7.31.)Thisrequirementisintendedtoprevent

companiesfromminimizingearningsimplicationswhendisposingofasubsidiary(e.g.,aparentthat

intendedtosella100-percent-ownedsubsidiaryataloss).Withoutthisrequirement,theparentmay

attempttostructurethesaleintwotransactionsinawaythatminimizesthesale’snegativeeffecton

earnings.Inthefirsttransaction,forexample,theparentmaysell49percent.Sincetheparentretains

control,thelosswouldberecordedinequityandtherewouldbenoeffectonearnings.Inthesecond





transaction,theparentmayselltheremaining51percent.However,sincetheparentnowlosescontrol,

thisportionofthelossisrecordedintheincomestatement.

Disclosure of Changes in Equity That Are Attributable to the NoncontrollingInterest



Nosuchdisclosureswererequiredbecauseentitiesrecordednoncontrollinginterestsoutsideofshareholders’equity.

Discloseeitherintheconsolidatedstatementofchangesinequity,ifpresented,orinthenotestotheconsolidatedfinancialstatements,(1)changesintotalequity,(2)changesinequitythatareattributabletotheparent,and(3)changesinequitythatareattributabletothenoncontrollinginterest.(See13.35.)

B.18 Statement160doesnotexplicitlystatewhichentitiesmustpresentaseparateconsolidated

statementofchangesinequity.Generally,onlySECregistrantsarerequiredtopresentsuchastatement.

Disclosure of Effects of Changes in the Parent’s Ownership Interest



Nospecificdisclosurerequirement. Disclosetheeffectsonequitythatareattributabletotheparentinaseparatescheduleinthefootnotestotheconsolidatedfinancialstatements.(See13.36–13.38.)

B.20 Thisseparatescheduleisonlyrequiredforperiodsinwhichtheparent’sownershipinterestinits

subsidiarychanges.Inaddition,thescheduleexcludeschangesinaccumulatedothercomprehensive

incomethatareattributabletotheparent,akeydifferencefromthedisclosureofchangesinequitythat

areattributabletothenoncontrollinginterest.(SeeB.17.)



Appendix C — Differences BetweenU.S. GAAP and IFRSs

C.01 ThisAppendixdiscusseskeydifferencesbetweenthefollowingstandards:

• Statement141(R)andIFRS3(R)—accountingforbusinesscombinations.

• Statement160andIAS27(R)—accountingfornoncontrollinginterests,changesinaparent’s

ownershipinterest,anddeconsolidations.

• Statement142andbothIAS36andIAS38—accountingforintangibleassetsandgoodwill.

Differences Between Statement 141(R) and IFRS 3(R)

C.02 AlthoughtheissuanceofStatement141(R)andIFRS3(R)markedthecompletionofthemost

significantconvergenceprojecttodatebetweentheFASBandIASB,somedifferencesremainbetween

thestandards.

C.03 Thedifferencesdiscussedinthissectioncanbecategorizedasfollows:(1)differentconclusions

reachedduringthejointbusinesscombinationsconvergenceprojectand(2)differencesoutsidethe

scopeofthejointbusinesscombinationsconvergenceprojectthatstemprimarilyfromreferencesto

otherFASBorIASBstandards.Theboardsintendtoaddresssomeofthelatterdifferencesinfuture

convergenceprojects(e.g.,leases,consolidations,fairvalue,andpostemploymentbenefits).

Different Conclusions Reached During the Joint Business Combinations Convergence Project

Effective Date and Transition

C.04 Thetablebelowhighlightsdifferencesbetweenthestandards.

Statement 141(R) IFRS 3(R)

ApplyprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2008.Earlyadoptionisprohibited.(See14.01.)

ApplyprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterJuly1,2009.Earlyadoptionispermitted.

C.05 Theboardsoriginallyintendedtomaketheeffectivedatesoftherespectivestandards

approximatelythesame.However,becauseofdelaysintheissuanceofthefinalstandards,aswellasthe

IASB’spromisetogiveitsconstituentsatleastan18-monthtransitionperiodfornewlyissuedstandards,theIASBpushedbackitseffectivedate.EarlyadoptionispermittedbytheIASBpartiallybecausethe

revisionstotheexistingguidanceinIFRS3werenotassignificantastherevisionstoStatement141.

EntitieselectingtoearlyadoptIFRS3(R)mustalsoearlyadoptIAS27(R)andconsequentialamendments

toIAS28(R)andIAS31(R)atthesametime.





Scope



Scopeexceptionforcombinationsbetweennot-for-profitorganizationsoracquisitionsofafor-profitbusinessbyanot-for-profitorganization.(See1.47.)

Theprimarybeneficiaryofavariableinterestentity(VIE)underInterpretation46(R)thatmeetsthedefinitionofabusinessmustapplyStatement141(R)uponinitialconsolidationoftheVIE.(See1.17–1.21.)

Noscopeexceptionforcombinationsbetweennot-for-profitorganizationsoracquisitionsofafor-profitbusinessbyanot-for-profitorganization.

TheIASBdoesnothaveavariableinterestconsolidationmodelthatisequivalenttotheFASB’sInterpretation46(R).

C.07 UnlikeU.S.GAAP,IFRSsgenerallydonothavescopelimitationsfornot-for-profitorganizations.

C.08 Whilenotpartofinternationalconvergence,aprojectontheFASB’sagendaaddresses

accountingformergersandacquisitionsinvolvingnot-for-profitorganizations,aswellassubsequent

accountingforgoodwillandotherintangibleassetsforsuchentities.InOctober2006,theFASB

releasedtwoexposuredrafts:Not-for-ProfitOrganizations:MergersandAcquisitionsandNot-for-Profit

Organizations:GoodwillandOtherIntangibleAssetsAcquiredinaMergerorAcquisition.InMay2008,

theFASBrequestedcomments,dueinJuly2008,onpotentialrevisionstotheexposuredraftsand

expectstoissuefinalstandardsinthefirsthalfof2009.

C.09 Along-termgoaloftheFASBandIASBisconvergenceoftheirrespectiveconsolidationmodels

andguidance,buttheyhavemadenosignificantprogresstodate.SeeC.31belowforacomparison

ofthedefinitionofcontrolunderU.S.GAAPandIFRSs.(Notethatthedefinitionsfalloutsidethescope

ofthejointbusinesscombinationsconvergenceproject.)OnDecember18,2008,theIASBissuedan

exposuredraft,ED10,ConsolidatedFinancialStatements ,whichwouldmodifythedefinitionofcontrolunderIFRS.Thisexposuredocumentwasnotissuedaspartofajointconvergenceprojectwiththe

FASB.

C.10 TransactionsbetweenentitiesundercommoncontrolarenotinthescopeofStatement141(R)

andIFRS3(R).UnderU.S.GAAP,AppendixDofStatement141(R)providessupplementalguidanceon

accountingforthesetransactions(see1.41–1.42).UnderIFRSs,thereiscurrentlynospecificguidance

onaccountingforcommoncontroltransactions.However,inDecember2007theIASBaddedaproject

onthistopictoitsagenda.Intheabsenceofspecificguidance,entitiesreportingunderIFRSsandthat

areinvolvedincommoncontroltransactionsshouldselectanappropriateaccountingpolicybyusingthe

hierarchydescribedinparagraphs10–12ofIAS8.Becausethehierarchypermitstheconsiderationof

pronouncementsofotherstandard-settingbodies,theguidanceoncommoncontroltransactionsinU.S.GAAPmaybeappliedinpractice.





Noncontrolling Interests — Initial Measurement



Measureatfairvalue.Disclosevaluationtechniquesandsignificantinputsused.(See7.07 and13.16.)

Measureatfairvalueorproportionateshareofthefairvalueoftheacquiree’sidentifiablenetassets(i.e.,nogoodwillattributed).Disclose(1)measurementbasisusedand(2)ifmeasuredatfairvalue,valuationtechniquesandsignificantinputsused.

C.12 TheIASBgivesentitiestwooptions,onanacquisition-by-acquisition-basis,formeasuringthe

noncontrollinginterestinabusinesscombinationwherecontrolisobtainedbutlessthan100percent

ofthebusinessacquired.Thefirstistomeasurethenoncontrollinginterestatitsproportionateshareof

thefairvalueoftheacquiree’sidentifiablenetassets,whichisconsistentwithpriorrequirementsinIFRS

3.Thesecondistomeasurethenoncontrollinginterestatfairvalue,whichisconsistentwiththeFASB’s

Statement141(R)requirement.Fairvaluemeasurementsofthenoncontrollinginterest,undereither

standard,includegoodwillattributabletothenoncontrollinginterest.

Example C-1

Comparison of the IASB’s Options for Measuring Noncontrolling Interests

CompanyAacquires65percentofCompanyBinabusinesscombinationfor$750incash,whichrepresentsthefairvalueofthecontrollinginterestandincludesacontrolpremium.Thefairvalueofthenoncontrollinginterestis$350,soforpurposesofthisexampleassumethatthetotalfairvalueofCompanyBis$1,100($750+$350).*Asoftheacquisitiondate,thefairvalueofCompanyB’sidentifiablenetassetsacquired(i.e.,assetsacquirednetofliabilitiesassumed)is$800.

Thefollowingtableillustratesthedifferencebetweenmeasuringthenoncontrollinginterestat(1)fairvalue,asrequiredunderStatement141(R)andoneoftwooptionsavailabletoentitiesapplyingIFRS3(R)and(2)theproportionateshareofthefairvalueoftheacquiree’sidentifiablenetassets,whichistheotheroptionavailabletoentitiesapplyingIFRS3(R):

Fair Value

Proportionate Share ofAcquiree’s Identifiable NetAssets

NetAssetsAcquired $ 800 $ 800

Total Goodwill $ 300** $ 230†

GoodwillAttributedtotheControllingInterest (230)† (230)

GoodwillAttributedtotheNoncontrollingInterest $ 70 $ 0‡

Noncontrolling Interest $ 350 $ 280^

Note:ThisexampleisintendedtohighlightthedifferencebetweenthevaluesofthenoncontrollinginterestunderthetwoacceptablemethodologiesunderIFRS3(R).Itisnotintendedtoillustratethemannerinwhichgoodwilliscalculated.SeeExample5-4foranillustrativeexampleofthecalculationofgoodwillunderStatement141(R),whichwouldbesimilar

underIFRS3(R).

* Thefairvalueofanentityasawholewillnotalwaysequalthesumofthefairvalueofthecontrollinginterestandnoncontrollinginterest.

**FairvalueofCompanyB($1,100)lessfairvalueofCompanyB’sidentifiablenetassetsacquired($800).

† Fairvalueof65percentofCompanyB($750)lessfairvalueof65percentofCompanyB’sidentifiablenetassetsacquired($800×65%,or$520).Underthefairvaluescenario,thecontrollinginterest’sshareofgoodwillisnot65percentofthetotalamountofgoodwillbecauseofthepresenceofacontrolpremium.

‡ Underthisoption,thenoncontrollinginterestdoesnotincludeanyvaluerelatedtothegoodwill.

^ Fairvalueof35percentofCompanyB’sidentifiablenetassetsacquired($800×35%).





Acquired Contingencies — Initial Measurement



Recognizeassetsacquiredandliabilitiesassumedthatarisefromcontractualcontingenciesatfairvalue.Recognizeassetsacquiredandliabilitiesassumedthatarisefromnoncontractualcontingenciesatfairvalueifthecontingencymeetsthemore-likely-than-notthreshold.(See4.32.)

Recognizeacontingentliabilityatfairvalueifit(1)isapresentobligationthatarisesfromapasteventand(2)canbemeasuredreliably.

C.14 Statement141(R)andIFRS3(R)differinthreekeywaysontheinitialmeasurementofacquired

contingencies.First,contingentassetsarenotrecognizedunderIFRS3(R).Second,Statement141(R)has

arecognitionthresholdfornoncontractualcontingencies(i.e.,thecontingencymustmorelikelythan

notgiverisetoanassetoraliabilityinaccordancewithConceptsStatementNo.6toberecognized)

whileIFRS3(R)doesnothaveasimilarthresholdforcontingentliabilities.Thisdifferencemayresultin

morecontingentliabilitiesbeingrecognizedunderIFRS3(R)thanunderStatement141(R).Finally,IFRS

3(R)hasareliabilitythresholdfordeterminingthefairvaluemeasurementofacontingentliability,while

Statement141(R),whichreferstoStatement157’sfairvaluemeasurementguidance,doesnothavea

similarthreshold.

C.15 OnDecember15,2008,theFASBissuedproposedFSPFAS141(R)-a,whichwouldamend

Statement141(R)torequirethatpreacquisitioncontingenciesgenerallybemeasuredatfairvalueasof

theacquisitiondateifsuchamountscanbereasonablydetermined.Itisexpectedthattheguidancein

theproposedFSPwouldresultintherecognitionofmorecontingentassetsandliabilitiesatfairvalue

thantheguidanceinStatement141,butfewerthanthecurrentStatement141(R)guidance.This

RoadmapwillbeupdatedforthefinalguidanceonceitisissuedbytheFASB.

Example C-2

Initial Measurement of an Assumed Noncontractual Contingency — Statement 141(R) andIFRS 3(R)

OnJanuary1,20X9,CompanyAacquiresCompanyBinabusinesscombination.Asoftheacquisitiondate,CompanyBisdefendingapendinglawsuitinwhichtheplaintiffsareclaimingtheirpropertywascontaminatedbypollutantsfromCompanyB’sneighboringfactory.Theplaintiffshaveassertedaclaimof$100millionforthecostsofthecleanup,andCompanyAbelievesthatthereisonlya30percentchancethatthecombinedcompanieswillbefoundliableinacourtoflaw.

BecauseCompanyAestimatesthatitdoesnothaveagreaterthan50percentchanceofbeingfoundliableforthisnoncontractualcontingency,underStatement141(R)themore-likely-than-notrecognitionthresholdisnotmet,and

CompanyAwouldnotrecordanassumedliabilityasoftheacquisitiondate.Insubsequentperiods,CompanyAwouldfollowtheaccountingguidanceinStatement5.

UnderIFRS3(R),becausethecontingencyisapresentobligationthatarisesfromapasteventandcanbemeasuredreliably,CompanyAwouldrecognizealiabilityasoftheacquisitiondatemeasuredatfairvalue.Uncertaintyabouttheoutcomeofthelawsuit,aswellasotheradjustmentssuchasdiscounting,wouldbefactoredintotheliability’sfairvaluemeasurement.Asaresult,thefairvalueoftheliabilityasoftheacquisitiondatewillmostlikelybelessthanthetotalestimatedfutureclaimsof$100million.UnlikeStatement141(R),IFRS3(R)doesnothaveamore-than-likely-than-notrecognitionthresholdforassumedcontingencies.





Acquired Contingencies Recognized as of the Acquisition Date — SubsequentMeasurement



Foracontingentasset,recordthelowerofitsacquisition-datefairvalueorthebestestimateofitsfuturesettlementamount.Foracontingentliability,recordthehigherofitsacquisition-datefairvalueortheamountthatwouldberecognizedunderStatement5.(See4.34–4.35.)

Foracontingentliability,untiltheliabilityissettled,cancelled,orexpired,recordthehigheroftheamountcalculatedunderIAS37ortheacquisition-datefairvaluelesscumulativeamortizationrecognizedunderIAS18(ifappropriate).

C.17 BothStatement141(R)andIFRS3(R)containspecificguidanceonthesubsequentmeasurement

ofacquiredcontingencies.Becausetheguidanceisnotfullyconverged,however,accountingcandiffer

asaresultofthemodelsforcontingenciesunderU.S.GAAP(Statement5)andIFRSs(IAS37).

C.18 NotethattheIASBhasaprojectonitsagendatoreconsidertheguidanceontherecognitionandmeasurementofliabilities,includingcontingentliabilities,underIAS37.Afinalstandardisnot

expecteduntilthesecondhalfof2009.Also,theFASB’sagendaincludesaprojecttoreconsiderthe

disclosurerequirementsforcontingenciesinStatements5and141(R).Afinalstandard,ifissued,would

beeffectiveforfiscalyearsnosoonerthanthoseendingafterDecember15,2009.Thisprojectmay

alsoincludeasecondphaseinwhichtherecognitionandmeasurementrequirementsforcontingencies

wouldbereconsidered.

Operating Leases in Which the Acquiree Is the Lessor



Recognizeanintangibleassetorliabilityapartfromtheacquiredasset(thatissubjecttoanoperatingleaseinwhichtheacquireeisthelessor)ifthetermsoftheleasearefavorableorunfavorable,respectively,relativetocurrentmarkettermsorprices.(See4.18.)

Recognizefavorableorunfavorabletermsoftheoperatinglease,relativetocurrentmarkettermsorprices,aspartofthefairvalueoftheacquiredasset(thatissubjecttoanoperatingleaseinwhichtheacquireeisthelessor);theacquirerdoesnotpresentaseparateintangibleassetorliability.

C.20 BothStatement141(R)andIFRS3(R)requiretheacquirertorecognizefavorableorunfavorable

termsoftheacquiree’soperatingleases.However,theacquirer’spresentationoftherecognizedamounts

differsunderStatement141(R)andIFRS3(R)whentheacquireeisthelessor.UnderStatement141(R),theacquirerpresentsthevalueofthefavorableorunfavorabletermsseparatelyfromtheacquiredasset

(thatissubjecttoanoperatingleaseinwhichtheacquireeisthelessor),whereasunderIFRS3(R),when

acostmodelisfollowed,theacquirerpresentsthevalueofthefavorableorunfavorabletermsaspartof

thefairvalueoftheacquiredassetsubjecttothelease.Despitethedifferenceinpresentation,IAS16’s

requirementforentitiestodepreciateoramortizeseparatelyeachsignificantportionofplant,property,

andequipmentislikelytoresultinsimilardepreciationoramortizationexpenseoverthelifeofthelease

underU.S.GAAPandIFRSs.Inotherwords,thedepreciablelivesanddepreciationmethodsforthe

buildingandthefavorableorunfavorablecomponentoftheoperatingleasemaydiffer.





Example C-3

Acquired Operating Lease in Which the Acquiree Is the Lessor and the Terms Are Favorable toMarket

CompanyCacquiresCompanyDinabusinesscombination.CompanyDhasbeenleasingaportionofitswarehousetoathirdpartyunderalong-termleaseagreementthatisnotrenewableandexpiresfiveyearsaftertheacquisitiondate.Asoftheacquisitiondate,theleaseisfavorableby$10millionrelativetocurrentmarketpricesforsimilarpropertiesinthearea.

Theacquiredwarehousehasanacquisition-datefairvalueof$75million(valued“asifvacant,”whichexcludesthevalueofthefavorablelease;see5.37)andaremainingusefullifeof20years.

UnderStatement141(R),CompanyCwouldrecordtwoidentifiableassetsacquiredasoftheacquisitiondateasfollows:(1)abuildingwithafairvalueof$75millionand(2)afinite-livedintangibleassetwithafairvalueof$10million.Thebuildingandintangibleassetwouldbeamortizedovertheirremainingusefullivesof20and5years,respectively.

UnderIFRS3(R),CompanyCwouldgenerallyrecordasingleassetforthebuildingat$85millionasoftheacquisitiondate.However,paragraph43ofIAS16statesthatinthecalculationofsubsequentdepreciationexpense,theamountattributabletothebuilding($75million)mustbedepreciatedseparately,usinga20-yearlife,fromtheamountattributabletothefavorablelease($10million),whichwouldusea5-yearlife.DepreciationexpensewouldberecordedinaccordancewithIAS16.

Contingent Consideration Classified as a Liability — Subsequent Measurement



Recordatfairvalue.(See6.25.) RecordfinancialinstrumentsthatarewithinthescopeofIAS39atfairvalue.Otherwise,usethebest-estimateapproachunderIAS37orfollowotherIFRSsasappropriate.

C.22 Whenacontingentconsiderationarrangementisclassifiedasaliability,theacquirerremeasures

theliabilityeachreportingperioduntilthecontingencyisresolved.Inpractice,underbothStatement141(R)andIFRS3(R),subsequentfluctuationsintherecordedliabilityaregenerallyrecognizedin

earnings.UnderIAS37,theacquirermeasuresliabilitiesusingthebestestimateoftheexpendituresit

expectstoincurinthefuturetosettletheobligation,whichcanalsobediscountedifthatamountis

materialtotheoverallestimate.

C.23 AdifferenceisoutlinedinC.34betweenU.S.GAAPandIFRSsintheinitialclassificationofa

contingentconsiderationarrangementaseitheraliabilityorequity.

Disclosures — Pro Forma Financial Information



Requiredonlyforpublicbusinessenterprises(unlessimpracticable);comparableprior-perioddisclosuresmustbepresented.(See13.18.)

Requiredforallacquirersforthecurrentperiodonly,unlessimpracticabletodoso.

C.25 TheFASBcitedcost-benefitconcernsasthereasonforitspositionthatproformadisclosures

shouldnotberequiredforprivatebusinessenterprises.TheIASBcarriedforwarditspriorguidance

inIFRS3becauseitcurrentlyhasaprojectonitsagendatoreconsidertheapplicationofallIFRSs





tosmaller,nonlistedentities.TheIASBreleasedanexposuredraft(IFRSforSmallandMedium-sized

Entities )inFebruary2007that,amongotherthings,proposestoeliminateproformadisclosuresfor

nonlistedcompaniesthatareacquirersinabusinesscombination.Theproformainformationrequired

byIFRS3(R)isasfollows:

(i) theamountsofrevenueandprofitorlossoftheacquireesincetheacquisitiondateincluded

intheconsolidatedstatementofcomprehensiveincomeforthereportingperiod;and

(ii) therevenueandprofitorlossofthecombinedentityforthecurrentreportingperiodas

thoughtheacquisitiondateforallbusinesscombinationsthatoccurredduringtheyearhad

beenasofthebeginningoftheannualreportingperiod.

C.26 TheIASBelectednottorequiredisclosureofcomparableprior-periodinformationbecauseof

thepotentialcostsanddifficultiesinvolvedinobtainingtheneededinformationincertainsituations.

Forexample,itmaybecostlyanddifficultforanacquirertoobtaintheacquiree’sfinancialinformation,

preparedinaccordancewithIFRS,iftheacquireeisbasedinaforeigncountrythathasnotadopted

IFRSs.

Disclosures — Gain or Loss Recognized After the Acquisition Date for Net AssetsAcquired



Nodisclosurerequirement. Disclosurerequiredofamountandexplanationofanygainorlossrecognizedinthecurrentperiodthatrelatestoidentifiableassetsacquiredandliabilitiesassumedinabusinesscombination(onlyifsizeandnatureofamountisrelevanttounderstandingthepostcombinationresults).

C.28 TheIASBcarriedforwardthisdisclosurerequirementfromIFRS3.Statement141(R)doesnot

haveasimilardisclosurerequirement;however,underU.S.GAAP,significantgainsorlossesrecognized

bythecombinedentityrelatedtotheacquiredassetsandassumedliabilities(e.g.,impairmentofa

long-livedassetunderStatement144aftertheacquisitiondate)arelikelytobedisclosedunderthe

requirementsofotheraccountingliterature.Inotherwords,itislikelythatU.S.GAAPdisclosuresofsuch

gainandlossinformationwillbesimilartoIFRSsdisclosureswhenalltheotherdisclosurerequirements

inU.S.GAAP(otherthanStatement141(R))aretakenintoaccount.

Disclosures — Goodwill



EntitiesthatapplysegmentreportingunderStatement131arerequiredtodisclosetheamountofgoodwillallocatedtoeachsegment,asoftheacquisitiondate,foreachmaterialbusinesscombination(orintheaggregateforindividuallyimmaterialbusinesscombinationsthatarematerialintheaggregate).(See13.29.)

Norequirementtodisclosegoodwillallocatedtoeachcash-generatingunitasoftheacquisitiondate.





C.30 IAS36,whichappliestoallentities(i.e.,bothprivateandpublicbusinessenterprises),contains

arequirementtodisclosegoodwillforeachcash-generatingunitasofthebalancesheetdate ifthe

amountsaresignificantrelativetotheentity’stotalgoodwill.Statement142requiresasimilardisclosure

ofgoodwillbyreportablesegmentsasofeachbalancesheetdate,butonlyforentitieswithinthescope

ofStatement131(i.e.,publicbusinessenterprises).

Differences Outside the Scope of the Joint Business Combinations Convergence Project

Definition of Control



Controlreferstoacontrollingfinancialinterest,generallythroughownershipofamajorityvotinginterest.DefinitionisfromARB51,asamendedandinterpretedbyInterpretation46(R),whichisnotconvergedwithIFRSs.(See1.03.)

Controlreferstothepowertogovernthefinancialandoperatingpoliciesofanentitytoobtainbenefitsfromitsactivities.DefinitionisfromIAS27,whichisnotconvergedwithU.S.GAAP.

OnDecember18,2008,theIASBissuedanexposuredraft,ED10,ConsolidatedFinancialStatements ,

whichwouldmodifythedefinitionofcontrolunderIFRS.Thisexposuredocumentwasnotissuedaspart

ofajointconvergenceprojectwiththeFASB.

Definition of Fair Value



Fairvalueisdefinedasthepricethatwouldbereceivedtosellanassetorthatwouldbepaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsasofthemeasurementdate.Definitionisfromparagraph5ofStatement157,whichisnotconvergedwithIFRSs.(See3.40–3.58.)

Fairvalueisdefinedastheamountforwhichanassetcouldbeexchangedoraliabilitysettledbetweenknowledgeable,willingpartiesinanarm’s-lengthtransaction.DefinitionisnotconvergedwithU.S.GAAP.

C.33 NotethattheIASBiscurrentlyworkingonaprojecttodevelopaconsistentdefinitionoffair

valueamongallIFRSsaswellasdevelopfairvaluemeasurementguidance.Thedefinitionandguidance

wouldbesubstantiallyconvergedwiththeFASB’sStatement157.TheIASBexpectstoissueanexposure

draftin2009andafinalstandardin2010.

Contingent Consideration — Initial Classification



Classifyasaliabilityorequityinaccordancewithexistingstandards(e.g.,Statement150),whicharenotconvergedwithIFRSs.(See6.22.)

Classifyasaliabilityorequityinaccordancewithexistingstandards(e.g.,IAS32andIAS39),whicharenotconvergedwithU.S.GAAP.





Deferred Taxes and Uncertain Tax Positions



RecognizeandmeasureinaccordancewithStatement109andInterpretation48,whicharenotconvergedwithIFRSs.(SeeSection 8.)

RecognizeandmeasuredeferredtaxesinaccordancewithIAS12,whichisnotconvergedwithU.S.GAAP.IAS12doesnotcontainspecificguidanceonaccountingforuncertaintaxpositions.

Employee Benefits



Recognizeandmeasureinaccordancewithexistingstandards(e.g.,Statements87and106),whicharenotconvergedwithIFRSs.(See4.41–4.45.)

RecognizeandmeasureinaccordancewithIAS19,whichisnotconvergedwithU.S.GAAP.

Share-Based Payment Awards — Initial Measurement



RecognizeandmeasureinaccordancewithStatement123(R),whichisnotconvergedwithIFRSs.(See4.49.)

RecognizeandmeasureinaccordancewithIFRS2,whichisnotconvergedwithU.S.GAAP.

Replacement Share-Based Payment Awards — Allocation of Amounts toConsideration Transferred



Iftheacquirerisobligatedtoreplacetheacquiree’sawards:

• Recognizetheexcessofthefairvalueofacquirer’sreplacementawardoveracquiree’sawardinpostcombinationearnings.

• Allocateremainderofreplacementawardto

considerationtransferredonthebasisoftheratioofthepastserviceperiodtothegreaterofthetotalserviceperiodororiginalserviceperiod.

FormulausedtoallocateremainderofreplacementawardisnotconsistentwithIFRS3(R)formulabecauseofdifferencesbetweenStatement123(R)andIFRS2,whicharenotconverged.(See6.10–6.16.)

Iftheacquirerisobligatedtoreplacetheacquiree’sawards:

• Recognizetheexcessofthefairvalueofacquirer’sreplacementawardoveracquiree’sawardinpostcombinationearnings.

• Allocateremainderofreplacementawardto

considerationtransferredonthebasisoftheratioofthevestingperiodcompleted(whichcanincludebothserviceandperformanceconditions)tothegreaterofthetotalserviceperiodororiginalvestingperiod.

FormulausedtoallocateremainderofreplacementawardisnotconsistentwithStatement141(R)formulabecauseofdifferencesbetweenStatement123(R)andIFRS2,whicharenotconverged.





Disclosures — Acquired Contingencies



UnlikeIFRS3(R),andbecauseofexistingdifferencesbetweenStatement5andIAS37,disclosureisnotrequiredofmajorassumptionsmadeaboutfutureeventsortheamountofexpectedreimbursements.

Disclosureisrequiredofmajorassumptionsmadeaboutfutureeventsandtheamountofexpectedreimbursements,ifany,pursuanttoparagraph85ofIAS37.IAS37isnotconvergedwithU.S.GAAP.

Differences Between Statement 160 and IAS 27(R)

C.40 Statement160andIAS27(R)wereissuedaspartofthejointbusinesscombinationsconvergence

projectbetweentheFASBandIASB.Bothstandardsamendthepreviousaccountingfornoncontrolling

interests,changesinaparent’sownershipinterest,anddeconsolidations,andaresubstantially

converged,withoneexceptionrelatedtotheeffectivedate.

C.41 ThissectiondoesnotdiscussdifferencesbetweenARB51andIAS27relatedtotherespectiveconsolidationmodelsandpoliciesbecausetheboardscarriedforwardmuchoftheexistingguidance

withoutreconsideration.Suchdifferencesmaybeaddressedinafutureconvergenceproject.

C.42 ThetablebelowindicatesdifferencesrelatedtotheeffectivedatesofStatement160,which

amendsARB51,andIAS27(R).

Statement 160 IAS 27(R)

EffectiveforfiscalyearsbeginningonorafterDecember15,2008.Earlyadoptionisprohibited.(See14.47.)

EffectiveforfiscalyearsbeginningonorafterJuly1,2009.Earlyadoptionispermitted.

NotethatentitieselectingtoearlyadoptIAS27(R)mustalsoadoptIFRS3(R)atthesametime.

Differences Between Statement 142 and IAS 36/38

C.43 Thedifferencesdiscussedbelowrelatetoareasofaccountingforgoodwillandotherintangible

assetsthatwerenotwithintheprimaryscopeofthejointbusinesscombinationsconvergenceproject.

ThemainsourcesofguidanceontheseareasareStatement142underU.S.GAAP,andIAS36andIAS

38underIFRSs.Incertaincircumstances,accountingforspecifictransactions(e.g.,advertisingcosts)is

prescribedbyotherliterature.Guidanceforsuchcircumstancesisnotedbelow.

Level of Impairment Testing for Goodwill

C.44 ThetablebelowhighlightsdifferencesbetweenStatement142andIAS36.

Statement 142 IAS 36

Reportingunit—eitheranoperatingsegmentoronelevelbelow.(See11.05.)

Cashgeneratingunit(CGU)—thelowestlevelatwhichinternalmanagementmonitorsgoodwill.Thislevelcannotbelargerthananoperatingsegment.





C.45 ThelevelatwhichgoodwillimpairmenttestingiscompletedcoulddifferunderU.S.GAAPand

IFRSs.ThelowestlevelatwhichanentitymaytestgoodwillforimpairmentunderU.S.GAAPisone

levelbelowtheoperatingsegment,whereasunderIFRSs,thelowestlevelfortestingisnotspecifically

prescribed.TheonlyrequirementstatedunderIFRSsisthattheleveloftestingmustnotbelargerthan

anoperatingsegmentlevel.

C.46 Paragraph30ofStatement142providesthefollowingguidanceforidentifyingreportingunits:

Areportingunitisanoperatingsegmentoronelevelbelowanoperatingsegment(referredtoasa

component).Acomponentofanoperatingsegmentisareportingunitifthecomponentconstitutes

abusinessforwhichdiscretefinancialinformationisavailableandsegmentmanagementregularly

reviewstheoperatingresultsofthatcomponent.However,twoormorecomponentsofanoperating

segmentshallbeaggregatedanddeemedasinglereportingunitifthecomponentshavesimilar

economiccharacteristics.Anoperatingsegmentshallbedeemedtobeareportingunitifallofits

componentsaresimilar,ifnoneofitscomponentsisareportingunit,orifitcomprisesonlyasingle

component.TherelevantprovisionsofStatement131andrelatedinterpretiveliteratureshallbeused

todeterminethereportingunitsofanentity.[Footnotesomitted]

C.47 UnderIFRSs,theCGUisthelevelatwhichgoodwillistestedforimpairmentunderIAS36.Paragraph6ofIAS36definesaCGUas“thesmallestidentifiablegroupofassetsthatgeneratescash

inflowsthatarelargelyindependentofthecashinflowsfromotherassetsorgroupsofassets.”

C.48 Inaddition,paragraph80ofIAS36states:

Forthepurposeofimpairmenttesting,goodwillacquiredinabusinesscombinationshall,fromthe

acquisitiondate,beallocatedtoeachoftheacquirer’scash-generatingunits,orgroupsofcash

generatingunits,thatisexpectedtobenefitfromthesynergiesofthecombination,irrespectiveof

whetherotherassetsorliabilitiesoftheacquireeareassignedtothoseunitsorgroupsofunits.Each

unitorgroupofunitstowhichthegoodwillissoallocatedshall:

(a) representthelowestlevelwithintheentityatwhichthegoodwillismonitoredfor

internalmanagementpurposes;and

(b) notbelargerthananoperatingsegmentdeterminedinaccordancewithIFRS8,

OperatingSegments.

Goodwill Impairment Testing

C.49 ThetablebelowhighlightsthesignificantdifferencebetweenStatement142andIAS36.


Atwo-steptestisperformed:

Step1—Fairvalueofthereportingunitiscompared

withitscarryingamount,includinggoodwill.Iffairvalueisgreaterthancarryingamount,step2isskippedbecausegoodwillisnotimpaired.

Step2—The“impliedfairvalue”ofreportingunitgoodwilliscomparedwithitscarryingamount.Ifthecarryingamountexceedstheimpliedfairvalueofgoodwill,thenanimpairmentlossisrecognizedinanamountequaltothatexcess.(See11.32.)

TherecoverableamountofaCGU(higherof(1)fairvaluelesscoststoselland(2)valueinuse)iscomparedwiththe

carryingamount.Theimpairmentlossisallocatedby(1)reducinganygoodwilloftheCGUandthen(2)reducingthecarryingamountofotherassetsoftheCGUonaproratabasis.





C.50 UnderU.S.GAAP,paragraphs19and20ofStatement142outlinethefollowingtwo-step

methodfortestinggoodwillforimpairment:

Step1

• Determinewhetherthefairvalueofthereportingunitislessthanitscarryingamount,including

goodwill.

• Ifthefairvalueofthereportingunitisless,proceedtostep2.

• Ifthefairvalueofthereportingunitisnotless,performnoadditionaltestingofgoodwillfor

impairment.

Step2

• Determinetheimpliedfairvalueofgoodwillofthereportingunitbyallocatingthefairvalueof

thereportingunitusedinstep1toalltheassetsandliabilitiesofthatreportingunit(including

anyrecognizedandunrecognizedintangibleassets)asifthereportingunithadbeenacquired

inabusinesscombinationandthefairvalueofthereportingunitwasthepricepaidtoacquire

thereportingunit.

• Comparetheimpliedfairvalueofgoodwilltothecarryingamountofgoodwilltodetermine

whethergoodwillisimpaired.Ifthecarryingamountexceedstheimpliedfairvalueofgoodwill,

animpairmentlossisrecognizedinanamountequaltothatexcess.

C.51 UnderIFRSs,therecoverableamountofaCGU(higherof(1)fairvaluelesscoststoselland(2)

valueinuse)iscomparedwiththecarryingamountoftheCGU.Paragraph104ofIAS36statesthat

iftherecoverableamountoftheCGUislessthanthecarryingamountoftheCGU,“theimpairment

lossshallbeallocatedtoreducethecarryingamountoftheassetsoftheunit(groupofunits)inthe

followingorder:

(a) first,toreducethecarryingamountofanygoodwillallocatedtothecash-generatingunit

(groupofunits);and

(b) then,totheotherassetsoftheunit(groupofunits)prorataonthebasisofthecarrying

amountofeachassetintheunit(groupofunits).”

Paragraph105ofIAS36furtherstates:

Inallocatinganimpairmentlossinaccordancewithparagraph104,anentityshallnotreducethe

carryingamountofanassetbelowthehighestof:

(a) itsfairvaluelesscoststosell(ifdeterminable);

(b) itsvalueinuse(ifdeterminable);and

(c) zero.

C.52 Inaccordancewithparagraph60ofIAS36,suchreductionsincarryingamountsaretreatedas

impairmentlossesonindividualassets.





Impairment Testing of Indefinite-Lived Intangible Assets



Thefairvalueoftheassetiscomparedwithitscarryingamount.Animpairmentlossisrecognizedfortheamountbywhichthecarryingamountexceedsthefairvalue.(See10.41.)

Therecoverableamountoftheasset(higherof(1)fairvaluelesscoststoselland(2)valueinuse)iscomparedwithitscarryingamount.Animpairmentlossisrecognizedfortheamountbywhichthecarryingamountexceedstherecoverableamount.

C.54 UnderU.S.GAAP,anintangibleassetthatisnotsubjecttoamortizationistestedforimpairment

bycomparingthefairvalueoftheintangibleassetwiththecarryingamount.UnderIFRSs,the

recoverableamountiscomparedwiththecarryingamount.

C.55 Paragraph17ofStatement142states,inpart:

Ifthecarryingamountofanintangibleassetexceedsitsfairvalue,animpairmentlossshallbe

recognizedinanamountequaltothatexcess.Aftertheimpairmentlossisrecognized,theadjusted

carryingamountoftheintangibleassetshallbeitsnewaccountingbasis.Subsequentreversalofa

previouslyrecognizedimpairmentlossisprohibited.

C.56 Inaddition,underU.S.GAAP,Issue02-7providesguidanceongroupingcertainindefinite-lived

intangibleassetsforimpairmenttesting.UnderIFRSsthereisnocomparableguidance.

C.57 UnderIFRSs,anintangibleassetwithanindefiniteusefullifeisgenerallytestedforimpairment

bycomparingitsrecoverableamounttoitscarryingamount.Iftherecoverableamountislessthanthe

carryingamount,animpairmentlossisrecognizedfortheexcess.UnlikeU.S.GAAP,paragraph114of

IAS36allowsforthesubsequentreversalofanimpairmentlossonanintangibleassetwithanindefinite

usefullife(notincludinggoodwill).Theparagraphstates:

Animpairmentlossrecognizedinpriorperiodsforanassetotherthangoodwillshallbereversed

if,andonlyif,therehasbeenachangeintheestimatesusedtodeterminetheasset’srecoverable

amountsincethelastimpairmentlossrecognized.Ifthisisthecase,thecarryingamountoftheasset

shall,exceptasdescribedinparagraph117,beincreasedtoitsrecoverableamount.Thatincreaseisa

reversalofanimpairmentloss.

C.58 Inaddition,paragraph117ofIAS36states:

Theincreasedcarryingamountofanassetotherthangoodwillattributabletoareversalofan

impairmentlossshallnotexceedthecarryingamountthatwouldhavebeendetermined(netof

amortisationordeprecation)hadnoimpairmentlossbeenrecognisedfortheassetinprioryears.

Intangible Asset Revaluations



Norevaluationofintangibleassetsispermitted(otherthanforimpairments).

Intangibleassetsmaybeaccountedforathistoricalcost(lessaccumulatedamortizationandimpairments)orpursuanttoarevaluationmodel(permittedinlimitedsituations).





C.60 UnderU.S.GAAP,intangibleassetsarecarriedatcostlessaccumulatedamortizationand

impairments,andrevaluationoftheamountinitiallyrecognizedisnotallowed.Asimilarcostmodelis

generallyusedunderIFRSstoaccountforintangibleassets;however,ifanintangibleassethasaquoted

marketpriceinanactivemarket(whichisrare),thentheentitymustmakeanaccountingpolicychoice

whethertousetherevaluationmodelorthecostmodel.

C.61 Therevaluationmodelisappliedaftertheintangibleassethasbeeninitiallyrecognizedat

cost.Undertherevaluationmodel,theintangibleassetiscarriedatarevaluedamount,whichisfair

valueasoftherevaluationdate,lessanysubsequentaccumulatedamortizationandanysubsequent

accumulatedimpairments.Paragraphs85and86ofIAS38indicatethatrevaluationincreasesand

decreasesarerecognizedeitherinequityortheincomestatement.Theparagraphsstate:

• Ifanintangibleasset’scarryingamountisincreasedasaresultofarevaluation,theincrease

shallbecrediteddirectlytoequityundertheheadingofrevaluationsurplus.However,the

increaseshallberecognisedinprofitorlosstotheextentthatitreversesarevaluation

decreaseofthesameassetpreviouslyrecognizedinprofitorloss.

• Ifanintangibleasset’scarryingamountisdecreasedasaresultofarevaluation,thedecrease

shallberecognisedinprofitorloss.However,thedecreaseshallbedebiteddirectlytoequity

undertheheadingofrevaluationsurplustotheextentofanycreditbalanceintherevaluation

surplusinrespectofthatasset.

Internally Developed Intangible Assets



Generally,costsincurredtodevelop,maintain,orrestoreintangibleassetsarerecognizedasanexpensewhenincurred.Exceptionsincludecostsassociatedwithcomputersoftwareintendedtobesold,Websitedevelopment,andcomputersoftwareforinternaluse.

Internallydevelopedintangibleassetsshallberecognizedonlyif(1)itisprobablethattheexpectedfutureeconomicbenefitsthatareattributabletotheassetwillflowtotheentityand(2)thecostoftheassetcanbemeasuredreliably.

C.63 Paragraph10ofStatement142statesthat“[c]ostsofinternallydeveloping,maintaining,

orrestoringintangibleassets(includinggoodwill)thatarenotspecificallyidentifiable,thathave

indeterminatelives,orthatareinherentinacontinuingbusinessandrelatedtoanentityasawhole,

shallberecognizedasanexpensewhenincurred.”IAS38,however,requirestherecognitionof

internallydevelopedintangibleassetsiftheyareincurredinthe“developmentphase”and(1)itis

probablethattheexpectedfutureeconomicbenefitsthatareattributabletotheassetwillflowtothe

entityand(2)thecostoftheassetcanbemeasuredreliably.

C.64 Inabusinesscombination,anacquirershallrecognizeanintangibleassetforcertaincosts

thatmayhavebeenexpensedbytheacquiree.Paragraph15ofStatement141(R)statesthat“the

acquirerrecognizestheacquiredidentifiableintangibleassets,suchasabrandname,apatent,ora

customerrelationship,thattheacquireedidnotrecognizeasassetsinitsfinancialstatementsbecauseit

developedtheminternallyandchargedtherelatedcoststoexpense.”UnderIFRS3(R),thesamenotion

wouldapplyandsuchassetswouldberecognizedintheacquisitionmethodaccounting.





Advertising Costs

C.65 ThetablebelowhighlightsdifferencesbetweenSOP93-7andIAS38.

SOP 93-7 IAS 38

Advertisingcostsareeitherexpensedasincurredorexpensedthefirsttimetheadvertisingtakesplace.Exceptionsinclude(1)direct-responseadvertisingand(2)expendituresforadvertisingcoststhatareincurredafterrecognizingrevenuesrelatedtothosecosts(e.g.,cooperativeadvertising).

Advertisingcostsaregenerallyexpensedasincurredunlesstheexpenditurerelatestoprepaymentforthedeliveryofgoodsandservices(i.e.,TVcommercialsnotyetaired).Insuchcases,aprepaidassetwouldgenerallyberecognized.

C.66 UnderU.S.GAAP,advertisingcostsareaccountedforpursuanttoSOP93-7.Typically,they

areexpensedeitherasincurredorwhentheadvertisingfirsttakesplaceunlessthecostsrelateto

either(1)direct-responseadvertisingor(2)expendituresforadvertisingcoststhatareincurredafter

recognizingrevenuesrelatedtothosecosts(e.g.,cooperativeadvertising).Enterprisesmayelectto

expenseadvertisingcostseitherasincurred,orthefirsttimetheadvertisingtakesplace,aslongasthe

accountingpolicyisconsistentlyappliedtosimilarkindsofadvertisingexpenses.Paragraph26ofSOP

93-7notesthat“thefirsttimeadvertisingtakesplace”wouldinclude“thefirstpublicshowingofa

televisioncommercialforitsintendedpurposeandthefirstappearanceofamagazineadvertisement

foritsintendedpurpose.”Similarly,underIFRSs,advertisingcostsareexpensedasincurred.Theone

exceptionisforcoststhatrelatetotheprepaymentofadvertisingforwhichtheadvertisingserviceshave

notyetbeenrendered(e.g.,atelevisioncommercialnotyetaired).Aprepaidassetwouldberecognized

forsuchcostsonlyuntilanentityhasgainedarighttoaccesstherelatedgoodsorhasreceivedthe

relatedservices.



Appendix D — Glossary of Standards andRegulations

FASBStatementNo.160,NoncontrollingInterestsinConsolidatedFinancialStatements—an

amendmentofARBNo.51

FASBStatementNo.159,TheFairValueOptionforFinancialAssetsandFinancialLiabilities —Including

anamendmentofFASBStatementNo.115

FASBStatementNo.158,Employers’AccountingforDefinedBenefitPensionandOtherPostretirement

Plans —anamendmentofFASBStatementsNo.87,88,106,and132(R)

FASBStatementNo.157,FairValueMeasurements

FASBStatementNo.154,AccountingChangesandErrorCorrections

FASBStatementNo.150,AccountingforCertainFinancialInstrumentsWithCharacteristicsofBoth

LiabilitiesandEquity

FASBStatementNo.147,AcquisitionsofCertainFinancialInstitutions—anamendmentofFASB

StatementsNo.72and144andFASBInterpretationNo.9

FASBStatementNo.146,AccountingforCostsAssociatedWithExitorDisposalActivities

FASBStatementNo.144,AccountingfortheImpairmentorDisposalofLong-LivedAssets

FASBStatementNo.142,GoodwillandOtherIntangibleAssets

FASBStatementNo.141(R),BusinessCombinations

FASBStatementNo.141,BusinessCombinations

FASBStatementNo.140,AccountingforTransfersandServicingofFinancialAssetsandExtinguishments

ofLiabilities —areplacementofFASBStatement125

FASBStatementNo.133,AccountingforDerivativeInstrumentsandHedgingActivities

FASBStatementNo.131,DisclosuresAboutSegmentsofanEnterpriseandRelatedInformation

FASBStatementNo.130,ReportingComprehensiveIncome

FASBStatementNo.128,EarningsperShare

FASBStatementNo.123(R),Share-BasedPayment

FASBStatementNo.116,AccountingforContributionsReceivedandContributionsMade

FASBStatementNo.115,AccountingforCertainInvestmentsinDebtandEquitySecurities

FASBStatementNo.114,AccountingbyCreditorsforImpairmentofaLoan—anamendmentofFASB

StatementsNo.5and15

FASBStatementNo.112,Employers’AccountingforPostemploymentBenefits —anamendmentof

FASBStatementsNo.5and43

FASBStatementNo.109,AccountingforIncomeTaxes

FASBStatementNo.106,Employers’AccountingforPostretirementBenefitsOtherThanPensions

FASBStatementNo.95,StatementofCashFlows





FASBStatementNo.88,Employers’AccountingforSettlementsandCurtailmentsofDefinedBenefit

PensionPlansandforTerminationBenefits

FASBStatementNo.87,Employers’AccountingforPensions

FASBStatementNo.86,AccountingfortheCostsofComputerSoftwaretoBeSold,Leased,or

OtherwiseMarketed

FASBStatementNo.72,AccountingforCertainAcquisitionsofBankingorThriftInstitutions—an

amendmentofAPBOpinionNo.17,aninterpretationofAPBOpinions16and17,andanamendment

ofFASBInterpretationNo.9

FASBStatementNo.60,AccountingandReportingbyInsuranceEnterprises

FASBStatementNo.57,RelatedPartyDisclosures

FASBStatementNo.52,ForeignCurrencyTranslation

FASBStatementNo.43,AccountingforCompensatedAbsences

FASBStatementNo.13,AccountingforLeases

FASBStatementNo.5,AccountingforContingencies

FASBStatementNo.2,AccountingforResearchandDevelopmentCosts

FASBInterpretationNo.48,AccountingforUncertaintyinIncomeTaxes —aninterpretationofFASB

StatementNo.109

FASBInterpretationNo.46(R),ConsolidationofVariableInterestEntities—aninterpretationof

ARBNo.51

FASBInterpretationNo.45,Guarantor’sAccountingandDisclosureRequirementsforGuarantees,

IncludingGuaranteesofIndebtednessofOthers—aninterpretationofFASBStatementsNo.5,57,and

107andrescissionofFASBInterpretationNo.34FASBInterpretationNo.37,AccountingforTranslationAdjustmentsUponSaleofPartofanInvestment

inaForeignEntity —aninterpretationofFASBStatementNo.52

FASBInterpretationNo.21,AccountingforLeasesinaBusinessCombination—aninterpretationof

FASBStatementNo.13

FASBInterpretationNo.4,ApplicabilityofFASBStatementNo.2toBusinessCombinationsAccounted

forbythePurchaseMethod—aninterpretationofFASBStatementNo.2

FASBTechnicalBulletinNo.85-5, IssuesRelatingtoAccountingforBusinessCombinations,Including

CostsofClosingDuplicateFacilitiesofanAcquirer,StockTransactionsBetweenCompaniesUnder

CommonControl,DownstreamMergers,IdenticalCommonSharesforaPoolingofInterests,PoolingofInterestsbyMutualandCooperativeEnterprises

FASBConceptsStatementNo.6,ElementsofFinancialStatements

FASBConceptsStatementNo.5,RecognitionandMeasurementinFinancialStatementsofBusiness

Enterprises

FASBConceptsStatementNo.4,ObjectivesofFinancialReportingbyNonbusinessOrganizations

Question2ofFASBStaffImplementationGuide(Statement131),“SegmentInformation:Guidanceon

ApplyingStatement131”





Question17ofFASBStaffImplementationGuide(Statement86),“ComputerSoftware:Guidanceon

ApplyingStatement86”

FASBStaffPosition(FSP)No.FAS157-2,“EffectiveDateofFASBStatementNo.157”

FASBStaffPosition(FSP)No.FAS142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”

ProposedFASBStaffPosition(FSP)No.FAS142-d,“AmortizationandImpairmentofAcquiredRenewableIntangibleAssets”

ProposedFASBStaffPosition(FSP)No.FAS141(R)-a,“AccountingforAssetsAcquiredandLiabilities

AssumedinaBusinessCombinationThatAriseFromContingencies”

FASBStaffPosition(FSP)No.FIN45-2,“WhetherFASBInterpretationNo.45ProvidesSupportfor

SubsequentlyAccountingforaGuarantor’sLiabilityatFairValue”

FASBStaffPosition(FSP)No.SOP90-7-1,“AnAmendmentofAICPAStatementofPosition90-7”

EITFIssueNo.08-7,“AccountingforDefensiveIntangibleAssets”

EITFIssueNo.08-6,“EquityMethodInvestmentAccountingConsiderations”

EITFIssueNo.07-5,“DeterminingWhetheranInstrument(orEmbeddedFeature)IsIndexedtoan

Entity’sOwnStock”

EITFIssueNo.04-4,“AllocationofGoodwilltoReportingUnitsforaMiningEnterprise”

EITFIssueNo.04-3,“MiningAssets:ImpairmentandBusinessCombinations”

EITFIssueNo.04-2,“WhetherMineralRightsAreTangibleorIntangibleAssets”

EITFIssueNo.04-1,“AccountingforPreexistingRelationshipsBetweenthePartiestoaBusiness

Combination”

EITFIssueNo.03-9,“DeterminationoftheUsefulLifeofRenewableIntangibleAssetsUnderFASB

StatementNo.142”

EITFIssueNo.02-17,“RecognitionofCustomerRelationshipIntangibleAssetsAcquiredinaBusiness

Combination”

EITFIssueNo.02-13,“DeferredIncomeTaxConsiderationsinApplyingtheGoodwillImpairmentTestin

FASBStatementNo.142”

EITFIssueNo.02-7,“UnitofAccountingforTestingImpairmentofIndefinite-LivedIntangibleAssets”

EITFIssueNo.02-5,“Definitionof‘CommonControl’inRelationtoFASBStatementNo.141”

EITFIssueNo.01-5,“ApplicationofFASBStatementNo.52toanInvestmentBeingEvaluatedfor

ImpairmentThatWillBeDisposedOf”EITFIssueNo.00-19,“AccountingforDerivativeFinancialInstrumentsIndexedto,andPotentially

Settledin,aCompany’sOwnStock”

EITFIssueNo.99-12,“DeterminationoftheMeasurementDatefortheMarketPriceofAcquirer

SecuritiesIssuedinaPurchaseBusinessCombination”

EITFIssueNo.98-4,“AccountingbyaJointVentureforBusinessesReceivedatItsFormation”

EITFIssueNo.98-3,”DeterminingWhetheraNonmonetaryTransactionInvolvesReceiptofProductive

AssetsorofaBusiness”





EITFIssueNo.96-16,“Investor’sAccountingforanInvesteeWhentheInvestorHasaMajorityofthe

VotingInterestbuttheMinorityShareholderorShareholdersHaveCertainApprovalorVetoRights”

EITFIssueNo.96-5,“RecognitionofLiabilitiesforContractualTerminationBenefitsorChangingBenefit

PlanAssumptionsinAnticipationofaBusinessCombination”

EITFIssueNo.95-3,“RecognitionofLiabilitiesinConnectionWithaPurchaseBusinessCombination”

EITFIssueNo.93-7,“UncertaintiesRelatedtoIncomeTaxesinaPurchaseBusinessCombination”

EITFIssueNo.88-16,“BasisinLeveragedBuyoutTransactions”

EITFIssueNo.86-9,“IRCSection338andPush-DownAccounting”

EITFTopicNo.D-108,“UseoftheResidualMethodtoValueAcquiredAssetsOtherThanGoodwill”

EITFTopicNo.D-101,“ClarificationofReportingUnitGuidanceinParagraph30ofFASBStatementNo.

142”

EITFTopicNo.D-98,“ClassificationandMeasurementofRedeemableSecurities”

EITFTopicNo.D-97,“Push-DownAccounting”APBOpinionNo.29,AccountingforNonmonetaryTransactions

APBOpinionNo.23,AccountingforIncomeTaxes—SpecialAreas

APBOpinionNo.22,DisclosureofAccountingPolicies

APBOpinionNo.18,TheEquityMethodofAccountingforInvestmentsinCommonStock

APBOpinionNo.17,IntangibleAssets

APBOpinionNo.16,BusinessCombinations

APBOpinionNo.12,OmnibusOpinion—1967

AccountingResearchBulletinNo.51,ConsolidatedFinancialStatements

AICPAStatementofPosition03-3,AccountingforCertainLoansorDebtSecuritiesAcquiredina

Transfer

AICPAStatementofPosition94-6,DisclosureofCertainSignificantRisksandUncertainties

AICPAStatementofPosition93-7,ReportingonAdvertisingCosts

AICPAStatementofPosition90-7,FinancialReportingbyEntitiesinReorganizationUnderthe

BankruptcyCode

AICPAPracticeBulletin14,AccountingandReportingbyLimitedLiabilityCompaniesandLimited

LiabilityPartnerships

SECStaffAccountingBulletinTopic2.A.5,“AdjustmentstoAllowancesforLoanLossesinConnection

WithBusinessCombinations”(SAB61)

SECStaffAccountingBulletinTopic2.A.6,“DebtIssueCosts”(SAB77)

SECStaffAccountingBulletinTopic5.A,“ExpensesofOffering”

SECStaffAccountingBulletinTopic5.H,“AccountingforSalesofStockbyaSubsidiary”(SAB51)

SECStaffAccountingBulletinTopic5.J,“PushDownBasisofAccountingRequiredinCertainLimited

Circumstances”(SAB54)





SECStaffAccountingBulletinTopic5.L,“LIFOInventoryPractices”(SAB58)

SECStaffAccountingBulletinTopic6.G,“AccountingSeriesReleases177and286—Relatingto

AmendmentstoForm10-Q,RegulationS-K,andRegulationS-XRegardingInterimFinancialReporting”

SECStaffAccountingBulletinTopic11.M,“MiscellaneousDisclosure”(SAB74)

SECRegulationS-X,Rule1-02,“DefinitionofTermsUsedinRegulationS-X”

SECRegulationS-X,Rule3-05,“FinancialStatementsofBusinessesAcquiredortoBeAcquired”

SECRegulationS-X,Rule4-08,“GeneralNotestoFinancialStatements”

SECRegulationS-X,Rule5-03,“IncomeStatements”

SECRegulationS-X,Rule10-01,“InterimFinancialStatements”

SECRegulationS-X,Rule11-01,“PresentationRequirements”

SECRegulationS-K,Item303,“Management’sDiscussionandAnalysisofFinancialConditionand

ResultsofOperations”

SECRegulationS-K,Item512,“Undertakings”

SECRegulationS-K,Item601,“Exhibits”

SECAccountingSeriesReleaseNo.268(FRRSection211),RedeemablePreferredStocks

IFRS8,OperatingSegments

IFRS3(revised2008),BusinessCombinations(IFRS3(R))

IFRS3,BusinessCombinations

IFRS2,Share-basedPayment

IAS39,FinancialInstruments:RecognitionandMeasurement

IAS38,IntangibleAssets

IAS37,Provisions,ContingentLiabilitiesandContingentAssets

IAS36,ImpairmentofAssets

IAS27(revised2008),ConsolidatedandSeparateFinancialStatements(IAS27(R))

IAS27,ConsolidatedandSeparateFinancialStatements

IAS19,EmployeeBenefits

IAS18,Revenue

IAS16,Property,PlantandEquipment

IAS12,IncomeTaxes

IAS8,AccountingPolicies,ChangesinAccountingEstimatesandErrors



Documents

Roadmap_Business Combinations - Deloitte