Business Combinations (Portfolio 5170)

BNA Tax and Accounting Portfolio 5170-2nd, Business Combinations (Accounting Policy and Practice Series), explains and analyzes financial accounting for mergers, acquisitions, and other business combinations under domestic and international accounting standards.

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BNA Tax and Accounting Portfolio 5170-2nd, Business Combinations (Accounting Policy and Practice Series), explains and analyzes financial accounting for mergers, acquisitions, and other business combinations under domestic and international accounting standards. This Portfolio focuses on converged domestic and international financial reporting standards set forth in FASB Accounting Standards Codification (ASC) 805, Business Combinations (based in part on rules issues in December 2007 through former FASB Statement No. 141R, Business Combinations: A Replacement of FASB Statement No. 141 ((FAS 141R), and International Financial Reporting Standard No. 3, Business Combinations (as revised) (IFRS 3R), released in January 2008. The Portfolio also compares these rules to their predecessors, identifies significant remaining differences between the domestic and international rules notwithstanding the converged standards, and explains effective dates so that users of the Portfolio can know which rules apply to particular transactions.
After summarizing its scope, focus, purposes and contents, the Portfolio focuses on why enterprises consummate business combinations, discusses the major principles of the converged standards, definines a “Business Combination,” and explains in detail how to apply the “acquisition method” (which replaces the “purchase method”) of accounting for combinations. The Portfolio details the process of measuring an acquired enterprise's fair value but also addresses how to account for assets and liabilities not recognized at fair value as of the acquisition date. Users seeking additional guidance on fair value measurements generally are urged to consult BNA Tax and Accounting Portfolio 5127, Ketz and Zyla, Fair Value Measurements: Valuation Principles and Auditing Techniques (Accounting Policy and Practice Series). This Portfolio also explains how to apply the acquisition method to specific situations including reverse acquisitions, combinations achieved by contract alone, and combinations that occur in stages.
In addition to explaining how to account for business combinations, this Portfolio describes and illustrates required disclosures. The Worksheets include a roadmap to the acquisition method of accounting, due diligence checklist, information request for valuation purposes, disclosures checklist and example disclosures, and summary comparisons of ASC 805, former FAS 141 and IFRS 3R.
This Portfolio does not discuss two substantial subjects intertwined with business combinations: (i) business combinations of not-for-profit organizations, joint ventures, entities under common control, and (ii) consolidated financial statements and accounting for non-controlling interests. Readers interested in business combinations involving not-for-profit organizations are encouraged to consult BNA Tax and Accounting Portfolio 5203, Daher and Daher, Accounting for Combinations of Not-for-Profit Organizations, (Accounting Policy and Practice Series) (which currently is undergoing revisions for the codified rules set forth in ASC 958-805, Not-for-Profit Entities — Business Combinations, as those rules are based on FASB Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions — Including an Amendment to FASB Statement No. 142).
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5170-2nd, Smith, Black and Gary, Business Combinations (Accounting Policy and Practice Series).


Pamela A. Smith, CPA, Ph.D.

Pamela A. Smith, CPA, Ph.D., is the KPMG Professor of Accountancy at Northern Illinois University. She earned her MBA from the University of Texas at Dallas, Ph.D. from the University of North Texas, and a CPA (inactive) in Texas. Professor Smith has been a visiting professor at the University of Texas at Austin and the Helsinki School of Business and Economics. In her teaching, Professor Smith maintains a practical perspective by drawing from her years in public accounting and training as a Big Eight audit manager and stays abreast of current issues by utilizing sabbaticals. During recent sabbaticals, she studied fair value measurements, business valuations and accounting for derivatives and hedging activities. She serves as an Associate Editor at Issues in Accounting Education and teaches undergraduate and graduate courses in financial accounting and financial statement analysis in the Executive MBA programs at Northern Illinois University.

Ervin L. Black, Ph.D.

Ervin L. Black, Ph.D., is the PricewaterhouseCoopers Fellow at Brigham Young University. He received his Ph.D. from the University of Washington and has held faculty positions at Brigham Young University, University of Arkansas, and University of Wyoming. Prior to his academic career, Professor Black received his MBA from Brigham Young University and worked for seven years in private industry as a financial and quality analyst, a corporate treasurer for a start-up company, and a stockbroker. His research is primarily in financial and international accounting, with emphasis on examining the usefulness of firm financial characteristics in different settings. Professor Black teaches undergraduate and graduate courses in international accounting, financial statement analysis, financial accounting, and professional research methods.

Daniel T. Gary, CPA, Partner

Daniel T. Gary is a partner in KPMG's Transaction Services practice, focusing on accounting for valuation-related events such as acquisitions, impairments and fresh start accounting for emergence from bankruptcy. He also is deeply experienced with the requirements of registrants with the Securities Exchange Commission. In his full-time role as a service delivery partner, he is closely involved with a wide range of technical issues as well as operational challenges involving implementation of new standards. Dan's prior tenures as an auditor and a corporate controller enable his understanding of all aspects of an issue. He speaks frequently on accounting for business combinations and has been published and quoted in numerous publications. Brian Heckler, David Hori and Michele Meadows from KPMG LLP Transaction Services provided valuable insights and practical examples in the development of this Portfolio. Their contributions and perspectives are gratefully acknowledged.

Table of Contents

Detailed Analysis

I. Scope, Focus, Purpose, and Contents of Portfolio

A. Genesis of Revised Standards on Accounting for Business Combinations

B. Introduction to the Acquisition Method of Accounting for Business Combinations

1. Scope of the Acquisition Method

2. Significant Differences From Purchase Method

3. Key Considerations in Applying the Acquisition Method

4. Transactions Not Accounted for Under the Acquisition Method

a. Formation of Joint Ventures

b. Acquisition of an Asset or Group of Assets That Does Not Constitute a Business

c. Combinations Involving Entities or Businesses Under Common Control

d. Combinations Involving Not-for-Profit Organizations

C. Purposes of This Portfolio

1. Explanations, Interpretations, and Examples

2. Significant Differences Between U.S. and International Accounting for Business Combinations

II. Motivations for Business Combinations

Introductory Material

A. Growth

1. Globalization

2. Horizontal Expansion

3. Vertical Integration

B. Synergies

1. Operational Synergies

2. Financial Synergies

C. Diversification

III. Convergence on Accounting for Business Combinations

Introductory Material

A. Significant Issues Expressed in Comment Letters

B. Bases for Conclusions

C. Chronology of Domestic Rules

1. Accounting Principles Board Opinion No. 16, Business Combinations (APB 16)

a. Purchase Method

b. Pooling-of-Interests Method

2. FASB Statement No. 38 Accounting for Preacquisition Contingencies of Purchase Enterprises (FAS 38)

3. FASB Statement No. 141, Business Combinations (FAS 141)

4. FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R)

D. Chronology of International Rules

1. International Accounting Standard No. 22, Accounting for Business Combinations (IAS 22)

2. IFRS 3, Business Combinations and Associated Standards

a. IAS 36, Impairment of Assets

b. IAS 38, Intangible Assets

3. International Financial Reporting Standard No. 3, Business Combinations (revised) (IFRS 3R)

E. Significant Differences Between Updated Rules and Their Predecessors

IV. Effective Dates

Introductory Material

A. FASB â€" FAS 141R, Business Combinations

B. IASB â€" IFRS 3R, Business Combinations

C. Transition Issues

1. In General

2. Income Taxes

3. Goodwill

V. Accounting for Equity Interests

A. Scope and Relevance of Discussion

B. Classification Criteria Summarized

C. Equity Method Accounting

D. Consolidation

1. Fundamental Principles

2. Theories

3. Example

4. Comparison of Theories

a. Economic Entity Concept

b. Parent Company Concept

c. Proportionate Consolidation Concept

d. Hybrid Concept

VI. Major Principles in Accounting for Business Combinations

Introductory Material

A. Recognition and Measurement Principles

B. Steps in the Acquisition Method

1. Identify the Acquirer

2. Determine the Acquisition Date

3. Recognize and Measure the Identifiable Assets Acquired, the Liabilities Assumed, and Any Noncontrolling Interest in the Acquiree

4. Recognize and Measure Goodwill or a Gain From a Bargain Purchase

VII. A Business Combination Defined

Introductory Material

A. Acquisition of a Business

1. Definition

2. Difference From Other Definitions

3. Asset Acquisitions Distinguished

B. Acquisition of Control

1. Control Obtained Through Equity Ownership

2. Control of a Variable Interest Entity

3. Control Obtained Through the Lapse of Minority Rights

4. Control Obtained Through Contract Alone or Other Methods

C. Identifying the Acquirer

VIII. Acquisition-Related Issues

Introductory Material

A. Determining the Acquisition Date

B. Costs Incurred in Connection With a Business Combination

C. Determining the Consideration Transferred

1. Assets Transferred and Liabilities Incurred

2. Contingent Consideration

a. Defined

b. Initial and Subsequent Measurement

c. Earn-Outs

3. Equity Instruments

4. Exchange of Share-Based Payment Awards

a. Distinguishing Business Combination Consideration From Separately Expensed Items

b. Examples

D. Assessing What Is Part of the Exchange for the Acquiree

1. Payments That Effectively Settle Preexisting Relationships Between the Acquirer and Acquiree.

a. Non-contractual Preexisting Relationship

b. Contractual Preexisting Relationship

2. Payments to Compensate Employees or Former Owners of the Acquiree

IX. Measuring the Fair Value of the Acquiree

Introductory Material

A. Assets Acquired and Liabilities Assumed Recognized at Fair Value

1. Valuation Allowances

2. Contingencies

3. Restructuring or Exit Liabilities

4. Leases

5. Intangible Assets

a. Marketing Related

b. Customer Related

c. Artistic Related

d. Contract Based

e. Technology Based

f. Assembled Work Force

g. In-Process Research and Development (IPR& D)

B. Assets and Liabilities Not Recognized at Acquisition-Date Fair Value

1. Deferred Taxes

a. Change in the Valuation Allowance of a Deferred Tax Asset

b. Reduction or Elimination of a Valuation Allowance Established at the Date of Acquisition

c. Tax Benefits With Respect to Tax-Deductible Goodwill

d. Changes After the Acquisition Date Concerning Uncertain Tax Positions

2. Operating Leases

3. Goodwill

4. Assets Held for Sale

5. Indemnification Assets

C. Determining the Measurement Period

1. Fact Pattern and Basic Concept

2. Examples

3. Subsequent Measurement and Accounting

a. General

b. Reacquired Rights

c. Assets and Liabilities Arising From Contingencies

d. Indemnification Assets

e. Contingent Consideration

X. Applying the Acquisition Method to Specific Situations

Introductory Material

A. Reverse Acquisitions

1. Benefits

2. Determining Acquisition-Date Fair Market Value

3. Post-Acquisition Adjustments

a. In General

b. Noncontrolling Interests

c. Earnings Per Share

4. Examples

B. Acquisitions Achieved by Contract Alone

1. Rationale for Treating as Business Combination

2. Examples

3. Application of Acquisition Method

C. Partial and Step Acquisitions

1. Perspectives

2. Determination of the Full Fair Value of Goodwill

a. Fundamental Principle

b. Examples

c. Bargain Purchase

3. Acquisitions Achieved in Stages

a. Comparison to Purchase Method

b. Authoritative Guidance

c. Situations in Which Control Is Obtained

d. Situations in Which Control Is Maintained

e. Situations in Which Control Is Lost

D. Multi-Element Arrangements

1. Analogous Guidance

2. Presumption of Bundling

3. Allocation of Value to the Multi-elements

a. General Principles

b. Application

c. Residual Method and "Bargain Purchase"

E. Mutual Entities

1. Applying the Acquisition Method

2. Transition Rules

3. Goodwill and Other Intangibles

XI. Disclosures

Introductory Material

A. Objectives

B. Cross References

C. Major Changes in the Disclosure Requirements

Working Papers

Working Papers


Worksheet 1 Diagram of Acquisition Method Accounting

Worksheet 2 Is the Set of Activities and Assets a Business?

Worksheet 3 Is Control Obtained?

Worksheet 4 Due Diligence Checklist

Worksheet 5 Information Request for Valuation Purposes

Worksheet 6 Disclosure Checklist

Worksheet 7 Example Disclosures

Worksheet 8 Comparison of FAS 141 and 141R

Worksheet 9 Comparison of FAS 141R and IFRS 3R

Worksheet 10 Glossary of Significant Terms and Acronyms Used in this Portfolio

Worksheet 11 Example Filings Related to Reverse Acquisitions

Worksheet 12 FASB Staff Position No. FAS 157-3

Worksheet 13 Effective Dates for Accounting Standards



American Institute of Certified Public Accountants:

Financial Accounting Standards Board:


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International Accounting Standards Board:


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