As a result, users of financial statements could not compare the financial results of entities where different combination methods had been used; users of financial statements indicated a need for better information regarding intangible assets; and company management felt that differences in combination accounting methods impacted competition in markets for mergers and acquisitions. SFAS 141 is based on the proposition that all business combinations are essentially acquisitions, and thus all business combinations should be accounted for in a consistent manner with other asset acquisitions.
FAS 141 begins with the declaration that the “accounting for a business combination follows the concepts normally applicable to the initial recognition and measurement of assets acquired, liabilities assumed or incurred…as well as to the subsequent accounting for those items. ” A “business combination occurs when an entity acquires net assets that constitute a business or acquires equity interest of one or more other entities and obtains control over that entity or entities. ” In a combination effected through an exchange of cash or other assets it is easy to identify the acquiring entity and the acquired entity.
In a combination effected through an exchange of equity interests, the entity issuing the equity interest is generally the acquiring entity. However, in some business combinations, known as reverse acquisitions, it is the acquired entity that issues the equity interests. (Paragraphs 15-19 offer guidance in this complex area. ) Generally, in exchange transactions, the fair values of the assets acquired and the consideration surrendered are considered to be equal, and no gain or loss is recognized.
The total cost of the exchange transaction is then allocated to the individual assets acquired and liabilities assumed based on their relative fair values. “Fair value” is defined as “the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. ” The excess of the cost of the acquired assets over the fair value amounts assigned to the tangible assets, the financial assets and identifiable intangible assets is evidence of an unidentified intangible asset or assets, or goodwill.
In determining the cost allocation, the Statement offers guidance for many items, including: ? Receivables at present values, less allowances for uncollectibility and collection costs ? Finished goods inventory and merchandise at estimated selling prices less costs of disposal and reasonable profit allowance ? Work in process inventory at estimated selling prices of finished goods less cost to complete, cost of disposal and reasonable profit ? Raw materials inventory at current replacement costs ? Intangible assets that meet certain criteria are valued at estimated fair value ?
Liabilities and accruals at present value of amounts to be paid ? Other liabilities and commitments – such as unfavorable leases, contracts ad commitments – at present values of amounts to be paid. “An acquiring entity shall not recognize the goodwill previously recorded by an acquired entity, nor shall it recognize the deferred income taxes recorded by an acquired entity before its acquisition. A deferred tax liability or asset shall be recognized for differences between the assigned values and the tax bases of the recognized assets acquired and liabilities ssumed in accordance with FASB 109. ” SFAS 141 also changes how intangible assets are recognized. APB Opinion 16 required separate recognition of intangible assets that could be identified and named. SFAS 141 requires that acquired intangible assets apart from goodwill be recognized if: 1. the intangible arises from contractual or other legal rights, such as patents and trademarks OR 2. the intangible can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged individually, or in combinati