The AICPA's Guide to Business Combinations, Goodwill and Other Consolidation Issues

Learn how SFAS Nos. 141(R) and 160 have changed the rules for business combinations and accounting for non-controlling interests. Develop standards for applying the acquisition method and how to apply fair value concepts under SFAS No. 141(R). Identify variable interest entities’ impact under FASB Interpretation No. 46(R). Learn how SFAS No. 160 deals with non-controlling interests, including initial recognition and transactions affecting control.

• Properly account for a business combination under SFAS No. 141(R)
• Understand the accounting for non-controlling interests
• Determine when and when not to consolidate

Prerequisite:  Basic understanding of the principles of consolidation

• Determine when and how to consolidate.
• Apply proper accounting treatment for a business combination under generally accepted accounting principles.
• Determine when and how to present combined financial statements.
• Understand the consolidation requirements for not-for-profit organizations and other entities.

Many accounting entities consist of multiple legal entities, thus making consolidation a necessary part of preparing financial statements. An understanding of the requirements of consolidated financial statements is necessary for both accountants in industry and in public practice. In addition, a thorough understanding of the guidance on accounting for business combinations and accounting for goodwill is critical for all accountants.

This course will cover existing GAAP, including FASB statements on business combinations and goodwill, as well as discuss FASB Interpretation No. 46, Consolidation of Variable Interest Entities.

The course is a combination of discussion, examples to illustrate the concepts, plus thoughtful questions and answers and cases to test the understanding of the concepts covered in the course.

The course is organized as follows:

Chapter 1 – Consolidation and Business Combinations – Introduction and Background. Explains why consolidated statements are required, the concept of effective control plus coverage of existing GAAP on consolidations and business combinations.

Chapter 2 – Business Combinations. Discusses how a business combination can be accomplished as an asset acquisition or stock acquisition as well as accounting for the combination. SFAS No. 141(R), Business Combinations, is discussed in detail.

Chapter 3 – Applying the Acquisition Method. In accordance with SFAS No. 141(R), all business combinations are accounted for by applying the acquisition method (referred to as the "purchase method" in the previous SFAS No. 141). This chapter explores the steps necessary to apply this method.

Chapter 4 – Consolidated Financial Statements. Explores the process of preparing consolidated financial statements, eliminating intercompany investments and transactions, and presenting a noncontrolling interest when preparing consolidated financial statements.

Chapter 5 – Accounting for Noncontrolling Interests. According to the acquisition method, even though a company acquires less than 100% of another firm, the acquirer includes in its consolidated statements 100% of each of the assets acquired and liabilities assumed at their full fair values. This chapter explores the issues in accounting for these acquisitions and consolidations.

Chapter 6 – Accounting for Goodwill and Other Intangible Assets. Covers the requirements in SFAS No. 142, Accounting for Goodwill and Other Intangible Assets, including initial recognition and measurement of intangible assets. Also explains the requirements in SFAS No. 142 to test goodwill for impairment.

Chapter 7 – Combined Financial Statements. Covers existing GAAP that deal with the determination of when combined financial statements are appropriate.

Chapter 8 – Not-for-Profit Issues and Other Special Considerations. Discusses when consolidation is required for not-for-profit organizations using current GAAP requirements, and how the FASB's exposure drafts would affect these requirements. Other issues covered include parent-company-only financial statements.

Chapter 9 – Variable Interest Entities. Covers FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, including identification of variable interest entities and the primary beneficiary.

This manual is designed to be a permanent reference tool. We hope your reading of this manual enriches your professional learning experience.

Note. We use the terms he and she alternately throughout the course (except when a particular person is mentioned) since both sexes are well represented in the accounting and auditing areas.

• Be aware of the new FASB statements related to business combinations and noncontrolling interests
• Understand the acquisition method of accounting for a business combination
• Recognize the differences in accounting between the previous standards and the new standards
• Understand the accounting for partial acquisitions
• Be aware of the impact of transactions with noncontrolling interests

SFAS Nos. 141(R) and 160 are effective for fiscal years beginning after December 15, 2008 (January 1, 2009 for calendar year companies). This course presents the guidance in SFAS Nos. 141(R) and 160. Business combinations occurring or consolidated financial statements prepared prior to that date should not apply the guidance in these standards.

On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements. Effective for fiscal years beginning after December 15, 2008, the objective of the standards is to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements.

The new standards require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at "full fair value." The standards also require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. The new standards are the U.S. GAAP outcome of a joint project with the International Accounting Standards Board (IASB).

While certain aspects of the accounting for business combinations and consolidations will be simpler, the new standards introduce new accounting concepts and create certain accounting complexities. Further, the expanded use of fair value accounting will inherently create valuation Here are just some of the key changes:

• Transaction costs and restructuring charges will be expensed.
• The accounting for certain assets acquired and liabilities assumed in an acquisition will change significantly. Some notable examples: acquired in-process research and development (IP & D) assets will now be capitalized; certain contingent assets and liabilities will be recognized at fair value; and allowances for loan losses on the acquisition date will be eliminated.
• Contingent consideration arrangements, depending on how they are structured, will be measured at fair value until settled, with changes in fair value recognized each period in earnings.
• In partial acquisitions, when control is obtained, the acquiring company will recognize and measure at fair value 100% of the assets and liabilities, including goodwill, as if the entire target company had been acquired.
• Companies will no longer recognize gains or losses on the sale of shares of a subsidiary when control is retained.
• Material adjustments made during the measurement period to the initial acquisition accounting will be recorded back to the acquisition date.

SFAS No. 141(R) applies to all business combinations; SFAS No. 160 applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS No. 141(R) defines a business combination as a transaction or other event in which an entity (the acquirer) obtains control of one or more businesses (the acquiree or acquirees), even if control is not obtained by purchasing equity interests or net assets, as in the case of control obtained by contract alone. This can occur, for example, when a minority shareholder's substantive participating rights expire.

SFAS No. 141(R) defines a business as an integrated set of activities and assets that are capable of being managed to provide a return to investors or economic benefits to owners, members, or participants. Thus a set of activities and assets may be considered a business even if it cannot currently access customers or is an "early-stage development stage entity."

SFAS No. 141(R) also applies to combinations among mutual entities, but like the previous SFAS No. 141, it does not apply to formations of joint ventures, acquisitions of assets or groups of assets that do not constitute a business, combinations among entities under common control,

All business combinations will be accounted for by applying the acquisition method (referred to as the "purchase method" in the previous SFAS No. 141). Applying this method requires

• Identifying the acquirer;
• Determining the acquisition date and purchase price;
• Recognizing at their acquisition-date fair values the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree (with certain exceptions discussed below); and
• Recognizing goodwill or, in the case of a bargain purchase, a gain.

SFAS No. 160 changes the nature of the financial reporting relationship between the parent and minority shareholders in a consolidated subsidiary (the standards refer to minority shareholders as "noncontrolling interests").

The FASB has adopted the view that the consolidated financial statements should be presented as if the parent company investors and the other minority investors in partially owned subsidiaries have similar economic interests in a single entity. Therefore, minority shareholders are now viewed as having an interest in the consolidated reporting entity. As a result, the investments of these minority shareholders, previously recorded between liabilities and equity (the "mezzanine"), will now be reported as equity in the parent company's consolidated financial statements.

Since the noncontrolling interests are now considered equity of the entire reporting entity, transactions between the parent company and the noncontrolling interests will be treated as transactions between shareholders, provided that the transactions do not create a change in control. This means that no gains or losses will be recognized in earnings for transactions between the parent company and the noncontrolling interests, unless control is achieved or lost. These new principles fundamentally change not only the presentation, but also the accounting for noncontrolling interests in the consolidated financial statements.

Although the change makes certain aspects of the accounting for transactions between shareholders simpler, like step-acquisition accounting, other aspects of the new financial reporting relationship will be highly complex, for example, determining the fair value of the noncontrolling interests on the acquisition date.

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