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

• Chapter 0 - Overview
  • Course Objectives
  • Introduction
  • Organization
  • The FASB Accounting Standards Codification™
    • Key Items Regarding the FASB ASC
    • Population of FASB ASC
    • Essential and Nonessential Content
    • Topical Structure
    • Referencing the FASB ASC
    • A Helpful Tool
• Chapter 1 - Consolidations and Business Combinations – Introduction and Background
  • Learning Objectives
  • Introduction
  • Why Present Consolidated Financial Statements?
  • Consolidation Purpose and Policy
    • Current U.S. GAAP Requirements for Consolidation and Business Combinations
  • Business Combinations and Noncontrolling Interests
    • FASB ASC 805, Business Combinations [SFAS No. 141(R)] and FASB ASC 810, Consolidation (SFAS No. 160)
    • Business Combinations
    • Noncontrolling Interests
  • Questions and Case
    • Case 1-1
• Chapter 2 - Business Combinations
  • Learning Objectives
  • Introduction
  • Overview of Guidance for Business Combinations
    • Key Terms Used in FASB ASC 805, Business Combinations [SFAS No. 141(R)]
    • The Acquisition Method
  • The Structure of Business Combinations – Asset Acquisition Versus Stock Acquisition
  • Questions and Case
    • Case 2-1 – Consolidation with Acquisition Accounting – Date of Acquisition
• Chapter 3 - Applying the Acquisition Method
  • Learning Objectives
  • Introduction
  • Identifying the Acquirer
  • Determining the Acquisition Date
  • Determining the Purchase Price
    • Determining What Is Part of the Business Combination Transaction
    • Determining Consideration Transferred
    • Contingent Consideration
    • No Transfer of Consideration
  • Recognizing and Measuring Assets, Liabilities, and Noncontrolling Interests
    • Recognition Conditions
    • Classifying or Designating Identifiable Assets Acquired and Liabilities Assumed
    • Measurement Principle
    • Exceptions to the Recognition or Measurement Principles
    • Contingencies
    • Tax Benefits
    • Share-Based Payment Awards
    • Restructuring Costs
    • Long-Lived Assets
    • In-Process Research and Development
    • Indemnification Assets
  • Recognizing Particular Assets Acquired and Liabilities Assumed
    • Operating Leases
    • Intangible Assets
    • Acquired Research and Development
    • Assets Held for Sale and Discontinued Operations
  • Partial Acquisitions
  • Goodwill
  • Bargain Purchase
  • Measurement Period
  • Measuring the Fair Value of Certain Assets
    • Assets with Uncertain Cash Flows (Valuation Allowance)
    • Assets Subject to Operating Leases in Which the Acquiree Is the Lessor
    • Assets the Acquirer Intends Not to Use or to Use in a Way Other Than Their Highest and Best Use
    • Measuring the Fair Value of a Noncontrolling Interest in an Acquiree
  • Questions and Cases
    • Case 3-1 – Acquisition Method
    • Case 3-2 – Acquisition Method
• Chapter 4 - Consolidated Financial Statements
  • Learning Objectives
  • Introduction
  • Accounting for the Parent’s Investment in the Subsidiary
  • Example 4-4 – 80% Ownership and the Cost Method
  • Example 4-5 – 80% Ownership and the Simple Equity Method
  • Example 4-6 – Effective Control with 40% Ownership and the Simple Equity Method
  • Example 4-7 – Intercompany Transactions
  • Other Issues in Subsequent Consolidations
    • Reacquired Rights
    • Assets and Liabilities Arising from Contingencies
    • Proposed FSP FAS 141(R)-a, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
    • Indemnification Assets
    • Contingent Consideration
  • Questions and Cases
    • Case 4-1 – Consolidation with the Cost Method
    • Case 4-2 – Consolidation with the Equity Method
    • Case 4-3 – Contingent Consideration
• Chapter 5 - Accounting for Noncontrolling Interests
  • Learning Objectives
  • Introduction
  • Fair Value of Noncontrolling Interest
    • Noncontrolling Interest Fair Value Implied by Consideration Transferred
    • Noncontrolling Interest Fair Value Implied by Other Valuation Techniques
    • Allocating Acquired Goodwill to the Controlling and Noncontrolling Interests
  • Partial Ownership Consolidations
  • Control Achieved in Steps
    • Worksheet Consolidation for a Step Acquisition
  • Parent Company Sales of Subsidiary Stock-Acquisition Method
  • Questions and Cases
    • Case 5-1
    • Case 5-2
• Chapter 6 - Accounting for Goodwill and Other Intangible Assets
  • Learning Objectives
  • Introduction
  • Initial Recognition and Measurement of Intangible Assets
    • Internally Developed Intangible Assets
  • Accounting for Intangible Assets
    • Determining the Useful Life of an Intangible Asset
    • Intangible Assets Subject to Amortization
    • Intangible Assets Not Subject to Amortization
  • Accounting for Goodwill
  • Recognition and Measurement of an Impairment Loss
    • Reporting Unit
    • Assigning Assets and Liabilities to Reporting Units
    • Assigning Goodwill to Reporting Units
    • Fair Value Measurements
    • The Two-Step Impairment Test
  • Other Issues
    • Impairment Testing by a Subsidiary
    • Impairment Testing When a Noncontrolling Interest Exists
    • Disposal of a Reporting Unit
    • Deferred Income Taxes
  • Financial Statement Presentation
    • Intangible Assets
    • Goodwill
  • Questions and Cases
    • Case 6-1 – Measuring Impairment
    • Case 6-2 – Disposal of a Portion of a Reporting Unit
• Chapter 7 - Combined Financial Statements
  • Learning Objectives
  • Introduction
  • Guidance for Combined Financial Statements
  • Questions and Cases
    • Case 7-1
    • Case 7-2
• Chapter 8 - Not-for-Profit Issues and Other Special Considerations
  • Learning Objectives
  • Introduction
  • Not-for-Profits
    • Existing U.S. GAAP Guidance
  • Combinations of Not-for-Profit Organizations
    • Proposed FASB Statement, Not-for-Profit Organizations: Mergers and Acquisitions
    • Proposed FASB Statement, Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition – an amendment of FASB Statement No. 142
    • Method of Accounting for a Combination of NFP Organizations
  • Parent-Company-Only Financial Statements
    • AICPA Technical Practice Aid 1400.32, Parent-Only Financial Statements and Relationship to U.S. GAAP
  • Question and Case
    • Case 8-1
• Chapter 9 - Variable Interest Entities
  • Learning Objectives
  • Introduction
  • What Is a Variable Interest?
  • What Is a Variable Interest Entity?
    • Assessing the Sufficiency of Equity
    • Expected Losses and Expected Residual Returns
    • Characteristics of a Controlling Financial Interest
  • Determining Whether the Reporting Entity Should Consolidate a VIE
  • Disclosure Requirements
    • Primary Beneficiary Disclosures
    • Reporting Entity Not the Primary Beneficiary
  • Timing of the Assessments under FASB ASC 810, Consolidation [FIN No. 46(R)]
  • FASB ASC 810, Consolidation [FIN No. 46(R)], and Related Party Leases
    • Application of FASB ASC 810, Consolidation [FIN No. 46(R)]
    • Conclusion
  • Summary
  • Case Studies – Accounting for Leasing Arrangements with Related Parties
    • Introduction
    • Case Study 1 – Lessor Is an Individual
    • Case Study 2 – Lessor Is a Single-Member LLC
  • Proposed Statement Amendments to FASB Interpretation No. 46(R)
    • Effective Date and Transition
  • FSPs Related to FIN No. 46(R)
    • FSP FIN No. 46(R)-1 – Reporting Variable Interests in Specified Assets of VIEs as Separate VIE under Paragraph 13 of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810-10-25-58)
    • FSP FIN No. 46(R)-2 – Calculation of Expected Losses under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810-10-55, paragraphs 50-54)
    • FSP FIN No. 46(R)-3 – Evaluating Whether as a Group the Holders of the Equity Investment at Risk Lack the Direct or Indirect Ability to Make Decisions about an Entity's Activities through Voting Rights or Similar Rights under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810-10-55, paragraphs 1-8)
    • FSP FIN No. 46(R)-4 – Technical Correction of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, Relating to Its Effects on Question No. 12 of EITF Issue No. 96-21, "Implementation Issues in Accounting for Leasing Transactions Involving Special-Purpose Entities" [Paragraph F2(b) of FIN No. 46(R) amended by FSP FIN 46(R)-6]
    • FSP FIN No. 46(R)-5 – Implicit Variable Interests Resulting from Related Party Relationships under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810-10-25, paragraphs 48-54, and FASB ASC 810-10-55, paragraphs 88-89)
    • FSP FIN No. 46(R)-6 – Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) (See FASB ASC 810-10 Sections 15, 25 and 55 for specific paragraph references)
    • FSP FIN No. 46(R)-7 – Application of FASB Interpretation No. 46(R) to Investment Companies (FASB ASC 810-10-15-12)
    • FSP No. FAS 140-4 and FIN 46(R)-8 – Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities
  • AICPA TPAs Related to VIEs
    • TPA 1400.32, Parent-Only Financial Statements and Relationship to U.S. Generally Accepted Accounting Principles
    • TPA 1400.29, Consolidated versus Combined Financial Statements under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities
    • TPA 1400.30, Stand-Alone Financial Statements of a Variable Interest Entity
    • TPA 1400.31, U.S. GAAP Departure for FIN No. 46(R)
    • TPA 1500.06, Application of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, to Income Tax Basis Financial Statements
  • Questions and Case
    • Case 9-1
• Chapter 10 - Latest Developments

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Consolidation Purpose and Policy

As the FASB has stated,

The purpose of consolidated financial statements is to present, primarily for the benefit of the shareholders and creditors of the parent company, the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single entity with one or more branches or divisions. There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. If an entity has one or more subsidiaries, consolidated financial statements rather than parent-company-only financial statements are the appropriate general-purpose financial statements.

Omission of relevant information about an entity’s assets, whether controlled directly or indirectly, and its liabilities, revenues, expenses, gains, and losses impairs the relevance of its financial statements.

The issue that makes the process of preparing consolidating financial statements more complex than simply adding balances together is how to deal with investments and transactions between the companies within the consolidated group. This process is explored in detail in Chapter 4, “Consolidated Financial Statements.” In the example above, the column labeled eliminations is used to remove the impact of transactions between members of the group and make the consolidated statements appear as if only one set of accounting records exists for the consolidated group.

Limitations also exist within these consolidated statements, and are explored later. These limitations make the decision about when to require consolidated financial statements more complex than this simple example.

Current U.S. GAAP Requirements for Consolidation and Business Combinations

FASB ASC 810, Consolidation (ARB 51, SFAS No. 94 and SFAS No. 160), is the source of current U.S. GAAP requirements for consolidation and states that

The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule, ownership by one entity, directly or indirectly, of more than 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.

Exceptions

There are certain exceptions to this general rule. A majority-owned subsidiary shall not be consolidated if control does not rest with the majority owner, for example, if any of the following are present:

• The entity is in legal reorganization.

• The entity is in bankruptcy.

• The entity operates under foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the entity.

• Approval or veto rights granted to minority shareholders (minority rights) are so restrictive as to call into question whether control rests with the majority owner.

• Control exists through means other than ownership of a majority voting interest.

Difference in Fiscal Periods

A difference in fiscal periods of a parent and subsidiary does not justify the exclusion of the subsidiary from consolidation. It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary’s financial statements for its fiscal period; when this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.

Policy Disclosure

Consolidated financial statements shall disclose the consolidation policy that is being followed. In most cases this can be made apparent by the headings or other information in the financial statements, but in other cases a footnote is required.

Business Combinations and Noncontrolling Interests

In June 2005, the FASB and the International Accounting Standards Board (IASB) issued joint proposals to improve and converge the accounting for business combinations and reporting of noncontrolling interests in consolidated financial statements. The result of this joint effort on the U.S. side was the issuance of FASB ASC 805, Business Combinations [SFAS No. 141(R)], and FASB ASC 810, Consolidation (SFAS No. 160).

FASB ASC 805, Business Combinations [SFAS No. 141(R)] and FASB ASC 810, Consolidation (SFAS No. 160)

On December 4, 2007, the FASB issued FASB ASC 805, Business Combinations [SFAS No. 141(R)], and FASB ASC 810, Consolidation (SFAS No.160). Effective for fiscal years beginning after December 15, 2008, the objectives of these standards are to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements.

FASB ASC 805 [SFAS No. 141(R)] and FASB ASC 810 (SFAS No.160) 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 changed the accounting for transactions with noncontrolling interest holders.

While certain aspects of the accounting for business combinations and consolidations were made simpler, FASB ASC 805 [SFAS No. 141(R)] and FASB ASC 810 (SFAS No.160) introduced new accounting concepts and created certain accounting complexities. Further, the expanded use of fair value accounting inherently created valuation complexities.

Here are just some of the key changes brought about by FASB ASC 805 [SFAS No. 141(R)] and FASB ASC 810 (SFAS No.160):

• Transaction costs and restructuring charges are expensed with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable U.S. GAAP.

• The accounting for certain assets acquired and liabilities assumed in an acquisition changed significantly. Some notable examples are that acquired in-process research and development (IPR&D) assets are capitalized; certain contingent assets and liabilities are recognized at fair value; and allowances for loan losses on the acquisition date were eliminated.

• Contingent consideration arrangements, depending on how they are structured, are 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 recognizes and measures at fair value 100% of the assets and liabilities, including goodwill, as if the entire target company had been acquired.

• Companies do not 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 are recorded back to the acquisition date.

Business Combinations

FASB ASC 805, Business Combinations [SFAS No. 141(R)], applies to all business combinations; FASB ASC 810, Consolidation (SFAS No.160), applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. The FASB ASC glossary defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations.

The FASB ASC glossary defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other 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 entity.”

FASB ASC 805 [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, and combinations between not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization.

FASB ASC 805 [SFAS No. 141(R)] requires that all business combinations be accounted for by applying the acquisition method. Applying the acquisition 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.

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