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Forecasting Post-Combination Earnings

A company planning an acquisition should consider using an acquisition accounting forecast for a business combination to estimate the total effect on post-acquisition earnings under Statement no. 141(R).

December 2008
by Michael Devine/Journal of Accountancy

The acquisition method of financial accounting for business combinations under FASB Statement no. 141(R), Business Combinations, requires the acquiring company to recognize and measure all identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired company as of the acquisition date at their respective fair values. The assets acquired may include assets that are not included on the acquiree’s balance sheet because they were expensed or written off before the acquisition date. Additionally, the acquirer may record liabilities arising from contingencies at the acquisition date that were not recorded by the acquiree. This article suggests a method for management to forecast the effects of a business combination on reported earnings.

Due to numerous possible factors, the effect of recording the business combination under Statement no. 141(R) on post-combination earnings can be significant.

This article has been excerpted from the Journal of Accountancy.
View the full article here.