FAS 141 and 142_en
Report About
SFAS no.141 (Business combination)
& SFAS no.142 (Goodwill & other Intangible Assets)
SUBMITTED BY
Mohammed Amin Al-Falleh
SUPERVISED BY
DR.EMAD ABU SHA'BAN
2010
Table of contents
Introduction
SFAS no.141
Overview
Analysis of SFAS.141
SFAS. 141 Scpoe
SFAS no.142
Overview
Analysis of SFAS.142
SFAS. 142 Scpoe
Presentations and Disclosures
Summary of SFAS 141 & 141R ..
INTRODUCTION
During the 1980's and 1990's a great number of business mergers and acquisitions took place. The generally accepted accounting principles to record the initial transaction and to account for the acquired assets during their estimated useful lives this were well established.
During the 1970’s the FASB had an active project on its agenda to reexamine the accounting for business combinations and acquired intangible assets. However, action on the project was deferred until, in 1981, the Board removed the project from its agenda entirely, to focus on higher priority projects.
In 1996 the Financial Accounting Standards Board (FASB) included the project on business combinations on its agenda. The purpose was to “improve the transparency of accounting and reporting of business combinations, including the accounting for goodwill and other intangible assets.” The FASB’s study confirmed that users of financial statements placed greater emphasis on the goodwill asset reported on the balance sheet, rather than an allocation of goodwill amortization expense reported on the income statement. This project resulted in FASB 141 – Business Combinations, and FASB 142 - Goodwill and Other Intangible Assets.
This emphasis on asset valuation rather than expense recognition reflected the FASB’s evolving emphasis on fair value measurement of assets and liabilities. The FASB achieved their two stated goals, that:
- All business combinations be accounted for in the same manner
- Goodwill and intangible assets are accounted for in a manner that reflects economic reality.
Another reason the Board undertook the project is because “many perceived the differences in the pooling-of-interests method and purchase method to have affected competition in markets for mergers and acquisitions. Entities that could not meet all of the conditions for applying the pooling method believed that they faced an unlevel playing field in competing for targets with entities that could apply that method.”
Under the pooling-of-interests method, the carrying amount of assets and liabilities recognized in the statements of financial position of each combining entity are carried forward to the statements of the combined entity. No other assets or liabilities are recognized as a result of the combination, and thus the excess of the purchase price over the book value of the net assets acquired is not recognized.
This “unlevel playing field” was perceived to extend internationally, as well. “Cross-border differences in accounting standards for business combinations and the rapidly accelerating movement of capital flows globally heightened the need for accounting standards to be comparable internationally.” Thus the Canadian equivalent of FASB conducted a similar project concurrently with FASB.
Differences between two method
Under pooling-of-interest :
1- Assets & liabilities acquired are recorded @ book value
2-Now excess , No GW. Recorded . No additional Depreciation or Amortization expenses .
3-Retaind earnings also added to RE of the acquirer .
4-Equity share issued recorded @ BV.
5-Expeceted earnings and related earnings per-share
are greater .
Under Purchase method :
1- Assets & liabilities acquired are recorded at FV.
2-Excess of cost over Net-assets FV. is recorded as goodwill .
3-There are anew depreciation and amortization , lower future earnings and earnings per-share .
4-Equity security issued @FV .
5-The Acquired Retained earnings are not recognize .
The FASB’s project culminated in two new pronouncements, SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets.
SFAS 141 – Business Combinations
Overview
FAS 141 supersedes APB Opinion 16, Business Combinations. Under APB 16, business combinations were accounted for using either the pooling-of-interests method or the purchase method. The pooling-of-interests method was required when twelve specified criteria were met; otherwise the purchase method was required. However, the twelve criteria did not distinguish transactions that were economically dissimilar and thus similar business combinations were accounted for using different methods, and producing dramatically different results.
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.