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Business Combinations Applying FAS 141 Post-Enron June 2002 (SmartPros) Influenced by the merger and acquisition activity of the 1990's, the Financial Accounting Standards Board became aware of the fact that two economically similar transactions may be accounted for by different methods that produce dramatically different financial statement results. Consequently, FASB concluded one year ago that the purchase method, rather than pooling-of-interests, is the appropriate method for all business combinations. SmartPros FMN Online recently spoke with managing director Philip Antoon, in the New York City office of Duff & Phelps LLC, to discuss how organizations can account for mergers and acquisitions utilizing Statement 141, Business Combinations.
A business combination occurs when one company acquires the net assets constituting a business or obtains control over a company. As companies begin to implement Statement No. 141, many corporate financial managers are looking at three distinct implementation phases:
Antoon described Phase One as an intricate step that most companies tend to overlook.
"Rather than just performing a 141 analysis for an acquisition, the first step is to take the acquired assets and allocate those to the acquiring companies to reporting units first ... The starting point for identifying a reporting unit is at the 131 level. You then must determine if you should push the reporting unit beneath that level," explained Antoon.
Here, there are three things to look at. One, are there separate financial statements kept for that reporting unit? Two, do they have a segment manager who is overseeing the operations of that reporting unit? And three, do we have economic differences between the reporting units?
"If we don't have all those factors, the 131 operating segment would be equal to the reporting unit level," added Antoon.
Then, in Phase Two, the task at hand is to look at FASB’s outlined intangible assets (in Paragraph 39 of the standard) that should be reviewed and potentially identified as being valuable and amortized.
In addition to determining fair value, Antoon said, Phase Two involves determining the remaining useful life of the assets.
"The reason you determine the remaining economic life of the asset is to determine the amortization period for that asset. The key in determining the remaining economic life is matching the economic benefits of that asset to the period over which you amortize," said Antoon.
"So, first determine a fair value, then determine the remaining useful life for that asset over which it should be amortized."
In contrast, for tangible assets, look more towards a cost approach. The methodology most often used, Antoon said, is depreciated replacement cost approach.
Finally, in Phase Three, chief financial officers sit down with management to review assumptions and methodologies.
"The auditors must perform a thorough audit of the analysis [CFOs] have performed," explained Antoon.
An important note: Changes coming in August of this year, a result of the post-Enron auditor independence rules, will prohibit outside auditors from helping companies with valuation issues. In the past, auditors typically performed this service for their audit clients.
"I think most companies, as we move into the middle of 2002 and into 2003, will really take independence to be a serious issue in terms of FAS 141 and 142 analysis," concluded Antoon.
Addressing whether or not FASB has been successful in its project, Antoon said it may be too soon to tell, as M&A activity in the U.S. within the past year has been low.
Those companies that are implementing 141 "are doing a very good job at it so far," he added.
This article highlights just a few of the topics covered in FMN Online's multimedia segment, FASB's Goodwill Guidance: Effective Implementation, available now as one CPE credit for $44.99, or included with a subscription to FMN Online.
Learn more about FMN Online
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