The Financial Accounting Standards Board and the International Accounting Standards Board issued the fruits of their most significant convergence effort yet—parallel proposals on new accounting for business combinations that seek to treat all combinations as acquisitions.
FASB and IASB jointly issued exposure drafts last week on business combinations that advocate a single accounting method in which one party is always identified as acquiring the other. FASB also issued a separate related proposed statement on noncontrolling interests, or minority interests, closely paralleling IASB’s direction on the same subject.
In keeping with their stated intention to move toward more principles-based, fair-value accounting, the FASB and IASB proposals would require a buyer to record an acquisition not based on purchase price, but on the fair value of the purchased entity—even if the buyer purchases less than full interest in the entity. FASB’s exposure draft is a proposed statement of Financial Accounting Standards titled Business Combinations—a replacement of FASB Statement No. 141.
FASB’s proposals would end current practice under U.S. Generally Accepted Accounting Principles of recording acquisition of a controlling interest, but not a 100 percent interest, by assigning different values to the portion purchased vs. the portion that is not controlled by the buyer.
The proposals also would require the buyer to recognize the acquired entity’s goodwill, which is the value in the business that exceeds its booked equity, even the portion attributable to the noncontrolled interest. In addition, FASB specifies that costs associated with the acquisition, such as legal and other professional fees, should be expensed at the outset instead of capitalized as part of the value of the acquisition.
Separately, FASB issued another proposed statement of Financial Accounting Standard titled Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries—a replacement of ARB No. 51. It defines minority interests as belonging to the parent company’s equity, not liabilities, as they are sometimes recorded.
FASB and IASB say the proposals will make financial statements more comparable by giving business combinations more consistent accounting treatment and by eliminating exceptions that exist in current accounting practices.
Experts predict significant resistance.
Ketz
Overall, the proposed revisions will bring more value from acquired entities onto balance sheets, says Penn State accounting professor J. Edward Ketz, because the new rules “gross up the values currently recognized by minority or noncontrolling interests.”
The increase in fair value will jack up depreciation and amortization charges, he said, and the additional goodwill value will create the potential for greater impairment losses down the road as values change. Neither is likely to sit well with corporate finance professionals, he said.
Dennis Beresford, former FASB chairman and accounting professor at the University of Georgia, says FASB has walked this path more than once in the past and been pelted by constituent objection. During his tenure in the 1980s, the Board championed new accounting for business combinations and eventually abandoned the project because of significant protest from the business community.
Beresford
“There are some strongly held views on these issues and I don’t believe the Board members have changed one mind in corporate America,” he said. “This is not something constituents were clamoring for. The business community has loudly objected in the past, and I’m not aware of any substantial interest in the user community either.”
Herbert Wong of Deloitte & Touche says in a Deloitte newsletter that the proposed statements will “change profoundly the way companies account for business combinations and minority interests.”
If the new rules were adopted as proposed, financial statement readers would need re-education on the content of balance sheets following a business combination, especially if the combination involved less than 100 percent of the acquired entity. On top of that, writes Wong, readers should “be prepared for greater income statement volatility in periods following a business combination.”
The complete proposals are available in the box above, right.
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