FASB and IASB Issue First Converged Standard: It's on M&A Accounting

In a significant milestone towards international accounting standards, the FASB and the IASB have issued their first converged accounting standard as part of their long-range convergence initiative. The new M&A accounting standard was issued as FASB Statement 141 (R) and revised IFRS 3. The new standards are designed to improve and converge internationally the accounting for business combinations and acquisitions. In publishing its equivalents to IFRS 3, FASB made fundamental changes to its M&A accounting in order to bring US accounting into line with IFRS 3. The changes to IFRS 3, in contrast, were relatively small. Both the SEC and the European have blessed the FASB-IASB best efforts convergence project.

The new standards are substantially similar, with the prominent exception being that of measuring non-controlling interests. The revised IFRS 3 permits an acquirer to measure the non-controlling interests in an acquiree either at fair value or at its proportionate share of the acquiree’s identifiable net assets while SFAS 141(R) requires the non-controlling interests in an acquiree to be measured at fair value.

There are also some legacy differences. For example, the two Boards have different definitions of control. Consequently, it is possible that a transaction that is a business combination in accordance with revised IFRS 3 might not be a business combination in accordance with SFAS 141(R). The IASB will issue a discussion paper on this topic in 2008.

Under the new converged standards, acquisition-related costs will be recognized as expenses, rather than included in goodwill. In addition, the requirement to measure at fair value every asset and liability at each step for the purpose of calculating a portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired.

Further, restructuring charges will be accounted for as they are incurred, rather than allowing them to be anticipated at the time of the business combination. Moreover, in -process research and development will be recognized as a separate intangible asset, rather than immediately written off as an expense.The converged standards also clarified the requirements for how the acquirer accounts for some of the assets and liabilities acquired in a business combination that had been proving to be problematic, such as replacing the acquiree’s share-based payment awards, embedded derivatives; cash flow hedges; and operating leases.

With over 250 comments received on the proposal, the IASB decided to issue a feedback statement explaining how the comments affected the final standards. One important result from the comments was the decision to abandon the full goodwill model under which goodwill is derived by measuring the difference between the fair value of the business as a whole and the sum of the net assets acquired and liabilities assumed.

Commenters feared that the proposal placed too much emphasis on estimating the fair value of the business; and that this estimate can be unreliable. In response, the standard-setters shifted the focus back to the components of business combination transactions, being the consideration transferred and the assets, liabilities and equity instruments of the acquiree. Any difference between the consideration transferred and the components of the business would be attributed to goodwill.