An Overview of SFAS 141R
The Financial Accounting Standards Board released a revised version of Statement of Financial Accounting Standards No. 141, Business Combinations, ("SFAS 141R") on December 7, 2007. While the standard will not be effective for most practitioners until early 2009, financial managers should familiarize themselves with the rule changes now, so that they can be adequately prepared when SFAS 141R becomes effective. The revised standard sharpens the accounting guidance for business combinations as well as the scope of situations applicable to these rules, and also provides a significantly larger body of implementation guidance than its predecessor.
REPORTING REQUIREMENTS
The increased timing sensitivity and lengthened list of disclosure requirements in the revised standard will likely prove to be the most immediate challenge for financial managers. While current rules prescribe only a vague timeline for the reporting of business combinations, SFAS 141R establishes a defined measurement period that governs the time period within which the business combination must be reported. If the accounting for a business combination is not completed by the end of the reporting period the transaction occurred, a company must report provisional amounts for the incomplete items. The measurement period is the period (of up to one year following the close of a transaction) during which the company gathers the necessary information to complete the accounting. During this period, changes to the provisional amounts can be made without reporting the changes as errors in accounting.
In addition, the revised standard significantly expands the scope of disclosure requirements. The full list of required disclosures can be found in paragraphs 67 - 73 of SFAS 141R. Of note, if the company does not complete the business combination accounting by the end of the reporting period when the business combination occurred, the company must disclose the reasons why the accounting is incomplete. This requirement may create significant pressure for companies to complete the business combination accounting during that reporting period, which would be a dramatic change of pace for the completion of business combination accounting for many reporting companies. Given the changes in reporting requirements, discussing the pertinent valuation issues with the valuation specialist early in the process will be helpful in minimizing the potential for unsavory surprises.
PURCHASE CONSIDERATION
SFAS 141R includes several important changes to the measurement of purchase consideration, the most significant of which is the inclusion of contingent consideration (i.e. earn-out consideration). When the revised standard becomes effective, consideration transferred in a business combination will be defined as the aggregate of the fair values of assets transferred from, liabilities incurred, and equity interests issued by the acquirer to the target company and its previous owners.