FAF COMPLETES POST-IMPLEMENTATION REVIEW OF FASB STANDARD ON BUSINESS COMBINATIONS

Norwalk, CT, May 22, 2013—The Financial Accounting Foundation (FAF) today announced the completion of the Post-Implementation Review (PIR) of an accounting standard intended to improve the relevance, representational faithfulness, and comparability of information that a company or organization reports about a business combination and its effects.

FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141R) (codified in Accounting Standards Codification Topic 805, Business Combinations), requires an acquiring organization to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired organization at the acquisition date, measured at their fair values as of that date, with limited exceptions.

The PIR found that Statement 141R resolved some of the issues associated with the purchase method of accounting for business combinations; that its principles and requirements generally are understandable and can be applied as intended; and that investors generally find the resulting information to be useful.

The review determined that some investors question the reliability of reported information related to assets and liabilities that are difficult to measure at fair value, that result in a bargain purchase, or that may be asset purchases. The review also found that the standard in certain areas introduced more costs and complexity to business combination accounting than FASB had anticipated.

The review of Statement 141R was undertaken by an independent FAF team working under the oversight of the FAF Board of Trustees. The team’s formal report is available at www.accountingfoundation.org. The International Accounting Standards Board (IASB) also is conducting a post-implementation review of International Financial Reporting Standards (IFRS) 3 (revised 2007), Business Combinations, which was issued concurrently with Statement 141R.

“The PIR team performed a robust, independent review of Statement 141R, and we believe that the findings and recommendations will help improve the standard-setting process for the FASB,” said FAF President and Chief Executive Officer Teresa S. Polley. “We thank all of the stakeholders from various backgrounds and industries who contributed important feedback to the PIR team on the real-world technical application, operationality, usefulness, and cost-effectiveness of the business combinations standard.”

FASB Chairman Leslie F. Seidman said, “The post-implementation review report on Statement 141R identified many positive aspects of the business combinations standard, including the resolution of prior practice issues as well as enhancements in the usefulness of information about a business combination. The report also identified some stakeholder concerns, many of which the Board has already begun to address, for example, push-down accounting and the definition of a business. Because this is a converged standard, we plan to coordinate our review efforts with the IASB.”

The Statement 141R review team received input from investors and other financial statement users; preparers of various sizes, industries and levels of experience with the standard; auditors; academics; and financial regulators. The review team reached its conclusions using judgment, considering all the input received, and striving to be objective and balanced. Based on its research, the review team concluded that:

• Statement 141R resolved some of the practice issues associated with the purchase method of accounting for business combinations. Some practice issues remain unresolved, including identifying when a new basis of accounting is appropriate and accounting for combinations between joint ventures and organizations under common control. Additionally, Statement 141R is convergent with IFRS 3 in many areas; however, some differences remain between the requirements of Statement 141R and IFRS 3.
• Statement 141R’s principles and requirements are understandable and generally can be applied as the FASB intended. The requirements in Statement 141R that stakeholders had the most difficulty applying relate to measuring assets acquired and liabilities assumed using the fair value requirements in FASB Statement No. 157, Fair Value Measurements; measuring the fair value of contingent consideration; and determining whether a transaction is a business combination or an asset purchase. Preparers for medium to small organizations reported the most difficulty in applying the standard.
• Investors generally find the information resulting from application of Statement 141R useful in understanding and analyzing most business combination transactions, including the measurement of the transaction at fair value. However, some review participants question the reliability or decision usefulness of the reported information for business combinations that (a) include assets and liabilities that are difficult to measure at fair value, (b) result in a bargain purchase, or (c) in substance may be asset purchases.
• The costs and complexity of applying Statement 141R are higher than the FASB anticipated. Much of the complexity relates to the application of Statement 157’s measurement requirements to certain items. The costs relate to the extensive external valuation expertise being sought by both preparers and auditors of financial statements. Smaller organizations may face additional costs for timely access to external resources.
• Statement 141R achieved improvements in the relevance and completeness of business combination information. Improvements in the area of comparability, reliability, and representational faithfulness of that information were not fully achieved in large part because of the questions about the reliability of fair value measurement requirements.

The PIR team also recommended the following improvements to the standard-setting process:

• Enhance and formalize the process for identifying, prioritizing, tracking, and resolving significant financial reporting issues.
• Regularly report on and update the status of those issues and their relative priorities.
• Clearly identify and document the need a project will address and how that determination was made. When resuming a deferred project, document the FASB’s reassessment of the need for the project.
• Consistently conduct key research (such as field work and reviewing academic studies) as early as possible in the agenda-setting and deliberation phases. In addition, fully identify, in a standard’s basis for conclusions, any research and/or economic principles relied upon when concluding on a significant issue.

The FAF also announced today that the PIR team will start a review of Statement 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Stakeholders who would like the opportunity to participate in a PIR survey on Statement 157, conducted by an independent survey firm on behalf of the Financial Accounting Foundation, should register online.


About the Financial Accounting Foundation

The FAF is responsible for the oversight, administration, and finances of both the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB). The Foundation is also responsible for selecting the members of both Boards and their respective Advisory Councils.

About the Financial Accounting Standards Board

Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit our website at www.fasb.org.