Financial Reporting Presents: FASB Exposure Drafts on Business Combinations and Noncontrolling Interests

Transcription

1 Financial Reporting Presents: FASB Exposure Drafts on Business Combinations and Noncontrolling Interests

2 Agenda Introduction Background Business Combinations Noncontrolling Interests Questions & Answers 1

3 Introduction This webcast is based on the observations of Deloitte & Touche LLP representatives. Although we believe the information presented to be accurate, we cannot represent that it is complete or without error. This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance 2

4 Introduction Learning objective To enhance participants understanding of the provisions of the following FASB exposure drafts issued on June 30, 2005: Business Combinations a replacement of FASB Statement No. 141 Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries a replacement of ARB No. 51 3

5 Background Previous FASB decisions resulted in: FASB 141, Business Combinations FASB 142, Goodwill and Other Intangible Assets Current FASB considerations: Business Combinations Consolidated Financial Statements and Noncontrolling Interests Combinations Involving Not-for-Profit Organizations (NFPs) 4

6 Business Combinations Key dates Comment letter due to either the FASB or the IASB by October 28, 2005 Public roundtable meetings (October 27 and November 9, 2005) Final standard expected 2Q 2006 Effective date and transition Applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual period beginning on or after December 15,

7 Business Combinations Fundamental Principles 1. At the acquisition date, the acquirer becomes responsible and accountable for all of the acquiree s assets, liabilities and activities, regardless of the percentage acquired 2. Identifiable assets acquired and liabilities assumed are recorded at fair value on the date control is obtained 3. Total amount to be recognized for the acquiree should be the fair value of the acquiree as a whole 4. Business combinations are generally exchange transactions in which knowledgeable, unrelated willing parties are presumed to exchange equal values 6

8 Polling Question #1 In applying Statement 141, does your company use a third party valuation specialist? Yes No Not applicable 7

9 Business Combinations Significant Changes to FASB 141 Scope Measurement date for equity interests issued by the acquirer Acquisition-related costs of the acquirer Contingent consideration Contingent assets and liabilities 8

10 Business Combinations Significant Changes to FASB 141 (cont d) Costs associated with restructuring or exit activities In-process research and development Adjustments to provisional values during the measurement period Business combinations achieved in stages (i.e., step acquisitions) Acquisitions of less than 100% of the equity interests in the acquiree 9

11 Business Combinations Scope All acquisitions of businesses (except NFPs) Includes mutual entities Nullifies EITF 98-3, but carries forward the definition of a business with some important changes 10

12 Business Combinations Measurement date for equity interests issued by the acquirer Exposure Draft Acquisition date Current GAAP A reasonable period of time before and after terms are agreed to and announced Basis for conclusion Measurement at acquisition date eliminates mixed measurement basis that, at times, results from EITF Measurement at acquisition date eliminates complexities that, at times, results from EITF Converges with IFRS 3, Business Combinations 11

13 Business Combinations Acquisition-related costs of the acquirer (legal, investment bankers, etc.) Basis for conclusion Acquisition-related costs are not part of the exchange between the buyer and seller for the business Exposure Draft Accounted for separately from the business combination generally expensed as incurred Current GAAP Direct costs capitalized as part of the business combination Implementation Consideration: Any portion of the transaction price or any assets acquired or liabilities assumed or incurred that are not part of the exchange of the acquiree shall be accounted for separately from the business combination. 12

14 Polling Question #2 In the past, has your company included contingent consideration arrangements in business combinations? Yes No No opinion 13

15 Business Combinations Contingent consideration Recognition of contingent consideration at acquisition date Exposure Draft Fair value Current GAAP Amounts that are determinable at the date of acquisition are included in the cost of the acquired business 14

16 Business Combinations Contingent consideration (cont d) Subsequent accounting for contingent consideration classified as a liability* Subsequent accounting for contingent consideration classified as equity Exposure Draft Remeasure to fair value through earnings each period No remeasurement Current GAAP Distributions upon resolution of contingencies based on: (1) earnings result in additional cost of the acquired business, (2) security prices do not change the recorded cost of the acquired business *Contingent consideration arrangements that classified as a liability and are financial instruments within the scope of FASB 133 are accounted for under FASB

17 Business Combinations Contingent consideration (cont d) Basis for conclusion Acquirer s agreement to make contingent payments is an obligating event FASB 141 treatment resulted in delayed recognition of additional cost of the acquired entity Subsequent changes in value of contingent consideration are a result of post-combination events Implementation Considerations: Fair value measurement requirement and potential post-acquisition income statement remeasurement effects. 16

18 Polling Question #3 Do you expect the exposure draft, if issued as drafted, will result in a reduction of contingent consideration arrangements? Yes No Not sure 17

19 Business Combinations Initial recognition of contingent assets and liabilities Subsequent accounting for FASB 5 contingent assets and liabilities* Exposure Draft Fair value at the acquisition date Remeasure to fair value through earnings each period Current GAAP Preacquisition contingencies recorded at fair value if determinable during allocation period Do not remeasure to fair value Basis for conclusion Fair value is a better representation of the economic circumstances at the acquisition date *Non-FASB 5 contingencies are accounted for under other appropriate generally accepted accounting principles 18

20 Business Combinations Costs associated with restructuring or exit activities Exposure Draft Expensed by the combined entity when incurred Current GAAP Accrued as cost of the business combination Basis for conclusion New treatment is consistent with FASB 146, Accounting for Costs Associated with Exit or Disposal Activities Implementation Consideration: Acquirer must perform an analysis to determine whether these costs are assumed liabilities. 19

21 Business Combinations In-process research and development Exposure Draft Recognize as an intangible asset separately from goodwill at the acquisition date do not immediately write-off Current GAAP Expense as of the acquisition date Basis for conclusion IPR&D has future economic benefit Immediately writing off an item that meets the definition of an asset is not representationally faithful International convergence Implementation Consideration: Application of FASB 142 to IPR&D. 20

22 Business Combinations Adjustments to provisional values during the measurement period Exposure Draft Comparative information for prior periods presented is adjusted back to the acquisition date Current GAAP Generally, adjustments accounted for prospectively Basis for conclusion Improves comparability Converges with IFRS 3, Business Combinations 21

23 Polling Question #4 Based on your experience with past business combinations, will the requirement to retroactively adjust prior periods for changes made to provisional values during the measurement period result in: A retroactive adjustment almost every quarter until the measurement period ends? Limited adjustments as provisional allocations are generally accurate? No opinion 22

24 Business Combinations Business combinations achieved in stages (i.e., step acquisitions) Exposure Draft Remeasure previously held equity interests to fair value through earnings Current GAAP Do not adjust previously held equity interests Basis for conclusion Acquiring control of a business is a remeasurement event Reflects the economic value of the acquiree 23

25 Business Combinations Acquisitions of less than 100% of the equity interests in the acquiree Exposure Draft Initial measurement of noncontrolling interest s share of assets and liabilities, including goodwill, is fair value Current GAAP Initial measurement of noncontrolling interest s share of assets and liabilities is carryover basis; goodwill related to noncontrolling interest is not recorded Basis for conclusion Consistent with the general principle of initially recognizing assets acquired and liabilities assumed at acquisition-date fair values Can be applied in practice with reasonably high degree of consistency 24

26 Business Combinations Illustration Acquisition of less than 100% of the equity interests in the acquiree Global acquires 60% of Regional for $144 (control premium was paid) Fair value of Regional (includes goodwill) = $235 Fair value of Regional s identifiable assets net of liabilities = $200 Book value of Regional s net assets = $150 DR CR Exposure Draft Goodwill - controlling interest (144 (200*.6)) Goodwill noncontrolling interest (( )-24) Net assets Noncontrolling Interest ((200*.4)+11) Cash FASB 141 Goodwill - controlling interest (144 (200*.6)) Goodwill minority interest Net assets ((200*.6)+(150*.4)) Minority interest (150*.4) Cash

27 Polling Question #5 If the provisions of the business combinations exposure draft are finalized as drafted, do you anticipate increased use of third party valuation specialists in applying the new standard? Yes No No opinion 26

28 Noncontrolling Interests Background Replacement of ARB 51, Consolidated Financial Statements Consolidated financial statements Noncontrolling interests (minority interests) in a subsidiary Converges with IASB s revisions to IAS 27 Comment letter due to FASB on October 28,

29 Noncontrolling Interests Key Provisions Balance sheet classification Attribution of net losses of a subsidiary Increase or decrease in ownership in the subsidiary while parent retains control Loss of control 28

30 Noncontrolling Interests Balance sheet classification Equity Exposure Draft Current GAAP Mezzanine equity or liability Basis for conclusion Holders of noncontrolling interests own a residual interest in a component of the consolidated entity Concepts Statement 6 defines three elements of a statement of financial position: assets, liabilities, and equity noncontrolling interest does not meet the conceptual definition of a liability 29

31 Noncontrolling Interests Attribution of net losses of a subsidiary Basis for conclusion Exposure Draft Attribute to noncontrolling interest even if attribution exceeds the equity attributable to the noncontrolling interest Current GAAP Losses in excess of noncontrolling interest in equity of subsidiary are charged against the majority interest Noncontrolling interest holders participate proportionately in the risks and rewards of the subsidiary Implementation Consideration: This provision needs to be applied retrospectively, adjusting comparative financial statements. 30

32 Noncontrolling Interests Increase or decrease in ownership of the subsidiary while parent retains control Basis for conclusion Equity treatment is consistent with the decision that NCI is part of the equity of the consolidated group Exposure Draft Accounted for as equity transactions no gain or loss recognized Current GAAP Increase, use the purchase method no gain or loss recorded; decrease, record as disposition of interest gain or loss may result Implementation Consideration: Gains or losses recorded in net income for decreases in parent s interest when control is retained are applied retrospectively. 31

33 Noncontrolling Interests Loss of control Exposure Draft Remaining interest is remeasured at fair value with gain/loss recognized Current GAAP Remaining interest is not remeasured Basis for conclusion Loss of control is a remeasurement event that should result in gain/loss recognition Reflects the economic value of the remaining interest 32

34 Noncontrolling Interests Effective date and transition: Fiscal years beginning after December 15, 2006 Apply certain provisions retrospectively Balance sheet classification Attribution of net income and other comprehensive income Attribution of net losses of a subsidiary Decreases in ownership of the subsidiary while parent retains control Disclosures Shall not apply certain provisions retrospectively Increases in ownership of the subsidiary while parent retains control Loss of control 33

35 Polling Question #6 Do you believe the changes resulting from the noncontrolling interests exposure draft are an improvement to financial reporting? Yes No Haven t decided yet 34

36 Questions 35

37 Upcoming Webcast Join us September 20 th at 2 PM EDT as our Financial Reporting group presents: EITF Roundup: Highlights of the September Meeting 36