BUSINESS COMBINATIONS WITH SFAS 141R, 157, AND 160

Transcription

1 BUSINESS COMBINATIONS WITH SFAS 141R, 157, AND 160 A GUIDE TO FINANCIAL REPORTING To Be Used in Conjunction with Official Pronouncements SFAS 141R, 157, and 160 Michael J. Mard, CPA/ABV, ASA Steven D. Hyden, CPA/ABV, ASA Edward W. Trott, CPA, FASB (retired) WILEY John Wiley & Sons, Inc.

2 CONTENTS About the Authors xiii Michael J. Mard, CPA/ABV, ASA xiii Steven D. Hyden, CPA/ABV, ASA xiii Edward W. Trott, CPA. xiv Acknowledgments xv Preface xvii Introduction : 1 Philosophy of Fair Value 1 SFAS Fair Value Philosophy,...3 Convergence with IFRS '. 4 Norwalk Agreement 7 ThelASB '. 9 Use of Valuation Specialists by Accountants and Auditors Fair Value and SFAS Scope 13 Fair Value Definition...14 Principal (or Most Advantageous) Market 15 Transaction Costs 16 Transportation Costs '.16 Market Participants r. 17 Highest and Best Use and Valuation Premise 18 Applicability to Liabilities '. : 19. Entry Price Versus Exit Price : 20 Valuation Techniques: Market, Income, and Cost Approaches 21 Cost Approach,. 22 Income Approach 22 Examples of Present Value Techniques 22 Market Approach < : 23 Risk/Uncertainty Premiums 24 Inputs: Observable and Unobservable 25 Fair Value Hierarchy 32 Inputs Based on Bid and Ask Prices 34 Restrictions 35 Stock v..35 Assets '. : 35 Events Subsequent to a Quoted Price ; '. 36 vii

3 Securities Owned as an Asset and Blockage Discounts 37 Disclosures 38 Subsequent Guidance about SFAS EITFs ;39 FSPs. 39 Preparer's Guidance Flowchart of SFAS SFAS 141R 46 Overview and Objective 46 Statement 141R and IFRS 3 (as revised)..:...46 Statement of 141R Reduces the Volume of US GAAP.46 Expanded Scope of Applying the Acquisition Method 47 Transactions Not Covered by 141R 48 The Acquisition Method 49 Identifying the Acquirer Determining the Acquisition Date : 49 Recognition arid Measurement 50 Postcombination Expenses (Restructuring or Exit Activities) 50 Acquisition-Related Costs 51 Determining What Is Part of a Business Combination 52 Preexisting Relationships or Arrangement 53 Compensation Arrangements 54 Hidden Acquisition Costs 55 Classifying or Designating Assets and Liabilities 55 Examples of Acquired Assets and Assumed Liabilities Initially Recognized at Fair Value 56 Assets 56 Liabilities 57 Recording Assets and Liabilities at SFAS 157 Fair Value Differs from Guidance in SFAS Exceptions to the Recognition or Measurement Principles 58 Assets/Liabilities Arising from Contingencies 58 Acquirer Obtains a Reacquired Right..60 Share-Based Payment Awards 60 Assets Held for Sale 61 Income Taxes, Tax Uncertainties, and Tax Valuation Allowance 62 Employee Benefits 63 Indemnification Assets 63 Additional Specific Guidance 64 Operating Leases 64 Capital Leases 65 Intangible Assets Intangible Assets Not Recognized by Acquiree 69 viii

4 Research and Development Assets : 70 Assets an Acquirer Does Not Plan to Use or Sell 71 Recording the Consideration Transferred to Acquire the Acquiree, Including Contingent Consideration.' 72 Contingent Consideration 72 Calculation of Goodwill and Recording Noncontrolling Interest in the Acquiree 74 Goodwill Calculation in a 100% Acquisition.74 Goodwill Calculation in a Full Acquisition (Acquirer Has an Existing Investment) 75 Calculation of Goodwill in a Partial Acquisition and Recording Noncontrolling Interest 75 Gain from a Bargain Purchase >.. x 77 The Measurement Period for Recording a Business Combination 78 Disclosures about a Business Combination 79 Selected Disclosure Requirements 79 Effective Date and Transition, 80 Other Guidance in Statement 141R 81 Subsequent Guidance about SFAS 141R 81 EITFs '. : 81 Statement 160 and Noncontrolling Interest, 82 Objective and Scope '.,. 82 Definition 83 Transactions that Change the Parent's Ownership Interest in a Subsidiary 83 Purchase of Noncontrolling Interest (Minority Interest)..., 83 Reduction in Parent Ownership Interest 84 Deconsolidation of a Subsidiary.,...85 Classification of Noncontrolling Interest 86 Changes to the Balance Sheet,. 87 Changes to the Income Statement. ;...87 Additional Points about Noncontrolling Interest 89 Disclosures about Noncontrolling Interests 89 Selected Disclosure Requirements 90 Effective Date and Transition 91 Subsequent Guidance about SFAS 160, 91 Comparing SFAS 141 with SFAS 141R! (New) SFAS 141R 92 (Old) SFAS R Flowchart...,.. 93 Case Study: Determining the Value of Goodwill and Other Intangible Assets in a Business Combination, : 97 Consideration and Calculation of the Total of Intangible Assets and Goodwill 99 Identifying Intangible Assets, : 105 ix

5 Remaining Useful Life Analysis : 106 Business Enterprise Analysis 108 Discounted Cash Flow Method Discount Rate Ill Valuation of Tangible Assets 113 General Discussion 113 Marketable Securities 113 Accounts Receivable.' 114 Inventory : 114 Prepaid Expenses 114 Land and Building : Machinery and Equipment '...! 115 Organization Cost and Existing Goodwill : 115 Summary of Values 115 Valuation of Intangible Assets '. 116 Rates of Return 117 Acquired Software 118 Amortization Benefit 120 Discount Rate for Amortization Benefit 121 Assembled Workforce, :. 122 Trade Name : 124 Noncompete Agreement 126 Technology (Existing and In-process) and Customer Relationships The Multiperiod Excess Earnings Method 129 Existing Technology ; 132 In-Process Research and Development ;.'...,..133 Customer Relationships *. 134 Valuation of Goodwill 134 Weighted Average Return on Assets 135 Case Study Accounting Entry : 137 Abbreviated Sample Worksheet 138 Sample Balance Sheet 140 Case Study Exhibits :.' 142 Other Discussion Issues? 164 FASB's Valuation Resource Group 164 Issue No Impact of Valuing Contingent Liabilities under FAS 141(R) - Gross Versus Net Analysis \.'. 164 Issue No Fair Value of a Noncontrolling Interest and a Previously held Equity Interest '. : ; 165 Issue No Identification and Allocation of Market Participant Synergies,...166

6 Issue No Fair Value of Accounts Receivable, Account Payable, and Other Accrued Liabilities 166 Issue No Allocation of In-use Valuation to Individual Unit of Account 167. Issue No Fair Value Measurement of Liabilities Under FAS ! Issue No Observable Versus Unobservable Inputs 169 Issue No Fair Value Disclosures : 170 Issue No IASB Expert Advisory Panel White Paper 176 Issue No Contingent Liabilities 176 Issue No Employee Benefit Plans, 177 Issue No Determining Whether a Discount Should be Applied for a Restriction on Sale 177 Issue No Observable versus Unobservable Fair Value Measurements in the Current Credit Environment..179 Issue No Allocation of Portfolio-based Credit Adjustments for Hedge Effectiveness Testing 181 Issue No Fair Value of Inventory 181 Issue No Meaning of Legally Permissible in Assessing Highest and Best Use 181 Issue No Valuation of Intangible Assets Using "Current Replacement Cost" 182 Issue No Customer Relationships 182 Issue No Accounting for Assets that the Acquirer Does Not Intend to Use or Intends to Use in a Way Other than its Highest and Best Use 183 Issue No Use of Net Asset Value in Fund of Funds Investments 184 Issue No Accounting for Held to Maturity Debt Instruments 189 Issue No Pension Plan Disclosures 189 Issue No Accounting for Transaction Costs in Determining the Fair Value of an Investment 190 Issue No (to Be Discussed with Issue No. 11) - Adjustments to Level 2 Inputs (Related to Definition of Significant) 190 Issue No (to Be Discussed with Issue No. 12)-Definition of Significant 191 Issue No Fair Value of Asset Acquired Through the Highest Bid in Auction 191 Issue No Highest and Best Use Land Example 192 Issue No Fair Value of a Liability with Third-Party Guarantees 192 Issue No Assets without Markets, 192 Issue No Defensive Value: Accounting Impact of Using Marketplace Participant Assumptions to Measure the Fair Value of an Asset That the Combined Entity Does Not Intend to Use or Sell 193 Issue No Determination of PrincipalMarket 194 Issue No Elements of Consideration for Determination of "Active Market" 194 Issue No How to Factor Liquidity into Fair Value Measures 195 Issue No Unit of Account Decomposition of an Asset 195 Issue No Fair Value of Mortgage Loans 197 Other Implementation Aids 198 xi

7 Fair Value Measurement Checklist '., 198 Preparer's Conclusions Worksheet 207 Acquiree Management Interview - Operations 208 Acquiree Management Interview - Financial Review : 214 DataRequestRelatedtoIntangible Assets Acquired Procedures for the Valuation of Intangible Assets 226 xn