Accounting for Income Taxes in a Business Combination. Seidman, Trott, and Young IASB: Leisenring. Rhine

Transcription

1 MINUTES To: From: Board Members Business Combinations: Applying the Acquisition Method Team (Rhine, Ext. 296) Subject: Minutes of the January 31, 2007 Board Meeting Date: February 14, 2007 cc: FASB: Bielstein, Smith, MacDonald, Bossio, Tamulis, Posta, Vessels, Willis, Cafini, Delmonico, Rhine, Income Tax team (Cassel, Paul, Beckendorff, Kosminoff), Glotzer, Lapolla, Polley, Chookazsian, Gabriele, Sutay, Carney, Allen, FASB Intranet; IASB: Leisenring, Upton, Hickey, McGeachin, Teixeira, Buschhueter, Quiring, Eastman, Kwiatkowska The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation. Topics: Accounting for Income Taxes in a Business Combination Basis for Discussion: Board Memorandum No. 37 Length of Discussion: 9:10 to 9:30 a.m. Attendance: Board members present: Staff in charge of topic: Other staff at Board table: IASB participants: FASB: Herz, Batavick, Crooch, Linsmeier, Seidman, Trott, and Young IASB: Leisenring Posta Bielstein, Cassel, Paul, Tamulis, Beckendorff, and Rhine Buschhueter, Kwiatkowska, McGeachin, Teixeira (by phone)

2 Summary of Decisions Reached: The Board continued redeliberations of its June 2005 Exposure Draft, Business Combinations, focusing on the accounting for income tax assets and liabilities in a business combination. The Board made the following decisions. 1. An acquirer would measure income tax assets and liabilities acquired in a business combination in accordance with FASB Statement No. 109, Accounting for Income Taxes, and related interpretive guidance, including FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. [That decision affirms the Exposure Draft proposal.] 2. An acquirer would recognize any changes in its own deferred tax assets that result from a business combination in profit and loss or equity as of the acquisition date. [That decision affirms the Exposure Draft proposal.] 3. An acquirer would apply the measurement period guidance in accounting for changes to acquired deferred tax assets after the acquisition. That is, a. A change to a deferred tax asset valuation allowance within the measurement period that results from new information about facts and circumstances that existed as of the acquisition date would be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, an acquirer would recognize any additional decreases of the valuation allowance as a reduction of income tax expense. b. An acquirer would recognize all other changes in a deferred tax asset valuation allowance through a corresponding adjustment to income tax expense. [That decision affirms the Exposure Draft proposal with slight modifications] 4. An acquirer would recognize changes to acquired income tax uncertainties after the acquisition similarly to the accounting for changes in acquired deferred tax assets. That is, a. A change to an acquired income tax uncertainty within the measurement period that results from new information about facts and circumstances that existed as of the acquisition date would be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, an acquirer would recognize any additional increases of the recognized income tax uncertainty as a reduction of income tax expense. b. All other changes in the acquired income tax uncertainties would be accounted for in accordance with Interpretation The Board also considered but rejected a suggestion made by some respondents to the Exposure Draft that an exception should be made to the comprehensive recognition of deferred taxes for indefinite-lived intangible assets. [That decision affirms the Exposure Draft proposal.] 2

3 The staff reported that the IASB reached the same conclusions when it discussed these issues at its January 2007 meeting, with the exception of acquired income tax uncertainties. Because the IASB is developing proposals for the treatment of tax uncertainties in the short-term convergence project on income taxes, the IASB decided that, pending those proposals, no changes should be made to IAS 12, Income Taxes, relating to tax uncertainties. Objectives of Meeting: The objective of the meeting was for the Board to reach decisions on the following topics: 1. Measurement attribute for income tax assets and liabilities acquired in a business combination 2. Recognition of changes to the acquirer s deferred tax assets that result from a business combination 3. Subsequent changes to deferred taxes acquired in a business combination 4. Subsequent changes to tax uncertainties acquired in a business combination 5. Recognition of deferred taxes for indefinite-lived intangible assets. The objective was met. Matters Discussed and Decisions Reached: 1. Ms. Posta noted that the business combinations Exposure Draft proposes to retain much of the existing guidance with respect to the accounting for income taxes in a business combination. However, the Exposure Draft proposes limited amendments to Statement 109 and IAS 12 to further converge those standards and to make those standards more consistent with the principles in the Exposure Draft to the extent possible. ISSUE 1: EXCEPTION TO THE FAIR VALUE MEASUREMENT PRINCIPLE FOR INCOME TAXES 2. Ms. Posta stated that FASB Statement No. 141, Business Combinations, and IFRS 3, Business Combinations, currently require that income tax assets and liabilities acquired in a business combination be measured in accordance with existing income tax guidance in Statement 109 and IAS 12, respectively, rather than at fair value. The Exposure Draft proposes to retain that exception, primarily because of the complexities that would arise in periods subsequent to the acquisition under the temporary difference 3

4 approach for income tax accounting. The Boards rejected measuring deferred tax assets and liabilities at fair value because Statement 109 and IAS 12 prohibit discounting of both deferred tax assets and liabilities. Additionally, as observed in developing Statement 109, the conceptual and implementation issues associated with discounting income taxes are numerous and complex. 3. Ms. Posta noted that respondents generally support retaining this exception. The staff recommends that an acquirer measure income tax assets and liabilities acquired in a business combination in accordance with Statement 109 and related interpretive guidance, including Interpretation The Board unanimously agreed with the staff s recommendation. [That decision affirms the Exposure Draft proposal.] ISSUE 2: CHANGES IN THE ACQUIRER S DEFERRED TAX ASSETS THAT RESULT FROM A BUSINESS COMBINATION 5. Ms. Posta stated that IAS 12 and Statement 109 presently require different accounting for changes to the acquirer s deferred taxes that result from a business combination. IAS 12 requires that an acquirer recognize any changes in its deferred tax benefits as a transaction separately from the business combination. Such changes are recognized in postcombination profit and loss or equity. Statement 109 requires that an acquirer recognize any changes in its deferred tax benefits as part of business combination accounting, generally as an adjustment of goodwill. The Exposure Draft proposes that an acquirer recognize any changes in the acquirer s deferred tax benefits at the acquisition date in profit and loss or equity, which is consistent with the IAS 12 guidance. 6. Ms. Posta noted that the majority of respondents agree with the proposal in the Exposure Draft. Those respondents commented that the proposal seems like a logical extension of excluding effects that are not part of the exchange from the accounting for the business combination. Other respondents disagree with the proposal because they believe that an acquirer s tax synergies are factored into the price that the acquirer is willing to pay and, therefore, those tax synergies constitute goodwill. The staff 4

5 acknowledges concerns that there may be some potential scenarios in which a portion of the tax synergies are factored into the price, but believes that the portion that is within the total consideration paid is difficult to identify and judge. Concerns raised in the comment letters about the proposed guidance were considered by the Boards in their deliberations. Therefore, the staff recommends that an acquirer recognize changes to its own deferred tax benefits at the acquisition date in profit and loss or equity (separately from the business combination accounting). 7. The Board with the staff s recommendation. [All Board members agreed.] [That decision affirms the Exposure Draft proposal.] ISSUE 3: CHANGES TO THE ACQUIRED DEFERRED TAX BENEFITS AFTER THE BUSINESS COMBINATION 8. Ms. Posta stated that the Exposure Draft proposes changes to paragraph 30 of Statement 109. Specifically, the Exposure Draft would require that there is a rebuttable presumption that decreases in the valuation allowance within one year of acquisition be accounted for by reducing goodwill. The rebuttable presumption could be overcome if the recognition of the tax benefits results from a discrete event or circumstance that occurred after the acquisition date, in which case the tax benefits would be reported as a reduction of income tax expense. Following the one-year period, decreases in the valuation allowance would be accounted for as a reduction of income tax expense. 9. Few respondents addressed this issue and the responses received were mixed. Those that disagree with the proposal support reducing goodwill indefinitely because they view the required measurement for deferred tax assets as being drastically different from fair value. Those that support ending the indefinite reduction of goodwill believe that, conceptually, changes in estimates pertaining to deferred taxes recognized in a business combination should be the same as other revisions to the amounts recorded at acquisition. The staff disagrees with the assertion in the comment letters that measurement exceptions should equate to indefinite adjustments to goodwill. The Exposure Draft contains other limited exceptions to the recognition and measurement 5

6 principles, such as employee benefit plans. However, no other exception results in an indefinite adjustment to goodwill for subsequent changes. 10. Ms. Posta stated that some respondents suggested slight modifications to the proposal to clarify the length of adjustment, to address increases and decreases of the valuation allowance consistently, and to remove the rebuttable presumption. The staff agrees with those suggestions and recommends that an acquirer apply the measurement period guidance in accounting for changes to acquired deferred tax assets after the acquisition. That is, a. A change to a deferred tax asset valuation allowance within the measurement period that results from new information about facts and circumstances that existed as of the acquisition date would be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, an acquirer would recognize any additional decreases of the valuation allowance as a reduction of income tax expense. b. An acquirer would recognize all other changes in a deferred tax asset valuation allowance through a corresponding adjustment to income tax expense. 11. The Board agreed with the staff s recommendation for amendments to paragraph 30 of Statement 109. [All Board members agreed.] [That decision affirms the Exposure Draft proposal with slight modifications.] Mr. Batavick noted that the decisions reached by the Board are more consistent with the principles of the Exposure Draft. ISSUE 4: CHANGES TO ACQUIRED TAX UNCERTAINTIES AFTER THE BUSINESS COMBINATION 12. Ms. Posta noted that current accounting guidance treats decreases in a valuation allowance (discussed in Issue 3) and changes to tax uncertainties consistently. Specifically, EITF Issue No. 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination, and FASB Staff Q&A Question 17 require that the effects of adjustments to the amounts recognized for income tax uncertainties after the acquisition date be applied first to reduce goodwill attributable to that acquisition to zero, second to reduce other noncurrent intangible assets related to that acquisition to zero, and third to income. Those adjustments would continue to be applied in that manner until the contingency is resolved, which may be many years after the acquisition. 6

7 13. Ms. Posta stated that upon adoption, Interpretation 48 would apply to the acquirer s recognition and measurement of those uncertainties at the date of a business combination. However, Interpretation 48 retains the guidance pertaining to the accounting for the effects of the adjustments (first goodwill, then noncurrent intangible assets, then income) and it retains the indefinite adjustment period for those uncertainties. Although the Exposure Draft included Issue 93-7 and Question 17 in its anticipated effect on related authoritative literature, this issue had not been explicitly considered by the Board in deliberations. Therefore, the staff asked the Board to address this issue in its deliberations of the final Statement. 14. Respondents to the Exposure Draft suggested that the guidance in Statement 109 and related interpretative guidance be clarified to address how to account for those effects. Respondents supported accounting for subsequent adjustments to amounts recognized for tax uncertainties using the same approach as the accounting for subsequent adjustments to a valuation allowance for acquired deferred tax assets. That uniformity in approach was supported even by those that disagreed with the Board s proposal for subsequent adjustments to a valuation allowance. 15. Ms. Posta stated that IAS 12 is silent on this issue. The IASB is developing an approach to account for tax uncertainties as part of the convergence income tax project. At its January 2007 meeting, the IASB decided that no modifications should be made to IAS 12 to address the accounting for changes in acquired income tax uncertainties in a business combination, other than to make clear that income tax uncertainties are an exception to the fair value measurement principle. 16. Ms. Posta stated that the staff recommends that an acquirer recognize changes to acquired income tax uncertainties after the acquisition similarly to the accounting for changes in acquired deferred tax assets. That is, a. A change to an acquired income tax uncertainty within the measurement period that results from new information about facts and circumstances that existed as of the acquisition date would be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, an acquirer would 7

8 recognize any additional increases of the recognized income tax uncertainty as a reduction of income tax expense. b. All other changes in the acquired income tax uncertainties would be accounted for in accordance with Interpretation The Board agreed with the staff s recommendation. [All Board members agreed.] Mr. Trott emphasized that this decision would supersede Issue ISSUE 5: EXEMPTION FOR INDEFINITE-LIVED INTANGIBLE ASSETS ACQUIRED IN A BUSINESS COMBINATION 18. Ms. Posta stated that both Statement 109 and IAS 12 require recognition of deferred tax assets and liabilities for taxable and deductible temporary differences related to identifiable intangible assets, including those that are indefinite lived. The Exposure Draft proposes no changes to that requirement. 19. Ms. Posta reported that two respondents urged the Board to consider amending Statement 109 to eliminate the current requirement to recognize deferred taxes related to intangible assets that are expected to be held indefinitely. The comments received on this issue raise the same concerns that the FASB received on the Exposure Drafts that led to the issuance of Statement 141 and FASB Statement No. 142, Goodwill and Other Intangible Asset. The Board considered those concerns and rejected them because the suggested amendment would conflict with the IASB s initiatives to improve IAS 12 by eliminating unnecessary exceptions. 20. Ms. Posta stated that the staff recommends the Board retain the requirements of Statement 109 and not provide an exception to comprehensive recognition of deferred taxes for indefinite-lived intangible assets. 21. The Board agreed with the staff s recommendation. [All Board members agreed.] [That decision affirms the Exposure Draft proposal.] 22. Messrs. Young and Herz expressed concern about the requirement to recognize deferred taxes for indefinite-lived intangible assets. Mr. Young stated that the decision reached for indefinite-lived intangible assets is inconsistent with the decision reached for 8

9 nondeductible goodwill. Ms. Posta noted that, like goodwill, indefinite-lived intangible assets have an indeterminable life. However, unlike goodwill, indefinite-lived intangible assets are separable or contractual and an entity may incur a tax consequence when they are sold. 23. Mr. Herz agreed with Mr. Young and noted that the requirement to recognize deferred taxes for indefinite-lived intangible assets might not faithfully reflect the financial position of an entity because it is possible that an entity may never realize a tax difference for indefinite-lived intangible assets. Nevertheless, he believes that such situations are inevitable when full deferred taxes are recognized and he believes that the Board should not provide an exception. Follow-Up Items: None. General Announcements: None. 9