August 11, 2009
By Pat Boyle
In 2009, we will now see significant changes in the accounting treatment of acquisitions and mergers. For calendar year-end companies acquisitions completed starting in 2009 will be dramatically impacted by the new rules which impact all companies’ fiscal years beginning after December 15, 2008. These rules will not only impact the accounting treatment but potentially the way that deals get structured.
The new rules increase the amount of fair value measurements and could result in an increased use of third party valuation specialists. A summary of the specific significant changes are as follow:
Historically most acquisition costs, such as legal and other professional fees, were capitalized as part of the purchase price of the transaction. Under the new rules, an acquirer should expense these as incurred except that costs to register debt and equity securities in conjunction with a business combination can continue to be capitalized.
Restructuring costs under the new rules should be recorded as a charge to the post acquisition earnings, previously these costs were capitalized as a part of the purchase price resulting in a higher amount of Goodwill being recorded.
Under the new rules, contingencies are to be recognized at fair value at the acquisition date if the amount can be determined during the measurement period. If the acquisition date fair value cannot be determined during the measurement period, the amount should be recognized if information becomes available before the end of the measurement period that indicates it is probable that the item existed at the acquisition date and the amount can be reasonably estimated. Changes that become known after the measurement period should be recorded as period costs consistent with existing practice prior to the new rules.
Contingent Consideration (Earn Outs)
Companies will now record contingent consideration at the time of acquisition at fair value and classify the amount as a liability or equity based on its characteristics and existing rules regardless of the likelihood of payment. Subsequent changes to the fair value of the liability would need to be recorded through earnings, though no changes would be recorded to equity. Previously, contingent consideration was not recorded until the contingency was settled.
Valuation of Equity Securities Issued
For equity securities issued in conjunction with a business combination should be recorded at fair value at the acquisition date, as opposed to a reasonable time before and after the terms of the business combination are agreed to and announced.
Assets acquired not to be used
Under the new rules, assets that the acquirer intends not to use must be recognized at fair value even if the company decides not to use it, as opposed to the historical practice of assigning little or no value to the asset.
For acquired IPR&D, historically these amounts were valued at fair value and expensed immediately after the acquisition and not capitalized. Under the new guidance, these amounts would continue to be measured at value and be capitalized as an indefinite life intangible and tested annually for impairment. Once the project is completed, the amounts would then be amortized into earnings over the useful life of the product.
Once an acquirer obtains control, it measures 100 percent of the acquired assets at fair value as opposed to the previous guidance of only a portion of the assets being at fair value and portion at historic book value. For changes in the parent’s ownership interest, after control is reached the parent must account for additional purchases and sales of a subsidiaries stock as equity transactions as long as control is still retained.
Adjustments to certain acquired tax balances
Under the new guidance adjustments made after the measurement period (and adjustments during the measurement period where facts and circumstances did not exist at the acquisition date) are made through income tax expense as opposed to the previous guidance of adjusting these items through goodwill.
Adjustments to Purchase Accounting
Adjustments may still be made during the one year measurement period as long as these adjustments relate to facts and circumstances that existed at the measurement date. The difference in the new guidance is that the acquirer must now revise the comparative prior period data to conform to the changes.
In summary these changes are characterized by an increase in the amount of fair value measures. These new rules should certainly be evaluated for business combinations being contemplated as the changes represent a significant change from the previous rules.