FRF for SMEs--Business Combinations, Part 2
In the previous blog, we discussed basic elements of the acquisition method for business combinations under the FRF for SMEs. Other related issues are discussed below.
- Asset retirement obligations: Any asset retirement obligations associated with the acquired assets should be recognized and measured by the acquirer. For example, the disposal and replacement of underground gasoline storage tanks, as required by statute, should be provided for in an acquisition of an entity that stores and sells gasoline.
- Income Taxes: When an acquirer uses the deferred income taxes method, it should provide for a deferred income tax asset or liability related to assets acquired and liabilities assumed. This would include temporary differences and carryforwards of the acquiree that exist at the acquisition date.
- Employee benefits: Essentially, pension and post-retirement plan assets are valued at market value. The accrued benefit asset or obligation is the difference between that market value and the plans’ accrued benefit obligations.
- Indemnification assets: When the acquiree agrees to indemnify the acquirer as to the outcome of an uncertainty or contingency, the acquirer should recognize an acquisition-date asset at market value, the same basis it uses to recognize the liability for the indemnified item.
- Goodwill: The aggregate of consideration transferred at acquisition-date market value and the amount of any non-controlling interests in the acquiree over the acquisition-date market value of an acquiree’s net assets results in either the carrying amount of goodwill or a gain on a bargain purchase option.
- Contingent consideration: When the payment for contingent consideration can be estimated and is probable, it should be recognized by the acquirer as an a asset or liability based on the terms of the agreement.
- A business combination in stages: When an acquirer has a less than controlling interest in an entity and obtains a controlling interest, the previously acquired equity interest should be revalued at its acquisition-date market value and recognize any gain or loss in net income.
- No transfer of consideration: In a contractual combination, equity interests in an acquiree held by parties other than the acquirer are treated as non-controlling interests, even if all the equity interests are held by non-controlling interests.
- Measurement period: At the end of the reporting period in which a combination occurs, estimated amounts should be provided for items that are not complete. Adjustments to such amounts may be made, and additional assets or liabilities recognized, during the measurement period. Such adjustments will result in an increase or decrease in goodwill. The period may not exceed one year.
- Acquisition-related costs: Costs incurred to accomplish a business combination, such as legal, accounting and other professional services, and direct general and administrative costs, should be recognized as period costs when they occur.
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.