The accounting for business combinations (ASC 805), discontinued operations, divestitures, and related topics such as impairments, intangibles, and segment reporting continue to pose many challenges and remains on the SEC's radar screen.
Read the latest developments on these accounting for business combinations topics:
At its March 18, 2015 meeting, the Financial Accounting Standards Board (FASB) voted to add to its agenda a project to simplify two aspects of the equity method of accounting:
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot, with a comment period of 60 days. The proposed Accounting Standards Update is tentatively expected to be issued in the second quarter of 2015.
At its March 18, 2015 meeting, the FASB voted to add to its agenda a project to simplify one aspect of the accounting for business combinations – the accounting for measurement period adjustments. The project is expected to simplify the accounting by removing the requirement to account for measurement period adjustments retrospectively.
The FASB decided that during the measurement period, an acquirer would recognize adjustments of provisional amounts in the reporting period in which the adjustment amount is determined. The acquirer would record, in the current period income statement, the cumulative effect on earnings of changes in depreciation, amortization, or other income effects, as a result of the change to the provisional amount.
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot, with a comment period of 45 days. The proposed Accounting Standards Update is tentatively expected to be issued in the second quarter of 2015.
The FASB has undertaken a project that is intended to clarify the definition of a business with an objective of addressing whether certain transactions should be accounted for as asset acquisitions or acquisitions of businesses. Differentiating between an asset and business can be challenging, particularly in certain industries. This project is also intended to provide guidance for partial sales or transfers involving in-substance nonfinancial assets. The Board has begun meeting on this project, but no technical decisions have been made so stay tuned for further developments.
Following the issuance of Accounting Standards Update No. 2014-02, Accounting for Goodwill, which significantly changes the way that private companies can account for goodwill, the FASB has undertaken a project to consider changes to the accounting for goodwill for all companies (including public, private and nonprofit entities). At the November 2014 meeting the board requested the staff to research potential alternatives related to amortizing goodwill, and simplifying the impairment test. At the November meeting the board also decided to add a separate project to its agenda for public business entities and not-for-profits on a potential simplification to the accounting for identifiable intangible assets in a business combination. The Board is considering several potential alternatives related to both of these projects and is closely monitoring the IASB’s agenda.
In April 2014, the FASB issued a new standard changing the threshold for reporting discontinued operations and requiring new disclosures for disposals. The new guidance defines a discontinued operation as a component (or group of components) that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. A strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the FASB provided examples of when a disposal qualifies as a discontinued operation.
Under the new standard, discontinued operations presentation is no longer precluded due to significant continuing involvement with a component after a disposal or failure to eliminate the operations or cash flows of a disposed component from an entity’s ongoing operations.
The new standard also has new disclosure and presentation requirements that apply to discontinued operations and to disposals of individually significant components that do not qualify as discontinued operations. The guidance applies prospectively to new disposals of components and new classifications as held for sale beginning in 2015 for most entities, with early adoption allowed. PwC's Dataline on discontinued operations, and Financial Statement Presentation accounting and financial reporting guide summarizes the main provisions, provides insights into key aspects of the standard, and highlights areas to consider when applying the new guidance.
In October 2014, the FASB issued new guidance on pushdown accounting and the SEC rescinded its pushdown accounting guidance in Staff Accounting Bulletin Topic No. 5.J, New Basis of Accounting Required in Certain Circumstances (SAB Topic 5.J). The new guidance makes pushdown accounting elective for all entities, public and nonpublic, with the election available at each change-in-control event. Previously, there was limited guidance in U.S. GAAP on when pushdown accounting should be applied other than SAB Topic 5.J, which applied only to the filings of SEC registrants and required (or precluded) pushdown accounting in certain circumstances.
The new pushdown accounting guidance provides an entity with the option to apply pushdown accounting each time there is a transaction or event in which another entity or individual (acquirer) obtains control of the entity (“change-in-control event”). An acquirer may obtain control of the entity either directly through purchase of the acquired entity’s equity interests (or equity interests of the acquired entity’s parent), or without transferring consideration, such as when certain rights in a contract lapse. The existing guidance in U.S. GAAP should be applied to determine if and when an acquirer has obtained control of the entity.
The election to apply pushdown accounting should be made in the period in which the change-in-control event occurs. Once pushdown accounting is applied, it is irrevocable. However, if an entity did not apply pushdown accounting at the time of its most recent change-in-control event, in a subsequent period it can elect to do so retrospectively as a change in accounting policy.
The pushdown accounting standard is effective immediately for all transactions in periods for which financial statements have not been issued. Entities that did not elect pushdown accounting for a change in control event that occurred prior to the effective date may do so as a change in accounting policy.
Refer to PwC’s In depth on the new pushdown accounting standard for more information.
Among the continuing areas of challenge for preparers and users is the application of guidance for:
In addition to being complex, applying the relevant accounting guidance often involves significant judgments and estimates to be determined by both financial and non-financial management. PwC has a publication series entitled “Mergers & acquisitions - a snapshot” that takes these topics and addresses them in a plain-English manner. PwC has issued multiple publications from this series which are available on the M&A snapshot page in the “Publications” section of this website. Last year PwC issued a series that focused on navigating unique issues of a cross-border acquisition. PwC recently commenced a series focused on navigating the stages of bankruptcy. Three publications have been issued in the series so far that cover an overview of the turnaround process, various aspects of the bankruptcy process and the financial reporting requirements, and most recently, considerations when emerging from bankruptcy. Stay tuned for the next issue on tax considerations.
This PwC guide explains the principles of accounting and financial reporting for business combinations and noncontrolling interests (ASC 805) under both U.S. GAAP and IFRS. This guide includes our perspectives on the application of those principles, and our insights on the challenges of accounting for intangible assets and goodwill in the post-combination period. Read more