The accounting for business combinations, divestitures, and related topics such as impairments and segment reporting continues to pose many challenges and remains on the SEC's radar screen.
In January, the FASB issued Accounting Standards Update No. 2014-02, Accounting for Goodwill, which will significantly change the way that private companies can account for goodwill. Under the guidance, eligible private companies may elect to amortize goodwill, generally over a period of 10 years. Goodwill is subject to a trigger-based impairment test performed at either an entity-wide level or reporting unit level. The impairment assessment is simplified in that any difference between the fair value of the entity (or reporting unit) and its carrying amount reduces goodwill. For companies that choose to apply the guidance, the effective date is for years beginning after December 15, 2014, with early adoption permitted. The FASB decided to add a separate project to its agenda to explore whether some or all of these changes should also be extended to public companies and not-for-profit organizations. The timing of those deliberations is uncertain. Refer to PwC’s In brief 2014-01 for details.
In November, the AICPA's Financial Reporting Executive Committee (FinREC) issued the AICPA Accounting and Valuation Guide, Testing Goodwill for Impairment. This guide was developed by the AICPA Impairment Task Force to provide non-authoritative accounting and valuation guidance and illustrations for preparers of financial statements, auditors, and valuation specialists regarding goodwill impairment testing. Refer to PwC’s Dataline 2013-24 for details. In January, FinREC issued an updated Accounting and Valuation Guide covering acquired in process research and development assets. Refer to PwC’s Dataline 2014-04 for details.
By March, the FASB plans to issue a final standard that would result in significant changes to the treatment of discontinued operations. The new threshold for reporting discontinued operations would be “a component or group of components that has been disposed of or is classified as held for sale, together as a group in a single transaction,” and “represents a strategic shift that has (or will have) a major effect on an entity’s financial results.” The board indicated that a strategic shift includes the disposal of a separate major line of business or major geographical area of operations. This is expected to reduce the number of disposals that will qualify as discontinued operations compared to today’s guidance.
Discontinued operations would no longer be precluded when there is significant continuing involvement or the operations and cash flows are not eliminated after a disposal. Several new disclosures would be required, including pre-tax earnings for individually material components that do not meet the definition of a discontinued operation. In January, the FASB decided to allow entities an option to disclose either (1) total operating and total investing cash flows of discontinued operations or (2) depreciation and amortization expense, capital expenditures, and significant non-cash items. The guidance would be applied prospectively to new disposals and new classifications as held for sale in annual periods beginning on or after December 15, 2014, with early adoption permitted. Refer to PwC’s In brief 2013-46 for details.
The FASB continues to deliberate its consolidation project, which was initially intended to focus on assessing factors to determine if a decision maker (the party with the power to direct the most significant activities of an entity) is a “principal” or an “agent” in order to conclude whether consolidation is appropriate. Last fall, the FASB decided that an entity having an interest in a registered money market fund (or similar type of fund) would not need to assess whether it should consolidate the fund. Those in the asset management industry are keenly focused on this topic.
More recently, the FASB decided that the factors to consider when making the principal versus agent assessment should be integrated into its broader consolidation guidance rather than requiring that entities perform a separate analysis. Redeliberations are expected to continue through at least the first half of 2014. It is not clear when a standard will be finalized or when it would take effect. Refer to PwC’s In brief 2013-44 for details.
At its November meeting, the EITF continued discussing Issue 12-F, Recognition of New Accounting Basis (Pushdown) in Certain Circumstances, which addresses the scope and threshold for applying pushdown accounting in a subsidiary’s financial statements. For public entities, the Task Force reached a tentative decision to require pushdown accounting upon an entity becoming substantially wholly-owned as a result of a business combination, and to provide an option to apply pushdown accounting upon a change in control. For nonpublic entities, the Task Force tentatively decided not to require pushdown accounting at any level, but to provide an option to apply pushdown accounting upon a change in control. The Task Force will continue deliberating follow-on issues when it meets again in March. Look to PwC’s EITF observer – November 2013 for details.
Finally, two standards that were issued last year became effective for some companies beginning in January 2014:
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 complex topics and addresses them in a plain-English manner. PwC has issued numerous publications from this series which are available, along with other helpful technical alerts, in the “Publications” section of this website.
This PwC guide explains the fundamental principles of accounting and reporting for business combinations and noncontrolling interests under both U.S. GAAP and IFRS. This guide also includes our perspectives on the application of those principles, as well as our insights on the challenges of accounting for intangible assets and goodwill in the postacquisition period. Read more