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.
Accounting for Goodwill
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 after a business combination, including potential simplification of the goodwill impairment test for public and not-for-profit entities. The board is considering several potential alternatives, but during its March meeting, indicated a preliminary leaning toward permitting entities to apply a single-step impairment test, and possibly allowing that assessment to be done at a level higher than a reporting unit. The board is awaiting the results of the IASB’s post-implementation review of its business combinations standard to see whether there may be an opportunity to improve convergence before arriving at any conclusions. Further discussions are not expected until the third quarter of 2014.
Reporting Discontinued Operations
- The FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (the “revised standard”) on April 10, 2014. The revised standard changes today’s guidance and, in many cases, is expected to result in fewer disposals being presented as discontinued operations. These changes will impact entities across all industries, particularly those that actively divest components.
- The new standard amends the criteria for determining whether a disposal qualifies for reporting as a discontinued operation. Under the revised standard, a “disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results” as determined when the component or group of components: (i) meets the criteria to be classified as held for sale; (ii) is disposed of by sale; or (iii) is disposed of other than by sale.
- The revised standard includes examples of strategic shifts that have (or will have) a major effect on an entity’s operations and financial results and states that a strategic shift could include the “disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.” The concept of a strategic shift is intended to be entity specific.
- Discontinued operations will no longer be precluded by the existence of (i) significant continuing involvement with a component after its disposal, or (ii) operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations.
- New and expanded disclosure requirements for discontinued operations will include more details about earnings, balance sheet accounts, and cash flows.
- For disposals of individually significant components that do not qualify as discontinued operations, entities will have to disclose pre-tax profit or loss of the disposed component and the amount attributable to the parent if a noncontrolling party has an interest in the disposed component.
- Assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period will have to be reclassified for the comparative prior periods presented in the statement of financial position. Currently, prior period reclassification is optional.
- The guidance is to be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. Public business entities and certain not-for-profit entities are required to apply the guidance in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. All other entities will be required to apply the guidance within annual periods beginning on or after December 15, 2014, and interim periods thereafter. Early adoption will be permitted for all entities but only for disposals and new classifications as held for sale occurring in periods for which financial statements have not yet been issued.
- The revised standard generally changes the frequency of reporting discontinued operations. Some stakeholders believe that too many disposals of assets qualify for discontinued operations presentation under current guidance. The resulting frequency of changes in the composition of continuing operations was thought to impair decision usefulness of the financial statements for users and result in higher costs for preparers.
- Although converging U.S. GAAP with IFRS was not the primary objective of this standard, the FASB aligned certain concepts (the removal of ongoing cash flows and continuing involvement guidance) and terminology within IFRS 5 (major lines of business and geographical areas of operations) into its revised standard, which enhances convergence in this area of financial reporting.
At its March meeting, the Emerging Issues Task Force (EITF) reached a consensus-for-exposure on Issue 12-F that all entities would have the option to apply pushdown accounting upon a change-in-control. This would result in a significant change in practice. Currently, pushdown accounting is prohibited for public entities unless a purchase transaction results in obtaining an ownership interest of at least 80%, and it is required at an ownership interest of 95% or more.
There would be no additional requirements to apply pushdown accounting and no circumstances that would preclude an entity from applying pushdown accounting upon a change-in-control. The guidance would be applied prospectively to all change-in-control events occurring after the effective date. The effective date will be discussed after input from comment letter respondents is received. Look to PwC’s EITF observer – March 2014 for details.
Two standards that were issued last year became effective for some companies beginning in January 2014:
- Accounting Standards Update No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. Refer to PwC’s Dataline 2013-10 for details.
- Accounting Standards Update No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. Refer to PwC’s In brief 2013-22 for details.
Continued areas of focus in Business Combinations Accounting
Among the continuing areas of challenge for preparers and users is the application of guidance for:
- Determining if a transaction should be accounted for as an asset acquisition or a business combination;
- Accounting and valuation of contingent consideration;
- Accounting for changes in ownership interests and noncontrolling interests;
- Segment reporting, and
- Impairments of goodwill and long-lived tangible and intangible assets.
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. PwC recently commenced a series focused on navigating the waters of a cross-border acquisition. The series will look at various aspects along the deal continuum, including pre-acquisition due diligence and strategies, financial reporting requirements, tax implications, and post-acquisition considerations.