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.
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.
In April 2014, the FASB issued a new standard changing the threshold for reporting discontinued operations and adding 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 provides examples of when a disposal qualifies as a discontinued operation.
Having significant continuing involvement with a component after a disposal or failing to eliminate the operations or cash flows of a disposed component from an entity’s ongoing operations will no longer preclude presentation as a discontinued operation. New disclosure and presentation requirements 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 summarizes the main provisions, provides insights into key aspects of the standard, and highlights areas to consider when applying the new guidance.
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:
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. 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.
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