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.
The FASB is close to issuing 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. 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. We expect the FASB to issue its final standard by mid-April which would allow calendar year-end companies to apply the proposed guidance to first quarter transactions if they elect early adoption. Refer to PwC’s In brief 2013-46 for details.
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 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