Board Meeting Handout 1. How should the full amount of

Board Meeting Handout
July 9, 2003 Norwalk, CT
Business Combinations II—Purchase Method Procedures
The Board will discuss:
•
Issues surrounding the initial allocation between the controlling and noncontrolling interests
of the full amount of goodwill1 that arises in an acquisition of a less than 100 percent
controlling interest.
•
Issues surrounding the subsequent allocation of goodwill impairment losses between the
controlling and noncontrolling interests in a less than 100 percent owned subsidiary for
which the full amount of goodwill was recognized.
•
Whether the fair value of an intangible asset that does not meet the criteria for recognition as
an intangible asset apart from goodwill at the acquisition date (and, thus, is included in the
amount recorded as goodwill) should be reclassified from goodwill if that intangible asset
subsequently meets the criteria for recognition apart from goodwill.
Initial Allocation Between the Controlling and Noncontrolling Interests of the Full
Amount of Goodwill in an Acquisition of a Less Than 100 Percent Controlling Interest
1. How should the full amount of goodwill be allocated (or assigned) between the
controlling and the noncontrolling interests in an acquisition of a less than 100
percent controlling interest in a subsidiary?
•
Alternative One: The goodwill allocated to the controlling interest would be calculated as
the difference between the consideration paid for the ownership interest acquired and the
controlling interest’s share of the fair value of the identifiable net assets acquired. The
remainder of the goodwill would be allocated to the noncontrolling interests.
•
Alternative Two: The goodwill would be allocated between the controlling and
noncontrolling interests based on their relative ownership interests in the fair value of the
acquiree.
1
The full amount of goodwill is measured as the difference between the fair value of the acquired entity taken as a
whole and the sum of the fair values of all of the identifiable net assets acquired on the acquisition date. Unlike
present practice, when an entity acquires a controlling interest in a partially owned entity (subsidiary), the full
amount of goodwill includes goodwill related to the interests of noncontrolling shareholders in that acquired entity.
The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at
the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of
the FASB or its staff. Official positions of the FASB are determined only after extensive due process and
deliberations.
•
Alternative Three: If another unit of the controlling interest is expected to benefit from
the synergies of the combination, first assign the related goodwill to that other unit. Then
allocate the remainder of the goodwill assigned to the acquiree between the controlling
and noncontrolling interests based on their relative ownership interests in the acquiree.
1.a Should the guidance that requires goodwill to be assigned to the reporting unit
expected to obtain the benefits of the synergies of the combination apply regardless of
whether the subsidiary is wholly or partially owned?
Paragraphs 34 and 35 of FASB Statement No. 142, Goodwill and Other Intangible Assets,
provide the standards and guidance for assigning goodwill to reporting units, including
units that were assigned none of the assets acquired or liabilities assumed. Paragraph 34
states:
For the purpose of testing goodwill for impairment, all goodwill
acquired in a business combination shall be assigned to one or more reporting
units as of the acquisition date. Goodwill shall be assigned to reporting units
of the acquiring entity that are expected to benefit from the synergies of the
combination even though other assets or liabilities of the acquired entity may
not be assigned to that reporting unit.
Illustration of Alternatives for Allocating the Full Amount of Goodwill If a Less Than
100 Percent Controlling Interest in a Subsidiary Is Acquired (Assuming the Guidance
in Paragraphs 34 and 35 of Statement 142 Applies)
Assume the following:
Total fair value of Subsidiary
Fair value of Subsidiary’s identifiable assets and liabilities
Goodwill
$ 190
150
$ 40
Controlling interest acquired
Consideration paid
Goodwill expected to be recovered in another unit of Parent
50%
$ 100
$ 12
Under Alternative One, goodwill would be allocated as follows:
Goodwill—Parent’s share (consideration paid of $100 less Parent's
share of the identifiable net assets acquired of $75)
Goodwill recoverable at another reporting unit of Parent
Goodwill expected to be recovered in Subsidiary:
Goodwill—Parent’s share ($25 - $12)
Goodwill—Noncontrolling interests' share
Total goodwill
2
$
25
$ 12
13
15
$ 40
Under Alternative Two, goodwill would be allocated as follows:
Goodwill—Parent’s share (50% of $40 total goodwill)
$
20
Goodwill recoverable at another reporting unit of Parent
Goodwill expected to be recovered in Subsidiary:
Goodwill—Parent’s share ($20 - $12)
Goodwill—Noncontrolling interests' share
Total goodwill
$ 12
8
20
$ 40
Under Alternative Three, goodwill would be allocated as follows:2
Goodwill—Parent’s share
$
26
Goodwill recoverable at another reporting unit of Parent
Goodwill expected to be recovered in Subsidiary:
Goodwill—Parent’s share (50% of remainder)
Goodwill—Noncontrolling interests' share (50% of remainder)
Total goodwill
$ 12
14
14
$ 40
2.a If Alternative One is selected for initial allocation of the full amount of goodwill,
does the Board wish to clarify how goodwill should be allocated to the controlling
and noncontrolling interests if no consideration is paid by the acquirer on the date of
the business combination?
Alternative One, as currently worded, could be interpreted to mean that if no consideration
is exchanged on the date of the business combination, then all of the goodwill should be
allocated to the noncontrolling interest. Control of a business could be obtained without the
acquirer paying any consideration on the acquisition date, for example, if minority veto
rights lapse.
If Alternative One is selected for the initial allocation of goodwill in Question 1, and no
consideration is paid on the date of the business combination, should the goodwill allocated
to the controlling interest be measured as the difference between the fair value of the
acquirer’s investment in the acquiree at the acquisition date and the controlling interest’s
share of the fair value of the identifiable net assets acquired?
2
Under Alternative Three (as in this example), the goodwill assigned to the controlling interest could be greater than
the difference between the consideration paid and the percentage of the net identifiable assets acquired. [$100 paid
for 50 percent controlling interest compared to $101 fair value of acquiree assigned to the controlling interest ($75
for 50 percent of the identifiable assets plus $26 in goodwill).]
3
2.b If Alternative One is selected for initial allocation of the full amount of goodwill,
does the Board wish to clarify how goodwill should be allocated to the controlling
and noncontrolling interests if, on the date of the business combination, the
consideration paid does not represent the total controlling interest owned because
control was obtained as part of a step acquisition?
In a step acquisition, the current wording of Alternative One could result in the controlling
interest being allocated less than its ownership interests in the full amount of goodwill. This
is because the consideration paid at the acquisition date is unlikely to be the appropriate
basis for measuring all of the goodwill that should be allocated to the controlling interest.
If Alternative One is selected for the initial allocation of goodwill in Question 1, and
control of a business combination is achieved as part of a step acquisition, should the
goodwill allocated to the controlling interest be measured as the difference between:
•
The fair value at the acquisition date of the acquirer’s previously held investment in the
acquiree, plus the fair value of the consideration paid for the additional ownership
interest that resulted in the acquirer obtaining control of the acquiree, and
•
The controlling interest’s share of the fair value at the acquisition date of the acquiree’s
identifiable net assets.
Illustration of Allocating Goodwill Under Alternative One (Question 1) in a Step
Acquisition
Assume the following:
Fair value of Subsidiary
Fair value of Subsidiary’s identifiable assets and liabilities
Goodwill
$ 190
150
$ 40
Controlling interest acquired (before the business
combination the acquirer owned 40%)
Total controlling interest owned
Consideration paid for 10% controlling interest
10%
50%
$ 22
This would result in the following application of Alternative One in a step acquisition:
Fair value of previously held ownership interest (40% x $190)
Consideration paid for additional 10% interest
Total “consideration paid”
Less: Parent’s share of identifiable net assets (50% x $150)
Goodwill attributable to parent
4
$
76
22
$ 98
75
$ 23
Subsequent Allocation of Goodwill Impairment Losses Between the Controlling and
Noncontrolling Interests If the Full Amount of Goodwill Was Recognized Initially
3.
Should the Board (i) specify how goodwill impairment losses should be allocated
between the controlling and noncontrolling interests or (ii) only indicate that losses
should be allocated on a reasonable and consistent basis?
3.a If the Board decides to specify how to allocate goodwill impairment losses, how
should those losses be allocated if the reporting unit incurring the loss is a standalone partially owned subsidiary?
•
Alternative One: Allocate goodwill impairment losses between the controlling and
noncontrolling interests on a pro rata basis using the relative carrying amounts of the
goodwill allocated to them. If a change in ownership interests in a subsidiary occurs,
the carrying value of goodwill allocated to that subsidiary should be reallocated
between the controlling and noncontrolling interests to reflect the changes in relative
ownership interests (whether an impairment loss occurs or not).
•
Alternative Two: Allocate goodwill impairment losses to the controlling and
noncontrolling interests based on the actual ownership percentages at the date of the
impairment.
Illustration of Allocating Goodwill Impairment Losses Under Alternative One If the
Subsidiary Is a Stand-Alone Reporting Unit
Assume Parent acquired a 50 percent controlling interest and $40 of goodwill was allocated
initially to the controlling and noncontrolling interests of the partially owned subsidiary as
follows:
Goodwill—Parent’s share
Goodwill—Noncontrolling interests' share
Total goodwill
$
$
25
15
40
Now assume that Parent purchased one-half of the outstanding noncontrolling interest,
increasing its ownership in Subsidiary from 50 percent to 75 percent. Then Subsidiary
incurs a $16 impairment loss.
5
The impairment loss would be allocated under Alternative One as follows:
%
Initial
Allocation
Goodwill—
Parent’s share
Goodwill—
Noncontrolling
interests' share
Total goodwill
Ownership
Change
Goodwill
Adjustment3
Adjusted
Carrying
Value of
Goodwill
%
Allocation
of Impair.
Loss
%
New %
Carrying
Basis
$ 25
62.5
$ 7.5
$ 32.5
81.3
($ 13)
81.3
$ 19.5
81.3
15
$ 40
37.5
100.0
(7.5)
0
7.5
$ 40.0
18.7
100.0
(3)
($ 16)
18.7
100.0
4.5
$ 24.0
18.7
100.0
3.b If the Board decides to specify how to allocate goodwill impairment losses, how
should those losses be allocated if the reporting unit incurring the loss includes all or
part of one or more partially owned subsidiaries?
•
Alternative One: Require goodwill of partially owned subsidiaries to be assigned and
tested for impairment at the subsidiary level. Partially owned subsidiaries, therefore,
would be treated as separate reporting units for impairment testing.
•
Alternative Two: Allocate the impairment loss among the components of the reporting
unit using the relative value method. Under this method, the portion of the impairment
loss attributable to the partially owned subsidiary would be determined by multiplying
the loss by the proportion of the fair value of the subsidiary to the fair value of the
reporting unit as a whole.
•
Alternative Three: Allocate the impairment loss among the components of the
reporting unit using the relative carrying value of goodwill method. Under this
method, the portion of the impairment loss attributable to the partially owned subsidiary
would be determined by multiplying the loss by the proportion of the carrying value of
the goodwill assigned to the subsidiary to the carrying value of goodwill of the
reporting unit as a whole.
3
Since Parent purchased one-half of the outstanding noncontrolling interest’s ownership interest, transfer one-half
of the goodwill allocated to the noncontrolling interest to Parent.
6
Subsequent Reclassification of Intangible Assets from Goodwill
4. Should intangible assets that are included in the amount recorded as goodwill at the
date of acquisition because they do not meet the criteria for separate recognition be
reclassified from goodwill if they subsequently meet those criteria?
Certain IASB Board members expressed some concern about whether those intangible assets
should continue to be subsumed in goodwill indefinitely.
According to paragraph 39 of Statement 141 an intangible asset is recognized apart from
goodwill if it arises from contractual or other legal rights (regardless of whether those rights
are transferable or separable from the acquired entity or from other rights and obligations). If
an intangible asset does not arise from contractual or other legal rights, it is recognized apart
from goodwill only if it is separable—that is, capable of being separated or divided from the
acquired entity and sold, transferred, licensed, rented, or exchanged (regardless of whether
there is an intent to do so). An intangible asset that cannot be sold, transferred, licensed,
rented, or exchanged individually is considered separable if it can be sold, transferred,
licensed, rented, or exchanged in combination with a related contract, asset, or liability.
•
Alternative One: Require an intangible asset that forms part of the goodwill at the
acquisition date to be subsequently reclassified from goodwill and recognized separately
if it meets the criteria for separate recognition within a short period of time after the
acquisition date (for instance, one year) as a result of a subsequent event.
•
Alternative Two: Do not adjust goodwill for events that occur subsequent to the business
combination.
7
Board Meeting Handout
July 9, 2003 Norwalk, CT
Financial Instruments: Liabilities and Equity
The Board will discuss objectives and planning for redeliberations of the second phase of its
liabilities and equity project. The Board will address the following questions:
1) Should the project scope be expanded to include financial instruments (and, potentially,
components of financial instruments) with characteristics of both assets and equity?
a) If the scope is expanded to include financial instruments with asset characteristics, the
Board will need to consider whether to amend the definition of an asset found in FASB
Concepts Statement No. 6, Elements of Financial Statements, to include financial
instruments embodying rights to receive the issuer’s own shares.
2) Does the Board agree with the stated objectives for the second phase of the liabilities and
equity project ? The stated objectives are to:
a) Improve accounting and reporting by issuers for financial instruments that contain
characteristics of both liabilities and equity (or of both assets and equity, or of all three),
but have been presented entirely as liabilities, entirely as assets, entirely as equity, or
between the liabilities section and the equity section of the statement of financial position
b) Amend the definitions of elements in Concepts Statement 6 so that the Board’s decisions
in FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, and in the planned Statements for the
second phase of the project are consistent with those concepts.
The Board also will be asked for input and suggestions related to the staff’s proposed project
plan to accomplish those objectives. Possible discussion topics include:
•
Whether the plan includes the main issues to be redeliberated
•
Whether the general sequence of the redeliberations plan is appropriate
o The staff has proposed to begin by resolving issues related to definitions and
classification. Next would come resolving issues related to the unit of accounting
(whether to separate) and how to separate (using measurement methods). That might
be called a “fresh look” approach.
o Alternatively, the project could first address separation issues (both whether and how
to separate) and then turn to definitions. That might be called a “pick up where we
left off” approach, using the ownership relationship notion and other tentative
conclusions developed in the ED and prior redeliberations as the starting point.
The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at
the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of
the FASB or its staff. Official positions of the FASB are determined only after extensive due process and
deliberations.
•
Whether the proposed approach to international convergence and SEC interaction is good
o The plan is to assess the potential to achieve international convergence on an
issue by issue basis.
o The plan is to collaborate closely with the SEC staff regarding potential effects on
existing SEC literature, such as the guidance promulgated in Accounting Series
Release No. 268, “Presentation in Financial Statements of Redeemable Preferred
Stock.”
•
Whether the estimated timing of the plan and staff resources appear reasonable.
2
Board Meeting Handout
107 Replacement Project
At its July 9, 2003 meeting, the Board will discuss four alternative future steps for
the FAS 107 project. The alternative future steps identified by the staff are:
1. Retain the FAS 107 project and revise its objectives to only address
issues related to the definition of a financial instrument, the scope
exclusions embodied in paragraph 8 of FAS 107, and the display
objective.
2. Remove the FAS 107 project from the Board’s agenda and re-assign the
display objective to the Reporting Financial Performance project.
3. Remove the FAS 107 project from the Board’s agenda and do not address
display issues until all measurement issues have been resolved.
4. Establish a new project to codify and simplify all disclosures about
financial instruments.
The staff will also ask the Board to consider the implications of the selected
alternative on the Board’s April 9th decision to amend FAS 115 regarding
valuation of restricted stock.
The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be
addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended
to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after
extensive due process and deliberations.