If your company is contemplating entering into a purchase or sale transaction in the coming months or is in the process of closing such a transaction, in addition to all of the other steps to consider and address in the acquisition process, you should also keep in mind the new business combination accounting rules that are about to go into effect. In December 2007, the Financial Accounting Standards Board issued a revised version of Statement of Financial Accounting Standards No. 141 ("FAS 141R"). FAS 141R retains many of the fundamental requirements contained in the original Statement of Financial Accounting Standards No. 141, Business Combinations ("Statement No. 141"), but the acquisition method of accounting set forth in FAS 141R includes many substantive revisions that could have an impact on the way transactions are structured and, in particular, the timing of transactions this year.

FAS 141R is effective prospectively for any business combinations closing during fiscal years beginning on or after December 15, 2008. For companies with calendar year fiscal years, this means that FAS 141R will apply to any business combinations that close after January 1, 2009.

Below is a summary of some of the changes included in FAS 141R that may impact you.

  • The definition of a "business combination" was expanded and now includes any transaction or other event in which an acquirer obtains control of one or more businesses, whether or not consideration is transferred.
  • FAS 141R requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree on the acquisition date (typically, the closing date) at their fair values on that date. This replaces the cost-allocation process in Statement No. 141.
  • One exception to the above is for assets and liabilities arising from contingencies. Assets and liabilities arising from contingencies related to contracts are measured at their fair values on the acquisition date. For all other contingencies, you must assess whether it is more likely than not as of the acquisition date that the contingency will give rise to an asset or liability. Other exceptions exist for income taxes, employee benefit arrangements, indemnification assets or liabilities and assets held for sale.
  • Perhaps the most significant change relates to the accounting for acquisition-related and restructuring costs. Acquisition-related costs, such as finder's fees, advisory, legal, accounting, valuation and other professional or consulting fees and general administrative costs, must be accounted for as expenses in the periods in which they are incurred. The only exception is for costs to issue debt or equity securities. This means that a company could be expensing these costs months in advance of the transaction closing. Similarly, unless specific criteria are met, restructuring costs are likely to be expensed in the periods in which they are incurred, instead of being accrued as a liability under purchase accounting.
  • FAS 141R requires the acquirer to recognize goodwill as of the acquisition date. Goodwill is measured as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of the identifiable net assets acquired. In making this determination, contingent consideration is included at its fair value, as measured on the acquisition date. Changes in the fair value of contingent consideration obligations classified as assets or liabilities are recognized in earnings and not as an adjustment to the purchase price. This is a change from Statement No. 141, under which contingent consideration obligations were usually recognized when they were resolved and consideration was paid or became payable.
  • Under Statement No. 141, if there was "negative goodwill", it was allocated as a pro rata reduction of the amounts assigned to particular assets acquired. Under FAS 141R, if there is a "bargain purchase" (the acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree), the acquirer must recognize that excess in earnings as a gain.
  • The fair value of equity securities being issued by the acquirer as part of the consideration is determined on the acquisition date, not the announcement date. Because of the time that may exist between announcement and closing, there may be significant fluctuations in the market price of the equity securities that could affect the value of the consideration being transferred.

The revisions detailed above should be kept in mind when determining the timing and deal terms for current transactions and agreements that may be entered into in the coming months. Assuming your company has a calendar year fiscal year, to utilize purchase accounting, you will need to close your transaction prior to the end of 2008. If equity is being issued as consideration and you are not certain whether the transaction will close prior to the end of 2008, you will want to ensure that adequate share price protections are contained in the transaction documents to protect your company from fluctuations in stock prices and, to the extent possible, you will want to lessen the amount of time between announcement and closing of the transaction.