Implementing the One Year Look Back Rules under ASC 805 (FAS 141R)

Due in part to the credit crisis, the last big wave of acquisitions took place before 1/1/2009, when new accounting rules became effective under ASC 805 (FAS 141R). The next round of buying will be the first time the new rules are tested en masse. At a recent tax conference for finance executives, deal chatter was on the rise. So this is a good time to look at one aspect of how the new rules are being applied, the “one year look back”, and how to prevent controversies in interpretation. Read on to learn how to avoid one of the purchase accounting pitfalls. The new rules generally require the acquirer to recognize the assets acquired, the liabilities assumed and any non-controlling interest at fair value as of the date the acquisition closes. This means there is no more “purchase price allocation”, which involved allocating the cost of an acquisition to the individual assets acquired and liabilities assumed based on their estimated fair values. The FASB recognizes that it is often challenging to estimate fair value as of the closing date for a period of time following the acquisition due to incomplete accounting. Paragraph 51 provides,

• If the initial accounting is incomplete by the end of the reporting period, the acquirer shall report provisional amounts for those items.
• During the measurement period, the acquirer shall retrospectively adjust the provisional amounts to reflect new information about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
• During the measurement period, the acquirer shall recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.
• The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date.

It is the last bullet that has recently caused controversy, the concept of when the measurement period ends. The difference can be enormous. If new information is deemed to be received before the measurement period ends, adjustments are applied on a retrospective basis to the acquisition fair values, for example, on the balance sheet as an adjustment to goodwill. If new information is deemed to be received after the measurement period ends, adjustments are applied prospectively as a change in estimate, for example, in the income statement. The determination of the end of the measurement period is subtle and subjective, as is whether there has been a change in estimate or a change in information about facts and circumstances that existed as of the acquisition that, if known, would have changed a person’s mind. The rule says that the measurement period ends as soon as the acquirer receives the information it was seeking or learns that more information can’t be obtained. In recent discussions with one of the Big Four accounting firms, there was a strong tendency to label many post acquisition adjustments as changes in estimates, resulting in an unexpected impact on the income statement. For example, auditors may take the view that if the information was reasonably obtainable at the reporting date, it is a change in estimate even though the information was not actually obtained. This is especially true if interim filings do not disclose significant open or incomplete items. Interestingly, the majority of the time, the information in question involves an appraisal from an independent valuation firm. As the deal pipeline swells, now is a good time to think about qualified independent business valuation resources. Pluris has significant experience with ASC 805 and can assist you before, during and after the deal. Contact us now to discuss how ASC 805 will affect your business combination.