New Bizcom Rule: FSP 141 (R)-1

If your company was involved in a business combination event in the first quarter that involved the acquisition or assumption of certain assets and liabilities arising from contingencies, youwill be affected by this new rule for your March 10-Q. On April 1, 2009, the FASB issued a final FSP 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (the “FSP”). Under the FSP, assets and liabilities acquired and assumed in a business combination that arise from contingencies should be recognized at fair value as of the acquisition date if fair value can be determined during the measurement period. If fair value can’t be determined during the measurement period, such items should be recognized at the acquisition date, but only if two conditions are met:

1. It is probable that an asset existed or that a liability had been incurred. This must be supported by information that is available before the end of the measurement period. It should also be probable, at the acquisition date, that future events are expected to occur that will confirm the existence of the asset or that a liability will occur.
2. The amount of the asset or liability can be reasonably estimated.

If these two conditions are not met, the acquirer cannot recognize an asset or liability at the acquisition date. In periods after the acquisition date, the acquirer should account for such items in accordance with, for example, FAS 5, Accounting for Contingences.  For example, there may be sufficient information to determine the fair value of warranty obligations, but not enough to determine the fair value of a legal contingency. For calendar year-end companies, the new rule is effective as of January 1, 2009 (same effective date as FAS 141(R)).  Companies that had a business combination in the first quarter must quickly assess the impact of the new guidance for their first quarter 10-Q. The FSP does not apply to assets or liabilities arising from contingencies that are specifically addressed in FAS 141(R), including indemnification assets, contingent consideration arrangements and valuation allowances. CONTINGENT CONSIDERATION ARRANGEMENTS Under the FSP, contingent consideration arrangements of an acquiree assumed by the acquirer should be recognized initially at fair value and subsequently measured according toFAS 141(R). If an acquiree’s pre-existing contingent consideration arrangement is assumed by an acquirer as part of a business combination, it should be accounted for as contingent consideration by the acquirer (because an acquisition event does not change the nature of pre-existing arrangement). This represents a change in practice. Until now, pre-existing contingent consideration arrangements were treated as pre-acquisition contingencies. Either way, such arrangements would likely be measured at fair value on the acquisition date. Subsequent measurement, however, would likely differ between the two treatments because contingent consideration arrangements are usually marked-to-market through earnings whereas pre-acquisition contingencies are accounted for under FAS 5. This difference could have an impact after the completion of an acquisition. SUBSEQUENT MEASUREMENT The FSP amends FAS 141(R)’s subsequent measurement guidance.  Under the FSP, assets and liabilities arising from contingencies are subsequently measured and accounted for using a systematic and rational basis depending on their nature. DISCLOSURE The FSP changes disclosures as follows:

1. For assets and liabilities arising from contingencies recognized at the acquisition date:
   • Nature of the contingencies
   • Amounts recognized at the acquisition date
   • The measurement basis applied to those amounts (i.e. fair value, FAS 5, or FIN 14)
   • Disclosures for similar items can be aggregated
2. For contingencies that are not recognized at the acquisition date, entities should consider the disclosures required by FAS 5
3. The FSP eliminates the FAS 141 (R) requirement to disclose the range of expected outcomes for assets and liabilities arising from contingencies and changes in those ranges.  This will keep companies from having to disclose private information related to litigation contingencies.

U.S. GAAP VS. IFRS There are differences between the FSP and IFRS. For example, IFRS requires an acquirer to subsequently measure a contingent liability at the higher of 1. the best estimate, or 2. the amount initially recorded less cumulative amortization. Under the FSP, assets and liabilities arising from contingencies are subsequently measured and accounted for using a systematic and rational basis depending on their nature.