PUBLICATIONS

A. Highlights: Business Combinations

FASB believes that the new business combination rules will benefit investors by spurring companies to be more transparent and provide more accurate information on the true cost of both transactions and acquired intangible assets. It also believes that investors will be more able to ascertain how well the investment has performed over time, and will have better information to compare intra- and inter-company performance.

 ·  FASB Statement 141 applies to the initial recognition and measurement of goodwill and intangible assets acquired in a business combination.
 ·  FASB Statement 141 applies to corporate as well as non-corporate entities .
 ·  FASB Statement 141 amends in part, carries forward in part, and supercedes in part, APB Opinion 16.
 ·  FASB Statement 141 supercedes, but carries forward much of FASB Statement 38.
 ·  FASB Statement 121 no longer applies to goodwill.
 ·  FASB Statement 142 applies to the initial recognition and measurement of goodwill and intangible assets acquired individually or as part of a group of other assets. It also applies to the subsequent accounting and measurement of goodwill and intangible assets.

 ·  FASB Statement 142 supercedes APB Opinion 17 (which required that goodwill and intangible assets be amortized over a life not to exceed 40 years), but carries forward its provisions related to internally developed intangible assets.
 ·  According to FASB Statement 141, business combinations will be accounted for using the purchase method if the acquisition date is July 1, 2001 or thereafter, regardless of when the business combination was initiated. This statement represents the end of pooling-of-interests for business combinations initiated after June 30, 2001. FASB believes that the purchase method is consistent with how the historical-cost accounting model accounts for transactions in which a company acquires assets and incurs liabilities. FASB has argued that eliminating pooling-of-interest will level the playing field and provide more comparable and neutral information for investors. FASB also believes that the advantages of using only the purchase method of accounting for business combinations includes enhanced relevance, reliability, and comparability.
 ·  All pooling-of-interest business combinations initiated on or before June 30, 2001 will not be affected by FASB Statement 141. Further, previously issued financial statements will not be restated to eliminate goodwill amortization, provided that the business combination complies with the requirements of APB Opinion 16 (including consummation within one year of initiation). Consequently, the effects of the pooling-of-interest method will remain with us for a long time. With the pooling-of-interest method of accounting for a business combination, the buyer simply added to its balance sheet the book value (or historical cost) of the target company's assets and liabilities. This understated the value of the assets acquired, and avoided the recording of goodwill.
 ·  A pooling-of-interest is considered initiated if the major terms of the transaction, including the ratio of exchange are announced publicly or otherwise communicated to the shareholders of one of the combining companies (APB Opinion 16, paragraph 46).
 ·  Early adoption is permitted for entities with fiscal years beginning after March 15, 2001, provided that their first quarter financial statements have not been issued. In all cases, the provisions of FASB Statement 142 must be adopted as of the beginning of a fiscal year.
 ·  Entities are required to adopt FASB Statement 142 in their fiscal year beginning after December 15, 2001 (i.e. January 1, 2002 for entities using the calendar year). Retroactive application of FASB Statement 142 is not permitted.
 ·  Goodwill and intangible assets with indefinite useful lives arising from a business combination completed after June 30, 2001 will not be amortized even though an entity has not otherwise adopted FASB Statement 142. FASB did not believe that all goodwill declines in value or that goodwill that does decline in value does so on a straight-line basis, even though it was the underlying assumption behind the majority of corporate amortization schedules. It is also to be noted that the application of amortization had historically decreased reported earnings and diluted earnings per share.
 ·  With certain exceptions, the transition provisions of FASB Statement 142 provide until the beginning of the next fiscal year to implement the new rules. Therefore, goodwill and indefinite-lived intangible assets arising from a business combination completed prior to June 30, 2001 will continue to be amortized until FASB Statement 142 is adopted.
 ·  The financial statement presentation and disclosure requirements of FASB Statement 142 should not be applied to goodwill or intangible assets (even to “new” goodwill or intangible assets) until the entity fully adopts FASB Statement 142 (January 1, 2002 for a calendar year-end entity).
 ·  A business combination occurs when an entity acquires either net assets that constitute a business (as described in EITF Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business) or equity interests of an entity or entities and obtains control over the entity or entities.
 ·  FASB Statement 141 is not applicable to an acquisition through a management contract or lease, nor transfers of net assets or exchanges of shares between enterprises under common control, as was the case with APB Opinion 16.
 ·  The identifying of the acquiring entity in an equity-based acquisition should be done on the basis of all of the facts and circumstances, especially the relative voting rights in the business combination, the composition of the board of directors and the senior management of the business combination, and which entity received a premium.
 ·  The identifying of the acquiring entity in a roll-up transaction should be done on the basis of all the facts and circumstances, especially the relative size of the combining entities.
 ·  The methodology used to determine the amount of assets and liabilities assigned to a reporting unit or component level should be reasonable, supportable, and applied in a consistent manner.
 ·  A reporting unit is the same as or one level below (the component level) an operating segment as defined in FASB Statement 131, paragraph 10, and is the level at which segment management reviews arise and assess the performance of the operating segment.
 ·  After establishing the reporting units and component levels, and assigning the related assets and liabilities, all goodwill recognized in the entity’s balance sheet at the date of the acquisition should be assigned to one or more reporting units or component levels.
 ·  Goodwill may be assigned to reporting units or component levels of the acquiring entity that are expected to benefit from the synergies of a business combination, even if the acquired entity's other assets are not assigned to the reporting unit or component level.
 ·  FASB 141 continues APB Opinion 16 guidance with respect to the acquisition date, i.e. the closing date. However, some marketable securities associated with the acquisition may use the announcement date.
 ·  FASB 141 continues APB Opinion 16 guidance with respect to the determination of the cost of the acquired entity, i.e. fair value plus transaction costs.
 ·  FASB 141 continues APB Opinion 16 guidance with respect to reorganization of entities under common control, i.e. use the carryover basis.
 ·  FASB 141 continues APB Opinion 16 guidance with respect to the acquisition of a minority interest, i.e. use the purchase method, but do not consider it a business combination.
 ·  FASB 141 continues APB Opinion 16 guidance with respect to contingencies in a business combination, i.e. record when contingencies are issued or issuable beyond a reasonable doubt.
 ·  FASB 141 continues APB Opinion 16 guidance with respect to purchase price allocation of pre-acquisition contingencies, i.e. where the fair value is determinable or where it is determinable in 1 year.
 ·  Research and development that has no alternative future use (i.e., in-process research and development) shall be expensed at the acquisition date (FASB Statement 142).
 

B. Highlights: Intangible Assets and Their Useful Life

 ·  FASB Statements 141 and 142 create a distinction between goodwill and intangible assets in a business combination.
 ·  FASB Statement 141 defines intangible assets as assets (not including financial instruments) that lack physical substance.
 ·  According to FASB Statement 141, intangible assets are those assets with legal or contract rights (e.g. a patent or licensing agreement) or are deemed separate from goodwill (e.g. customer lists) and are acquired under a business combination.
 ·  FASB believes the new definition and guidance for intangible assets will enhance consistency in the application of the standard.
 ·  The determination of whether an intangible asset should be reported separately should be based on the facts and circumstances of each individual business combination.
 ·  The definition of an intangible asset does not include an assembled workforce of at-will employees; therefore, an assembled work force is deemed goodwill. FASB believes that replacement cost with respect to the fair value of an assembled workforce is not a representationally fair measurement. Ernst & Young believes that employees subject to a collective bargaining agreement (i.e., union contract) should also be considered at-will employees in applying the provisions of FASB Statement 141.
 ·  FASB Statement 142 states that intangible assets should be recognized at fair value, whether acquired individually or as part of a group of intangible assets. The entire cost of the group of intangible assets must be allocated to the individual intangible assets based on their fair values. Therefore, no amount of the purchase price may be unallocated, and as a result, accounted for as goodwill
 ·  Intangible assets have to be tested to determine their useful life. The useful life is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the entity.
 ·  Intangible assets have either a definite (e.g. a patent or copyright) or an indefinite useful life (e.g. trade secret). The term “indefinite” does not mean infinite, it just means beyond the foreseeable time horizon.
 ·  An entity should reassess the useful lives assigned to its recognized intangible assets, and where appropriate, adjust their future amortization as of the beginning of the fiscal year that FASB Statement 142 is adopted. This reassessment should be completed before the end of the first interim period of the fiscal year in which FASB Statement 142 is adopted and any remaining amortization period adjusted accordingly.
 ·  The factors leading to the determination of an intangible asset’s useful life should be evaluated each year to determine whether events and circumstances continue to support the previous determination.
 

C. Highlights: Amortization of Intangible Assets with a Definite Useful Life

 ·  An intangible asset should be assigned a value based on the purchase price
§ The value is based on the amount a willing buyer would pay for the asset. Whereas, under APB Opinion 16, the focus was on a value associated with what the acquiring entity was intending to do with the asset.
 ·  Intangible assets with a definite useful life acquired after June 30, 2001 will be amortized over the period of their useful life, whatever the length (not just up to 40 years, as was the case previously under APB Opinion 16), to their residual value, in proportion to the economic benefits consumed. Straight-line amortization cannot be presumed.
 ·  Intangible assets with a definite useful life, acquired prior to July 1, 2001, are only affected by the amortization provisions of and upon the adoption of FASB Statement 142 (including amortization for useful life in excess of the pre-existing amortized period limit under the old rules for an intangible asset).
 ·  An entity should evaluate the amortization period on an annual basis.
 ·  Impairment test is done in accordance with FASB Statement 121.
 ·  The timing of the impairment test is when there is an indication that the carrying amount of the intangible asset may not be recoverable applying the two-step test under FASB Statement 121:

1). Evaluate recoverability cost of the intangible asset based on undiscounted future cash flows, and
2). Compare fair value of the asset group with its carrying value, including goodwill.

 ·  It is possible under FASB Statement 121 for a long-lived asset’s fair value to be less than its carrying amount, but the carrying amount be fully recoverable on an undiscounted cash flow basis. Consequently, no impairment loss is recognized.
 ·  Any impairment loss recognized under FASB Statement 121 reduces the asset to its new accounting basis. Reversal of a previously recognized impairment is prohibited.
 ·  An intangible asset should not be written off in the period it is acquired unless it becomes impaired due to changes in circumstances or events occurring after the date of acquisition during that period.
 

D. Highlights: Goodwill and the End of its Amortization

 ·  Goodwill is defined as “The excess of the cost of an acquired entity over the net of the amount assigned to assets acquired and liabilities assumed” (FASB Statement 141, paragraph 43); it includes goodwill associated with equity-method investments.
 ·  Purchased goodwill will appear as an asset and a line item on the balance sheet.
 ·  Goodwill is deemed a non-wasting asset.
 ·  FASB Statement 141 continues APB Opinion 16 guidance with respect to unidentifiable intangible assets, i.e. the residual value, being recorded as goodwill.
 ·   Excess reorganization value will be reported as goodwill. Excess reorganization value is recognized in accordance with AICPA Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.
 ·  Goodwill is to be no longer amortized. FASB ultimately decided that an arbitrary amortization charge for goodwill adds little if any informational value to most investors.
 ·  The amortization provisions of FASB Statement 142 apply to goodwill acquired after June 30, 2001. With respect to goodwill acquired prior to July 1, 2001, the amortization provisions are only effective upon adoption of FASB Statement 142. Thus, goodwill will no longer be written down or amortized after January 1, 2002. Therefore, an entity could have “new goodwill” not subject to amortization, while “old goodwill” will continue to be amortized until FASB Statement 142 is adopted.
 ·  Equity method goodwill will no longer be amortized. Instead, it will be evaluated for impairment in accordance with the provisions of APB Opinion 18.
 ·  Upon the earlier of adopting FASB Statement 142 or the first day of the first fiscal year beginning after December 15, 2001, any un-amortized unallocated negative goodwill or negative equity method goodwill remaining from a business combination entered into prior to July 1, 2001 that was accounted for in accordance with either APB Opinion 16 or APB Opinion 18 is to be written off as a cumulative effect of a change in accounting principle.
 

E. Highlights: Impairment Testing of Goodwill and Intangibles

 ·  The impairment provisions of FASB Statement 142 are effective upon the adoption of FASB Statement 142. It must be adopted as of the beginning of a fiscal year (i.e. for a calendar year entity January 1, 2002). FASB accepted that the impairment test would only ensure that the carrying amount of goodwill of a reporting unit does not exceed the total goodwill of the reporting unit and could therefore be viewed as capitalizing internally generated goodwill.
 ·  Goodwill is to be tested at the reporting unit or component level.
 ·  All existing un-amortized and newly acquired goodwill will be tested at least annually for impairment or more often upon an event that “would more likely than not reduce the fair value of a reporting unit below its carrying amount.”
 ·  The annual impairment test of goodwill should occur at the same time each year.
 ·  Goodwill impairment testing will comprise of a two-step test as specified in FASB Statement 142.
 ·  Entities must complete the first step of the benchmark or transitional impairment test of their goodwill within six months of adoption of FASB Statement 142. The first step requires the following computation: Reporting Unit’s Fair Value – Reporting Unit’s Carrying Amount (including goodwill). Excess reorganization value recognized in accordance with SOP 90-7 prior to the date FASB Statement 142 is adopted must also be evaluated for impairment as part of the benchmark or transitional impairment test.
 ·  The measurement date for determining the fair value of the reporting unit or component level to be used in the first step of the benchmark or transitional impairment test of goodwill should be the date of adoption of FASB Statement 142 and not the date the step is performed.
 ·  If, as a result of completing step 1, an entity determines that the fair value of its goodwill is less than the carrying amount, it is required to initiate Step 2. This requires the carrying out of the following computation with regard to the goodwill: Implied Fair Value of Reporting Unit’s Goodwill (Reporting Unit’s Fair Value – Value of Recognized Net Assets (Excluding Goodwill)) – Carrying Amount of Reporting Unit’s Goodwill. Step 2 of the impairment benchmark or transitional test of goodwill should occur as soon as possible, and be completed within 12 months of its inception.
 ·  The measurement date for determining the fair value of the reporting unit or component level to be used in the second step of the benchmark or transitional impairment test for goodwill should be the date the step is performed.
 ·  The transitional or benchmark impairment test of goodwill does not establish the required measurement date for the annual impairment tests at each reporting unit.
 ·  Intangible assets with an indefinite useful life acquired in a business combination completed after June 30, 2001 will not be amortized. FASB believes that amortization of intangible assets with an indefinite useful life would not be representationally faithful.
 ·  Intangible assets with an indefinite useful life acquired in a business combination completed prior to June 30, 2001 will continue to be amortized until the adoption of FASB Statement 142.
 ·  Intangible assets with an indefinite useful life will be tested at least annually for impairment or more often upon an event or circumstance which occurs that indicates that the intangible asset might be impaired.
 ·  An intangible asset that has an indefinite useful life has to be evaluated for impairment at least annually on a lower-of-cost or fair-value basis.
 ·  The annual impairment test of an intangible asset with an indefinite useful life requiring the comparison of the fair value and carrying value is to be applied upon the adoption of FASB Statement 142, but not before. The test will occur at the beginning of the fiscal year in which the Statement is adopted. This benchmark or transitional impairment test should be completed in the first interim period in which FASB Statement 142 is adopted.
 ·  If after the completion of the impairment test the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of the goodwill. The adjusted carrying amount of the goodwill shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited once the measurement of that loss is completed.
 ·  If after the completion of the impairment test the carrying amount of the intangible asset with an indefinite useful life exceeds the fair value of that intangible asset, an impairment loss shall be recognized in an amount equal to that excess. The adjusted carrying amount shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited.
 ·  An impairment loss recognized as a result of initially adopting FASB Statement 142 will be recorded as a cumulative effect of a change in accounting principle. Subsequent to adoption, an impairment loss will be deducted from operating income.
 ·  If an indicator of impairment loss arises before the completion of the transitional or benchmark impairment test for goodwill, an impairment test should be performed. Any impairment loss resulting from such an impairment test in the first six months of adoption should be reported as an impairment loss against operating income and not as the cumulative effect of a change in accounting principle.
 ·  There is no “cushioning” of the impairment loss because of the belief that the fair value is only temporarily depressed.
 ·  There is also no reversal of an impairment loss should the fair value happen to subsequently recover, i.e. you can not “write-up” goodwill.