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Update on FASB ASC 740 (FIN No. 48)

Update on FASB ASC 740 (FIN No. 48). By Steve Johnson, CPA Principal Olsen Thielen & Co., Ltd. . FIN 48 Timeline.

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Update on FASB ASC 740 (FIN No. 48)

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  1. Update onFASB ASC 740 (FIN No. 48) By Steve Johnson, CPA Principal Olsen Thielen & Co., Ltd.

  2. FIN 48 Timeline • The original proposed interpretation was released in 2005. It was expected to be effective as of the close of the first fiscal year ending after 12/15/05, with earlier application encouraged. • FIN 48 was issued in 2006 and was to be effective for fiscal years beginning after 12/15/06, with earlier application permitted. • FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises, was posted February 1, 2008. The FSP deferred the effective date of FIN 48 for certain nonpublic enterprises (including nonpublic not-for-profit organizations) to fiscal years beginning after 12/15/07.

  3. FIN 48 Timeline (Continued) • FSP FIN 48-3, Additional Delay of the Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Entities. • Allowed election of deferral of one additional year to fiscal years beginning after 12/15/08. • Required an electing entity to disclose (1) the fact of the deferral, and (2) its accounting policy for evaluating uncertain tax positions. • In September of 2009 FASB issued ASU 2009-06, Implementation Guidance on Accounting for Uncertainty on Income Taxes and Disclosure Amendments for Nonpublic Entities. • For entities currently applying FIN 48, the changes are effective for interim and annual periods ending after 9/15/09. • For entities who deferred application under FSP FIN 48-3, the effective date coincides with the date FIN 48 is applied.

  4. ASU 2009-06 Amendments to Subtopic 740-10 • Adds to the definition of a tax position an entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity. • Includes within the scope of entities subject to accounting for uncertain tax positions tax exempt not-for-profits, pass-through entities, and entities that are taxed in a manner similar to pass-through entities. • Excludes nonpublic entities from certain disclosure requirements: • Tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of the period. • Amount of unrecognized tax benefits, which, if recognized, would have an impact on the effective tax rate.

  5. Clarifying Examples Added to Subtopic 740-10-55 • Evaluating nexus for all jurisdictions in which an entity may be subject to income taxes, even if there is no physical presence. • Decisions regarding built-in gains tax upon tax conversions. • Characterization of activities as related or unrelated to an entity’s tax exempt status. • Determination of whether income taxes are attributable to an entity or to its owners. Should be based on the laws and regulations of the taxing authority, rather than on the party that actually pays the income taxes or on obligations imposed by agreements between the entity and its owners. • Consolidated or combined financial statements must include all tax positions for each of the entities within the group (even if one or more of the entities is a pass-through entity).

  6. FASB Accounting Standards Codification By Steve Johnson, CPA Principal, Olsen Thielen & Co., Ltd.

  7. FASB Accounting Standards Codification Overview • The Codification was released by the FASB on July 1, 2009 • Effective for interim and annual periods ending after September 15, 2009 as established in SFAS No. 168 • It is the single source of authoritative non-governmental U.S. GAAP • All existing accounting standards documents are superseded, and any literature not included in the Codification is considered to be non-authoritative • Combines thousands of GAAP pronouncements into around 90 topics and displays them in a consistent structure

  8. Goals for the New System • Reduce the time it takes to research different topics and issues • Mitigate the risk of noncompliance with standards since all the literature is organized in a central location • Provide real-time updates as soon as standards are released • Help the FASB with the research and convergence required during the standard setting process • Become the authoritative source of literature of the completed XBRL taxonomy

  9. What is included in the Codification? • The Codification includes all authoritative U.S. GAAP • As mentioned before, all existing accounting standards documents are superseded • This includes FASB, AICPA, and EITF pronouncements as well as relevant portions of authoritative content issued by the SEC (e.g. Regulation S-X and Staff Accounting Bulletins) • All codified literature will carry the same level of authority • The Codification does NOT include non-authoritative sources (e.g. IFRS, FASB Concepts Statements, AICPA Issues Papers, textbooks, handbooks, articles, etc.)

  10. How is the Codification structured? Areas Topics Subtopics Sections Subsections

  11. How is the Codification structured? (Continued) • Topics represent a collection of related guidance. The topics are further broken out into subtopics, sections, and subsections. • Note that subsections are not numbered and are limited in occurrence • Topics reside in four main areas

  12. The Four Main Areas of the FASB ASC • Presentation (Topic Codes 205-299) • Topics relate only to presentation matters • Do not address recognition, measurement and derecognition • Financial Statement Accounts (Topic Codes 305-700) • Topics relate to specific accounts (e.g. cash, inventory, debt, taxes) • Broad Transactions (Topic Codes 805-899) • Topics are transaction oriented (e.g. consolidation, leases, financial instruments, related party disclosures)

  13. The Four Main Areas of the FASB ASC (Continued) • Industries (Topic Codes 905-999) • Topics relate to accounting for specific types of industries and/or activities (e.g. agriculture, health care, not-for-profit entities, real estate)

  14. How will the Codification be updated? • Changes are communicated through Accounting Standards Updates (ASUs) • ASUs will be published for all authoritative U.S. GAAP pronouncements, as well as for amendments to SEC content • An ASU is a transient document that summarizes the changes and explains the basis for the FASB’s decisions • Note that ASUs update FASB Codification but are NOT authoritative in their own right • The FASB will not amend ASUs, it will only amend the Codification

  15. SFAS 168 The FASB ASC and the Hierarchy of GAAP • SFAS 168 replaces SFAS 162 The Hierarchy of GAAP • It establishes a new hierarchy of GAAP sources for non-governmental entities under the Codification • The Codification contains certain software revenue recognition guidance from Section 5100 “Revenue Recognition” of the AICPA Technical Inquiry Service, which may not have been previously followed by some non-public entities. For these entities, it is possible that the effect of applying the provisions of SFAS 168 could result in a change in accounting principle or correction of an error

  16. Statement of Financial Accounting Standards No. 141(R) and No. 164Business CombinationsNot-for-Profit Entities:Mergers and Acquisitions TELERGEE CFO & Controllers Conference October 15, 2009 Steve Johnson

  17. Prior to SFAS No. 141 • APB No. 16 issued August 1970 was the main authoritative pronouncement on accounting for business combinations. • Two accepted methods of accounting: • Purchase Method accounted for the combination as the acquisition of one company by another. • Pooling of Interests Method accounted for the combination as the uniting of ownership interests of two or more companies by exchange of equity securities. All of a series of conditions had to be met for this method to be applied. • Not-for-profit combinations would use the Pooling of Interests method if certain circumstances existed.

  18. SFAS No. 141 • Superseded APB No. 16 • Effective for business combinations initiated on or after July 1, 2001. • Statement 141 did not apply to: • The formation of a joint venture. • Combinations between not-for-profit organizations. • Acquisition of a for-profit business by a not-for-profit entity. • Combinations of two or more mutual enterprises.

  19. SFAS No. 141 (Continued) • Purchase accounting required for business combinations covered by SFAS No. 141. • Pooling of interests method is not longer permitted. • Statement 141 did not fundamentally change the manner in which purchase accounting is applied: • Carries forward guidance concerning (1) determination of cost, (2) allocation of purchase price to assets acquired and liabilities assumed, and (3) determination of date of acquisition. • Keeps guidance re: preacquisition contingencies. • Provides new guidance for recognizing intangible assets (apart from goodwill) and calls for additional disclosures.

  20. FASB ASC 805, Business Combinations[SFAS No. 141(R)] • Effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. • Same effective date as SFAS No. 160 on noncontrolling interests. • Retains fundamental requirements of the purchase method. However, purchase method is now referred to as the acquisition method. • The revised statement marks the FASB’s full transition to fair value accounting for business combinations. • SFAS 141(R) was written in collaboration with the International Accounting Standards Board to promote international convergence of accounting standards.

  21. Applicability of SFAS No. 141(R) • Statement 141(R) broadens the scope of activities that may be classified as a business combination. • SFAS No. 141 only applied to business combinations in which control was obtained by transferring consideration. • SFAS No. 141(R) applies to all transactions and other events in which one entity obtains control over another (example: by contract alone or through lapse of minority veto rights). • Applies to mutual entities. • Mutual entity – “An entity other than an investor-owned entity that provides dividends, lower costs or other economic benefits directly or proportionately to its owners, members, or participants. Mutual insurance entities, credit unions, and farm and rural electric cooperatives are examples of mutual entities.

  22. SFAS No. 141(R) Does Not Apply to: • The formation of a joint venture. • The acquisition of an asset or a group of assets that does not constitute a business. • A combination between entities or businesses under common control. • A combination between not-for-profit organizations or the acquisition of for-profit businesses by a not-for-profit organization.

  23. 141(R) Major Changes from Previous Standard • The date on which the acquirer obtains control of the acquiree has been established as the acquisition date. • Defines the acquirer. • Applies to all business combinations, including those in which control is obtained without the transfer of consideration. • 141(R), with limited exceptions, requires assets acquired and liabilities assumed to be recognized at their fair values. That requirement replaces the cost-allocation process in SFAS No. 141, under which the cost of an acquisition is allocated to individual assets and liabilities based on estimated fair values. Cost allocation under 141 often resulted in the measurement of some assets acquired and liabilities assumed at amounts other than fair value.

  24. 141(R) Major Changes from Previous Standard (Continued) • Under 141, costs incurred to effect the business combination are included in the allocated cost. 141(R) requires acquisition-related costs to be recognized separately from the acquisition. (Generally that means expensed as incurred.) • Under 141, restructuring costs the acquirer expected to incur were recognized as if they were a liability assumed at the acquisition date. Under 141(R), such costs are recognized separately from the acquisition. • Requires noncontrolling interests to be measured at fair value.

  25. 141(R) Major Changes from Previous Standard (Continued) • Under 141 goodwill recognized represented only the amount attributable to the acquirer. Under 141(R) because the noncontrolling interest is measured at fair value, the goodwill recognized is attributable to both the acquirer and the noncontrolling interest. • Changes handling of assets and liabilities arising from contingencies. • Changes handling of so-called “negative goodwill”.

  26. Assets and Liabilities Arising from Contingencies • Acquirer required to recognize assets and liabilities assumed arising from contractual contingencies as of acquisition date at fair value. • Non-contractual contingencies recognized at acquisition date only if “more likely than not”. • Subsequent to acquisition date acquirer will continue to value assets/liabilities arising from a contingency at its acquisition-date fair value. When new information is obtained about the possible outcome: • Liability measured at higher of acquisition date fair value or amount that would be recorded under FASB 5. • Assets measured at lower of acquisition date fair value or best estimate of future settlement amount.

  27. Goodwill and Gains from Bargain Purchases • Goodwill recognized as of the acquisition date. • All consideration paid for an acquisition (including contingent consideration such as an earn-out) must be included in the purchase price. • The original SFAS No. 141 requires negative goodwill to be allocated as a pro rata reduction to net assets. • With the revision, negative goodwill is required to be recognized as an immediate gain on the income statement.

  28. Timing is Critical • Transactions and any related consideration should be valued on the date the transaction closes (previously stock was valued as of the announcement date). • Accounting estimates related to the acquisition must be booked as of the closing date (previously they could be adjusted after the closing date). • Transaction costs are expensed rather than capitalized. • Measurement period (period where the acquirer may adjust the provisional amounts recognized when new information is available that existed as of the acquisition date) not to exceed one year after acquisition date.

  29. Disclosures – Acquisition Disclose the following information: • Name and description of the acquiree. • Acquisition date. • Percent of ownership interests acquired. • Primary reasons for the acquisition and description of how control was obtained. • Fair value of consideration transferred and fair value of each major class of consideration. • Amounts recognized as of acquisition date by major class of assets acquired and liabilities assumed. • Description of qualitative factors that make up goodwill recognized. • Goodwill expected to be deducted for tax purposes.

  30. Disclosures - Acquisition (Continued) • There are additional disclosures for contingencies, public companies, segment information, bargain purchases, non-controlling interests, combinations achieved in stages. • If the date of an acquisition is after the reporting date but before the financial statements are issued, the acquirer shall disclose: • Disclosure requirements from previous slide and above. • If acquisition information is incomplete at the time financial statements are issued the acquirer shall describe which disclosures could not be made and the reason why they could not be made.

  31. Steps in Recording a Combination • Assets acquired must be a business. • Applying the acquisition method: • Identify the acquirer. • Determine acquisition date (date obtains control). • Recognizing and measuring the identifiable assets acquired and liabilities assumed and any non-controlling interest in the acquiree. • Recognizing and measuring goodwill. • Measurement is as of the acquisition date.

  32. Why FASB Issued SFAS No. 164 • SFAS 141, SFAS 141(R) and SFAS 142 did not address not-for-profit entities. • Will improve relevance, representational faithfulness, and comparability of the information a not-for-profit provides in its financial statements about a combination with one or more not-for-profit entities. • Incorporates the unique characteristics of not-for-profit enterprises and of their business combinations.

  33. Scope and Applicability of 164 • Generally, any transaction that is deemed a merger of not-for-profit entities or an acquisition by a not-for-profit entity. • Merger – transaction or other event in which the governing bodies of two or more not-for-profit entities cede control of those entities to create a new not-for-profit entity. Merging entities do not retain shared control of the newly created entity and a newly formed governing body needs to have been established. • Acquisition – transaction in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and the assets and liabilities of the acquiree are recognized in the acquirer’s financial statements.

  34. Combinations Exempt from FASB 164 • Joint Ventures. • Acquisition of an asset or group of assets that does not constitute either a business or nonprofit activity. • A combination between not-for-profit entities, businesses under common control. • A transaction in which the not-for-profit entity obtains control of another entity but does not consolidate as permitted or required by AICPA Statement of Position 94-3.

  35. Effective Date of 164 • Mergers for which the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009. • Acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2009.

  36. Requirements of the Standard • Determines whether a combination is a merger or acquisition. • Applies the carryover method in accounting for a merger. • Applies the acquisition method in accounting for an acquisition. • Determines what information to disclose.

  37. Applying the Carryover Method to Merger • The combined entity’s initial set of financial statements carry forward the assets and liabilities of the combining entities. • Measured at their carrying amounts in the books of the combining entities at the merger date. • No goodwill or intangibles recognized. • Similar to pooling of interest from APB 16 although the measurement date is now the date of the merger. (Pooling of interests measurement date was the beginning of the period in which the merger occurred.) • New reporting entity created. • Entity’s history begins at inception.

  38. Applying the Acquisition Method • Similar to acquisition method as described in FASB 141(R). • Identifying the acquirer. • Determine the acquisition date. • Recognize and measure the identifiable assets acquired and liabilities assumed. • FASB 164 has additional guidance on items unique to not-for-profits and elimination of 141(R) guidance that does not apply to not-for-profits. • Differences in terminology and a few details unique to not-for-profit entities.

  39. Recognizing Goodwill or a Contribution Received • Areas that differ the most from FASB141(R): • Goodwill recognized as a separate charge to the Statement of Activities for not-for-profit entities that are predominantly supported by contributions and investment income. (“Excess of consideration paid over net assets acquired in Acquisition of Entity XY”) • Many not-for-profit acquisitions constitute an inherent contribution received because acquirer receives assets without transferring consideration. The contribution would be recorded as a separate credit in the Statement of Activities (“Excess of assets acquired over liabilities assumed in donation of Entity XY”)

  40. Other Issues • This Statement requires that a recognized non-controlling interest in another entity, whether a business or not-for-profit entity, be measured at fair value at the acquisition date. • The Statement establishes exceptions to the recognition principle for donor relationships, collections, promises to give, contingencies. • Cash flow presentations for items that are unique (such as goodwill and inherent contributions received). • Does this statement affect convergence with IFRS? • A not-for-profit entity shall apply FASB 142, in subsequent accounting for goodwill and other intangible assets.

  41. Disclosures - Merger • New entity’s initial reporting period begins with merger date. • Disclose the following information: • Name of merged entity. • Merger date. • Reasons for merger. • Amounts recognized as of merger date by major class. • If there are any significant amounts that GAAP doesn’t require to be measured. • Any significant adjustments needed to conform the individual accounting policies of the merging entities.

  42. Disclosures - Acquisition Disclose the following information: • Name and description of the acquiree. • Acquisition date. • If applicable, percent of ownership interests acquired. • Primary reasons for the acquisition and description of how control was obtained. • Fair value of consideration transferred and fair value of each major class of consideration. • Amounts recognized as of acquisition date by major class of assets acquired and liabilities assumed. • Description of qualitative factors that make up goodwill recognized (either on Statement of Financial Position or Statement of Activities).

  43. Disclosures - Acquisition (Continued) • There are additional disclosures for contingencies, collections, conditional promises and inherent contributions received. • If the date of an acquisition is after the reporting date but before the financial statements are issued, the acquirer shall disclose: • Disclosure requirements from previous slide and above. • If acquisition information is incomplete at the time financial statements are issued the acquirer shall describe which disclosures could not be made and the reason why they could not be made.

  44. Questions? Thank You

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