The document discusses changes to accounting standards for mergers and acquisitions (M&A) under FAS141R that will take effect in 2009. Key changes include stricter timing for reporting deals, requiring contingent consideration to be included in purchase price at fair value, treating in-process R&D as intangible assets rather than expenses, and expensing acquisition costs immediately rather than capitalizing them. Understanding these changes and modeling deals accordingly can help reduce potential negative effects on financial statements from new fair value requirements. While complications may arise, the changes complete international convergence of standards and M&A activity can continue with proper planning and valuation expertise.

1. S m a r t Va l u a t i o n
for Smart M&A
WHY M&A
NEW ACCOUNTING STANDARDS
WON’T HURT YOUR DEAL

2. SMART VALUATION SMART M&A
FOR When all is said and done, these revisions mean that
company leaders can expect ups and downs. When it
WHY M&A
NEW ACCOUNTING STANDARDS WON’T comes to M&A activity, an acquired entity will likely cause
HURT YOUR DEAL turmoil in financial statements until the merger stabilizes
over a number of reporting cycles.
Recent changes to Mergers and Acquisitions accounting has
The most significant changes coming under FAS141R
given rise to new questions, confusion, and sometimes even
include:
hesitation over completing a deal. Requirements under
FAS141R are behind it all, and companies will have to
1. TIMING OF DEALS AND REPORTING
comply beginning in calendar year 2009 – a date that
The biggest challenge for financial departments may come
looms large for many who are considering business
with the increased emphasis on timing and a growing list of
combinations.
disclosure requirements. FAS141R provides a more
However, the challenges presented by FAS141R should not
stringent timeline for reporting business combinations, and
stand in the way of intelligent deal making. Buyers and
if deadlines are missed then provisional amounts must be
sellers alike will adapt to the salient changes and base their
reported for incomplete terms. That means not having the
decisions on whether an acquisition is a good deal at the
most qualified information,
right time for them.
which can lead to more
Even as their accounting and valuation teams make the serious issues down the road.
necessary adjustments, they know that advantages can be There is a grace period of one
gained from the new system. The changes under FAS141R year after the deal is closed –
complete a joint effort by the FASB and the IASB to called the “measurement
improve financial reporting for business combinations and period” – during which
to promote the international convergence of accounting provisional items can be
standards. adjusted.
FAS141R will cause some major changes and fluctuations Also, the expanded disclosure requirements make meeting
to post-merger balance sheets. Understanding the new the deadlines even more difficult and often will force a
guidance, modeling deals accordingly and gauging impact company to speed through the process. A deeper planning
on the financial statement before closing the transaction process and having the right team in place early will help
will help reduce any potential negative effects. avoid sacrificing quality and accuracy for speed.
Complications arise due to the tricky nature of fair value
2. CONTINGENT CONSIDERATION
and deal modeling, especially when estimating intangibles
Perhaps the most significant accounting change is the
like unresolved contract contingencies. Calling in valuation
requirement that the purchase price of a business
specialists mitigates the damage that can result from poor
combination now include the fair value of contingent
assessments. When financial analysts evaluate transactions
consideration. This change could significantly increase the
and earnings, they’ll be looking for how fair value was
upfront purchase price recorded on deal transactions, as
applied and what normalized earnings will look like on a
well as increase the volatility of subsequent accounting.
forward looking basis.
The contingent consideration will be recorded by the
This is especially timely as fair value under FAS141R will
acquirer as a liability at fair value as of the transaction date
follow the guidance of FAS 157 and is defined as:
and will need to be adjusted to fair value at each
“the price that would be received to sell an asset or paid to subsequent reporting period. Given the major
transfer a liability in an orderly transaction between market uncertainties as to future amounts and timing of payments
participants at the measure date.” of the contingent consideration, the fair value of this
liability may materially fluctuate over time as more
Major changes to this definition include the market-
information is obtained.
participant perspective, exit price and more reliance on
Companies putting contingent payments into the deal
observable inputs, all of which create more difficulty in
structure will need to closely assess fair value of the
financial reporting for business combinations.
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3. contingency. There is no predicting the future, but to make decisions that are strategically sound for their
modeling and understanding the shapes that a deal can take business or come at a good investment price at the right
will help mitigate the potential fluctuations in reporting. time. The fact is, pre-141R accounting was already a
mystery to many. Adjustments will come from the
3. IN-PROCESS R&D (IPR&D) valuation and accounting side to ensure that deals go
through smoothly and under the best possible terms.
Under previous regulations, companies could record the
fair value of IPR&D as a period cost of a transaction.
FAS141R, however, requires that the fair value of IPR&D
be recorded as an intangible asset on the balance sheet. If For more information, please contact:
the IPR&D does not come to fruition, it will subsequently Bill Duratti, CPA, ABV, CVA
need to be written down to its fair value, potentially zero, Partner
resulting in an impairment charge to the income statement. bduratti@mfa-cpa.com
(978) 557-5305
4. DEAL COSTS
Acquisition-related costs such as negotiations that involve
banking and legal fees were traditionally reflected as deal
costs that could be capitalized along with the purchase
price, but FAS141R calls for these items to be expensed
immediately as period costs.
5. ASSETS AND LIABILITIES ARISING FROM CONTINGENCIES
about mfa
FAS141R improves the completeness of the information
reported about a deal by changing the requirements for
MFA – Moody, Famiglietti & Andronico, LLP (www.mfa-
recognizing assets and liabilities that arise from
cpa.com) is a proactive CPA and consulting firm located
contingencies. An acquirer is now required to recognize
North of Boston with National and Global reach.
these elements as they arise from both contractual
Founded in 1982, the firm is comprised of over 100
contingencies and noncontractual contingencies as of the professionals including 13 partners whose speed, precision,
acquisition date, measured at their acquisition-date fair and commitment to client success consistently results in
values. Again, post-merger adjustments to the fair value of proven best value solutions that offer the ideal
these contingencies can create significant fluctuations in combination of expertise, service and price.
reported earnings.
MFA is an independent member of the BDO Seidman
alliance, which allows them to coordinate seamlessly with
ACTION ITEMS
the 5th largest accounting firm in the world. Clients
With these items and others looming large at the beginning benefit from our ability to apply MFA’s expertise and value
of 2009, companies that are pursuing acquisitions should to resources from 632 member firm offices in 110
take a few important steps to solidify their position. countries.
In addition, MFA offers through affiliates complementary
• Re-assess current deals to determine the impact that
solutions such as wealth advisory, valuation, business
FAS141R might have, and consider if it will be beneficial to
performance enhancement services, IT consulting, fraud
close after the deadline passes.
and forensic accounting, litigation support and
• Be certain that the right teams are in place to understand and professional staffing.
apply new fair value concepts to aspects of a transaction.
• Instruct teams to prepare for the new guidelines and adjust Material Discussed in this Perspective Issue is meant to provide general information and should
not be acted on without obtaining professional advice tailored to your firm’s individual and spe-
their approach as best as possible to minimize impact on the
cific needs. This information is for general guidance only and is not a substitute for professional
balance sheet and fluctuations in future reporting. advice.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the
Despite the changes and action items that accompany IRS, we inform you that any U.S. tax advice contained in this communication (including any
FAS141R, the reasons for sourcing and completing deals attachments) is not intended or written to be used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recom-
should remain the same. Company leaders will still strive mending to another party any transaction or matter addressed herein.
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