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It appears as though SFAS 141R (Business Combinations, Applying the Aquisition Method) will be finalized by the end of September 2007. The primary changes in 141R include:
1. In-process R&D assets will be recognized as an asset and measured
at fair value. These assets will be classified as indefinite-lived
until completion or abandonment of the project. The company will begin
amortizing the asset once the project is completed, and will be tested
for impairment under FAS 142 until complete.
2. Transaction costs will now be expensed instead of included as part
of the purchase price.
3. Contingent consideration will be measured at fair value on the
acquisition date and classified as either a liability or equity. After
initial recognition, contingent consideration classified as equity
will not be remeasured, but contingent consideration classified as as
liability will be remeasured to fair value.
4. Recognize a reacquired right in a business combination as a
separately identifiable intangible asset. A reacquired right is a
right that the acquirer had previously granted to the acquiree to use
the acquirer's recognized or unrecognized intangible asset.
5. Assets held for sale should be measured at fair value and not fair
value less cost to sell.
6. Contingencies (e.g., lawsuits) should be recognize at fair value
for (a) all contingencies that arise from contractual rights and
obligations and (b) those contingencies that do not arise from
contractual rights and obligations (noncontractual contingencies) if
it is more likely than not that the contingency meets the definition
of an asset or liability.

This last change will likely cause real contention, as shown in the following example:

Suppose the target company has an outstanding lawsuit, with a
potential judgement against the company of $10.0 million. If there is
a 50/50 chance of losing the lawsuit, then the acquirer would
recognize a liability of $5.0 million. However, if the lawsuit is
settled in favor of the company with no judgement, then the Company
would recognize income of $5.0 million. It is safe to say that this
could materially distort the earnings reported by the Company.

Will this be just another "adjustment" that Wall Street analysts make when performing their research? Only time will tell.

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Posted by Jim Connors at 08:12 PM | Permalink | Comments (0) | TrackBacks (0)