FASB Emerging Issues Task Force. Issue No. 10-G Title: Disclosure of Supplementary Pro Forma Information for Business Combinations

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1 FASB Emerging Issues Task Force Issue No. 10-G Title: Disclosure of Supplementary Pro Forma Information for Business Combinations Document: Issue Summary No. 1, Supplement No. 1 Date prepared: November 10, 2010 FASB Staff: Breen (ext. 479) / Catalano (ext. 359) EITF Liaison: Hal Schroeder Date previously discussed: September 16, 2010 Previously distributed EITF materials: Issue Summary No. 1, dated August 27, 2010 Background 1. At the September 16, 2010 EITF meeting, the Task Force reached a consensus-for-exposure that if a public entity presents comparative financial statements, the entity would disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in the proposed Accounting Standards Update (proposed Update) also would expand the supplemental pro forma disclosures under Topic 805, Business Combinations, to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. 2. The Board ratified the consensus-for-exposure and approved the issuance of a proposed Update for public comment at its September 29, 2010 meeting. The proposed Update was posted to the FASB website on October 6, 2010, with a comment period that ended on November 5, Six comment letters were received on the proposed Update and have been distributed to The alternative views presented in this Issue Summary Supplement are for purposes of discussion by the EITF. No individual views are to be presumed to be acceptable or unacceptable applications of Generally Accepted Accounting Principles until the Task Force makes such a determination, exposes it for public comment, and it is ratified by the EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 1

2 Task Force members. At the November 19, 2010 EITF meeting, the Task Force will have the opportunity to consider the comment letters as it redeliberates the consensus-for-exposure. The Task Force will then be asked whether it agrees with the staff recommendations for the proposed changes to the amendments to the FASB Accounting Standards Codification TM (the Codification) to be included in the final Update and whether it would like to affirm its consensus-for-exposure (as amended) on this Issue as a final consensus. Summary of Comment Letters Received and FASB Staff Analysis and Recommendation 3. The staff received an informal comment that highlighted an inconsistency in the acquisition date used for the pro forma disclosure in the proposed Update when compared to Article 10 of Regulation S-X (interim financial statements) if comparable financial statements are presented. Article 10 indicates the following: Where a material business combination has occurred during the current fiscal year, pro forma disclosure shall be made of the results of operations for the current year up to the date of the most recent interim balance sheet provided (and for the corresponding period in the preceding year) as though the companies had combined at the beginning of the period being reported on. This pro forma information shall, at a minimum, show revenue, income before extraordinary items and the cumulative effect of accounting changes, including such income on a per share basis, net income, net income attributable to the registrant, and net income per share. The FASB staff is working with the SEC staff to resolve this comment and plans to provide an update for the Task Force at the November 19, 2010 EITF meeting. 4. In addition, of the six comment letters received, one was from an individual, two were from preparers, two were from accounting firms, and one was from an accounting organization. Comment letter respondents were asked to comment on the following questions in the proposed Update: Question 1: Do you agree that if comparative financial statements are presented, the acquisition date that should be used for reporting the supplemental pro forma disclosure in Topic 805 should be only as of the beginning of the prior annual reporting period? If not, why not? EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 2

3 Question 2: Do you agree that the additional disclosure of a description of the nature and amount of material, nonrecurring pro forma adjustments will provide useful information? If not, why not? Question 3: Do you agree that the amendments in this proposed Update should be applied prospectively, with early adoption permitted? If not, why not? Question 4: Do you believe that the effective date provides enough time for financial statement preparers to effectively implement the proposed amendments? If not, why not? 5. The staff analyzed the comment letters received and has included the significant comments, as well as the staff's recommendation on how the Task Force should proceed, in the paragraphs that follow. 6. The comment letters from the preparers, accounting firms, and the accounting organization generally agreed with the proposed Update. The staff notes that the comment letter from the individual seemed to support the proposed Update but did not directly respond to the questions asked. One of the preparers (CL #2) noted the following: This approach more faithfully represents an estimate of the comparative information that would assist users in understanding the effect of a business combination We do not believe users are benefited by pro forma information that assumes identical transactions occurred at the beginning of each reporting period presented as there is no ability for a user to understand the trends that result from the passage of time. 7. One of the accounting firms (CL #5) suggested that the following additional example be included with the amendments to Topic 805 (added text is underlined) (the proposed revision to the paragraph from Topic 958, Not-for-Profit Entities, was added by the staff): To meet the objective in the preceding paragraph, the acquirer shall disclose the following information for each business combination that occurs during the reporting period. h. If the acquirer is a public business entity, all of the following 3. If comparative financial statements are presented, the revenue and earnings of the combined entity as though the business combination(s) that occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information). For example, disclosures would initially be EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 3

4 provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised when 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented) If it presents comparative financial information, an NFP acquirer that is a public entity shall disclose the supplemental pro forma information required by the preceding paragraph as though the acquisition(s) that occurred during the current period had occurred as of the beginning of the comparable prior annual reporting period. For example, disclosures would initially be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised when 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented). 8. That accounting firm noted that the proposed comparative financial statements example is intended to prevent a potential misinterpretation that the disclosures need to be revised each year. The staff agrees with the revision to both Topic 805 and Topic It was also noted that the following illustrative examples should be updated (added text is underlined): The amounts of Target's revenue and earnings included in Acquirer's consolidated income statement for the year ended December 31, 20X2, and the revenue and earnings of the combined entity had the acquisition date been January 1, 20X2 (if comparative financial statements are not presented), and January 1, 20X1 (if comparative financial statements are presented), are as follows. Refer to Paragraph (h)(1) Actual from 6/30/20X2-12/31/20X (h)(2) 20X2 supplemental pro forma from 1/1/20X2-12/31/20X (h)(3) 20X2 supplemental pro forma from 1/1/20X2-12/31/20X2 20X1 supplemental pro forma from 1/1/20X1-12/31/20X1 Revenue Earnings $ 4,090 $ 1,710 $ 27,670 $ 12,870 $ 27,670 $ 14,770 $ 26,985 $ 12, (h)(4) 20X2 supplemental pro forma earnings were adjusted to exclude $1,250 of acquisition-related costs and $650 of nonrecurring expense EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 4

5 related to the fair value adjustment to acquisition-date inventory. Both of these charges are included in the 20X1 supplemental pro forma earnings. 10. The staff agrees with the proposed revisions to update the illustrative example in Topic 805. There is not a similar illustrative example in Topic 958. Considering the proposed revision to paragraph , which provides an example, and the revision to the illustrative example in Topic 805, which is a conforming change to a more comprehensive example of required disclosures, the staff does not believe adding an illustrative example of the pro forma disclosures to Topic 958 is warranted. Question 1: Does the Task Force wish to affirm its consensus-for-exposure (as amended) that if comparative financial statements are presented, the acquisition date that should be used for reporting the supplemental pro forma disclosure in Topic 805 should be only as of the beginning of the prior annual reporting period? 11. While the comment letter respondents were generally supportive of the additional disclosure of a description of the nature and amount of material, nonrecurring pro forma adjustments, one of the preparers (CL #2) suggested the following in regards to additional disclosures: [W]e recommend that the Board adopt pro forma requirements that are more closely aligned with the SEC's requirements under Article 11 of Regulation S-X. We believe such a modification would be consistent with the Board's objective of comparability, consistency and would address certain of the objections related to "disclosure overload" if the requirements were identical. 12. In addition, one of the accounting firms (CL #5) noted the following in regards to the description of nonrecurring pro forma adjustments: [W]e note the Proposal indicates nonrecurring adjustments that are directly attributable to the business combination should be reflected in the presentation. This approach is inconsistent with Article 11 of Regulation S-X, which states that adjustments should only give effect to events that are expected to have a continuing impact and requires disclosure of material nonrecurring effects of the transaction. We believe pro forma information does a better job of "enable[ing] users of financial statements to evaluate the nature and financial effect of a business combination" if the pro forma amounts reflect the approach in Article 11 EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 5

6 and exclude the nonrecurring effects of the business combination altogether. We recommend revising the Proposal to take this approach in computing the pro forma amounts and require disclosure of any material nonrecurring effects of the transaction. We note adopting an Article 11 approach would also be consistent with the investor preferences described in paragraph BC 5 [of the proposed Update]. 13. The staff notes that the Task Force previously considered these comments and decided not to pursue additional enhancements to the existing pro forma disclosure requirements under Topic 805 because these matters already had been deliberated by the Board in connection with FASB Statements No. 141, Business Combinations, and No. 141 (revised 2007), Business Combinations, and because the issue the Task Force was asked to address was narrow in scope. 14. One of the accounting firms (CL #4) suggested the following revisions to the amendments to the Codification paragraph (added text is underlined and deleted text is struck out): (h)(4) The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings (supplemental pro forma information) (e) The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the acquisition(s) included in the reported pro forma revenues and earningschanges in unrestricted net assets, changes in temporarily restricted net assets, and changes in permanently restricted net assets (supplemental pro forma information). 15. That respondent noted that without the proposed "pro forma" revision, actual adjustments recognized in the current reporting period that relate to business combinations that occurred in the comparative prior reporting period could be included in the disclosure. The staff agrees with the revision as the intent was not to include disclosures of adjustments from prior period business combinations. The staff also agrees with the proposed revision from "earnings" to "changes in unrestricted net assets, changes in temporarily restricted net assets, and changes in permanently restricted net assets" as this is consistent with the required pro forma disclosure requirements in Topic 958. EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 6

7 Question 2: Does the Task Force wish to affirm its consensus-for-exposure (as amended) that there should be additional disclosure of a description of the nature and amount of material, nonrecurring pro forma adjustments? Transition Method and Effective Date 16. The proposed Update would be effective prospectively for business combinations that are consummated on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. Both preparers and one accounting firm (CL #4) agreed with the transition method and the effective date in the proposed Update. One accounting firm noted that the proposed effective date should refer to a business combination's "acquisition date" rather than to its "consummation." The staff agrees with this recommendation as "acquisition date" is consistent with the effective date in Topic 805 (previously Statement 141R). 17. The accounting organization agreed with the transition method in the proposed Update but does not believe that the effective date provides enough time for financial statement preparers to effectively implement the proposed amendments. Considering that the effective date is for the first annual period beginning after December 15, 2010 (the earliest reporting period would be the first quarter of 2011), and would be applied prospectively, the staff believes that there is sufficient time to implement the proposed amendments. 18. One accounting firm (CL #5) did not agree with the prospective transition method in the proposed Update and stated the following: We recommend retrospective adoption in the interest of comparability. Since many public entities will have developed pro forma information for prior business combinations pursuant to Article 11, we believe much of the information needed for retrospective adoption is available without undue cost or effort. Otherwise diversity will persist for several years since prior year footnote disclosures that were not prepared consistent with the Proposal's guidance will continue to be presented in many sets of comparative financial statements. 19. The staff noted that the points raised by the respondent were previously deliberated by the EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 7

8 Task Force. The staff does not believe users of the financial statements would require comparability between the distinct pro forma financial information disclosed for business combinations completed in the current reporting period and those completed in the prior reporting period. The staff also notes that the prospective transition method is consistent with the transition included in Statement 141(R). Question 3: Does the Task Force wish to affirm its consensus-for-exposure that guidance in the proposed Update should be applied prospectively? Question 4: Does the Task Force wish to affirm its consensus-for-exposure (as amended) that this Issue should be 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, 2010, with early adoption permitted? EITF Issue No. 10-G Issue Summary No. 1, Supplement No. 1, p. 8