POST-IMPLEMENTATION REVIEW REPORT

Transcription

1 MAY 2013 POST-IMPLEMENTATION REVIEW REPORT on FASB Statement No. 141 (revised 2007), Business Combinations

2 401 Merritt 7, PO Box 5116 Norwalk, Connecticut T: F:

3 May 22, 2013 The accompanying Post-Implementation Review Report on FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141R), summarizes the FAF s post-implementation review (PIR or Review) team s research results and conclusions (collectively, Findings), and recommendations from its Review of Statement 141R. The PIR process is an important part of our FASB and GASB standardsetting oversight responsibilities. Our oversight objectives are to improve the standard-setting process, in part, through a robust, independent, and credible PIR process. The PIR team s review accomplishes the objectives we set out for the PIR process: (1) to determine whether Statement 141R is accomplishing its stated purpose, (2) to evaluate Statement 141R s implementation and continuing compliance costs and related benefits, and (3) to provide recommendations to improve the FASB s standard-setting process. To maintain the FASB s standardsetting independence, the PIR team does not make recommendations for the FASB to take standardsetting action. We have reviewed the Statement 141R Review team s procedures and the accompanying Statement 141R Report. We believe that they performed a robust, independent, and credible Review of Statement 141R. The team s summarized conclusions and recommendations, with which we concur, are included in the Summary section of the Report. The Statement 141R Report addresses the technical, operational, and cost-effectiveness aspects of Statement 141R. We think that the PIR team s findings related to the costs of fair value measurements associated with a business combination are not unique to business combinations. We believe that there are a number of environmental factors contributing to the increase in costs that may need to be considered in a broader context. The FASB has reviewed the Statement 141R Report and the PIR team s detailed Findings. After additional review and consideration, the FASB will provide a timely response to the matters discussed in the Report and Findings. We note that the International Accounting Standards Board (IASB) is conducting a post-implementation review of IFRS 3 (revised 2007), Business Combinations. (IFRS 3 was issued concurrently with Statement 141R, both the product of an FASB/IASB joint project.) The IASB expects to conclude its review in We would like to thank all of the individuals and organizations that provided input on Statement 141R and helped the PIR team further develop its Review process. We welcome your input on our PIR process at presidentsdesk@f-a-f.org. Sincerely, John Davidson Co-Chair Standard-Setting Process Oversight Committee FAF Board of Trustees Cynthia Eisenhauer Co-Chair Standard-Setting Process Oversight Committee FAF Board of Trustees

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5 TABLE OF CONTENTS Summary Glossary of Acronyms and Terms... 3 Post-Implementation Review Report PIR Objectives and Procedures Background on Statement 141R PIR Objective 1: Did Statement 141R Accomplish Its Stated Purpose? Did Statement 141R Resolve the Issues Underlying the Need for the Standard? Does Statement 141R Provide Decision-Useful Information? Is Statement 141R Operational? Did Statement 141R Result in Significant Unexpected Changes in Practice or Unanticipated Consequences? Overall Conclusion on Objective PIR Objective 2: Statement 141R Costs and Benefits Are Statement 141R s Implementation and Continuing Application Costs Consistent with the Costs the Board Considered and Stakeholders Expected? Are the Benefits of Statement 141R Consistent with the Benefits the Board Intended and Stakeholders Expected? PIR Objective 3: Standard-Setting Process Improvements PIR Process Page

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7 SUMMARY In 2010, the Trustees implemented a post-implementation review (PIR or Review) process as part of their FASB and GASB oversight responsibilities. The Trustees objectives for these Reviews are to determine whether a standard is accomplishing its stated purpose, evaluate its implementation and continuing compliance costs and related benefits, and provide recommendations to improve the standard-setting process. Given stakeholder diversity, seldom will stakeholders have unanimous views on whether any standard or its provisions are effective. In our (the PIR team) research, we note that stakeholder views on some issues vary based on respondent type, size, industry, and the number of acquisitions completed using Statement 141R. We reached our conclusions using judgment, considering all the input received, and striving to be objective and balanced. The Statement 141R PIR team reached the following overall conclusions: Statement 141R resolved some of the practice issues associated with the purchase method of accounting for business combinations. Some important practice issues related to business combination accounting remain unresolved. Statement 141R established recognition and measurement requirements for the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. It also established principles to guide disclosure of information to enable users of financial statements to evaluate the nature and effects of business combinations. Statement 141R is convergent in many areas with IFRS 3. Statement 141R s principles and requirements are understandable and generally can be applied as the FASB intended. The requirements in Statement 141R that stakeholders have the most difficulty applying relate to: measuring assets acquired and liabilities assumed using the fair value requirements in Statement 157, measuring the fair value of contingent consideration, and determining whether a transaction is a business combination or an asset purchase. Preparers for medium to small entities have the most difficulty. Investors generally find the information resulting from application of Statement 141R useful in understanding and analyzing most business combination transactions. Some review participants question the reliability or decision usefulness of the reported information for business combinations that (a) include assets and liabilities that are difficult to measure at fair value, (b) result in a bargain purchase, or (c) in substance may be asset purchases. Statement 141R introduced more complexity and costs to the accounting for business combinations than the FASB anticipated. Much of the complexity relates to the application of Statement 157 s measurement requirements. The costs relate to the extensive external valuation expertise being sought by both preparers and auditors of financial statements. Smaller entities may face additional costs for timely access to external resources. Statement 141R achieved improvements in the relevance and completeness of business combination information. Improvements in the area of comparability, reliability, and representational faithfulness of that information were not fully achieved in large part because of the fair value measurement requirements. PIR: FASB Statement 141R Report 1

8 The Statement 141R PIR team recommends that the FASB: Enhance and formalize its process for identifying, prioritizing, tracking, and resolving significant financial reporting issues. Regularly report on and update the status of those issues and their relative priorities. Clearly identify and document the need a project will address and how that determination was made. When resuming a deferred project, the FASB should document its reassessment of the need for the project. Continue its efforts to obtain user input about their information needs early in the agendasetting and deliberation phases. That input should help the Board evaluate how various accounting and reporting alternatives will address those needs. Consistently conduct key research (field work, reviewing academic studies) as early as possible in the agenda-setting and deliberation phases. In addition, the FASB and its staff should fully identify (e.g., in a standard s basis for conclusions) any research and/or economic principles relied upon when concluding on a significant issue. Continue its efforts to improve its consideration of cost and benefits as it deliberates significant issues, particularly when it makes a significant change in redeliberations. The FASB also should continue its efforts to clearly document those cost-benefit considerations. 2 PIR: FASB Statement 141R Report

9 GLOSSARY OF ACRONYMS AND TERMS Concepts Statement 8: Statement of Financial Accounting Concepts No. 8, Conceptual Framework for Financial Reporting Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (a replacement of FASB Concepts Statements No. 1 and No. 2) FAF: Financial Accounting Foundation FASB: Financial Accounting Standards Board GASB: Governmental Accounting Standards Board IFRS 3: IFRS 3 (revised 2007), Business Combinations Opinion 16: APB Opinion No. 16, Business Combinations Opinion 17: APB Opinion No. 17, Intangible Assets Oversight Committee: FAF s Trustees Standard-Setting Process Oversight Committee (or OC) PIR: Post-implementation review Practitioner: a person who audits financial statements, performs other attest services, or prepares financial statements for clients Preparer: a person who prepares financial statements Review: Post-implementation review Statement 141: FASB Statement No. 141, Business Combinations Statement 141R: FASB Statement No. 141 (revised 2007), Business Combinations (codified in Accounting Standards Codification Topic 805, Business Combinations) Statement 142: FASB Statement No. 142, Goodwill and Other Intangibles Statement 157: FASB Statement No. 157, Fair Value Measurement Survey Firm: Rockbridge Associates, Inc. Team: Post-implementation review team (or Our, We) Trustees: FAF Board of Trustees User: an investor, creditor, or other user of financial statements PIR: FASB Statement 141R Report 3

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11 POST-IMPLEMENTATION REVIEW REPORT PIR OBJECTIVES AND PROCEDURES The three primary PIR objectives are to (1) determine whether a standard is accomplishing its stated purpose, (2) evaluate its implementation and continuing compliance costs and related benefits, and (3) provide feedback to improve the standard-setting process (as opposed to recommending standard-setting actions). We divided the first objective further to determine whether: The standard resolved the issues underlying its need Decision-useful information is being reported to, and being used by, financial statement users The standard is operational Any significant unexpected changes to financial reporting or operating practices have occurred Any significant economic consequences 1 have occurred. Our criteria and procedures for reviewing selected accounting standards are described and posted on the FAF website (Evergreen Process Description). Generally, we will review significant standards that the FASB currently is not reassessing. Our procedures include reviewing the FASB s historical files, conducting stakeholder surveys and questionnaires, interviewing stakeholders, reviewing academic publications, and reviewing footnote disclosures and other public information for selected public companies. We design our surveys to obtain a variety of perspectives from each of the FASB s principal stakeholder groups. The Survey Firm received 313 responses to our Statement 141R survey: 20% from users of financial statements, 42% from accounting practitioners, 30% from preparers, and 8% from academics. The user survey participants varied by type (e.g., buy-side and sell-side analysts, loan officers, investment officers, and individual investors) and size of organization. About 75% of the preparer participants have completed at least one business combination using Statement 141R. About half of those experienced preparer participants were from the financial services industry. About half of the user participants indicated that they analyzed financial institutions. About 60% of the preparer participants were from publicly held entities and about two-thirds of those public entities have revenues of less than $1 billion. The practitioner participants were equally represented 1 One of the FASB s guiding principles is to be objective in its decision making and to ensure, insofar as possible, the neutrality of the information resulting from its standards. To be neutral, information must report economic activity as faithfully as possible without coloring the image it communicates for the purpose of influencing behavior in any particular direction. We use the term economic consequences for PIR purposes to mean effects on: entities values and/or operations, financial markets, and economic activity. We analyze stakeholder input about economic consequences, as we define it, to determine whether the standard has had any unanticipated effects. PIR: FASB Statement 141R Report 5

12 in terms of firm revenues. We received responses to our Statement 141R questionnaires from eight large accounting firms. We focused our research, surveys, questionnaires, and interviews on achieving the PIR objectives. We correlated our various research inputs to establish whether there were consistent views. In some cases, there was a great deal of consensus in views. In other cases, the views were diverse. Responses to our surveys did not reach the level necessary to draw statistically valid inferences, but they were informative when considered with our other research. Therefore, our research observations are indications of stakeholder views and do not constitute statistically valid inferences. We came to our conclusions using our judgments, considering all the input received, and striving to be objective and balanced. Seldom will stakeholders have unanimous views on whether any standard or its provisions are effective. Given stakeholder diversity, we expect stakeholders will have varying views about any standard s provisions and hold such views with varying conviction. In our Statement 141R research we noted that stakeholder views varied based upon a number of factors including: whether the company was public or privately held, the size of the company, the industry involved, and the number of acquisitions completed using Statement 141R. After completing our research, we compiled our procedures, research results, and conclusions into our Findings. We reviewed our Findings with the FAF president and CEO and the Oversight Committee co-chairs. We also reviewed our Findings with the FASB chairman and obtained her views on our preliminary conclusions and recommendations. We resolved and clarified factual differences before drafting our PIR report, which summarizes the contents of our Findings. We reviewed a draft of that Report with the Oversight Committee and the Trustees. After Trustee approval, we made our PIR Report available on the FAF website. BACKGROUND ON STATEMENT 141R Statement 141R was one of several standards resulting from the broader business combinations project added to the FASB s agenda in August 1996 to reconsider APB Opinion No. 16, Business Combinations, and APB Opinion No. 17, Intangible Assets. The objective of the business combinations project was to improve the transparency of accounting for, and reporting of, business combinations, including accounting for goodwill and other intangible assets. The FASB decided to conduct the project in phases. Phase 1 reconsidered the methods of accounting for business combinations (i.e., the pooling-of-interests method and the purchase method) and Phase 2 addressed issues associated with applying the purchase method. Phase 1 ended in June 2001 with the concurrent issuance of Statements 141 and 142. Phase 2 was originally expected to be completed at the same time as Phase 1; however, the FASB deferred work on Phase 2 in order to complete Statements 141 and 142. The Phase 2 project resumed in August 2001, immediately after the issuance of Statements 141 and 142. As contemplated in 1996, the Phase 2 project was to address issues related to the application of the purchase method, including how that 6 PIR: FASB Statement 141R Report

13 method should be applied to combinations between two or more mutual entities and to business combinations effected in stages (step acquisitions). In April 2002, the FASB and the IASB agreed to reconsider jointly their respective guidance for applying the purchase method of accounting for business combinations. The goal was to develop a single high-quality accounting standard that could be used for both domestic and international financial reporting. Phase 2 of the business combinations project ended in December 2007 with the issuance of Statement 141R. Statement 141R, which replaced Statement 141, applied to business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, Statement 141R eliminated the purchase method and replaced it with the acquisition method. The key differences are that when using the acquisition method: The purchase price is not allocated to the assets acquired and liabilities assumed (including noncontrolling interests); rather, assets acquired and liabilities assumed are measured at their full acquisition-date fair values as defined by Statement The triggering event for a business combination is the obtaining of control of a business, not the exchange of consideration. Statement 141R s stated objectives are to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. Those objectives are to be accomplished by the following principles and requirements established in the standard for how the acquiring entity: Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase Determines what information it should disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. 2 The FASB deliberated and issued Statement 157 during the same time frame as Statement 141R. PIR: FASB Statement 141R Report 7

14 PIR OBJECTIVE 1: DID STATEMENT 141R ACCOMPLISH ITS STATED PURPOSE? Did Statement 141R Resolve the Issues Underlying the Need for the Standard? The Board undertook the project that gave rise to Statement 141R primarily to address the significant practice issues encountered in applying the purchase method. Those practice issues were identified as: Accounting for noncontrolling interests Determining the aggregate amount paid for an acquisition (including accounting for contingent consideration) Identifying assets acquired and liabilities assumed Accounting for pre-acquisition contingencies. Our research indicates that Statement 141R addressed all of the practice issues identified above and that practice issues remain in these areas. We received mixed responses from the preparer and practitioner survey participants about whether Statement 141R resolved the practice issues associated with the purchase method. Most of the practitioners and preparers from larger entities said that Statement 141R resolved the significant issues in applying the purchase method, while most of the preparers from medium and smaller entities (based on revenue) indicated it did not. From the narrative responses to our survey and interview questions we learned that preparers and practitioners have difficulties measuring noncontrolling interests at the full amount of their fair values, measuring contingent consideration and bargain purchase gains, and identifying and measuring the intangible assets acquired in a business combination. Some interviewees indicated that the FASB guidance issued subsequent to Statement 141R essentially returned accounting practices for pre-acquisition contingencies back to what they were prior to issuance of Statement 141R. Our research also indicates that new basis of accounting issues and issues with combinations between joint ventures and entities under common control were part of the initial impetus for the project in New basis of accounting issues were initially included in the Phase 2 project scope; however, issues related to entities under common control and joint ventures were not. The Board moved the new basis of accounting issues into a separate project and later removed the new basis project from its agenda. Stakeholders participating in our review indicate guidance in these areas is still needed. Although convergence with IFRS 3 was not part of the Phase 2 objectives when the project resumed in 2001, it appeared to become an increasingly important objective as the project progressed. Statement 141R and IFRS 3 are converged in principle in many areas; however, there are some substantive differences between their requirements. Most of the differences are attributable to the interaction of Statement 141R and IFRS 3 with other standards that have not yet been converged. We conclude that Statement 141R resolved some of the practice issues that brought the business combinations project to the FASB s agenda. Some important issues were removed from the project 8 PIR: FASB Statement 141R Report

15 scope and are still not resolved. The unresolved issues are: identifying when a new basis of accounting is appropriate and accounting for combinations between joint ventures and entities under common control. Statement 141R is convergent with IFRS 3 in many areas; however, some substantive differences remain between the requirements of Statement 141R and IFRS 3. Does Statement 141R Provide Decision-Useful Information? We organized our research around three aspects of decision-useful information: whether or not Statement 141R provides decision-useful information to investors and other financial statement users (investors), whether or not the business combination information provided in the financial statements is sufficient for investment decisions, and how investors use such information. The majority of investor participants indicated that they perceive overall improvements in the relevance, representational faithfulness, and comparability of business combination information except for noncontrolling interests. Additionally, investors generally view the information provided by Statement 141R as decision useful. According to the investor participants, the most useful information is the description of the transaction, the combined earnings as if the acquisition occurred at the beginning of the year, and the post-acquisition earnings of the acquiree. They indicated that the information provided by Statement 141R is less useful for forecasting earnings, forecasting cash flows, and trend analysis. Many of the practitioner and preparer participants also indicated that the disclosures do not provide useful information for forecasting earnings or cash flows. Additionally, our research indicates that some business combination disclosure requirements are too generic to provide the information investors need to understand the reported fair values. For example, investor participants indicated that the required disclosures do not provide adequate information for them to assess the nature of the uncertainties or the range of distribution associated with the fair value measurements for acquired loans and for contingent consideration. Similarly, some of the practitioner and preparer participants explained that the disclosures are not useful for forecasting earnings or cash flows because the disclosed information is based on very subjective assumptions and those assumptions are not fully disclosed. According to Concepts Statement 8, for financial information to be useful, it must be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely, and understandable. As described below, information provided by review participants suggests that Statement 141R information may not be representationally faithful in some instances, which would adversely affect its decision usefulness. The definition of a business may be overly broad and is being interpreted inconsistently. Issues regarding the interpretation of the definition of a business bring into question whether the transaction being reported is a business combination or an asset purchase. PIR: FASB Statement 141R Report 9

16 Bargain purchases and the required treatment of the bargain purchase gain may not accurately portray the nature of the transaction. Many survey participants do not think bargain purchases are conceptually possible, especially when an acquisition involves more than one bidder. In addition, many survey participants do not think the immediate recognition of a bargain purchase gain is conceptually sound. Some review participants indicate that the information reported using Statement 141R may not accurately portray the nature of business combinations between two or more mutual or cooperative entities. Those participants indicate that it is often not clear that a change of control has passed to any of the combining entities. They also assert that market participant assumptions are not relevant to the mutual and cooperative entities that operate in markets where there are no other market participants (e.g., mutual or cooperative entities providing rural utility services). We conclude that Statement 141R generally improved the relevance, representational faithfulness, and comparability of business combination information. That information is generally useful for understanding and analyzing business combination transactions. We believe that the application of Statement 141R may not result in decision-useful information consistently and reliably for the following types of transactions: Business combinations that include a significant portion of assets and liabilities that are difficult to measure at fair value Business combinations that in fact may be asset purchases (such as single real estate assets or drug compounds) Business combinations that result in bargain purchases Business combinations that involve mutual entities or more than two entities. Is Statement 141R Operational? Based on our research, we believe that preparers and practitioners generally understand Statement 141R s requirements but they have difficulty applying some of those requirements. Preparer and practitioner participants indicated that the following requirements are most problematic: measuring assets acquired and liabilities assumed using the fair value requirements in Statement 157, measuring the fair value of contingent consideration, and determining whether a transaction is a business combination or an asset purchase. Our research indicates that the difficulties in applying these requirements tend not to diminish with more acquisition experience. Many of the preparer and practitioner participants associated with small- and medium-sized entities are particularly concerned with the application of Statement 141R s requirements. They also are concerned with their ability to provide sufficient evidence to support the necessary assumptions and judgments inherent in using Statement 157 s fair value measurement requirements. 10 PIR: FASB Statement 141R Report

17 We conclude that Statement 141R is operational; but, some of its requirements are difficult to apply. Many of those difficulties relate to the requirement to use Statement 157 s fair value measurement requirements. Did Statement 141R Result in Significant Unexpected Changes in Practice or Unanticipated Consequences? Our research indicates that the following significant unexpected changes or unanticipated consequences resulted from Statement 141R: Models to measure assets and liabilities that do not have readily determinable fair values are becoming increasingly complex and difficult to understand. As the complexity increases, there is an increasing use of external valuation experts to construct valuation models and provide opinions on these complex valuations. Based on our review, the FASB did not anticipate this level of complexity or the use of extensive external valuation expertise to apply Statement 141R. Some acquirers are structuring the timing of business combinations to allow sufficient time to complete the required valuations. Recent academic research suggests that smaller entities may have fewer resources and less timely access to external resources for financial statement preparation than do larger entities. The increasing use of valuation experts may result in additional costs for smaller entities that may not have internal expertise. In addition, the structuring of transaction timing may result in smaller entities paying a premium for timely access to external resources. We conclude that Statement 141R resulted in some significant unexpected changes to financial reporting and operating practices. Some of those changes may have had unanticipated consequences, such as increased costs related to the valuation requirements of Statement 141R and Statement 157. Overall Conclusion on Objective 1 Statement 141R resolved some of the practice issues associated with the purchase method of accounting for business combinations. Some important practice issues related to business combination accounting remain unresolved. Statement 141R established recognition and measurement requirements for the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. It also established principles to guide disclosure of information to enable users of financial statements to evaluate the nature and effects of business combinations. Statement 141R is convergent in many areas with IFRS 3. Statement 141R s principles and requirements are understandable and generally can be applied as the FASB intended. The requirements in Statement 141R that stakeholders have the most difficulty applying relate to: measuring assets acquired and liabilities assumed using the fair value requirements in Statement 157, measuring the fair value of contingent consideration, and determining whether a PIR: FASB Statement 141R Report 11

18 transaction is a business combination or an asset purchase. Preparers for medium to small entities have the most difficulty. Investors generally find the information resulting from application of Statement 141R useful in understanding and analyzing most business combination transactions. The types of transactions for which review participants question the reliability or decision usefulness of the reported information are business combinations that (a) include assets and liabilities that are difficult to measure at fair value, (b) result in a bargain purchase, or (c) in substance may be asset purchases. Statement 141R introduced more complexity and costs to the accounting for business combinations than the FASB anticipated. Much of the complexity relates to the application of Statement 157 s measurement requirements. The costs relate to the extensive external valuation expertise being sought by both preparers and auditors of financial statements. Smaller entities may face additional costs for timely access to external resources. PIR OBJECTIVE 2: STATEMENT 141R COSTS AND BENEFITS Are Statement 141R s Implementation and Continuing Application Costs Consistent with the Costs the Board Considered and Stakeholders Expected? Our review of the project files indicates that the Board did not believe the costs related to Statement 141R would be significantly different from the costs related to Statement 141. That is because Statement 141 already required entities to determine fair values for assets acquired and liabilities assumed. Our research indicates that the costs to apply Statement 141R are higher than what the Board considered and stakeholders expected. We learned that the costs associated with hiring valuation experts and determining Level 2 and 3 measurements using Statement 157 guidance (sometimes more than once) are the most significant drivers of the increase in costs incurred by preparers and practitioners. We conclude that the costs to apply Statement 141R are higher than the costs the Board considered and stakeholders expected when the standard was being developed. Are the Benefits of Statement 141R Consistent with the Benefits the Board Intended and Stakeholders Expected? The Board expected the following benefits when it issued Statement 141R: Improved comparability by applying the acquisition method to all transactions in which one entity obtains control over one or more businesses (the control concept) Improved completeness by recognizing assets and liabilities arising from contingencies Improved relevance, completeness, and representational faithfulness by recognizing acquisition costs separately from the business combination 12 PIR: FASB Statement 141R Report

19 Improved completeness and comparability of business combination information by requiring the noncontrolling interest to be measured at the full amounts of their fair values Improved representational faithfulness and completeness: (a) of the information about an acquirer s obligations and rights, (b) about the acquirer s earnings during the period of the acquisition and the measures of the acquired assets, and (c) by recognizing and measuring contingent consideration and thereby improving the measure of goodwill. The investor participants indicated that there has been an overall improvement in the completeness and relevance of business combination information. In particular, those participants support: The concept of measuring assets acquired and liabilities assumed at acquisition-date fair value The concept of obtaining control triggering a business combination (rather than the exchange of consideration). A significant number of investor participants indicated that the standard did not improve the comparability, reliability, and representational faithfulness of business combination information. Their responses appear related to some of the requirements in Statement 157 and a desire for more transparency about valuation assumptions. The aspect of acquisition accounting that investor participants indicated was least improved from Statement 141 is the requirement in Statement 141R to remeasure previous investments to fair value. That requirement includes step acquisitions and noncontrolling interests. As a convergence project, an additional benefit of Statement 141R was to develop a single, highquality accounting standard that would improve the comparability of business combination information internationally. The majority of investors who participated in our survey do not compare information about mergers and acquisitions across US GAAP and IFRS entities. The input on this issue from the academic, preparer, and practitioner participants was inconclusive. Therefore, we are not able to provide useful insight on this potential benefit. We conclude that overall Statement 141R achieved improvements in the relevance and completeness of business combination information. We think that improvements in the area of comparability, reliability, and representational faithfulness of that information were not fully achieved in large part because of the application of the fair value measurement requirements. PIR OBJECTIVE 3: STANDARD-SETTING PROCESS IMPROVEMENTS Our third PIR objective is to provide feedback to improve the standard-setting process. To meet that objective we assess whether the results of our review suggest that process improvements are needed. Our Findings include observations about various aspects of the process used in the Phase 2 project that may benefit future projects. Some of those Findings and our related recommendations follow. PIR: FASB Statement 141R Report 13

20 Many of the FASB constituents considered new basis of accounting issues and the accounting for combinations of joint ventures and entities under common control to be critical to the FASB s reconsideration of business combination accounting that began in As noted previously, those issues were not addressed in Statement 141R and remain unresolved. In addition, a few issues related to Statement 141R also remain unresolved. Those issues include the exception (in Statement 141R) to measure assets held for sale at an amount other than fair value and the inconsistent accounting for research and development assets acquired outside of a business combination. Information about the status of the FASB s consideration of the issues described above can be found on the FASB website. However, it is not clear from the documentation how significant each issue is relative to other issues that the FASB has on its agenda, how the FASB made its priority determination, and whether and when the issues will be addressed. We are aware that the FASB has a process for identifying and prioritizing the significant financial accounting and reporting issues brought to its attention. However, that process is somewhat informal and not robustly documented. In addition, the results of that process are not widely communicated or easily retrievable. Recommendations: We recommend that the FASB enhance and formalize its process for identifying, prioritizing, tracking, and resolving significant financial reporting issues. We also recommend that the FASB regularly report on and update the status of those issues and their relative priorities. When Phase 2 resumed in 2001, the FASB agreed to expand the project scope to include the issue of allocating the purchase price to the assets acquired and liabilities assumed vs. recognizing those assets and liabilities at their fair values. That scope addition resulted in a significant change in how entities would account for business combinations. We did not identify any information in the project files that described the research and analysis supporting the scope increase. Phase 2 of the business combinations project was to address application issues related to the purchase method. Based on our review of the project files, the FASB did not conduct additional research on purchase method practice issues at the juncture between the issuance of Statements 141 and 142 (Phase 1) and the resumption of Phase 2. This was an opportunity for the FASB to (a) assess whether the application issues were still pervasive in the current environment, (b) determine the effect of those application issues on the information provided to investors, and (c) determine whether the need for application guidance still existed and the priority of that need in relation to other FASB activities. Recommendations: We recommend that the FASB clearly identify and document the need a project will address and how that determination was made. When resuming a deferred project, the FASB should document its reassessment of the need for the project. In our findings related to the issues underlying the need for the Phase 2 project, there was no documentation that indicated the Board sought information about user needs in determining the scope and direction of Phase 2 when it resumed in Overall, we found limited documentation of user input in the Phase 2 project files. The FASB has invested considerable time and taken a 14 PIR: FASB Statement 141R Report

21 number of steps since they issued Statement 141R to improve the amount and timing of user input into the standard-setting process. Recommendations: We recommend the FASB continue its efforts to obtain user input about their information needs early in the agenda-setting and deliberation phases. That input should help the Board evaluate how various accounting and reporting alternatives will address those needs. The Board deliberated the bargain purchase issue in both Phase 1 and Phase 2 under the assumption that bargain purchases were rare. We did not identify any reference to the origin or basis of that assumption and the academic research on Statement 141R contradicts that assumption. Recommendations: The FASB should consistently conduct key research (field work, reviewing academic studies) as early as possible in the agenda-setting and deliberation phases. In addition, the FASB and its staff should fully identify (e.g., in a standard s basis for conclusions) any research and/or economic principles relied upon when concluding on a significant issue. Our research indicates that the costs to apply Statement 141R are much higher than the Board expected. We did not identify information in the Phase 2 project files about what costs the Board considered in its decision-making process. In particular, we did not identify information about how the changes made during redeliberations such as the change to the fair value definition in Statement 157 would affect the expected costs of applying Statement 141R. The FASB has recently reassessed and enhanced the steps it takes to consider both the costs and benefits associated with its proposed standards. Recommendations: The FASB should continue its efforts to improve its consideration of cost and benefits as it deliberates significant issues, particularly when it makes a significant change in redeliberations. The FASB also should continue its efforts to clearly document those cost-benefit considerations. PIR PROCESS We received valuable stakeholder input on our PIR process from the Statement 141R survey and questionnaire respondents, the individuals we interviewed, and our collaborator organizations. We will consider that stakeholder input during our internal review of the Statement 141R PIR process. We will modify and improve our PIR process after that internal review and as we complete our reviews of other standards. Statement 141R Post-Implementation Review Team: Kim Petrone, Director Regenia Cafini, Project Manager May 2013 PIR: FASB Statement 141R Report 15