Topic No. D-100 Topic: Clarification of Paragraph 61(b) of FASB Statement No. 141 and Paragraph 49(b) of FASB Statement No. 142 [Superseded by FAS 141(R)] Date Discussed: November 14 15, 2001 An FASB representative announced that the staff has received inquiries about the application of paragraph 61(b) of FASB Statement No. 141, Business Combinations, and paragraph 49(b) of FASB Statement No. 142, Goodwill and Other Intangible Assets. The interpretative guidance provided by this staff announcement was formally cleared by the Board at its October 10, 2001 meeting. Paragraph 61 of Statement 141 includes the following transition provisions: The following transition provisions apply to business combinations for which the acquisition date was before July 1, 2001, that were accounted for using the purchase method: a. The carrying amount of acquired intangible assets that do not meet the criteria in paragraph 39 for recognition apart from goodwill (and any related deferred tax liabilities if the intangible asset amortization is not deductible for tax purposes) shall be reclassified as goodwill as of the date Statement 142 is initially applied in its entirety. b. The carrying amount of (1) any recognized intangible assets that meet the recognition criteria in paragraph 39 or (2) any unidentifiable intangible assets recognized in accordance with paragraph 5 of FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, that have been included in the amount reported as goodwill (or as goodwill and intangible assets) shall be reclassified and accounted for as an asset Page 1
apart from goodwill as of the date Statement 142 is initially applied in its entirety. 25 c. Other than as set forth in (a) and (b), an entity shall not change the amount of the purchase price assigned to the assets acquired and liabilities assumed in a business combination for which the acquisition date was before July 1, 2001. [Footnote 26 omitted.] 25 For example, when a business combination was initially recorded, a portion of the [cost of the] acquired entity was assigned to intangible assets that meet the recognition criteria in paragraph 39. Those intangible assets have been included in the amount reported on the statement of financial position as goodwill (or as goodwill and other intangible assets). However, separate general ledger or other accounting records have been maintained for those assets. The FASB staff has received inquiries about the application of subparagraph 61(b) (the Transition Provision), in particular, the meaning of assigned to and accounting records have been maintained for those assets as those phrases are used in the footnote to the Transition Provision. The following paragraphs summarize the FASB staff s understanding of the Board s intent with respect to the Transition Provision and provide examples to illustrate its application. During the development of the Transition Provision, the Board noted that entities might not have adhered strictly to the purchase price allocation requirements in Opinion 16 because Opinion 17 required amortization of all acquired intangible assets and limited the maximum amortization period for both goodwill and other intangible assets to 40 years (footnote 36 to paragraph B220 of Statement 141). The Board believes that many entities concluded that their financial statements were prepared in accordance with generally accepted accounting principles, in all material respects, even though intangible assets acquired in a business combination were not recognized and accounted for separately from goodwill. In those cases, the FASB staff believes that the Transition Provision does Page 2
not allow entities to carve out from goodwill any intangible assets that had not been identified and measured at fair value in the initial recording of the business combination and subsequently accounted for separately from goodwill. Rather, the FASB staff believes it was the Board s intent to require reclassification of the carrying amount of a previously acquired intangible asset only if (a) the asset meets the recognition criteria in paragraph 39 of Statement 141, (b) the asset had been assigned an amount equal to its estimated fair value at the date that the business combination was initially recorded, and (c) the asset was accounted for separately from goodwill as evidenced by the maintenance of accounting records for that asset, such as a separate general ledger account or other subsidiary ledger (such as a spreadsheet or similar ledger account) to which periodic amortization charges, impairment charges, and other accounting entries were posted. [Note: See Subsequent Developments section below.] The following examples illustrate the staff s understanding of how the Transition Provision should be applied. Case A In recording the acquisition of a bank, the acquiring entity identified the core deposit intangible (CDI) asset as an acquired intangible asset, estimated its fair value at date of acquisition, determined its useful life, and recognized deferred taxes related to that asset. The acquiring entity combined the CDI asset and goodwill into a single amount for external reporting purposes and that combined amount was recorded in a single general ledger account labeled goodwill and other intangible assets. However, separate subsidiary ledgers (in the form of spreadsheets) were maintained for goodwill and for the CDI asset to which periodic amortization and impairment charges were posted. The FASB staff believes that the acquirer is required by the Transition Provision to reclassify the carrying amount of the CDI asset to an account other than goodwill as of the date Statement 142 is adopted in its entirety. The CDI asset meets the recognition criteria in paragraph 39 of Statement 141, its fair value was measured at the date of acquisition, and separate accounting records were maintained for the Page 3
asset. The FASB staff believes that after adoption of Statement 142, the separate CDI asset should continue to be amortized over its remaining useful life. Case B In recording the acquisition of a bank, the acquiring entity identified a CDI asset as an acquired intangible asset and estimated its fair value at date of acquisition. The acquiring entity decided, however, to recognize the CDI asset and goodwill as a single asset labeled goodwill and to amortize that combined asset over its estimated composite useful life of 15 years. The acquiring entity reasonably concluded that the financial reporting results produced by amortizing the combined amount recognized as goodwill over its composite useful life would not be materially different from the results that would have been produced had the CDI asset been recognized and accounted for separately from goodwill. At the date the combination was completed, the acquiring entity recorded the amounts assigned to goodwill and to the CDI asset in a single general ledger account. In subsequent periods, accounting records were maintained only for the combined asset. The acquiring entity has, however, retained in its accounting records documentation supporting the initial recording of the business combination that includes information about the estimated fair value of the acquired CDI asset and its useful life. The FASB staff believes that the Transition Provision does not permit the acquiring entity to change the amount of the purchase price assigned to goodwill because, in this case, while the acquirer had identified and estimated the fair value of the CDI asset at the date that the business combination was initially recorded, separate accounting records (such as a separate general ledger account or spreadsheet) were not maintained for the asset. Additional Observations While the above examples refer to a particular type of intangible asset a core deposit intangible asset of an acquired financial institution the FASB staff believes that the interpretative guidance in this staff announcement applies to all intangible assets acquired in past business combinations, including those with indefinite useful lives. The FASB staff believes that for a business combination completed after June 30, 2001, the approach described in Case B (that is, subsuming an acquired CDI asset into the amount recognized as goodwill when recording a business combination) would be inconsistent with the requirements of Statement 141. That is because the staff believes Page 4
that a CDI asset meets the criteria in paragraph 39 of Statement 141 for recognition as an asset apart from goodwill. [Note: See Subsequent Developments section below.] The FASB staff also observes that the amount of future goodwill impairment losses recognized might be affected if an acquired intangible asset is not reclassified and accounted for apart from goodwill on transition to Statement 142. That is because the goodwill impairment loss would be measured as the excess of the carrying amount of goodwill (which would include the carrying amount of the acquired intangible asset) over the implied fair value of goodwill (which would exclude the fair value of the acquired intangible asset). (Paragraph 21 of Statement 141 requires that a portion of the fair value of the reporting unit be allocated to all of the assets of a reporting unit [including unrecognized intangible assets] in measuring the implied fair value of goodwill.) For example, in Case B, a goodwill impairment loss would be measured by comparing the carrying amount of goodwill (which includes the carrying amount of the CDI asset) to the implied fair value of goodwill (which would not include the fair value of the CDI asset). Thus, a measured goodwill impairment loss might be larger than it would have been had an acquired intangible asset been recognized apart from goodwill. [Note: See Subsequent Developments section below.] The FASB staff also notes that Statement 141 does not change the requirement to recognize an unidentifiable intangible asset pursuant to paragraph 5 of FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. The staff notes that Statement 72 applies to the acquisition of a commercial bank, a savings and loan association, a mutual savings bank, a credit union, other depository institutions having assets and liabilities of the same types as those institutions, and branches of such Page 5
entities, regardless of whether the acquired entity or branch is considered to be financially troubled. [Note: See Subsequent Developments section below.] However, paragraph 5 of that Statement applies only to those acquisitions in which the fair value of the liabilities assumed by the acquiring entity exceeds the fair value of the tangible and recognized intangible assets acquired. Paragraph 5 requires that any excess of the fair value of the liabilities assumed over the fair value of the tangible and recognized intangible assets acquired be recognized as an unidentifiable intangible asset. For example, assume that on January 1, 20X1, a bank acquired a branch of another bank. The fair value of the liabilities assumed in that branch acquisition ($100) exceeds the fair value of the tangible and recognized intangible assets acquired ($80) by $20. Statement 141 does not change the requirement in Statement 72 to recognize that $20 excess as an unidentifiable intangible asset. Moreover, Statement 142 does not change the requirement to amortize that unidentifiable intangible asset in accordance with the method prescribed in paragraph 5 of Statement 72. [Note: See Subsequent Developments section below.] Subsequent Developments FASB Statement No. 147, Acquisitions of Certain Financial Institutions, was issued in October 2002 and amends Statement 72 to remove all financial institution acquisitions (except for transactions between mutual enterprises) from the scope of Statement 72. Statement 147 requires acquisitions of financial institutions (except for those between mutual enterprises) to be accounted for in accordance with Statements 141 and 142. The FASB is reconsidering the guidance in Statement 72 as it applies to transactions between mutual enterprises in a separate project. Page 6
FASB Statement No. 141 (revised 2007), Business Combinations, which was issued in December 2007, replaces Statement 141, supersedes Statement 72 and Statement 147, and supersedes this announcement. Statement 141(R) is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after 12/15/08. Page 7