Statements of Financial Standards

The Financial Accounting Standards Board (FASB) issued Statements of Financial Standards (SFAS) 141 and 142 in June 2001. SFAS 141 (FASB, 2001a) deals with accounting for business combinations, while SFAS (FASB, 2001b) deals with accounting for goodwill and other intangible assets. These two statements of standards implemented important and dramatic changes in accounting practices. This paper reviews the two statements of standards to identify the changes and assess their effects and implications.

This review begins with an explanation of the accounting practices that existed before the implementation of SFAS 141 and SFAS 142. Following this explanation of the prior accounting practices, there is a discussion of the changes and their effects and implications brought about by SFAS 141 and SFAS 142.

Accounting Practices in Effect before the Implementation of SFAS 141 and SFAS 142

Before the implementation of SFAS 141 and SFAS 142, accounting for business combinations could apply either the purchase method or the pooling of interests method. The pooling of interests method requires a consolidation of financial interests, records, and reporting, while the purchasing method does not require such actions (ôFASB to Address Pooling of Interests,ö 1997).

In the purchase method of accounting for a business combination, any difference between the terms of the merger and the book valu

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ingle transaction or in accordance with a specific plan within one year after initiation of the acquisition plan. Lastly, there could be no contingent payments based on the future performance of the acquired firm. 3. The third condition was that an acquiring firm must not later retire or reacquire common equity stock issued in connection with the merger or dispose of a significant portion of the assets of the combined firms for at least two years subsequent to the combination. All mergers that did not meet the pooling of interests conditions were required to use the purchase method. In the purchase method, the acquiring firm treats the acquired firm as an investment. If the acquiring firm paid a premium above the fair market value of the acquired firmÆs assets, this premium was recorded as goodwill on the acquiring firmÆs balance sheet. As goodwill, this purchase premium was amortized for accounting purposes over a period not to exceed 40 years. Reported post-merger earnings were reduced by the amount of this amortization. Further, this amortization of goodwill was not deductible from federal income tax liabilities. Changes in Accounting Practices Stemming from the Implementation of SFAS 141 and SFAS 142 The actual effec
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Approximate Word count = 1278
Approximate Pages = 5 (250 words per page)

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