SFAS 141 AND SFAS 142: ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL, AND INTANGIBLES
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 value of the acquired firm required the recording of goodwill on the asset side of the balance sheet of the acquired company and as acquired surplus on the liability side of the balance sheet. The earned surplus of the acquired company is added to the capital surplus of the acquiring company.
In the pooling of interests method of accounting for a business combination, the assets and liabilities of each company are combined. Any difference between the merger te...