Accounting for business combinations has always been complex, with numerous rules to guide us. In 2007, the standards guiding for-profit business combinations were revised again.

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141(R), Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements, in conjunction with an international convergence effort.

Effective dates
The business combination standard is effective for transactions consummated during fiscal years beginning after December 15, 2008. The presentation and disclosure of noncontrolling interests must be retrospectively applied in comparative financial statements for periods beginning after December 15, 2008.

Goals of FAS 141(R) and FAS 160
Two goals of revising the accounting standards were to converge with international standards and to remove a number of the complexities existing in current standards. For the most part, FASB succeeded. However, with any change new complexities arise and need to be considered when preparing financial statements beginning in 2009.

Key differences
The most significant departure from past practice is the replacement of the purchase method with the newly defined "acquisition method." Key differences between the old and new standards include:

• When control changes, 100 percent of the fair value of the company is recognized. The noncontrolling interest is measured and recorded at fair value. When prior owners retain a minority interest in the company, their ownership in the company will also be "stepped up." Preparers should keep in mind that this process may be more complex than merely extrapolating the price paid for the percentage purchased.
• Step acquisitions will change significantly. Once control is obtained, the acquisition method is applied. Further purchases of minority interests will be accounted for as equity transactions.
• Direct costs of the acquisition will no longer be considered part of the purchase price and accordingly will be expensed when incurred.
• Valuation allowances, such as the allowance for bad debts, will no longer be recognized at acquisition.
• Contingent consideration must be valued at the acquisition date and considered part of the purchase price. Obligations will need to be re-measured periodically, with the results recognized in the income statement. Accordingly, "earn outs" will need to be estimated when the sale is consummated.
• When the seller indemnifies the buyer for a contingency, the indemnification asset must be recognized. This results in the "grossing up" of the balance sheet for contingencies.
• Contractual contingencies will need to be measured and recorded at acquisition. Noncontractual contingencies (such as the resolution of a lawsuit) must be measured and recognized when it is more likely that an asset or liability exists.
• Bargain purchases (those resulting in gains) are more likely to occur, since long-term assets are no longer proportionately reduced when the net fair value of the assets received exceeds the price paid.

Based on these changes, it is clear that there will be greater differences between the recognition of a business combination under federal income tax rules and under generally accepted accounting principles. In prior years, many smaller businesses found that an asset acquisition resulted in similar accounting for book and tax. However, under the new standards a number of accounts (both assets and liabilities) will be measured differently or not estimated for tax purposes.

The new standards also include a requirement to present noncontrolling interests (previously called minority interest) in the equity section. In addition, cumulative losses attributable to the noncontrolling interest will be recorded as such. Previously, these losses were required to be absorbed by the controlling interest.