Financial Accounting Standards Board (FASB) 141 (FAS 141) Generally Accepted Accounting Principles (GAAP)

Definition

The Financial Accounting Standards Board (FASB) Statement No. 141 (FAS 141) provides standards for accounting for business combinations. Under FAS 141, companies must report acquired assets and assumed liabilities at their fair values on the acquisition date. The purpose of this standard is to improve the comparability and reliability of financial information presented by companies involved in mergers and acquisitions.

Examples

Lease Accounting:
- If a company acquires another company and the leases held are below market rent, FAS 141 requires that this difference is booked and amortized over the lease’s remaining term. Conversely, if the lease rents are above market rates, this too must be booked and amortized, ensuring that asset and liability valuations reflect marketplace realities.
Intangible Asset Recognition:
- When a company acquires another firm, intangible assets like customer lists, patents, and trademarks must be identified and recorded at fair value. These are then subject to amortization based on their useful life or, if they have an indeterminate life, tested annually for impairment.

Frequently Asked Questions (FAQs)

Q1: What is the primary goal of FAS 141? A1: The primary goal is to improve the comparability and reliability of financial information about business combinations, thus providing better consistency and clarity in financial reporting.

Q2: How does FAS 141 impact the balance sheet of a company post-acquisition? A2: FAS 141 impacts the balance sheet by requiring the fair value recognition of acquired assets and assumed liabilities. This generally results in adjustments to the assets, liabilities, and potentially the goodwill recorded on the balance sheet.

Q3: Can FAS 141 affect a company’s earnings post-merger? A3: Yes, FAS 141 can affect a company’s earnings as the lawful amortization of identified intangible assets and lease adjustments directly affect the financial statements in subsequent periods post-acquisition.

Q4: What happens if the acquisition price is lower than the fair value of identifiable net assets acquired? A4: If the acquisition price is lower than the fair value of the identifiable net assets, the difference is recognized as a bargain purchase gain in the profit and loss statement.

Q5: Are transaction costs included in the valuation of acquired assets under FAS 141? A5: No, transaction costs such as investment banking, legal, and due diligence fees are expensed as period costs and are not included in the measurement of the acquired assets and assumed liabilities’ fair values.

Goodwill: The excess of the purchase price over the fair value of net identifiable assets. Goodwill is tested annually for impairment rather than being amortized.
Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Amortization: The gradual write-off of the cost of an intangible asset over its useful life.
Business Combination: A transaction or event where an acquirer obtains control over one or more businesses.

Online Resources

References

Financial Accounting Standards Board. “Statement of Financial Accounting Standards No. 141: Business Combinations.” FASB.
Securities and Exchange Commission (SEC). “Business Combinations – Financial Reporting Manual.” SEC.
American Institute of CPAs (AICPA). “AICPA Guide: Business Combinations.”

Suggested Books for Further Studies

“Financial Accounting Standards: Financial Accounting Standards Board’s Conceptual Framework, Accounting Standards Codification, and International Financial Reporting Standards” by Wiley.
“Advanced Accounting” by Floyd A. Beams, Joseph H. Anthony, Robin P. Clement, Suzanne R. Lowensohn.
“Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis.

Financial Accounting Standards Board (FASB) 141 (FAS 141) Generally Accepted Accounting Principles (GAAP) Fundamentals Quiz

### What is the main objective of FAS 141? - [ ] To minimize company tax liabilities. - [x] To improve the comparability and reliability of financial reporting for business combinations. - [ ] To reduce accounting costs. - [ ] To standardize managerial accounting practices. > **Explanation:** FAS 141 aims to improve the comparability and reliability of financial information about business combinations, ensuring consistency and clarity in financial reporting. ### How should leases at below-market rates be treated under FAS 141 during an acquisition? - [x] The difference should be booked and amortized over the lease's remaining term. - [ ] The leases should be left unchanged. - [ ] The leases should be cancelled and renegotiated. - [ ] The difference should be ignored. > **Explanation:** The difference between market rents and actual rents must be recognized and amortized over the remaining lease term, ensuring accurate asset and liability valuation. ### Under FAS 141, what is goodwill? - [ ] The total purchase price in a business combination. - [ ] The market value of tangible assets. - [x] The excess purchase price over the fair value of identifiable net assets. - [ ] The aggregate of all acquired assets and assumed liabilities. > **Explanation:** Goodwill is the excess purchase price paid over the fair value of identifiable net assets acquired in a business combination. ### What is required to be reported at fair value on the acquisition date under FAS 141? - [x] All acquired assets and assumed liabilities. - [ ] Only acquired tangible assets. - [ ] Only bearable debts. - [ ] Future income prospects. > **Explanation:** Companies must report all acquired assets and assumed liabilities at their fair values as of the acquisition date to ensure accurate financial reporting. ### How are transaction costs treated under FAS 141? - [x] Expensed as period costs. - [ ] Capitalized along with acquired assets. - [ ] Deferred over several periods. - [ ] Included in the assets' fair value. > **Explanation:** Transaction costs such as legal and advisory fees are expensed as period costs and are not included in the fair value measurement of acquired assets. ### Can intangible assets with indefinite useful lives be amortized under FAS 141? - [ ] Yes, they must be amortized over 15 years. - [ ] Yes, they must be amortized over 30 years. - [ ] Yes, they can be amortized based on management's estimate. - [x] No, they must be tested annually for impairment. > **Explanation:** Intangible assets with indefinite useful lives must be tested annually for impairment instead of being amortized. ### How should a bargain purchase gain be treated under FAS 141? - [ ] As an increase in goodwill. - [ ] As a deferred income. - [ ] It should be ignored. - [x] Recognized as income in the profit and loss statement. > **Explanation:** If the acquisition price is lower than the fair value of net identifiable assets, the resulting bargain purchase gain is recognized as income in the profit and loss statement. ### What does the fair value of an acquired asset represent? - [x] The price at which the asset can be exchanged between market participants at the acquisition date. - [ ] The original purchase price. - [ ] The historical cost of the asset. - [ ] The value given by the seller. > **Explanation:** Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the acquisition date. ### Who is responsible for ensuring compliance with FAS 141 in a company? - [ ] The Board of Directors. - [x] The Accounting Department. - [ ] The Legal Department. - [ ] Human Resources. > **Explanation:** The Accounting Department is typically responsible for ensuring compliance with accounting standards, including FAS 141, as it pertains to financial reporting and business combinations. ### How often should intangible assets with an indefinite lifespan be reviewed for impairment under FAS 141? - [ ] Bi-annually. - [ ] Every five years. - [x] Annually. - [ ] As needed based on company performance. > **Explanation:** Under FAS 141, intangible assets with an indefinite life must be tested annually for impairment to ensure they are not overvalued on the company’s balance sheet.