Excerpts and Commentary

Introduction

SFAS 141: Business Combinations

This Statement addresses financial accounting and reporting for business
combinations. All business combinations are to be accounted for using one
method--the purchase method. Statement 141 includes guidance on
accounting for asset acquisitions, including (1) initial recognition; (2) initial
measurement; (3) allocation of purchase price; and (4) post-acquisition
accounting. It also identifies the required disclosures in the financial
statements, and the effective dates of adoption.

SFAS 142: Goodwill and Other Intangible Assets

This Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets. It first explains how intangible assets
should be accounted for upon their acquisition. Statement 142 then
addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements.

Brief Summary: 141 tells you how to distinguish intangible assets from
goodwill when you buy a company and do your asset allocation. 142 then tells
you how to amortize the purchased intangibles, and how to check for and
measure impairment when necessary.

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EXCERPTS AND COMMENTARY

Note: The text on this page consists of verbatim excerpts, paraphrases, and
commentary. Please refer to the original FASB documents for the complete,
authoritative Statements.

SFAS 141: Business Combinations

SFAS 141 defines a business combination as occurring when an entity acquires
net assets that constitute a business or equity interests of one or more other
entities and obtains control over the entity or entities.

The following transactions, in addition to conventional purchases, represent
business combinations and are to be accounted for using the guidance in S141:

(a) A transaction in which one or more entities are merged or become
subsidiaries, provided that they are not under common control.

(b) A transaction in which one entity transfers net assets or its owners transfer
their equity interests to another.

(c) A transaction in which all companies transfer their net assets or the owners
of those companies transfer their equity interests to a newly formed entity,
sometimes referred to as a "roll-up" or "put-together" transaction.

All of the foregoing transactions are business combinations regardless of
whether the consideration given is in cash, other assets, debt, common stock,
preferred stock, or any combination thereof. An exchange of a consolidated
business for a consolidated business is also a business combination.

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Allocation of Purchase Price

The price paid for the entity purchased is to be allocated among
four major categories:

1. Identifiable tangible assets;
2. Identifiable intangible assets with a determinable life;
3. Identifiable intangible assets that have an indefinite life;
4. Goodwill.

Goodwill should be recognized as an asset in the financial statements but should
not be amortized. Instead, goodwill should be tested annually for impairment
and on an interim basis if a significant event(s) occurs that is likely to reduce the
fair value of a reporting unit below its cost as carried on the books. Goodwill
should also be tested for impairment if a reporting unit or portion thereof is
likely to be sold or otherwise disposed of.

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Recognition of Intangible Assets Apart From Goodwill

The most significant changes in the purchase price allocation guidelines are
the new criteria established in Statement 141 to recognize intangible assets
apart from goodwill. (Statement 142 then addresses the amortization of those
recognized intangibles, and the impairment methods to be used).

Statement 141 defines intangible assets as assets (not including financial
instruments) that lack physical substance. The criteria for separate
recognition of intangible assets in a business combination are:

(a) The acquired intangible arises from contractual or other legal rights,
regardless of whether those rights are transferable or separable from the
acquired entity or from other rights and obligations.

(b) If the intangible does not arise from contractual or other legal rights, it
should be recognized as an asset apart from goodwill only if it is separable;
that is, if it is capable of being separated or divided from the acquired entity
and sold, transferred, licensed, rented, or exchanged.

(c) An intangible that cannot be sold, transferred, licensed, rented, or
exchanged individually is still considered separable if it can be sold,
transferred, licensed rented, or exchanged in combination with a related
contract, asset, or liability.

Comment: First, look for contractual or legal rights. If no contractual or legal
rights,it is a separable intangible only if capable of being individually separated
from the acquired entity. If it is not capable of being individually separated from
the acquired entity, it is still a separable intangible if it could be sold, etc., in
combination with a related contract, asset, or liability.

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Transitional Provisions

The carrying amount of acquired intangibles that do not meet the criteria for
recognition apart from goodwill are to be reclassified as goodwill as of the date
Statement 142 is initially applied in its entirety.

The carrying amount of any recognized intangibles that do meet the recognition
criteria, but that have been included in the amount reported as goodwill, are to
be reclassified and accounted for as an asset apart from goodwill as of the date
Statement 142 is initially applied in its entirety.

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Examples of Intangible Assets That Meet the Criteria for
Recognition Apart From Goodwill

This list is not intended to be all-inclusive:

Marketing-Related Intangible Assets

• Trademarks, trade names
  
• Service marks, collective marks, certification marks
  
• Trade dress (unique color, shape, or package design)
  
• Newspaper mastheads
  
• Internet domain names
  
• Noncompetition agreements

Customer-Related Intangible Assets

• Customer lists
  
• Order or production backlog
  
• Customer contracts and related customer relationships
  
• Noncontractual customer relationships
  

Artistic-Related Intangible Assets

• Plays, operas, ballets
  
• Books, magazines, newspapers, and other literary works
  
• Musical works such as compositions, song lyrics, advertising jingles
• Pictures, photographs
  
• Video and audiovisual material, including motion pictures,
  music videos, television programs

Contract-Based Intangible Assets

• Licensing, royalty, standstill agreements
  
• Advertising, construction, management, service or supply contracts
  
• Lease agreements
  
• Construction permits
  
• Franchise agreements
  
• Operating and broadcast rights
  
• Use rights such as drilling, water, air, mineral, timber cutting,
  and route authorities

Technology-Based Intangible Assets

• Patented technology
  
• Computer software and mask works
  
• Unpatented technology
  
• Databases, including title plants
  
• Trade secrets, such as secret formulas, processes, recipes
  

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SFAS 142:
Goodwill and Other Intangible Assets

Introduction

The Statement's initial provisions concerning recognition and measurement
apply to intangible assets acquired individually, or with a group of other assets.

The remaining provisions of the Statement apply to GOODWILL and to
other intangible assets, that an entity acquires in whatever manner,
including in a business combination.

Note: While goodwill is an intangible asset, the term intangible asset is used
in this Statement to refer to an intangible other than goodwill.

Initial Recognition and Measurement of Intangible Assets

An acquired intangible asset is to be initially recognized and measured based on
its fair value. The cost of a group of assets acquired in a transaction other than
a business combination is to be allocated to the individual assets based upon
their relative fair values, and will not give rise to goodwill.

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Accounting for Intangible Assets

Useful Life

The key to the accounting for a recognized intangible asset is its useful life
to the reporting entity. An intangible with a finite useful life is amortized; an
intangible with an indefinite useful life is not amortized. The useful life of an
intangible asset is the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of that entity. The previous
40-year limit on amortizable useful life is abolished. There is no
presumed maximum life.

 

Intangibles SUBJECT to Amortization

A recognized intangible is to be amortized over its useful life to the reporting
entity unless that life is determined to be indefinite. If an intangible has a finite
useful life, but the precise length of that life is not known, then the intangible is
to be amortized over the best estimate of its useful life.

The amount to be amortized shall be the amount initially assigned to that asset
less any residual value.

Each reporting period, an entity must evaluate the remaining useful life of an
intangible being amortized to determine whether a revision to the remaining
period of amortization is warranted. If the estimate of the remaining useful life
is changed, the remaining carrying amount of the intangible is to be amortized
prospectively over the revised remaining useful life. If the asset is later
determined to have an indefinite useful life, then it is to be tested for impairment
on a periodic basis as specified elsewhere in the Statement.

Recognition and Measurement of
An Impairment Loss (Amortizable)

An intangible subject to amortization is to be reviewed for impairment in
accordance with Statement 121 (para. 4-11). An impairment loss is
recognized if the carrying amount of an intangible is not recoverable and
its carrying amount exceeds its fair value. Subsequent reversal of an
impairment loss is prohibited.

Intangibles NOT SUBJECT to Amortization

If an intangible is determined to have an indefinite useful life, it is not to be
amortized until its useful life is determined to be no longer indefinite. An
entity should evaluate the remaining useful life (RUL) of an intangible that
is not being amortized each reporting period to determine whether events
and circumstances continue to support an indefinite life. If such an intangible
is subsequently determined to have a finite useful life, the asset shall be
tested for impairment. That intangible should then be amortized prospectively
over its estimated RUL.

Recognition and Measurement of
An Impairment Loss (Non-Amortizable)

An intangible that is not subject to amortization should be tested annually,
or more frequently if events or changes in circumstances indicate that the
asset might be impaired. The impairment test consists of a comparison of
the fair value of the intangible with its carrying amount. If the carrying
amount exceeds the asset’s fair value, an impairment loss should be
recognized in an amount equal to that excess. After an impairment loss
is recognized, the adjusted carrying amount of the intangible asset shall
be its new accounting basis. Subsequent reversal of a previously
recognized impairment loss is prohibited.

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Accounting for Goodwill

Goodwill is no longer amortized. Goodwill is tested for impairment
at a level of reporting referred to as a reporting unit. Impairment exists
when the carrying amount of goodwill exceeds its implied fair value.
A two step impairment test is used to identify potential impairment and
measure the amount of goodwill impairment to be recognized (if any).

Goodwill must be tested for impairment at least annually; more
often if events suggest that there may be impairment. However,
subsequent to initial determination, an entity may presume that
fair value exceeds carrying value if certain criteria are met.

Recognition and Measurement of An Impairment Loss (Goodwill)

The FIRST STEP of the goodwill impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the fair value
of the reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired, and the second step of the test is unnecessary.


Definition of Reporting Unit: from paragraph 30 of SFAS 142:

[A reporting unit is an operating segment or one level below an operating
segment (referred to as a component). A component of an operating segment
is a reporting unit IF the component constitutes a business for which discrete
financial information is available and segment management regularly reviews
the operating results of that component. However, two or more components
of an operating segment shall be aggregated and deemed a single reporting
unit if the components have similar economic characteristics. An operating
segment shall be deemed to be a reporting unit if all of its components are
similar, if none of its components is a reporting unit, or if it comprises only
a single component].

The SECOND STEP of the goodwill impairment test compares the
implied fair value of reporting unit goodwill with the carrying amount
of that goodwill. If the carrying amount of the reporting unit's goodwill
exceeds the implied fair value of that unit's goodwill, an impairment loss is
recognized in an amount equal to that excess. Impairment loss is presented
as a separate line item before income from continuing operations. After a
goodwill impairment loss is recognized, the adjusted carrying amount of
goodwill is its new accounting basis. Reversal of impairment loss is prohibited.

Comment: Independent appraisals are often necessary
to adequately perform steps one and two.

Implied Fair Value

The implied fair value of goodwill is determined in the same manner as
the amount of goodwill recognized in a business combination is determined.
An entity allocates the fair value of a reporting unit to all of the assets and
liabilities of that unit as if (1) the reporting unit had been acquired in a business
combination and (2) the fair value of the unit was the price paid to acquire it.

Value Measurements

The fair value of an asset is the amount at which that asset could be bought or
sold in a current transaction between willing parties, in other words, other than
in a forced or liquidation sale. The fair value of a reporting unit is the amount
at which the unit as a whole could be bought or sold in a current transaction
between willing parties.

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Disclosures: Period of Acquisition

For intangibles acquired either individually or with a group of assets, the
following information is to be disclosed in the notes to the financial
statements in the period of acquisition:

For intangibles subject to amortization:

• The total amount assigned;
  
• The amount assigned to any major intangible asset class (see above);
• The weighted-average amortization period, in total AND by major
  intangible asset class.

For intangibles NOT subject to amortization:

• The total amount assigned;
  
• The amount assigned to any major intangible asset class.
  
• The amount of research and development assets acquired and written
  off in the period, and the line item in the income statement in which
  the amounts written off are aggregated.
  
  
  

Disclosures: Each Period For Which SFP Is Presented

The following information has to be disclosed in the financial statements
or the notes to the financial statements for each period for which a
Statement of Financial Position is presented:

For intangibles subject to amortization:

• The gross carrying amount and accumulated amortization, in total and
  by major intangible asset class;
  
• The aggregate amortization expense for the period;
  
• The estimated aggregate amortization expense for each of the five
  succeeding fiscal years.

For intangibles NOT subject to amortization:

• The total carrying amount and the total carrying amount for each major
  asset class.
  
• The changes in the carrying amount of goodwill during the
  period including:

The aggregate amount of goodwill acquired;
The aggregate amount of impairment losses recognized;
The amount of goodwill included in the gain or loss on
disposal of all or a portion of a reporting unit.

Details of each impairment loss recognized related to an intangible asset
or to goodwill are also required to be disclosed. Impairment loss shall be
presented as a separate line item before income from continuing operations.

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Effective Date and Transition

All of the provisions of this Statement are to be applied in fiscal years beginning
after December 15, 2001, to all goodwill and other intangible assets recognized
in an entity’s statement of financial position at the beginning of that fiscal year,
regardless of when those previously recognized assets were initially recognized.

The carrying amount of acquired intangibles that do not meet the criteria of
Statement 141 for recognition apart from goodwill are to be reclassified as
goodwill as of the date this Statement is initially applied in its entirety.

The carrying amount of any recognized intangibles that do meet the recognition
criteria of Statement 141, but that have been included in the amount reported as
goodwill, are to be reclassified and accounted for as assets apart from goodwill
as of the date this Statement is initially applied in its entirety.

Goodwill acquired in a business combination after June 30, 2001, is not to
be amortized. [Registrants will continue to report goodwill amortization for any
purchase combination consummated prior to July 2001, until SFAS 142 is fully
adopted. Previous periods will not be restated to eliminate historical amortization].

Goodwill and intangible assets acquired in a transaction after June 30, 2001, but
before the date the Statement is applied in its entirety, are to be reviewed for
impairment until the date that this Statement is applied in its entirety.

For intangibles acquired in a transaction before June 30, 2001, the useful lives
must be reassessed and the remaining amortization periods adjusted accordingly.
Previously recognized intangibles deemed to have indefinite useful lives are to
be tested for impairment as of the beginning of the fiscal year in which this
Statement is initially applied.

All goodwill recognized at the time this Statement is initially applied is to be
assigned to one or more reporting units. Goodwill shall be assigned in a
reasonable and supportable manner. The sources of previously recognized
goodwill should be considered in making that initial assessment.

Within six months of adopting this Statement (i.e. by 6/30/02),
Step 1 of the transitional goodwill impairment test for each
reporting unit (as of the beginning of the year) is to be
completed. If Step 2 is necessary, it should be completed
before the end of the year in which Statement 142 is adopted.

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Services Offered

We offer the following services in relation to SFAS 141 and SFAS 142:

• Establishment of an implementation plan
  
  
• Identification of reporting units
  
  
• Determination of identifiable intangible assets
  
  
• Valuation of reporting units and individual assets
  
  
• Allocation of purchase price
  
  
• Determination of useful lives
  
  
• Impairment testing
  
  
• Determination of residual values
  
  
• Analysis of effects of pending or proposed acquisitions
  
  
• Documentation of methodologies, assumptions and calculations
  

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