Valuation Under SFAS 141R - Term Paper Example

Any goodwill forthcoming from the merger or acquisition is examined and appraised under SFAR 142, in regards to its fair value. The whole context was aimed at adding more items to what constitutes a business when the acquisition or a merger is undertaken. The acquisition method is still followed as before, but more items are included here as well as different ways of ascertaining the fair value of assets and liabilities, which are acquired. The SFAR 141 principle of measuring goodwill requires the full goodwill approach reporting by the acquiring firm.

This is explained as full measure i.e. 100% of both identifiable assets and liabilities and any non-controlling interest in the acquired firm, to be reported by the acquiring firm. Inadvertently, goodwill still stands as the salvage of the fair value of the business consideration exchange during the acquisition or merger, over the fair value of the assets acquired and liabilities undertaken. Goodwill is thus spread over both the controlling and non-controlling interests by the acquiring firm in the new rule.

The rules under the new section of SFAR 141 require that companies should report retrospectively. This means that the acquiring company has to recast prior business periods to reflect the correct valuations in their books. Under the new rules, bargain purchase i.e. any occurrence of negative goodwill needs to be counterchecked before any entries are made. Previously, this negative goodwill was spread over the noncurrent assets, but the rule now states that it should be recognized as a gain over how much the fair value of assets and liabilities exceed the consideration exchange, and not as an extraordinary item.

The consideration exchange during any combination is recognized on the acquisition date and not on the transaction announcement date, under the new rule. Any acquisition related costs e.g. legal fees, consultancy fees et cetera, are not included in the purchase price as the previous case. The items to be included here are cash, stock, contingent payments e.g. earn outs, and any assets transferred and liabilities assumed. Acquisition costs are expensed as they are incurred. Contingent liabilities are recorded at their fair values.

This is determined on the acquisition date as the higher of the fair value amount or that amount determined under the existing guidance for nonacquired contingencies. This is unlike the old method that added the contingent considerations to the goodwill. When the valuation is made i.e. market to market to determine the fair value and subsequently paid in cash, the reporting is done in the income statement (Eric, 2008). Any in-process research and development (IPR&D) is capitalized at fair value as an intangible asset until completion or abandonment.

This is irregardless to the previous rule that only recognized items that were reported in the balance sheet. These IPR&D are then written off if there is no future value for them by the acquirer on combination. However, on continued use, abandonment calls for a write off in the acquirer’s book and an amortization of the assets over the expected useful lives on completion of the project. Any other assets that are acquired with no intentions of using them i.e. defensive items are reported at the fair value by the acquiring firm.

Valuation allowances are reported, in the new rule, on any assets acquired