FAS No. 141R and FAS No.

160 FAJ Vol 66 Num 3 James Deitrick

Change in reporting philosophy more goodwill, reports value in in-process R&D

Acquisition method replaces the purchase method
This method focuses on the full fair value of a newly acquired entity, not just the amount
associated with buying the enterprise.
Replaces minority interests with noncontrolling interest on cond financial statements.
Better conveys the message that cond is based on managerial control rather than bright-line
Ownership percentage.
Previously, minority interest were presented in a mezzanine area between liabilities and equity or
among a companys liabilities.
Now they must be shown in cond equity and be distinct from parents companys equity
accounts.
Prepare and evaluate debt-to-equity and related measures when performing time series
analysis, especially if databases are used.
Noncontrolling interest in subsidiary earnings are now reported as an allocation of cond net income
(CNI) rather than as a component in the calculation of consd net income. CNI is an earnings measure for
the entire cond entity, not just the amount benefiting the parent company.
CNI is disclosed as the amount associated with the noncontrolling interest and the amount
associated with the parent company and its shareholders.
This change in the calculation of CNI can easily mislead analysts.
There is no change in EPS metrics
Incremental costs of the acq, like attorney fees, are now expensed as incurred. Prior they were
capitalized as part of the combinations cost.
Under FAS 141R, goodwill is defined as the monetary difference between the estimated FV of an
acquired entity as a whole and the FV of its individual assets and liabilities.
If a parent acquired less than 100% of a subsidiary, the subsidiary full fair value is determined by
combining the parents investment price with the estimated FV of the noncontrolling interest.
Goodwill and assets of the subsidiary will now appear larger because they are now reported at full FV.

Any negative goodwill is now a current period gain.

In-process R&D are no longer written off in the period of combination, now they are intangible assets
with indefinite lives.
Goodwill is higher now because of the full FV of the subsidiary is compared with FV of A/L. Prior,
goodwill was determined by comparing purchase price with its proportional interest in the FV of A/L,
including in-process R&D.
Mid-year acquisitions: no longer acceptable to report full period results, only results that occurred after
the acquisition.
Before they could include full year results and then use a one line adjustment to arrive the actual
subsidiary earnings.
This gave a better indication of future period income, now this is lost and we need to look when
acquisition occurred late in the year since full results will not be included.