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Companies, private equity and hedge funds, investors and parties to contracts deal with transactional information that has been recorded at fair value and often subject to periodic measurement of such.
Economic pressures, aggressive lending and increased risks have resulted in a wave of troubled balance sheets, prompting regulators to place heightened scrutiny on financial institutions. In this exceedingly complex landscape, lenders, policy makers, investors and consumers are facing unprecedented challenges.
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High-profile struggles of giants such as General Motors, Chrysler and Ford have brought to the forefront the increasingly volatile market conditions facing today’s automotive industry. Uncertainty surrounding macroeconomic challenges and the liquidity of original equipment manufacturers (OEMs), as well as the supply base, makes the near-term seem bleak and uncertain. As a result, automakers and their suppliers, whether distressed, underperforming or healthy, are filled with a greater sense of urgency to stop crises in their tracks, rapidly improve performance and create sustainable growth.
The consumer packaged goods industry is at a crossroads. Given current economic realities, these organizations continue to be challenged as they balance gaining share of the consumer’s wallet while providing value to the consumer. Faced with pressures from retailers, the diminishing impact of advertising, as well as competition from high-quality private label offerings, many consumer packaged goods organizations are losing critical brand relevance and positioning in the retail battleground.
The energy industry is undergoing a transformation as the rapid growth of North American crude oil and natural gas production changes global energy supplies and impacts the allocation of capital and corporate strategies. This transformation is creating both opportunities and challenges for companies in all sectors of the industry.
The credit crisis has produced a global shockwave for the financial services industry. Lingering pools of troubled assets, increased regulatory implications, government assistance, as well as the fall of major players continue to present unique challenges along with complex, mounting pressures and aggressive legislative developments.
Healthcare organizations and their stakeholders face unprecedented challenges in managing the business of healthcare. These mounting pressures can undermine – if not outright threaten – the sustainable delivery of quality services.
Technology companies face myriad challenges to not only meet financial goals, but to remain competitive in a constantly changing and innovative landscape. Consumers are increasingly savvy in technology capabilities and, consequently, are more sophisticated in their demands. In an economic downturn, technology businesses face budget cuts, declining sales and a decrease in consumer demand. To weather the storm, cost savings are crucial to firms that are struggling amid distressed market conditions.
Organizations and regulators across the insurance industry face complex challenges to improve performance, meet financial and operational targets, and navigate compliance issues. The Insurance Advisory services practice of Alvarez & Marsal (A&M) draws upon the firm's distinctive operational heritage to deliver results.
Manufacturing, which accounts for 18 percent of world GDP, is now facing its largest decline since World War II. Global competition, complex company structures, and emerging markets are challenging current business capabilities, while providing opportunities for prepared companies to gain market share. Input costs are challenging and IT and human capital investments are crucial considerations for all manufacturing businesses.
As communications, media, and entertainment companies continue to combat the complex challenges presented by the digital movement, plummeting ad revenues and consolidation, many recognize the significant opportunity the current landscape presents for improving the performance of their operations.
A&M helps public sector leaders to thoroughly analyze operations, seize opportunities and effect functional change to dramatically impact service delivery and budget management – in any economic climate.
How can A&M Real Estate Advisory Services ("A&M REAS") help your company – anywhere in the world? Today’s real estate landscape is more complex than ever – sovereign debt burdens, defaults and deleveraging, regulatory compliance, long-range sustainability and creative re-use, alignment between asset management strategy and property management implementation, and billions of dollars of dry powder looking for the optimal risk-adjusted return opportunities. A&M Real Estate Advisory Services professionals are experienced at addressing all of these issues and more.
As retailers continue to face a weak economic environment, the landscape is changing dramatically – with no signs that the pace of change is slowing.
Cutthroat competition and the increasingly unforgiving credit markets are creating a variety of challenges for transportation and infrastructure companies. In an industry that requires significant capital expenditure and investment, and with long-term high fuel prices putting pressure on businesses, leverage is often necessary to maintain liquidity.
December 23, 2008
Nearly every organization will be affected by the major changes in acquisition accounting introduced by new accounting standards under Financial Accounting Standards Board Statement No. 141 (revised 2007), Business Combinations. The changes introduced by FAS 141(R) — which are effective for transactions that occur in fiscal years beginning after December 15, 2008 — will affect how companies account for and report business acquisitions and will impact the financial statement reporting at the acquisition date and in subsequent periods.
In issuing FAS 141(R), the FASB’s goals were to improve the purchase method of accounting for business combinations (now called the acquisition method) and align the accounting for business combinations under US GAAP and international financial reporting standards, together with greater use of fair values in financial reporting and expanded disclosures. FAS 141(R) requires all business combinations (any event in which the acquirer obtains “control” of a “business”) to be accounted for using the acquisition method.
Transaction costs related to an acquisition will generally be expensed as incurred. Typical deal costs include fees paid to bankers, attorneys, accountants and valuation specialists. These deal costs will be expensed as the professional fees are incurred, affecting the income statement of such period. The FASB’s thinking for this change is that these costs are not part of the fair value of the target company but rather are costs of acquiring the business. Accounting for deal costs under the new standards will have an immediate impact on earnings, reducing reported earnings in the period prior to the transaction’s closing date.
Costs related to the planned restructuring of the target’s operations will generally be recorded in the earnings in the post-acquisition period. Under the new standards, the restructuring costs can be recognized as a liability under acquisition accounting only if certain conditions are met as of the acquisition date. For example, before a liability can be recorded, the acquirer’s restructuring plan must be approved and brought into effect, and the facilities must be abandoned.
Contingencies are assets or liabilities with uncertainty as to their future outcome and costs. Examples of common contingencies include pending legal claims, tax disputes and environmental liabilities. The acquirer must determine the nature of the contingency and the likelihood of the outcome, and record acquired contingent assets and liabilities at fair value as of the acquisition date. FAS 141(R) requires assets or liabilities resulting from contractual contingencies to be recognized at fair value as of the acquisition date. Assets or liabilities resulting from all other contingencies (non-contractual in nature) must also be recognized on the acquisition date and measured at fair value as of the acquisition date, only if they meet the “more likely than not” standard of FASB Concepts Statement No. 6, Elements of Financial Statements. If new information becomes available after the acquisition, the acquirer will need to evaluate the new information. The acquirer must then measure a liability at the higher of its acquisition-date fair value or the amount determined under existing guidance for non-acquired contingencies (i.e., applying FAS 5), and measure the asset at the lower of its acquisition-date fair value or the best estimate of its realizable amount.
Acquired Tax Reserves and Unrecognized Tax Benefits
Adjustments to acquisition-related tax reserves (e.g., valuation allowance or uncertain tax position) will now be recorded in earnings when occurred, instead of adjusting goodwill as was done under the prior purchase accounting standards. While the application of FAS 141(R) is generally prospective (affecting periods after its effective date), the provision related to income tax accounting is retrospective, applying to acquisitions prior to the effective date of FAS 141(R).
Adjustments to Acquisition-Date Accounting Estimates
Companies will continue to have a period of time after the acquisition date to true-up acquisition accounting estimates, similar to the current standard. However, under FAS 141(R), the treatment of these adjustments will differ from prior standards, where they generally were reflected in the period of the change. Under FAS 141(R), companies will be required to revise prior-period financial statements to record material adjustments to acquisition-date accounting estimates.
Transition provisions for the adoption of FAS 141(R) are generally prospective in their application, with the exception of accounting for changes in the valuation allowance of acquired deferred tax assets and the resolution of uncertain tax positions under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FAS 141(R) requires retrospective application in accounting for adjustments to valuation allowances and tax uncertainties attributable to prior business combinations.
An acquirer will need to recognize and measure the tax effect of all the temporary differences (tax benefit), carryforwards (deferred tax assets and liabilities) and income tax uncertainties of an acquired company in a business combination in accordance with FAS 109, Accounting for Income Taxes, and FIN 48. While the basic concepts of FAS 109 remain, FAS 141(R) changes certain provisions, resulting in significant changes to the tax accounting of acquisitions.
Release of Valuation Allowance
FAS 141(R) amends the income tax accounting guidance of FAS 109 to require that post-acquisition adjustments of valuation allowances no longer reduce goodwill or non-current assets. Instead, a reversal of a valuation allowance relating to acquired deferred tax assets will be recognized in income tax expense. An acquisition may also trigger a change in the assessment of recoverability for the buyer’s pre-acquisition-date deferred tax assets. Under FAS 141(R), such changes will be recognized through the income statement and recorded in the income tax provision. As a result, they will directly affect a company’s effective tax rate.
Adjustments to Uncertain Tax Positions
FAS 141(R) nullifies EITF 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination. Prior to FAS 141(R), adjustments to acquired tax liabilities were recorded as an adjustment to goodwill, irrespective of the time between the adjustment and the acquisition date. Under FAS 141(R), adjustments to acquisition-related uncertain tax reserves (e.g., FAS 5 or FIN 48 liabilities) will be recorded in earnings as part of the provision for income taxes, directly affecting a company’s effective tax rate.
Exception for Qualified Measurement Period Adjustments
The measurement period gives the acquirer up to one year after the acquisition date to obtain information and adjust the initial amounts recognized for a business combination. During the measurement period, any changes to a valuation allowance or uncertain tax position that was recorded as part of the acquisition as a result of additional insight into the facts and circumstances that existed at the acquisition date are recorded as an adjustment to goodwill. Adjustments after the measurement period, or based on new information uncovered within the measurement period, will be recorded in earnings as part of the provision for income taxes.
Excess Tax-Deductible Goodwill
FAS 141(R) also calls for recognition of a deferred tax asset equaling the income tax benefit of tax-deductible goodwill in excess of book goodwill at the acquisition date. Under prior rules, such a tax benefit was only recognized in the reporting period during which the deduction was actually taken on the company’s tax return. Recording the deferred tax asset for the excess tax goodwill on the acquisition date correspondingly increases the fair value of acquired net assets and decreases goodwill recorded under acquisition accounting for financial reporting purposes.
Tax departments need to develop an understanding of the new FAS 141(R), as many issues will be changing for calendar-year-end companies in the first quarter of 2009, affecting the calculation of the 2009 effective tax rate estimate. Tax directors and client advisors alike should be considering what previous acquisition activity will be affected by FAS 141(R). Review balances from before FAS 141(R) was adopted — is there any valuation allowance or unrecognized tax reserves that could relate back to an acquisition? Do existing tax accounting procedures and records have visibility to track tax attributes to distinguish acquisition-related items (and from which acquisition)? A&M suggests that companies proactively document tax balances of deferred items, valuation allowances and uncertain tax positions. Companies should also track future reversals of identified reserves to avoid errors in reporting, revise their accounting policies and procedures to differentiate between existing tax reserves and those acquired as part of a business combination, and allow enough time to evaluate and measure accounting for the transaction as of the acquisition date. For any current mergers and acquisitions activity, companies will need to carefully assess the accounting for acquisitions that are in process in late 2008.
As provided in Treasury Department Circular 230, this e-newsletter is not intended or written by Alvarez & Marsal Taxand, LLC, to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Alvarez & Marsal Taxand, LLC distributes a complimentary electronic newsletter to subscribers on a weekly basis. A&M Tax Advisor Weekly provides comprehensive and timely insight on a wide range of taxation issues including international tax, state and local tax, incentives and current issues. Readers are reminded that they should not consider these documents to be a recommendation to undertake any tax position, nor consider the information contained therein to be complete. Before any item or treatment is reported, or excluded from reporting on tax returns, financial statements, or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in these releases may not continue to apply to a reader's situation due to changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
Cheria Coram, Senior Associate, contributed to this article.
|11/04/08||Transaction Cost Analyses — A Kinder, Gentler IRS?|
|08/18/08||Update on Convergence of Income Tax Accounting Standards FAS 109 and IAS 12|
|12/20/07||Acquiring Loss Corporations — Commonly Encountered Rules, Pitfalls and Strategies|
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