5. Supersede paragraphs 805-50-05-1 and 805-50-05-8 and its related heading, amend paragraphs 805-50-05-2 and 805-50-05-6 through 05-7 and the Subsection title and add the General Note, and add paragraph 805-50-05-9 and the new Subsection title, with a link to transition paragraph 805-50-65-1, as follows:
Business Combinations—Related Issues
Overview and Background
General
805-50-05-1 Paragraph superseded by Accounting Standards Update 2014-17.This Subtopic provides guidance on the accounting and reporting for two transactions that have certain characteristics that are similar to business combinations but do not meet the requirements to be accounted for as business combinations, and on another issue that arises after a business combination.
805-50-05-2 This Subtopic presents guidance in the following Subsections:
a. General
b. Acquisition of Assets Rather than a Business
c. Transactions Between Entities under Common Control
d.
Formation of a Master Limited PartnershipNew Basis of Accounting (Pushdown).
e. Pushdown Accounting.
Note on Subsection New Basis of Accounting (Pushdown): Subsection below will change to Formation of a Master Limited Partnership. Upon the effective date of Accounting Standards Update 2014-17, the title of the
Formation of a Master Limited PartnershipNew Basis of Accounting (Pushdown)
805-50-05-6 The
Formation of a Master Limited Partnership New Basis of Accounting (Pushdown)
Subsections provide guidance on when
whether an entity must present
a new basis of accounting may be recorded for the assets and liabilities of a master limited partnership.
in certain situations. These Subsections provide guidance on specific types of master limited partnership transactions and, separately, the basis of accounting to be used by an acquiree after an acquisition.
> Master Limited Partnership Transactions
805-50-05-7 Master limited partnerships are partnerships in which interests are publicly traded. Most master limited partnerships are formed from assets in existing businesses. Typically, the general partner of the master limited partnership is affiliated with the existing
business (that is, the master limited partnership is usually operated as an extension of or complementary to the business of the general partner). The purposes for forming a master limited partnership vary. They can be formed to realize the value of undervalued assets, to pass income and tax-deductible losses directly through to owners, to raise capital, to combine several existing partnerships, or as a vehicle to enable entities to sell, spin off, or liquidate existing operations. A master limited partnership may be created in a variety of ways. Whether a particular transaction is a
business combination that should be accounted for using the acquisition method or a transaction between entities under common control can be determined only after a careful analysis of all facts and circumstances.
The Formation of a Master Limited Partnership New Basis of Accounting (Pushdown)
Subsections identify specific transactions involving master limited partnerships and provide guidance on whether a new basis of accounting is appropriate.
> Basis of Accounting to Be Used by Acquiree After an Acquisition
805-50-05-8 Paragraph superseded by Accounting Standards Update 2014-17.An acquisition may occur in which the acquiree is not a party to the transaction effecting the change in ownership and is not a Securities and Exchange Commission (SEC) registrant. In such a situation, a step-up in tax basis may be elected, and there may be no compelling reasons for retaining the old basis. The guidance in the New Basis of Accounting (Pushdown) Subsections also addresses whether pushdown accounting is required in the separate financial statements of the acquiree.
Pushdown Accounting
805-50-05-9 The guidance in the Pushdown Accounting Subsections addresses whether and at what threshold an acquiree that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements.
6. Amend paragraph 805-50-15-7 and the Subsection title and add the General Note, supersede paragraphs 805-50-15-8 through 15-9 and their related heading, and add paragraphs 805-50-15-10 through 15-11 and their related headings and the new Subsection title, with a link to transition paragraph 805-50-65-1, as follows:
Scope and Scope Exceptions
General
> Overall Guidance
805-50-15-1 This Subtopic has its own discrete scope, which is separate and distinct from the pervasive scope for this Topic as outlined in Section 805-10-15.
Note on Subsection New Basis of Accounting (Pushdown): Upon the effective date of Accounting Standards Update 2014-17, the title of theSubsection below will change to Formation of a Master Limited Partnership.
Formation of a Master Limited PartnershipNew Basis of Accounting (
Pushdown
)
> Entities
805-50-15-7 The guidance in the
Formation of a Master Limited Partnership New Basis of Accounting (Pushdown)
Subsections applies to
a publicly traded master limited partnership formed from assets of existing businesses.
Paragraph 805-50-05-7 explains that, typically, the general partner of the master limited partnership is affiliated with the existing business.all entities with transactions meeting the qualifications in the following paragraph.
805-50-15-8 Paragraph superseded by Accounting Standards Update 2014-17.
The guidance in the New Basis of Accounting (Pushdown) Subsections applies to the following transactions:
a. A publicly traded master limited partnership formed from assets of existing businesses. Paragraph 805-50-05-7 explains that typically, the general partner of the master limited partnership is affiliated with the existing business.
b. An acquisition in which all of the following conditions are met:
1. The acquiree is not a party to the transaction effecting change in ownership and is not a Securities and Exchange Commission (SEC) registrant.
2. A step-up in tax basis is elected.
3. There are no compelling reasons for retaining the old basis.
805-50-15-9 Paragraph superseded by Accounting Standards Update 2014-17.
For a transaction meeting the conditions in (b) in the preceding paragraph, guidance is provided solely on whether pushdown accounting is required in the preparation of the acquired entity's financial statements.
Pushdown Accounting
> Entities
805-50-15-10 The guidance in the Pushdown Accounting Subsections applies to the separate financial statements of an acquiree and its subsidiaries.
> Transactions
805-50-15-11 The guidance in the Pushdown Accounting Subsections does not apply to transactions in paragraph 805-10-15-4.
7. Supersede paragraph 805-50-25-3 and the Subsection title and add paragraphs 805-50-25-4 through 25-9 and the new Subsection title, with a link to transition paragraph 805-50-65-1, as follows:
Recognition
New Basis of Accounting (Pushdown)
805-50-25-3 Paragraph superseded by Accounting Standards Update 2014-17.Pushdown accounting
is not required for entities that are not Securities and Exchange Commission (SEC) registrants.
Pushdown Accounting
805-50-25-4 An acquiree shall have the option to apply pushdown accounting in its separate financial statements when an acquirer—an entity or individual— obtains {add glossary link to 3rd definition}control{add glossary link to 3rd definition} of the acquiree. An acquirer might obtain control of an acquiree in a variety of ways, including any of the following:
a. By transferring cash or other assets
b. By incurring liabilities
c. By issuing equity interests
d. By providing more than one type of consideration
e. Without transferring consideration, including by contract alone as discussed in paragraph 805-10-25-11.
805-50-25-5 The guidance in the General Subsections of Subtopic 810-10 on consolidation, related to determining the existence of a controlling financial interest shall be used to identify the acquirer. If a business combination has occurred but applying that guidance does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs 805-10-55-11 through 55-15 shall be considered in identifying the acquirer. However, if the acquiree is a variable interest entity (VIE), the primary beneficiary of the acquiree always is the acquirer. The determination of which party, if any, is the primary beneficiary of a VIE shall be made in accordance with the guidance in the Variable Interest Entities Subsections of Subtopic 810-10, not by applying the guidance in the General Subsections of that Subtopic relating to a controlling financial interest or the guidance in paragraphs 805-10-55-11 through 55-15.
805-50-25-6 The option to apply pushdown accounting may be elected each time there is a change-in-control event in which an acquirer obtains {add glossary link to 3rd definition}control{add glossary link to 3rd definition} of the acquiree. An acquiree shall make an election to apply pushdown accounting before the financial statements are issued (for a Securities and Exchange Commission (SEC) filer and a conduit bond obligor for conduit debt securities that are traded in a public market) or the financial statements are available to be issued (for all other entities) for the reporting period in which the change-in-control event occurred. If the acquiree elects the option to apply pushdown accounting, it must apply the accounting as of the acquisition date.
805-50-25-7 If the acquiree does not elect to apply pushdown accounting upon a change-in-control event, it can elect to apply pushdown accounting to its most recent change-in-control event in a subsequent reporting period as a change in accounting principle in accordance with Topic 250 on accounting changes and error corrections. Pushdown accounting shall be applied as of the acquisition date of the change-in-control event.
805-50-25-8 Any subsidiary of an acquiree also is eligible to make an election to apply pushdown accounting to its separate financial statements in accordance with the guidance in paragraphs 805-50-25-4 through 25-7 irrespective of whether the acquiree elects to apply pushdown accounting.
805-50-25-9 The decision to apply pushdown accounting to a specific change-incontrol event if elected by an acquiree is irrevocable.
8. Amend the Subsection title preceding paragraph 805-50-30-7 and add the General Note, and add paragraphs 805-50-30-10 through 30-12 and the new Subsection title, with a link to transition paragraph 805-50-65-1, as follows:
Initial Measurement
Note on Subsection New Basis of Accounting (Pushdown): Upon the effective date of Accounting Standards Update 2014-17, the title of the Subsection below will change to Formation of a Master Limited Partnership.
Formation of a Master Limited PartnershipNew Basis of Accounting (Pushdown)
805-50-30-7 Because of such factors as the consideration of common ownership and changes in control, a new basis of accounting is not appropriate for any of the following transactions that create a master limited partnership:
- A rollup in which the general partner of the new master limited partnership was also the general partner in some or all of the predecessor limited partnerships and no cash is involved in the transaction. Transaction costs in a rollup shall be charged to expense.
- A dropdown in which the sponsor receives 1 percent of the units in the master limited partnership as the general partner and 24 percent of the units as a limited partner, the remaining 75 percent of the units are sold to the public, and a two-thirds vote of the limited partners is required to replace the general partner.
- A rollout.
- A reorganization.
805-50-30-8 In other situations, it is possible that a new basis of accounting would be appropriate.
805-50-30-9 The issuance of master limited partnership units to a general partner of a predecessor limited partnership who will not be the general partner of the new master limited partnership in settlement of management contracts or for other services that will not carry over to the new master limited partnership has characteristics of compensation rather than of equity and shall be accounted for accordingly by the new master limited partnership.
Pushdown Accounting
805-50-30-10 If an acquiree elects the option in this Subtopic to apply pushdown accounting, the acquiree shall reflect in its separate financial statements the new basis of accounting established by the acquirer for the individual assets and liabilities of the acquiree by applying the guidance in other Subtopics of Topic 805. If the acquirer did not establish a new basis of accounting for the individual assets and liabilities of the acquiree because it was not required to apply Topic 805 (for example, if the acquirer was an individual or an investment company—see Topic 946 on investment companies), the acquiree shall reflect in its separate financial statements the new basis of accounting that would have been established by the acquirer had the acquirer applied the guidance in other Subtopics of Topic 805.
805-50-30-11 An acquiree shall recognize goodwill that arises because of the application of pushdown accounting in its separate financial statements. However, bargain purchase gains recognized by the acquirer, if any, shall not be recognized in the acquiree's income statement. The acquiree shall recognize the bargain purchase gains recognized by the acquirer as an adjustment to additional paid-in capital (or net assets of a not-for-profit acquiree).
805-50-30-12 An acquiree shall recognize in its separate financial statements any acquisition-related liability incurred by the acquirer only if the liability represents an obligation of the acquiree in accordance with other applicable Topics.
9. Add paragraphs 805-50-35-2 and 805-50-50-5 through 50-6 and the new Subsection title, with a link to transition paragraph 805-50-65-1, as follows:
Subsequent Measurement
Pushdown Accounting
805-50-35-2 An acquiree shall follow the subsequent measurement guidance in other Subtopics of Topic 805 and other applicable Topics to subsequently measure and account for its assets, liabilities, and equity instruments, as applicable.
Disclosure
Pushdown Accounting
805-50-50-5 If an acquiree elects the option to apply pushdown accounting in its separate financial statements, it shall disclose information in the period in which the pushdown accounting was applied (or in the current reporting period if the acquiree recognizes adjustments that relate to pushdown accounting) that enables users of financial statements to evaluate the effect of pushdown accounting. To meet this disclosure objective, the acquiree shall consider the disclosure requirements in other Subtopics of Topic 805.
805-50-50-6 Information to evaluate the effect of pushdown accounting may include the following:
a. The name and a description of the acquirer and a description of how the acquirer obtained {add glossary link to 3rd definition}control{add glossary link to 3rd definition} of the acquiree.
b. The acquisition date.
c. The acquisition-date fair value of the total consideration transferred by the acquirer.
d. The amounts recognized by the acquiree as of the acquisition date for each major class of assets and liabilities as a result of applying pushdown accounting. If the initial accounting for pushdown accounting is incomplete for any amounts recognized by the acquiree, the reasons why the initial accounting is incomplete.
e. A qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations of the acquiree and the acquirer, or intangible assets that do not qualify for separate recognition, or other factors. In a bargain purchase (see paragraphs 805-30-25-2 through 25-4), the amount of the bargain purchase recognized in additional paid-in capital (or net assets of a not-for-profit acquiree) and a description of the reasons why the transaction resulted in a gain.
f. Information to evaluate the financial effects of adjustments recognized in the current reporting period that relate to pushdown accounting that occurred in the current or previous reporting periods (including those adjustments made as a result of the initial accounting for pushdown accounting being incomplete [see paragraphs 805-10-25-13 through 25-14]).
The information in this paragraph is not an exhaustive list of disclosure requirements. The acquiree shall disclose whatever additional information is necessary to meet the disclosure objective set out in paragraph 805-50-50-5.
10. Add paragraph 805-50-65-1 and its related heading as follows:
> Transition Related to Accounting Standards Update No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting
805-50-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting:
a. The pending content that links to this paragraph is effective as of November 18, 2014.
b. The pending content that links to this paragraph shall be applied by an acquiree as of the acquisition date of a change-in-control event in which an acquirer obtained {add glossary link to 3rd definition}control{add glossary link to 3rd definition} of the acquiree to both of the following events:
1. A change-in-control event with an acquisition date after November 18, 2014
2. A change-in-control event with an acquisition date before November 18, 2014, when the financial statements of the reporting period that contains the acquisition date have not been issued (a Securities and Exchange Commission (SEC) filer or a conduit bond obligor as discussed in Topic 855 on subsequent events) or made available to be issued (all other entities as discussed in Topic 855).
c. The pending content that links to this paragraph shall be applied by an acquiree as of the acquisition date of its most recent change-in-control event in which an acquirer obtained control of the acquiree that meets both of the following conditions as a change in accounting principle in accordance with Topic 250 on accounting changes and error corrections:
1. The acquisition date of the change-in-control event is before November 18, 2014.
2. The financial statements of the reporting period that contains the acquisition date have been issued (an SEC filer or a conduit bond obligor as discussed in Topic 855) or made available to be issued (all other entities as discussed in Topic 855).
d. Pushdown accounting applied by an acquiree before the effective date of the pending content that links to this paragraph is irrevocable.
11. Amend paragraph 805-50-00-1, by adding the following items to the table, as follows:
805-50-00-1 The following table identifies the changes made to this Subtopic.
Paragraph |
Action |
Accounting Standards Update |
Date |
Change in Accounting Principle |
Added |
2014-17 |
11/18/2014 |
Conduit Debt Securities |
Added |
2014-17 |
11/18/2014 |
Control (3rd def.) |
Added |
2014-17 |
11/18/2014 |
Financial Statements Are Available to Be Issued |
Added |
2014-17 |
11/18/2014 |
Financial Statements Are Issued |
Added |
2014-17 |
11/18/2014 |
Pushdown Accounting |
Amended |
2014-17 |
11/18/2014 |
Securities and Exchange Commission (SEC) Filer |
Added |
2014-17 |
11/18/2014 |
805-50-05-1 |
Superseded |
2014-17 |
11/18/2014 |
805-50-05-2 |
Amended |
2014-17 |
11/18/2014 |
805-50-05-6 |
Amended |
2014-17 |
11/18/2014 |
805-50-05-7 |
Amended |
2014-17 |
11/18/2014 |
805-50-05-8 |
Superseded |
2014-17 |
11/18/2014 |
805-50-05-9 |
Added |
2014-17 |
11/18/2014 |
805-50-15-7 |
Amended |
2014-17 |
11/18/2014 |
805-50-15-8 |
Superseded |
2014-17 |
11/18/2014 |
805-50-15-9 |
Superseded |
2014-17 |
11/18/2014 |
805-50-15-10 |
Added |
2014-17 |
11/18/2014 |
805-50-15-11 |
Added |
2014-17 |
11/18/2014 |
805-50-25-3 |
Superseded |
2014-17 |
11/18/2014 |
805-50-25-4 through 25-9 |
Added |
2014-17 |
11/18/2014 |
805-50-30-10 through 30-12 |
Added |
2014-17 |
11/18/2014 |
805-50-35-2 |
Added |
2014-17 |
11/18/2014 |
805-50-50-5 |
Added |
2014-17 |
11/18/2014 |
805-50-50-6 |
Added |
2014-17 |
11/18/2014 |
805-50-65-1 |
Added |
2014-17 |
11/18/2014 |
The amendments in this Update were adopted by the affirmative vote of five members of the Financial Accounting Standards Board. Messrs. Linsmeier and Siegel dissented.
Messrs. Linsmeier and Siegel dissent from the issuance of this Update, which would expand the ability of an acquired entity to elect to use new basis accounting at any time after an acquirer gains control over the entity, for four primary reasons. First, this Update addresses only one of many possible scenarios in which new basis accounting could be considered. Furthermore, new basis accounting represents a significant fundamental shift in the measurement basis of assets and liabilities that raises many questions about its potential decision usefulness in general purpose financial statements that are designed to serve all of an entity's resource providers by helping them assess the potential cash flow prospects from their investments in the entity. In December 1991, the FASB exposed for comment its Discussion Memorandum, New Basis Accounting, with the objective of seeking stakeholder views on the fundamental issue of when, if ever, it is appropriate to recognize a new basis of accounting in four divergent situations. No conclusions subsequently were reached by the Board. Messrs. Linsmeier and Siegel, therefore, believe that it is inappropriate to selectively expand the potential use of new basis accounting without first determining whether and how it enhances the decision usefulness of general purpose financial statements. Once that determination is made, new basis accounting should be considered more holistically, rather than for just the change-in-control fact pattern addressed in this Update.
Second, the acquired entity's general purpose financial statements that would be eligible for pushdown accounting under this Update primarily serve the interests of claimants other than the controlling shareholders because debtholders and noncontrolling shareholders can look only to the net assets of the acquired entity to satisfy their claims. In contrast, the controlling shareholders of the acquired entity can look to the net assets of the consolidated entity to satisfy their claims. Messrs. Linsmeier and Siegel, therefore, question whether providing the controlling interest with an election to align the measurement basis of the assets and liabilities of the acquired entity with those of the acquirer will disserve the debtholders and noncontrolling shareholders of the acquired entity by including assets in the acquired entity financial statements to which they have no claim (such as goodwill) and by introducing a one-time change in the carrying value of assets and liabilities that makes time-series comparisons of changes in assets, liabilities, and resulting income items challenging, hindering the decision usefulness of the acquired entity's financial statements for its primary users.
Third, Messrs. Linsmeier and Siegel contend that providing an option to the controlling interest to push down the basis of accounting for the assets and liabilities of the controlling entity to the acquired entity's financial statements introduces potential noncomparability in the basis of accounting used by acquired entities, hindering the comparison of financial information across entities. They believe that this potential noncomparability is quite significant given that this Update permits not just the acquired entity but each subsidiary of an acquired entity to make separate independent elections to apply pushdown accounting to their separate financial statements. Thus, under this guidance, one or more of the subsidiaries of an acquired entity can elect to apply pushdown accounting to their separate financial statements even when the acquired entity or one or more of the other subsidiaries of the acquired entity elect not to apply pushdown accounting.
Messrs. Linsmeier and Siegel believe that it would be very confusing for users of the financial reports of the acquired entity and its subsidiaries to review financial statements prepared using different measurement bases for the same assets and liabilities within consolidated and separate statements. They also observe that the ability of the acquired entity and its subsidiaries to make these elections is inconsistent with the qualitative characteristics of financial reporting in Chapter 3 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, which sets out comparability as an enhancing qualitative characteristic of financial reporting. Paragraph QC25 of Chapter 3 states that "although a single economic phenomenon can be faithfully represented in multiple ways, permitting alternative accounting methods for the same economic phenomenon diminishes comparability." Messrs. Linsmeier and Siegel's concerns are heightened by the additional provision in this Update that permits an acquired entity and its subsidiaries to elect to apply pushdown accounting in a period after the changein-control event, perhaps years later, as a change in accounting principle. They are further troubled because introducing this future election to apply pushdown accounting gives an acquired entity or its subsidiaries the ability to compare the results of accounting under the two different measurement systems and change measurement methods when pushdown accounting makes the reported results look better.
Fourth, Messrs. Linsmeier and Siegel believe that the Update provides insufficient guidance on the application of pushdown accounting, which likely will result in diversity in application of pushdown accounting in practice. Their concern relates to a series of issues raised in comment letters responding to the proposed Update. Messrs. Linsmeier and Siegel note that respondents requested additional guidance on how to report under pushdown accounting for items such as indemnification assets, contingent consideration, transaction costs, noncompete agreements, change-in-control bonuses, and the presentation of predecessor and successor financial statements. Messrs. Linsmeier and Siegel are concerned that because the Update does not address how to report on those items, there will be an increase in the diversity in application of pushdown accounting as more companies are permitted to apply pushdown accounting at the lower change-in-control threshold and selectively for more and different entities.
To avoid the issues raised above, Messrs. Linsmeier and Siegel would have preferred that this Update only require that the acquired entity disclose the fair value of its assets and liabilities recognized on the acquirer's books because that was the information that users indicated is most useful to them. Such disclosures would not introduce comparability issues within and among companies and would allow the Board to address new basis issues comprehensively if and when they become a priority. Alternatively, Messrs. Linsmeier and Siegel could support requiring pushdown accounting when the acquirer obtains control over substantially all of the acquired entity because in that situation (1) the primary claimants to the acquired entity's net assets are the shareholders with a controlling interest and (2) a requirement to push down the accounting basis to all acquired entities does not introduce financial statement comparability issues among different acquired entities.
Members of the Financial Accounting Standards Board:
Russell G. Golden, Chairman
James L. Kroeker, Vice Chairman
Daryl E. Buck
Thomas J. Linsmeier
R. Harold Schroeder
Marc A. Siegel
Lawrence W. Smith