Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 12. ACCOUNTING FOR BUSINESS COMBINATIONS

Paul Pacter, PhD, CPA

Director IAS Global Office Deloitte Touche Tohmatsu

BACKGROUND

For the 30 years prior to June 30, 2001, accounting for business combinations in the United States was governed by Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," APB Opinion No. 17, "Intangible Assets," and their various amendments and interpretations. Those standards provided for two methods of accounting for business combinations—the pooling of interests method and the purchase method—and for amortization of goodwill and other intangible assets recognized under the purchase method over a period not longer than 40 years.

Effective July 1, 2001, those pronouncements were replaced by Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The new standards fundamentally change the method of accounting for business combinations and goodwill and other intangible assets. SFAS No. 141 requires that all business combinations be accounted for by a single method—the purchase method. And whereas Opinion No. 17 had presumed that goodwill and all other intangible assets were wasting assets (i.e., finite lived) that should be amortized in determining net income, SFAS No. 142 makes no such presumption. Instead, under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually ...