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Implications of the Joint FASB and IASB Proposal on Accounting for Business Combinations

Conceptual Changes on the Path to Convergence

By Pamela A. Smith and Georgia Saemann

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APRIL 2007 - The International Accounting Standards Board (IASB) and FASB issued their first joint exposure draft, Business Combinations: A Replacement of FASB Statement No. 141 [SFAS 141(R)], on June 30, 2005, with a comment deadline of October 28, 2005. SFAS 141(R) is a significant step forward in the working relationship of the two standards-setting bodies. Moreover, the ultimate outcome of the deliberation process related to this exposure draft (ED) may impact perceptions of the success of the convergence of international and U.S. accounting standards. Respondents to the ED included the major constituents of the IASB and FASB as well as other national accounting standards-setting bodies. The comment letters filed with the IASB and FASB reveal some of the potential implications of the proposed revision to SFAS 141. This review of the IASB/FASB proposal is divided into two parts: the overarching conceptual changes proposed, and the practical implications in the context of current accounting standards.

[On June 30, 2005, FASB and the IASB also issued an ED, Consolidated Financial Statements, which addresses accounting after the date of acquisition. Descriptions and examples of the conceptual views of the post-acquisition entity are addressed in “Understanding the Different Views of Consolidation,” by Rebecca Toppe Shortridge and Pamela A. Smith, accessible by clicking here.]

Conceptual Changes

Although the IASB and FASB’s conceptual frameworks state that information is useful if it is relevant and reliable, there has been a deliberate focus recently on improving relevance at the expense of reliability, as demonstrated in recent pronouncements in the areas of pensions, investments in securities, impairment of long-lived assets, goodwill...