SFAS 141R and the Valuation of Identifiable Intangible Assets

SFAS 141R revises some key rules that dictate the manner in which the purchase of a business is recorded on the books of the acquiring company

Don Wenk


In December 2007 the Financial Accounting Standards Board (FASB) issued its widely anticipated revision to Statement of Financial Accounting Standards 141. SFAS 141R, Business Combinations, revises some key rules that dictate the manner in which the purchase of a business is recorded on the books of the acquiring company. The FASB determined that a revision was necessary in order to “improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.”

The statement retains the guidance provided in the original SFAS 141 with respect to identifying and recognizing intangible assets separately from goodwill. The main features of the revised statement and the more significant improvements over its predecessor are described below.

Shift from Allocation Model to Valuation Model

SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of the acquisition date. That replaces the original Statement 141’s “cost allocation” method, which required the costs of a purchase to be allocated to the various assets acquired and liabilities assumed. The old allocation method often resulted in assets or liabilities to be recognized on the balance sheet at amounts other than their fair values. For example, the original Statement 141 required the acquirer to include the costs associated with the acquisition in its total amount to be allocated to the assets and liabilities. Additionally, in the event of a bargain purchase by the acquirer, the amounts recorded for the assets of the acquired were often systematically reduced so that the total of the assets recorded equaled the total purchase consideration.

Assets and Liabilities Arising from Contingencies

One of the more significant revisions included in 141R is that it requires the recognition of assets or liabilities associated with contingencies. The fair value of contingencies (both contractual and non-contractual) will have to be estimated based on information known as of the acquisition date. SFAS 141R provides specific guidance on the subsequent accounting for assets and liabilities arising from contingencies. Specifically, it requires that an acquirer continue to report an asset or liability arising from a contingency at its acquisition-date fair value absent new information about the possible outcome. When new information is obtained, the acquirer evaluates that new information and measures a liability at the higher of its acquisition-date fair value or the amount that would be recognized if applying FASB Statement No. 5 (Accounting for Contingencies), and measures an asset at the lower of its acquisition-date fair value or the best estimate of its future settlement amount.

Bargain Purchase

SFAS 141R defines a bargain purchase as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer. In contrast, the original Statement 141 required that “negative goodwill” amount to be allocated as a pro-rata reduction of the amounts that otherwise would have been assigned to particular assets acquired, and there was no immediate impact to the acquirer’s income statement.

In-Process Research & Development

The revised statement also changes the manner in which acquired in-process research and development (“IPR&D”) is recorded. Prior standards required that research and development assets acquired in a business combination that have no alternative future use to be measured at their acquisition-date fair values and then immediately charged to expense. Under SFAS 141R, the acquirer will recognize separately from goodwill the acquisition-date fair values of research and development assets acquired in a business combination, which improves the representational faithfulness and completeness of the information provided in financial reports about the assets acquired in a business combination. These IPR&D assets will remain on the books as an indefinite-lived asset pursuant to an amended SFAS 142 (Goodwill and Other Intangible Assets) until either the specific project is deemed a success, at which time the company will begin to amortize the asset over the estimated useful life of the technology, or if the research project is abandoned, the IPR&D asset booked at the date of acquisition associated with the project will be impaired pursuant to SFAS 144 (Accounting for the Impairment or Disposal of Long-Lived Assets).

Effective Date

This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.


With the release of SFAS 141R, the FASB continues to converge U.S. generally accepted accounting principals with international standards, and GAAP-based balance sheets continue an evolution toward fair value reporting as opposed to purely historical-cost-based reporting. At Kotzin Valuation Partners, we look forward to working with companies and their auditors in navigating the complexities of this new pronouncement.