Official releases: FASB No. 147 ... SSARS Interpretation.

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Statement of Financial Accounting Standards No. 147--Acquisitions of Certain Financial Institutions

(An amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9)

SUMMARY

FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used.

Scope of This Statement

The provisions of this Statement that relate to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. The provisions of this Statement that relate to the application of Statement 144 apply to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution, including those acquired in transactions between mutual enterprises.

Reasons for Issuing This Statement

Following the issuance of Statements 141 and 142, constituents asked the Board to reconsider the need for the guidance in Statement 72 and Interpretation 9; in particular, the special accounting for the unidentifiable intangible asset recognized under paragraph 5 of Statement 72. In developing this Statement, the Board concluded that the guidance in Statement 72 and Interpretation 9 is no longer necessary because:

a. For a transaction that is a business combination, the unidentifiable intangible asset that is required to be recognized under paragraph 5 of Statement 72 represents goodwill that should be accounted for under Statement 142.

b. Statement 141 provides sufficient guidance for assigning amounts to assets acquired and liabilities assumed; therefore, the specialized industry guidance in Interpretation 9 and paragraph 4 of Statement 72 is no longer necessary.

In addition, constituents asked the Board to clarify whether the acquisition of a less-than-whole financial institution (often referred to as a branch acquisition) should be accounted for as a business combination or in some other manner. This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill.

How the Changes in This Statement Improve Financial Reporting

The industry-specific guidance in Statement 72 will no longer apply to transactions in the scope of this Statement. Therefore, comparability of financial reporting will improve because Statement 141 will be used to account for financial institution acquisitions except transactions between mutual enterprises.

The Effective Date of This Statement

Paragraph 5 of this Statement, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted.

CONTENTS

Introduction/1-3
Standards of Financial Accounting and Reporting:
   Scope/4
   Method of Accounting/5
   Impairment and Disposal Accounting for
     Certain Acquired Long-Term Customer-Relationship
     Intangible Assets/6
   Effective Date/7
   Transition/8-15
     Previously Recognized Unidentifiable Intangible
       Assets/8-10
     Transitional Impairment Testing for Reclassified
       Goodwill/11-14
     Transition for Impairment Accounting for
       Certain Acquired Long-Term Customer-Relationship
       Intangible Assets to Be Held
       and Used/15
     Transitional Disclosures for Reclassified
       Goodwill/16-17
Appendix A: Background Information and
   Basis for Conclusions/Al-A35
Appendix B: Amendments to Existing Pronouncements/B
   1-B5
Appendix C: Glossary/C1

INTRODUCTION

1. This Statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, (1) except for a transaction between two or more mutual enterprises. (2) This Statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the Scope of FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method. This Statement also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets (such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets), including those acquired in transactions between two or more mutual enterprises.

2. The provisions of Statement 72, as amended by this Statement, and those of Interpretation 9 continue to apply to transactions between financial institutions that are mutual enterprises. The Board intends to provide guidance on the accounting and reporting for those transactions in a separate Statement, and that Statement may further amend or rescind Statement 72 and Interpretation 9.

3. Appendix A to this Statement provides background information and the basis for the Board's conclusions. Appendix B lists other pronouncements that are amended by this Statement. Appendix C provides a glossary of terms as used in this Statement.

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

Scope

4. Paragraph 5 of this Statement applies to the acquisition of all or part (3) of a financial institution, except for a transaction between two or more mutual enterprises. Paragraph 6 of this Statement applies to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution, including a transaction between mutual enterprises.

Method of Accounting

5. Statement 72 and Interpretation 9 shall not apply to acquisitions in the scope of this Statement. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with FASB Statement No. 141, Business Combinations. If the acquisition is not a business combination (4) because the transferred net assets and activities do not constitute a business, (5) that transaction shall be accounted for in accordance with paragraphs 4-8 of Statement 141. As discussed in paragraph 9 of FASB Statement No. 142, Goodwill and Other Intangible Assets, such transactions do not give rise to goodwill.

Impairment and Disposal Accounting for Certain Acquired Long-Term Customer-Relationship Intangible Assets

6. The provisions of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, apply to long-term customer-relationship intangible assets, except for servicing

Effective Date

7. The provisions in paragraph 5 of this Statement shall be effective for acquisitions for which the date of acquisition (7) is on or after October 1, 2002. The provisions in paragraph 6 shall be effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted.

Transition

Previously Recognized Unidentifiable Intangible Assets

8. The carrying amount of an unidentifiable intangible asset shall continue to be amortized as set forth in paragraph 5 of Statement 72 after October 1, 2002, unless the transaction in which that asset arose was a business combination.

9. If the transaction that gave rise to the unidentifiable intangible asset was a business combination, the carrying amount of that asset shall be reclassified to goodwill (8) (reclassified goodwill) as of the later of the date of acquisition or the date Statement 142 is applied in its entirety (9) (Statement 142 application date). The carrying amounts of any recognized intangible assets that meet the recognition criteria in paragraph 39 of Statement 141 that have been included in the amount reported as an unidentifiable intangible asset and for which separate accounting records have been maintained (as discussed in footnote 25 of Statement 141) shall be reclassified and accounted for as assets apart from the unidentifiable intangible asset and shall not be reclassified to goodwill.

10. The reclassified goodwill shall be accounted for and reported prospectively as goodwill under Statement 142. In addition:

a. If the Statement 142 application date preceded October 1, 2002, any previously issued interim or annual financial statements that reflect amortization of the unidentifiable intangible asset subsequent to the Statement 142 application date shall be restated to remove that amortization expense. When financial information is presented that includes those periods, that financial information shall be presented on the restated basis.

b. If the Statement 142 application date falls after October 1, 2002, the unidentifiable intangible asset shall continue to be amortized in accordance with paragraph 5 of Statement 72 until the Statement 142 application date.

Transitional Impairment Testing for Reclassified Goodwill

11. As described in paragraphs 12-14 of this Statement, reclassified goodwill shall be tested for impairment as of the Statement 142 application date. Paragraphs 12-14 apply only to reclassified goodwill for which the date of acquisition precedes the Statement 142 application date.

12. If an entity has no goodwill other than reclassified goodwill, the transitional impairment testing provisions in paragraphs 54-58 of Statement 142 shall be completed for the reclassified goodwill by the end of the fiscal year in which the transition provisions of this Statement are applied.

13. If an entity has other goodwill in addition to reclassified goodwill, and it has not completed the transitional impairment testing provisions in paragraphs 54-58 of Statement 142 as of October 1, 2002, the reclassified goodwill shall be combined with other goodwill in applying those transition provisions.

14. If an entity has other goodwill in addition to reclassified goodwill, and it has completed the transitional impairment testing provisions in paragraphs 54-58 of Statement 142 as of October 1, 2002, the following transition provisions shall be applied for each reporting unit that includes reclassified goodwill:

a. If the fair value of the reporting unit exceeded its carrying amount (including the unidentifiable intangible asset) at the Statement 142 application date, (10) additional impairment testing related to the reclassified goodwill is not required.

b. If the first step of the transitional goodwill impairment test indicated a potential impairment of goodwill at the Statement 142 application date, the amount of the goodwill impairment loss (if any) shall be remeasured based on the revised carrying amount of goodwill. (11) The revised carrying amount of goodwill used in remeasuring the loss equals the amount of previously recognized goodwill and the amount of any unidentifiable intangible asset reclassified as goodwill under the transition provisions of this Statement. Any adjustment to the impairment loss shall be recognized as the effect of a change in accounting principle in accordance with paragraph 56 of Statement 142.

Transition for Impairment Accounting for Certain Acquired Long-Term Customer-Relationship Intangible Assets to Be Held and Used

15. Impairment losses resulting from the application of Statement 144 to acquired long-term customer-relationship intangible assets to be held and used shall be reported in the period in which the impairment loss recognition criteria in that Statement are first applied and met and shall not be reported as a cumulative effect of a change in accounting principle.

Transitional Disclosures for Reclassified Goodwill

16. In the period that the transition provisions are first applied, an entity shall disclose the following in the notes to the financial statements:

a. The carrying amount of previously recognized unidentifiable intangible assets reclassified as goodwill

b. The effect of any restatement on net income for each period for which restated financial statements are presented pursuant to paragraph 10(a)

C. The amount of any adjustment to the previously recognized goodwill impairment loss recognized pursuant to paragraph 14(b).

17. For each period presented that precedes the Statement 142 application date, the amount of amortization expense related to reclassified goodwill shall be disclosed, either separately or as part of the transitional disclosure requirements of Statement 142 (paragraph 61).

This Statement was adopted by the unanimous vote of the seven members of the Financial Accounting Standards Board:

Robert H. Herz, Chairman G. Michael Crooch John M. Foster Gary S. Schieneman Katherine Schipper Edward W. Trott John K. Wulff

SSARS Interpretation

The staff of the Accounting and Review Services Committee (ARSC) is authorized to issue interpretations to provide timely guidance on the application of pronouncements of the ARSC. Interpretations are reviewed by members of that committee. An interpretation is not as authoritative as a pronouncement of the ARSC, but members should be aware that they may have to justify a departure from an interpretation if the quality of their work is questioned.

AR SECTION 9100

Interpretation of AR Section 100, "Compilation and Review of Financial Statements"

22. Use of "Selected Information--Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included"

.85 Question--Can an accountant label notes to the financial statements "Selected Information--Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included" when the client includes more than a few required disclosures?

.86 Answer--No. As discussed in paragraph 16 of SSARS 1 [section 100.16], when the entity wishes to include disclosures about only a few matters in the form of notes to the financial statements, such disclosures should be labeled "Selected Information--Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included."

.87 When the financial statements include more than a few disclosures, this guidance is not appropriate. The omission of one or more notes, when substantially all other disclosures are presented, should be treated in a compilation or review report like any other departure from GAAP, and the nature of the departure and its effects, if known, should be disclosed. .88 The label "Selected Information--Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included" should not be used in situations where substantially all disclosures are included. The label "Selected Information--Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included" is not intended to be used for the omission of (intentionally or unintentionally) one or more disclosures and the accountant should use his or her judgment in determining the appropriateness of the label.

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(1) Hereafter, the term financial institution as used in this Statement includes all or part of a commercial bank, a savings and loan association, a credit union, or other depository institution having assets and liabilities of the same types as those institutions.

(2) Terms defined in Appendix C, the glossary, are set forth in boldface type the first time they are used.

(3) Some transactions involve the acquisition of a less-than whole, or part of a, financial institution. Those transactions are sometimes referred to as branch acquisitions.

(4) Refer to paragraph 9 of Statement 141 for determining when an acquisition is a business combination.

(5) EITF Issue No. 98-3, "Determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a Business," provides guidance on determining whether an asset group constitutes a business. assets, (6) recognized in the acquisition of a financial institution.

(6) Examples of long-term customer-relationship intangible assets include depositor- and borrower-relationship intangible assets, credit cardholder intangible assets, and servicing assets. Servicing assets, however, are tested for impairment under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

(7) Refer to paragraph 48 of Statement 141 for guidance on determining the date of acquisition.

(8) If the amortization of the unidentifiable intangible asset is not deductible for tax purposes, any deferred tax liabilities related to that asset also shall be reclassified to goodwill.

(9) Statement 142 applies in its entirety in fiscal years be ginning after December 15, 2001. However, early application was permitted for entities with fiscal years beginning after March 15, 2001, in certain circumstances, as indicated in paragraph 48(a) of Statement 142.

(10) That is, the first step of the transitional goodwill impairment test indicated no impairment.

(11) The fair value of the reporting unit and related assets and liabilities used in calculating the implied fair value of goodwill shall not be remeasured for purposes of applying this transition provision.