The volatility on Wall Street last week was another in a long line of events that is making for an historically unstable economic environment. However, in our line of work we see a lot of the activity on the front lines, and we want to emphasize that there is still business to win and still growth to attain. Despite a climate that is financially questionable relative to recent years, the capitalist nature of the country offers opportunities for businesses to thrive – even in anxious times.

Our latest audiocast is on this very subject, and I encourage you to give a listen below or download the mp3. Feel free to drop us a comment or an email if you have any questions…as always, we’re happy to engage in a discussion about what’s happening across the business landscape.

New M&A guidelines under FAS 141R are taking effect in 2009, and there’s been some talk about how it might impact the deal process. In fact, this Accounting Today article cites a study by Deloitte that concludes “out of more than 1,850 executives, 40 percent said the revised standard would cause them to rethink deal strategy or have an impact on their planned deal activity.”

This doesn’t surprise me, as some of the pending changes will have a destabilizing effect on post-merger balance sheets. However, I also feel strongly that accounting challenges should never hold back a strategically sound deal. The accounting, valuation and auditing experts simply need to adjust to the new guidelines and structure deals accordingly – not forego or delay them.

Here are some of the significant changes headed our way:

1. Timing of deals and reporting

FAS 141R provides a more stringent timeline for reporting business combinations, and if deadlines are missed then provisional amounts must be reported for incomplete terms. That means not having the most qualified information, which can lead to more serious issues down the road. Expanded disclosure requirements will make the deadlines even more difficult to meet and could force companies to speed through the process, so prioritize the planning process and have the right team in place early to avoid sacrificing quality and accuracy for speed.

2. Contingent consideration

The purchase price of a business combination now includes the fair value of contingent considerations. This change could significantly increase the upfront purchase price recorded on deal transactions, as well as increase the volatility of subsequent accounting. Given the major uncertainties as to future amounts and timing of payments of the contingent payment, the fair value of this liability may materially fluctuate over time as more information is obtained.

3. In-process R&D

Under previous regulations, companies could record the fair value of IPR&D as a period cost of a transaction. FAS141R, however, requires that it be recorded as an intangible asset on the balance sheet. If the IPR&D does not come to fruition, it will subsequently need to be written down to its fair value, potentially zero, resulting in an impairment charge to the income statement.

These changes and others will bring us closer to international standards, and they will in the end make for a clearer picture of deals. We’ll take a more in-depth look at FAS 141R in an upcoming MFA Perspectives article, and we encourage you to check it out when it’s posted on our Thought Leadership page.

Well, it looks like we may be on our way.  After years of false starts and conjecture about U.S. adoption of - or complete convergence with - International Financial Reporting Standards (IFRS), the SEC issued a press release on August 27th entitled “SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily“.  Despite this press release, a final decision as to whether the adoption of IFRS is in the best interest of the public is not expected until 2011, and U.S. issuers would not begin using IFRS before 2014.

While this development is significant in that it is the first time the SEC has publicly announced a roadmap for the use of IFRS, it doesn’t change my position on what should be done now. I’ve been reading a lot from the press and other news sources about the impending effect of IFRS on U.S. GAAP, and I’m not convinced that IFRS will be a reality any time soon in the U.S.  Call me a cynic, but the SEC gives itself a lot of wiggle room to delay (indefinitely, if it wishes to), and Chairman Cox doesn’t help the cause by using words like “cautious and careful plan”.

And remember folks…the SEC’s announcement will likely have an impact on private companies as well.  The chairman of the FASB, Robert Herz, has gone on record a number of times regarding the push to international standards, and the SEC’s actions will simply add fuel to that fire.  But similarly, the FASB is unlikely to allow the adoption of IFRS prior to the SEC, and thus any delays by the SEC will likely be reflected in actions by the FASB too.

Being the cautious and conservative CPA that I am, I continue to strongly advocate advanced education on the topic of IFRS and I still contend that companies do not want to, nor should they be, taken by surprise if/when IFRS becomes a reality here in the United States.  But I remain less convinced that this change will come about in the United States as “quickly” as outlined in the SEC’s proposed roadmap.

Time will tell, but as far as I’m concerned, the sky is not yet falling.

UPDATE 10/7/08:  OK, I’m generally not one to say “I’m right”, but slippage is already occuring.  Here’s a link to a brief article on CFO.com that discusses what’s happening (or NOT happening) as of late.