Simultaneous Common Control Mergers and "Removal of Accounts" Provisions in Credit Card Securitizations
This month's column discusses two recent consensuses reached by the Financial Accounting Standards Board emerging issues task force (EITF) concerning accounting for simultaneous common control mergers and certain "removal of accounts" provisions in credit card securitizations. EITF Abstracts, copyrighted by the FASB, is available in softcover andloose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700. ISSUE NO. 90-13 This issue, Accounting for Simultaneous Common Control Mergers, addresses mergers designed to allow U.S. companies to better compete with foreign buyers when bidding on acquisitions. Simultaneous common control mergers are the brainchild of a Wall Street investment banker and Dow Chemical Company. Investment bankers and the corporate community saw these mergers as a way to avoid the charge to earnings from the amortization of goodwill under purchase accounting. They believed purchase accounting would not apply to such transactions because they are combinations of enterprises under common control, which normally are accounted for at historical cost in a manner that is similar to pooling. The Securities and Exchange Commission asked the EITF to address the issue as an increasing number of companies planned this transaction. The result was EITF Issue no. 90-13. The decision received media attention (see Forbes, August 20, 1990). The deals are structured as follows: An entity (Parent) obtains control of aanother entity (Target), either by ownership or otherwise. Almost simultaneously, as part of an integrated planned transaction, Target issues additional shares to Parent in exchange for Parent's interest in a subsidiary (Subsidiary). In substance, Parent is selling its subsidiary in partial consideration for acquiring Target. Accounting issues. Several accounting issues were considered by the task force. 1. Should Parent account for Subsidiary's transfer to Target at fair value, as in a purchase accounting transaction, or at historical cost, as in a transfer between entities under common control? 2. If the transaction is to be accounted for at fair value * Should Parent recognize a gain on the sale of Subsidiary? * How should the assets and liabilities of Target and Subsidiary as well as minority interest be determined in Parent's consolidated financial statements? * How should Target account for the transaction? Arguments: On the first issue, those in favor of applying historical cost accounting cite AICPA Accounting Interpretation no. 39, "Transfers and Exchanges Between Companies under Common Control," of Accounting Principles Board Opinion no. 16, Business Combinations, for support. They believe Parent effectively controls both Target and Subsidiary at the time Subsidiary is transferred to Target. Under Interpretation no.39, combinations involving parties under common control do not result in a step-up in basis. Others contend Interpretation no. 39 does not apply, because when both transactions (that is, obtaining control of Target and the merger of Subsidiary with Target) are being negotiated, Target and Subsidiary are not under common control. Therefore, the steps of the transaction cannot be separated and should be viewed as one transaction. As a result, they believe the transfer should be recorded by Parent as a purchase under APB Opinion no. 16. Still others argue the applicability of Interpretation no. 39 should be determined based on the facts and circumstances of each transaction. For example, if the substance of the control relationship before the merger is an equity ownership interest, Interpretation no. 39 should apply. On the other hand, if the premerger control is merely a voting proxy, the interpretation would not apply. Rather, purchase accounting should be used. …