J-GAAP: Business Combinations

The Business Accounting Deliberation Council, the former public-sector standard-setting body in Japan, issued in October 2003 Accounting Standard for Business Combinations.

The Standard allows entities to select the purchase method and the pooling-of-interest method, depending on the economic substance of business combinations.

If a business combination is qualified as a "purchase transaction," the purchase method should be applied; otherwise, the combination is categorized as "uniting of interests," and the pooling-of-interest method should be applied. Relative ownerships of shareholders of combining entities should be essentially the same, in order to categorize the combination as "uniting of interests." Quantitative threshold is set forth; i.e., 55% v. 45% merger can be accounted for by the pooling-of-interest method. So, business combinations that are categorized as "uniting of interests" would be very rare in practice.

Under the purchase method, an acquiring entity must be identified. Assets and liabilities of the acquired entity should be measured at fair value as of the agreement date. Any excess of acquisition cost over the net assets of the acquired entity should be recognized as goodwill. Goodwill should be amortized over the useful lives but no more than 20 years. If goodwill is impaired, impairment loss should be recognized.

In-process research and development costs of the acquired entity should be recognized, and immediately charged to expense. Restructuring provisions may be recognized when certain criteria are satisfied, but should be written off within 5 years. Any negative goodwill should be amortized over no more than 20 years.

Under the pooling-of-interest method, assets, liabilities, and components of equity of the combining entities should be carried forward as if those entities are merged into without adjustments to book values. No goodwill is recognized.

IFRS No. 3 and SFAS No. 141 eliminated the pooling-of-interest method as an alternative for accounting for business combinations. Those standards also prohibit amortization of goodwill. In those respects, Japanese GAAP for business combinations is different.