SFAS No. 147 acquisitions of certain financial institutions: SFAS 147 significantly affects how most financial institutions account for goodwill associated with prior bank purchase acquisitions. This article summarizes its provisions

RMA Journal, The, June, 2003 by Alan Reinstein

In October 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 147, Acquisitions of Certain Financial Institutions, to provide guidance on the accounting for purchase acquisitions of financial institutions. In accordance with this Standard, acquisitions of financial institutions, except for transactions between two or more mutual enterprises, should now follow the dictates of SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Previously, financial institutions were exempt from these two recent authoritative pronouncements and followed instead the provisions of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Since these provisions directly affect the banking industry bankers themselves should become familiar with them.

An Example of Applying the New Standard

Assume that Bank X acquires (through the purchase method) the assets and liabilities of Bank Y, whose fair value of deposits and other assets equals $1,000 and that of liabilities equals $700. Now, assume that of this $300 difference of potential goodwill, Bank X can attribute $260 to separately identifiable assets, such as depositor and borrower relationships. SFAS 72 would have required Bank X to call the remaining $40 of unidentified intangible asset "goodwill," to be amortized. Moreover, Bank X would have amortized this $40 under the interest method over a period of time no longer than the discount on the long-term interest-bearing assets acquired would be recognized as interest income. Moreover, following the dictates of APB Opinion Number 17, Intangible Assets, this amortization period could not exceed 40 years.

Most importantly, though, Bank X would have had to systematically amortize the same amount of goodwill annually. Using a 20-year amortization period, then, Bank X would have written off $2 (i.e., $40/20) each year, regardless of the changing underlying factors of the acquired banking relationships.

Now, under the provisions of SEAS 141 and 142, Bank X should examine at least annually such declines in the fair value of the acquired goodwill and reduce such values accordingly. (1)

Other Provisions of SFAS 147

Financial institutions meeting conditions of SFAS 147 should restate their balance sheets and income statements as if the amount accounted for under SFAS 72 as an unidentifiable intangible asset were reclassified to goodwill as of the date they initially adopted SEAS 142. For example, a financial institution adopting Statement 142 on January 1, 2002, would retroactively reclassify the unidentifiable intangible asset to goodwill as of that date and restate previously issued income statements to remove the amortization expense recognized in 2002.

SFAS 147 also requires financial institutions to adhere to the provisions of SEAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for such long-term customer relationship intangible assets as depositorand borrower-relationship intangible assets and credit cardholder intangible assets. Thus, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions as other long-lived or other amortizable intangible assets.

Applying SFAS 147 Provisions

Many financial institutions have already begun applying the provisions of SEAS 147. For example, NBT Bancorp reported on October 28, 2002, that the affect of this SEAS "eliminates the regular amortization of unidentifiable intangible assets related to the Company's branch acquisitions and reclassifies these unidentifiable intangible assets to goodwill beginning as of January 1, 2002. The Company will adopt SEAS No. 147 on October 1, 2002, and expects amortization of intangible assets reported for the nine months ended September 30, 2002, to decrease by approximately $1.9 million ($1.3 million after tax), which would increase net income for the nine months ended September 30, 2002, by $0.04 per diluted share."

Summary

The provisions of SFAS 147 align the accounting practices of financial institutions with those of other entities, thereby allowing them to compete more favorably in the worldwide market for capital resources.

Notes

(1.) An example of this process appears in "Goodwill Guidelines: Some Implications for Bankers," by Alan Reinstein and Mohamed E. Bayou, The RMA Journal, March 2003, pp. 58-61.

Contact Reinstein by e-mail at a.reinstein@wayne.edu.

[c] 2003 by RMA. Alan Reinstein, CPA, DBA, is George R. Husband Professor of Accounting at the School of Business, Wayne State University, Detroit, Michigan.