An Analysis of the Initial Adoption of FAS 141 and 142 in the Pharmaceutical Industry
18 Pages Posted: 22 Mar 2012 Last revised: 26 Dec 2012
Date Written: March 19, 2012
In 2001 the Financial Accounting Standards Board issued FAS 141 Business Combinations, and FAS 142 Goodwill and Intangible Assets. These new accounting standards significantly changed the accounting for mergers and acquisitions, dramatically altering how business combinations are reflected in the surviving company's financial statements. These new rules are particularly relevant for companies in industries that rely heavily on intellectual capital to generate future cash flows, or those that are characterized by considerable mergers and acquisitions activity.
Documenting how these new standards are initially applied provides valuable insight into their impact on the structure and content of the resulting financial statements. This study addresses this issue by examining and documenting initial FAS 141 and 142 disclosures for firms in the pharmaceutical industry. We focus on the pharmaceutical industry because it is dominated by a few well defined business models, and is characterized by firms that rely heavily on intangible assets and have considerable mergers and acquisitions activity.
The results of our analysis identify several emerging trends within the pharmaceutical industry. First, strategic analysis indicates that a variety of business models currently exist in the pharmaceutical industry, and most pharmaceutical companies pursue more than one business model. Second, financial disclosure analysis reveals that although different business models led to some variation in disclosures, disclosure practice across firms in the pharmaceutical industry is fairly consistent. Finally, analysis of recent acquisitions provides evidence of consistent reporting and disclosure of purchase type business combinations under FAS 141 and 142.
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