Certified Valuation Analyst (CVA) Practice Exam

What is the purpose of SFAS 141 and 142 (ASC 805 and 350)?

1. To standardize tax reporting

2. To guide business valuations only

3. For financial reporting regarding purchase price allocations, business combinations, and goodwill impairment

4. To regulate accounting practices across sectors

The correct answer is: For financial reporting regarding purchase price allocations, business combinations, and goodwill impairment

The primary purpose of SFAS 141 (now codified as ASC 805) and SFAS 142 (now codified as ASC 350) revolves around financial reporting specifically concerning purchase price allocations, business combinations, and goodwill impairment. These standards were established to enhance the transparency and accuracy of financial statements in the context of business acquisitions. SFAS 141 focuses on how to account for business combinations, requiring the acquisition method of accounting where the purchase price is allocated to the acquired assets and liabilities based on their fair values at the acquisition date. This helps ensure that financial statements reflect the economic reality of the combination. SFAS 142 addresses goodwill and other intangible assets, requiring that goodwill not be amortized but rather tested for impairment at least annually. This approach aims to provide a more relevant and reliable representation of the value of goodwill on the balance sheet. In contrast to the other options, these standards do not primarily focus on standardizing tax reporting, guiding business valuations exclusively, or regulating accounting practices across all sectors. Instead, their core function is to govern the financial reporting practices related to business combinations and the treatment of associated intangible assets, ensuring that stakeholders have clear and consistent information regarding the financial impacts of such transactions.