Scope of ASC 805, Business Combinations
First things first: ASC 805 applies to public and privately held entities and is applicable to all transactions or other events that meet the definition of a business combination or an acquisition by a not-for-profit entity.
Identifying the Acquirer and the Acquisition Date
The acquirer is the entity that gains control of a business. Sometimes this determination is straightforward, but in other cases it may not be as clear.
Once an acquirer has been identified, it evaluates whether the acquired group of assets and liabilities (the acquired set) meets the definition of a business.
Recognizing Assets Acquired, Liabilities Assumed, and Non-Controlling Interests
If the acquired set meets the definition of a business, the acquirer must recognize and measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value (with some exceptions).
Recognizing Goodwill or a Bargain Purchase Gain and Consideration Transferred
The final step in the acquisition method is to recognize and measure goodwill or a gain from a bargain purchase.
Transactions Separate from the Business Combination
An acquirer may enter arrangements with the sellers or the acquiree in connection with a business combination. Such arrangements require analysis to determine whether they should be accounted for as part of, or separate from, the business combination.
ASC 805 provides disclosure objectives and specific disclosure requirements designed to help users of the financial statements understand the effects of a business combination.
Pushdown accounting guidance is optional and can be elected for the separate financial statements of an acquiree (and its subsidiaries) when an acquirer obtains control of the acquiree that is a business or a nonprofit activity.
Unlike accounting for business combinations, accounting for common control transactions does not typically result in a step-up in basis; rather, common control transactions are accounted for at the ultimate parent’s carrying amount of the net assets or equity interests transferred. Further, the common control transfer of a business may result in a change in reporting entity, which may require retrospective adjustments to the receiving entity’s financial statements.
The term “asset acquisition” is used to describe the acquisition of an asset or group of assets that does not meet the definition of a business under U.S. GAAP. Asset acquisitions (other than the initial consolidation of a VIE) are accounted for under a cost accumulation model, with the cost being allocated to the acquired assets and liabilities assumed, based on relative fair values (with some exceptions).
Initial Accounting by a Joint Venture
A joint venture (as defined in U.S. GAAP) applies a new basis of accounting at its formation date, in which it recognizes and initially measures its assets and liabilities at fair value (with exceptions consistent with the business combinations guidance). The joint venture recognizes goodwill if the fair value of the joint venture as a whole exceeds the total identifiable assets and liabilities recognized by the joint venture at the formation date.
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