Business combination (ASC 805) vs. Asset Acquisition Accounting
You have a signed and executed purchase agreement. Now the real fun begins with business combination accounting for the acquisition! It’s common to dive in and start identifying any intangibles and fair valuing the acquiree’s assets, but an important question needs to be asked upfront. What was acquired? Did I buy a business or just a bunch of assets? This needs to be determined first, because the accounting for the acquisition of a business (as a business combination) vs. an asset acquisition is vastly different.
Determining whether a business combination or an asset acquisition exists is a common issue, which this post will discuss. If you’re interested in learning about other common business combination issues, visit our Business Combinations topic page for more information!
The first step
The first step in accounting for an acquisition is to determine what you’ve acquired. Needless to say, the accounting for an asset acquisition is far easier than accounting for a business combination. Therefore, many purchase agreements often stipulate the transaction is an asset purchase. But don’t let the wording fool you! If what is being acquired meets the definition of a business, then ASC 805 is applicable, regardless of what those acquisition lawyers and tax accountants say.
What is a business?
We discuss the definition of a business, as defined in ASC 805 in more detail within this post. In summary, a business is an integrated set of activities capable of providing a return. To be considered a business, a set needs to have an input and a substantive process that together significantly contribute to the ability to create outputs.
If substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set does not qualify as a business.
Let’s take a look at an example.
Example
Casserole Corp. is a successful real-estate corporation and acquired a portfolio of 12 single-family homes, for which each home has current in-place leases. The only items acquired by Casserole are the 12 single-family homes and the related 12 in-place leases (no employees or any other assets are acquired). Each of the acquired homes includes the land, building, and property improvements. Additionally, each home has a different floor plan, square footage, lot, and interior design.
Would Casserole’s acquisition meet the definition of a business? No, it would not (it has an asset acquisition). This is because substantially all the fair value of the gross assets acquired is concentrated in the group of similar identifiable assets. This is because the land, building, property improvements and the in-place leases can be considered a single asset (building/property improvements are attached to the land and can’t be removed without significant cost).
Additionally, the 12 single-family homes are similar due to the nature of the assets (all single-family) and due to the fact that the risks associated with managing and creating outputs are not significantly different (same type of home, same type of customers).
We discuss how a business combination would be accounted for in our overview course on business combinations, but how would an asset acquisition be accounted for?
Accounting: Business combinations vs. asset acquisition
Distinguishing between a business combination and an asset acquisition is important because it affects the recognition and measurement of assets acquired and liabilities assumed, both initially and subsequently. The table below summarizes the accounting differences for business combinations vs. an asset acquisition.
| Item | Business combination | Asset acquisition |
| Transaction costs | Expense as incurred | Capitalize as a component of the cost of assets acquired |
| In-process research and development (IPR&D) assets | Capitalize as an indefinite-lived intangible asset, regardless of whether the IPR&D asset has an alternative future use | Expense unless IPR&D has an alternative future use |
| Purchase price allocation | Allocate to assets acquired and liabilities assumed based on their fair values | Allocate on a relative fair value basis to non-current, non-financial assets |
| Goodwill | Recognize to the extent that the purchase price exceeds assets and liabilities assumed | Do not recognize in an asset purchase. Any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets (other than “non-qualifying” assets). |
| Contingent consideration | Recognize at its acquisition-date fair value as part of the consideration transferred | Generally recognize when the contingency is resolved (i.e., when the contingent consideration is paid or becomes payable) |
Final thoughts
As summarized in the table above, the accounting can be significantly different. The next time you are tasked with accounting for or auditing an acquisition, make sure you take that critical, often overlooked, first step to determine whether you are dealing with an acquired business or an asset acquisition.
If you need more information on business combination accounting, we have a 3-course collection on ASC 805 available for your learning needs.
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
