Accounting Resources for ASC 805 and IFRS 3

A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. Business combinations are accounted for in accordance U.S. GAAP under ASC Topic 805 Business Combinations (ASC 805) and under IFRS 3 Business Combinations (IFRS 3). Although the accounting for business combinations is not hard per se, it can be tricky as you weave your way through the myriad of guidance.

We’ve published this accounting topic page to help you learn more about the accounting for business combinations, including accounting issues and U.S. GAAP vs. IFRS differences. We also provide helpful links to our blog posts and eLearning courses on the topic, as well as external thought leadership published by Big 4 accounting firms. We hope you enjoy!

Welcome Video

Accounting Issues

Issue #1: Business Combinations vs. Asset Acquisitions

The first issue relates to determining what exactly was purchased. Did the entity purchase a business or just a bunch of assets? This determination matters because the accounting is vastly different!

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 pesky lawyers and tax accountants say!

According to ASC 805, to be considered a business, the acquired set needs to have an input and at least one substantive process that together significantly contribute to the ability to create outputs. The guidance provides a framework to evaluate when an input and substantive process are present, as well as providing more stringent criteria for sets without outputs to be considered a business.

Issue #2: Identifying the Assets Acquired and Liabilities Assumed

The second issue relates to identifying all the assets acquired and liabilities assumed (“net assets”) in the business combination. It’s important to start with the assets and liabilities reported on the acquiree’s balance sheet, but don’t stop there! Intangible assets must also be included if they are separable or arise from contractual or legal rights.

Included in the intangible assets acquired are in-process research and development (IPR&D) projects and brands, even if the acquirer intends to “kill the brand” post-acquisition.

Issue #3: Valuing the Assets Acquired and Liabilities Assumed

Now that the net assets acquired have been identified, ASC 805 requires the acquirer to determine the fair value of the net assets in accordance with ASC 820 Fair Value Measurements. This is the third issue relating to the accounting for business combinations.

Most of us didn’t go to school to learn how to value intangible assets. How do you measure the fair value of an IPR&D project in the “monkey phase” of trails? Or the fair value of a brand that the acquirer intends to “kill” post-acquisition? Who knows? However, what we do know is that market participant assumptions must be considered and, when you don’t know how to do something, ask for help! That’s why both preparers and auditors often rely on the work of specialists for such matters.

Issue #4: Accounting for Contingent Consideration

Any contingent consideration included in the business combination’s purchase agreement should be included in the purchase price. The amount to be included is measured at fair value at the date of the acquisition, not the expected payout at settlement. The probability of payment should be considered when determining fair value, not whether to record contingent consideration or not. In addition, the fair value should include the time value of money and, like all fair value measurements in accordance with ASC 820, based on market participant assumptions.

The acquirer must remeasure the contingent consideration each reporting period. And, since this remeasurement is recorded through current period earnings, this can lead to an incentive for management to overestimate contingent consideration at the acquisition date. Auditors should be careful in this area!

Issue #5: Determining the Measurement Period

The final accounting issue relates to an area where a lot of people misinterpret the guidance. Many companies believe they have up to one year to finalize the purchase price allocation, with any adjustments being recorded by an adjustment to goodwill. This is not true! The FASB didn’t give entities a one-year “blank check” to get the accounting straight. First, entities have to document and disclose within the financial statements which items are accounted for provisionally at the acquisition date. Second, the measurement period is not always one year. Once you have the information needed to determine the fair value of an asset or liability initially recorded provisionally, the measurement period ends.

Also check out this video, which summarizes these top 5 business combination accounting issues.

Accounting Differences: ASC 805 vs. IFRS 3

The guidance within ASC 805 and IFRS 3 is largely converged. However, there are still differences in the accounting for business combinations under U.S. GAAP as compared to IFRS.

Although this is not an all-inclusive list, here are the top differences between U.S. GAAP and IFRS in the area of business combinations:

Accounting for Pre-acquisition Contingencies

Under ASC 805, all contingencies, including contingent assets, are recognized at fair value at the acquisition date, if fair value can be reasonably determined during the measurement period. If fair value cannot be reasonably determined, then such contingencies are measured using existing guidance. In other words, contingent liabilities that are probable would be measured at the best estimate of expected payment, while contingent assets would not be recorded.

Under IFRS 3, contingent liabilities, as defined in IAS 37, should be measured at fair value. However, entities are not permitted to recognize a contingent asset in a business combination.

Measurement of Noncontrolling Interest

Noncontrolling interest is the portion of equity (ownership interest) in a subsidiary not attributable directly or indirectly to the parent.

Under ASC 805, noncontrolling interest is measured at fair value.

Under IFRS 3, noncontrolling interests that are present ownership interests and entitle their holders to a proportionate share of the acquiree’s net assets in the event of liquidation may be measured at either:

• Fair value, or
• The noncontrolling interest’s proportionate share of the fair value of the acquiree’s identifiable net assets

This choice is available on a transaction-by-transaction basis. All other components of noncontrolling interest are measured at fair value unless another measurement basis is required by IFRS.

Measurement Period Adjustments

As noted above, the measurement period is the period during which adjustments can be made to amounts originally recorded at the acquisition date, with the corresponding entry to goodwill.

ASC 805 requires such adjustments to be made prospectively by adjusting amounts in the period in which the adjustment is determined.

IFRS 3 requires such adjustments to be made retrospectively by “recasting” prior periods.

Pushdown Accounting

Pushdown accounting refers to establishing a new basis of accounting in the separate financial statements of the acquired entity (or acquiree) after it is acquired by an acquirer. In other words, the cost of the acquisition is reflected in the separate financial statements of the acquired subsidiary, with the parent (acquirer) “pushing down” the fair values assigned to the assets and liabilities acquired, as well as goodwill.

ASC 805 gives entities the option to apply pushdown accounting and this election may be elected each time there is a change-in-control event in which an acquirer obtains control of the acquiree. If elected, pushdown accounting is irrevocable.

There is no equivalent guidance within IFRS 3 and, therefore, it is unclear whether pushdown accounting is acceptable under IFRS.

Combinations Involving Entities under Common Control

Combinations between entities or businesses under common control are outside the scope of ASC 805. A common example is when one subsidiary acquires another subsidiary, both of which are under the common control of the same parent entity. Generally, these transactions are recorded carrying forward the historical cost basis of the assets and liabilities of the parent.

IFRS 3 does not specifically address combinations between entities under common control. In practice, entities develop and consistently apply an accounting policy related to such transactions. In other words, they would either carry forward the historical cost basis of the parent, as required by U.S. GAAP, or apply acquisition accounting where the assets and liabilities acquired are recorded at fair value at the acquisition date.

Looking for more information on GAAP differences? We encourage you to download the various GAAP differences books published by the Big 4 firms.

Online Learning

Our eLearning courses are designed to help accounting firms and companies, as well as individuals. We offer our U.S. GAAP and IFRS eLearning courses through our online eLearning platform we call the Revolution. Our courses are continually updated, and new content is always being added, so check back often!

These are not your typical eLearning courses. We try to make them fun, such as using celebrity couples (that broke up) as the theme for our accounting for business combinations eLearning courses. Check out the course details below:

Business combinations eLearning courses

Business Combinations: Overview of ASC 805 – Accounting for business combinations under ASC 805 can be quite complex! Do you know the difference between a business combination and an asset acquisition under U.S. GAAP? The answer to this question is important because the accounting is totally different! No worries. We have you covered in this CPE-eligible, eLearning course (1.5 CPE)! In this online course we begin with the definition of a business and whether a transaction falls within the scope of ASC 805. We then provide you with an overview of the 4-step acquisition method set out in ASC 805, including whether assets and liabilities acquired should be recognized apart from goodwill and, if so, how they should be measured. If you’re new to the accounting for business combinations under U.S. GAAP, this course is a good place to start!
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Business Combinations: Advanced Issues and Disclosures – Now that you are familiar with the basic accounting for business combinations under ASC 805, you’re ready to level up! This CPE-eligible, eLearning course (1.0 CPE) dives deeper into more advanced business combination issues, including exceptions to the general recognition and measurement guidelines for acquired assets and liabilities. We discuss the accounting for noncontrolling interests, which arise when an entity acquires less than 100% of a business. And what about measurement period adjustments? You learn that the measurement period is not always one year and, more importantly, it is not a blank check to throw everything into goodwill! This only course concludes with a discussion of the ASC 805 disclosure requirements.
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Business Combinations: Application of ASC 805 – Are you ready to put your ASC 805 knowledge to the test? After a brief review of the accounting for business combinations using the 4-step acquisition method, this CPE-eligible, eLearning course (0.5 CPE) provides you an opportunity to apply that knowledge by walking through an example acquisition and requiring you to identify the proper accounting treatment under U.S. GAAP. Do you think you’re up for the challenge? We bet you are!
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We’ve bundled all these eLearning courses into a US GAAP business combinations course collection for big savings!

Business Combinations: Key Concepts – Accounting for business combinations can be quite complex; therefore, it’s important to understand the basic key concepts! In this CPE-eligible, eLearning course (1.0 CPE) we cover the definition of a business and the scope of IFRS 3, discussing the difference between the accounting for business combinations as compared to asset acquisitions. The course then provides an overview of the 4-step acquisition method before jumping into the details of the first two steps, identifying the acquirer and determining the acquisition date, which are all about control! If you’re new to accounting for business combinations under IFRS, this course is a good place to start!
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Business Combinations: Application of Acquisition Method and Other Considerations – Now that you’ve been introduced to IFRS 3, it’s time to take a deeper dive into the accounting for business combinations under IFRS. After a quick refresher on the content discussed in our first online course, this CPE-eligible, eLearning course (1.0 CPE) covers the last two steps of the 4-step acquisition method within IFRS 3, specifically identifying and measuring the assets and liabilities acquired and calculating goodwill. There are a few exceptions to the general principle of recognizing the net assets acquired at fair value and we cover those in this course. This online course also covers other important issues related to business combinations, specifically accounting for noncontrolling interests, step acquisition, and measurement period adjustments.
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We’ve bundled all these eLearning courses into an IFRS business combinations course collection for big savings!

Accounting Resources

There are numerous resources available related to the accounting for business combinations under both ASC 805 and IFRS 3. To save you time, we’ve compiled a list of resources below to assist you in your journey to learn more about this exciting topic!

Resources from GAAP Dynamics:

We’ve written several blog posts on a variety of topics related to the accounting for business combinations. Click on the links below to learn more.

Accounting for Business Combinations: An Overview of ASC 805
Struggling with accounting for business combinations? This post provides you with an overview of ASC 805 and links to helpful resources.

5 Issues Related to Accounting for Business Combinations under ASC 805
Accounting for and auditing business combinations under ASC 805 is tricky! This post talks about the top five issues associated with these transactions.

Navigating ASC Topic 805: Business Combination or Asset Purchase?
This post explores why determining whether the transaction is an asset purchase or business combination is a common issue under ASC 805.

Intangible Assets (ASC 350) and Business Combinations (ASC 805) [Updated blog post coming soon!]
The next post in our series associated with business combinations: intangible assets (ASC 350) acquired in a business combination (ASC 805).

Accounting for Business Combinations ASC 805: Contingent Consideration
Contingent consideration is one of the trickiest issues when accounting for business combinations under ASC 805. In this post, we explore this issue in further detail.

Business Combinations (ASC 805): Measurement Period Adjustments
This post explores an entity’s ability to record measurement period adjustments when accounting for business combinations under ASC 805.

Merger of Equals? Business Combinations Must Have an Acquirer!
Merger of equals? Not possible! Recent headlines forced me to write a post explaining how to identify the acquirer in a business combination (ASC 805 / IFRS 15).

Raising the Bar: New Definition of a Business under ASC 805
Under ASC 805, the definition of a business is changing. The FASB recently issued ASU 2017-01 with a better framework for applying this definition.

Is it a Business (ASC 805)? ASU 2017-01 Provides Clarity!
The definition of a business (ASC 805) was too broad. ASU 2017-01 clarified the situation and now it looks like the IASB has plans for IFRS 3 too!