Did you realize that M&A activity has resulted in more than $10 TRILLION in domestic activity since 2013!?! (This was one of many interesting M&A facts I recently read in Deloitte’s The state of the deal: 2020 M&A Trends report). Recently announced mergers include Morgan Stanley buying E*Trade ($13 billion!), the potential megamerger of T-Mobile and Sprint ($26.5 billion!) and the 2019 SunTrust/BBT merger (hello Truist!) for $28.2 billion. All of this merger activity has put the accounting for business combinations under ASC 805 in the spotlight.
Are you struggling with accounting for business combinations under ASC 805? If so, I have great news! We’ve recently published a collection of three online eLearning courses covering the accounting for business combinations and it’s currently on sale! In this post, we’ll walk you through the important requirements of ASC 805, as well as provide you with a “sneak peek” of our ASC 805 training.
Course #1: Overview of ASC 805
A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. The key here is what constitutes a “business.” If the acquirer obtains a business, then the guidance in ASC 805, Business Combinations, will need to be applied. If the acquirer does not obtain a business, then the transaction is accounted for as an asset acquisition, with vastly different accounting requirements than under ASC 805.
So, what exactly constitutes a business? Well, the FASB recently updated that definition, which we discuss in this post. Under this new guidance, 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. The new guidance also provides a framework to evaluate when an input and a substantive process are present as well as provide more stringent criteria for sets without outputs to be considered businesses.
ASC 805 requires a business combination to be accounted for using the acquisition method, which can be separated into four steps:
- Identify the acquirer
- Determine the acquisition date
- Recognize and measure the identifiable assets acquired and liabilities assumed
- Recognize and measure goodwill
In a business combination, one of the combining entities needs to be identified as the acquirer. There is actually no such thing as a “merger of equals,” as we wrote about in this post using the BB&T and SunTrust merger as an example.
The date the acquirer obtains control is the acquisition date and this is the date the magic happens! On this date we determine the fair value of the assets acquired and liabilities assumed, we determine goodwill, and the acquirer begins to consolidate its new subsidiary.
Once the acquisition date has been determined, the next step is to recognize and measure the identifiable assets acquired and liabilities assumed. The key to this step is “identifiable”, meaning the assets/liabilities must be part of what the acquirer and acquiree exchanged in the combination, rather than the result of separate transactions. This often results in recognizing some assets/liabilities that the acquiree had not previously recognized as assets/liabilities in its financial statements (for example, internally developed intangible assets). All identifiable assets/liabilities must be measured at fair value, in accordance with ASC 820, Fair Value Measurement, as of the acquisition date. Determining fair value in accordance with ASC 820 is an entirely separate beast, but luckily we also have ASC 820 online training available!
To wrap-up the acquisition method, the acquirer must determine what they paid for the business (and there can be many components to the purchase price, including contingent consideration) minus the fair value of the identifiable assets acquired/liabilities assumed to determine goodwill.
Course #2: Advanced Issues and Disclosures
I can’t stress enough how important it is for the acquirer to properly classify the identifiable assets acquired and liabilities assumed at the acquisition date! ASC 805 provides certain classification guidelines, which we discuss in detail in this course.
Additionally, we dive into the various exceptions to the recognition and measurement principles (which are applied in Step 3 of the acquisition method) through specific examples and scenarios, including share-based payment awards, reacquired rights, and contingencies (just to name a few):
And don’t forget about noncontrolling interests! Any time an acquirer does not acquire 100% of the acquiree, it means that some other entity (or entities) own the remaining part of the acquiree and these interests owned by others are referred to as “noncontrolling interests.” When applying the acquisition method where the acquirer does not purchase 100% of the acquiree, the acquirer must recognize and measure the full fair value of the identifiable assets acquired/liabilities assumed (i.e., “full step-up”), AND the fair value of the noncontrolling interest in the acquiree.
And lastly, if the accounting for the business combination is not complete by the end of the acquirer’s reporting period, the acquirer reports provisional amounts for any incomplete items. During the measurement period, the acquirer then retrospectively adjusts those provisional amounts as it obtains the necessary information or, alternatively, determines that the necessary information will not be obtainable by the end of the measurement period. But how long is the measurement period? Check out our blog on measurement period adjustments and take our course to learn more!
Course #3: Application of ASC 805
The third course in our collection might be my favorite! It’s application-based, requiring you to use your knowledge of ASC 805 (hopefully from the first two courses as described above) to determine the proper accounting for a hypothetical business combination between Harry Inc. and Markle Corp. (and I have a feeling he does not have a bargain purchase in this scenario!).
We’ve summarized the top issues related to the accounting for business combinations in this post and compiled a listing of helpful resources related to ASC 805. Of course, if you’re ready to take a dive into ASC 805 training, our three-course collection is currently on sale!
About GAAP Dynamics
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