A.11 Acquisition-Related Liabilities
ASC 805-50
30-12 An acquiree shall recognize in its separate financial statements any acquisition-related liability incurred by the acquirer only if the liability represents an obligation of the acquiree in accordance with other applicable Topics.
ASC 805-50 provides guidance on applying pushdown accounting to acquisition-related liabilities
that the acquirer (or acquiree) incurs at the time of the acquisition (e.g., acquisition-related debt or
contingent consideration). Such liabilities differ from liabilities assumed, which were liabilities of the
acquiree before the acquisition that the acquirer assumes as part of the acquisition.
The Background Information and Basis for Conclusions of ASU 2014-17 notes that
the Task Force concluded that an acquiree should “recognize a liability incurred by
the acquirer only if that obligation is the [acquiree’s] liability” (i.e., the
liability is the acquiree’s legal obligation even if the acquirer incurred the
liability on behalf of the acquiree). The Background Information and Basis for
Conclusions also cites the guidance in ASC 405-40, which applies to obligations
related to joint-and-several liability arrangements for which the total amount under
the arrangement is fixed as of the reporting date. ASC 405-40-30-1 requires entities
to recognize and measure liabilities resulting from joint-and-several liability
arrangements as the sum of the following:
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The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors.
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Any additional amount the reporting entity expects to pay on behalf of its co-obligors. If some amount within a range of the additional amount the reporting entity expects to pay is a better estimate than any other amount within the range, that amount shall be the additional amount included in the measurement of the obligation. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range shall be the additional amount included in the measurement of the obligation.
A.11.1 Acquisition-Related Debt
Acquisition-related liabilities include debt incurred at the time of the acquisition. Under ASC 805-50-30-12, an acquiree must recognize any acquisition-related debt in its separate financial statements only
if it is required to do so under other GAAP. Thus, acquisition-related debt should be recognized in the
acquiree’s separate financial statements only if (1) the debt is the legal obligation of the acquiree or
(2) the acquirer and acquiree are joint and severally liable and the criteria in ASC 405-40 are met. We
believe that if the acquiree recognizes the acquisition-related debt in its separate financial statements, it
should also recognize the related interest expense and debt issue costs.
An acquiree may be required to recognize acquisition-related debt and liabilities in its separate financial
statements as a result of other GAAP even if it does not elect to apply pushdown accounting.
For example, if the acquirer incurs debt to finance the acquisition but the acquiree is named as the legal
obligor, that debt would need to be recognized in the acquiree’s separate financial statements even if
the acquiree does not apply pushdown accounting. This could lead to the acquiree’s presentation of
negative equity in its financial statements if pushdown accounting is not elected.
Before being rescinded by SAB 115, SAB Topic 5.J expressed the SEC staff’s views on the pushdown of
acquisition-related debt to the acquiree’s separate financial statements. SAB Topic 5.J stated that the
parent’s acquisition-related debt, related interest expense, and allocable debt issue costs should be
included in a subsidiary’s financial statements in any of the following circumstances:
- The subsidiary was to assume the parent’s debt “either presently or in a planned transaction in the future.”
- The proceeds of a debt or equity offering of the subsidiary were to be “used to retire all or a part of [the parent’s] debt.”
- The subsidiary guaranteed or pledged “its assets as collateral for [the parent’s] debt.”
Because an acquiree’s assets are often pledged as collateral against an acquirer’s debt, we believe
that the rescission of SAB Topic 5.J will result in fewer instances in which acquisition-related debt is
recognized in the acquiree’s separate financial statements.
A.11.2 Contingent Consideration
ASC 805-10-20 defines contingent consideration as follows:
Usually an obligation of the acquirer to transfer additional assets or equity interests to the former owners of
an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions
are met. However, contingent consideration also may give the acquirer the right to the return of previously
transferred consideration if specified conditions are met.
ASC 805-30-25-5 requires that an acquirer recognize any contingent consideration at fair value on the
acquisition date “as part of the consideration transferred in exchange for the acquiree.”
ASC 805-50 does not specify whether contingent consideration should be pushed down to the
acquiree’s separate financial statements. We believe that the general principles for acquisition-related
liabilities incurred by the acquirer apply and that contingent consideration should be recognized in the
acquiree’s separate financial statements only if it is the acquiree’s legal obligation to pay (or legal right to
receive) the contingent consideration. If contingent consideration is not pushed down to the acquiree’s
separate financial statements, the acquiree would not recognize any changes in the fair value of the
contingent consideration in its separate statement of operations.