A.12 Acquisition-Related Costs
ASC 805-10-25-23 states:
Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
We believe that the acquirer’s direct expenses for acquisition-related costs should not be recognized
in the acquiree’s separate financial statements unless the acquirer incurred such costs on behalf of,
or for the benefit of, the acquiree. SAB Topic 1.B states that “[i]n general, the staff believes that the
historical income statements of a registrant should reflect all of its costs of doing business. Therefore,
in specific situations, the staff has required the subsidiary to revise its financial statements to include
certain expenses incurred by the parent on its behalf.” Similarly, SAB Topic 5.T discusses the concept
of reflecting costs incurred by a shareholder on behalf of a company in the company’s financial
statements. SAB Topic 5.T states that a transaction in which “a principal stockholder pays an expense for the company, unless the stockholder’s action is caused by a relationship or obligation completely
unrelated to his position as a stockholder or such action clearly does not benefit the company,” should
be reflected as an expense in the company’s financial statements, with a corresponding credit to APIC.
While the guidance in SAB Topic 1.B and SAB Topic 5.T applies to public companies, we believe that
private companies should also apply this guidance when evaluating the recognition of acquisition-related
costs.
An acquiree will most likely incur acquisition-related costs associated with the business combination, such as legal fees or sell-side due diligence costs. The acquiree should recognize those costs in its separate financial statements in the periods in which the services are received. An acquirer may sometimes pay the liabilities of the acquiree on, or in close proximity to, the acquisition date. In such cases, it is necessary to determine whether the cash distributed should be reported as consideration transferred to effect the acquisition or as cash paid to settle a liability assumed in the acquisition. (See Section 4.12.1 for more information about making this determination.) If it is determined to be a liability assumed, and if the acquiree is the legal obligor for those costs, the liability should be recognized in the acquiree’s separate postacquisition financial statements regardless of whether it elects pushdown accounting.