B.3 Measurement | DART – Deloitte Accounting Research Tool

B.3.1 Measurement by the Receiving Entity

ASC 805-50

Transfer Date Recognition

25-2 When accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests shall initially recognize the assets and liabilities transferred at the date of transfer. See the Transactions Between Entities Under Common Control Subsection of Section 805-50-45 for guidance on the presentation of financial statements for the period of transfer and comparative financial statements for prior years.

Transfer Date Measurement

30-5 When accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests shall initially measure the recognized assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. If the carrying amounts of the assets and liabilities transferred differ from the historical cost of the parent of the entities under common control, for example, because pushdown accounting had not been applied, then the financial statements of the receiving entity shall reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control.

Under ASC 805-50-30-5, there is no change in basis for the net assets received because there is no change in control over the net asset or equity interests from the parent’s perspective. A difference between any proceeds transferred and the carrying amounts of the net assets received is recognized in equity (generally APIC) in the receiving entity’s separate financial statements.

B.3.1.1 Difference in Carrying Amounts Between the Parent and Transferring Entity

Sometimes, the carrying amounts of the net assets in the transferring entity’s financial statements differ from those in the parent’s consolidated financial statements. This can occur, for example, if the net assets being transferred were acquired in a business combination but the transferring entity did not apply pushdown accounting at the time of their acquisition. Under ASC 805-50-30-5, “the financial statements of the receiving entity shall reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control.“ As a result, the receiving entity effectively applies pushdown accounting in its separate financial statements. We believe that the historical cost of the parent refers to the historical cost of the ultimate parent or controlling shareholder. (See Appendix A for more information about the application of pushdown accounting.) Therefore, the amounts of the net assets derecognized by the transferring entity will not be consistent with the amounts of the net assets recognized by the receiving entity.

Example B-4

Common-Control Transfer That Triggers Pushdown Accounting

Parent transfers its ownership interest in one of its subsidiaries, Subsidiary B, to another of its subsidiaries, Subsidiary A, in exchange for additional shares of A. The carrying value of B’s net assets in Parent’s consolidated financial statements is $1,000, and the carrying value of B’s net assets in its separate financial statements is $500. The carrying value of B’s net assets differs in Parent’s consolidated financial statements and in B’s separate financial statements because B did not apply pushdown accounting in its separate financial statements when Parent acquired control of B.

Before Transfer

After Transfer

Subsidiary A’s separate financial statements should reflect B’s net assets at their carrying values, as presented in Parent’s consolidated financial statements. The nature of the transfer is that Parent is transferring its investment in B to A.

B.3.1.2 Conforming Accounting Principles

ASC 805-50

30-6 In some instances, the entity that receives the net assets or equity interests (the receiving entity) and the entity that transferred the net assets or equity interests (the transferring entity) may account for similar assets and liabilities using different accounting methods. In such circumstances, the carrying amounts of the assets and liabilities transferred may be adjusted to the basis of accounting used by the receiving entity if the change would be preferable. Any such change in accounting method shall be applied retrospectively, and financial statements presented for prior periods shall be adjusted unless it is impracticable to do so. Section 250-10-45 provides guidance if retrospective application is impracticable.

While we generally expect subsidiaries of a common parent to apply the same accounting principles to similar assets or liabilities, in limited circumstances it is acceptable for the accounting policies of subsidiaries of a common parent to differ. For example, one subsidiary of a parent may apply the LIFO method to account for inventory while another of its subsidiaries may use a different method for similar inventories. Therefore, in some cases, the receiving entity and the transferring entity may use different accounting methods to account for certain assets or liabilities. ASC 805-50-30-6 states that in a common-control transaction, “the carrying amounts of the assets and liabilities transferred may be adjusted to the basis of accounting used by the receiving entity if the change would be preferable.“ Thus, if the receiving entity applies a different accounting principle and elects to adopt that accounting principle for the assets or liabilities received, it must determine that the method it applies is preferable to the method applied by the transferring entity and must apply the change in accounting principle retrospectively in all periods presented, unless it is impracticable to do so, in accordance with the guidance in ASC 250. We believe that, in situations in which the accounting principle applied by the receiving entity is not preferable, the receiving entity has two options: (1) to continue to account for the transferred assets and liabilities using the accounting principle applied by the transferring entity or (2) to voluntarily adopt for its assets or liabilities the preferable accounting principle the transferring entity applies in accordance with ASC 250.

B.3.2 Measurement by the Transferring Entity

ASC 805-50 provides measurement guidance for the receiving entity but not for the transferring entity. Because of this lack of authoritative guidance, practice has developed such that the transferring entity’s measurement generally follows the receiving entity’s. That is, the transferring entity derecognizes the net assets transferred at their carrying amounts and generally recognizes no gains or losses. A difference between any proceeds received and the carrying amounts of the net assets transferred is recognized in equity (generally APIC) in the transferring entity’s separate financial statements.

However, in certain circumstances, the transferring entity must remeasure certain assets to fair value and recognize any gains or losses before they are transferred to the receiving entity. As discussed below, such circumstances represent exceptions to the principle that assets and liabilities should be transferred at their historical carrying amounts.

B.3.2.1 Exception for Transfers of Financial Assets

ASC 860-10-55-78 states, in part, that “a transfer [of financial assets] from one subsidiary (the transferor) to another subsidiary (the transferee) of a common parent would be accounted for as a sale in each subsidiary’s separate-entity financial statements” if (1) all the conditions in ASC 860-10-40-5 are met and (2) the receiving entity is not consolidated by the transferring entity. ASC 860-10-40-4 also indicates that “[i]n a transfer between two subsidiaries of a common parent, the [transferring entity] shall not consider parent involvements with the transferred financial assets in applying paragraph 860-10-40-5.“ Therefore, if those conditions are met, the transferring entity recognizes a gain or loss on a sale of financial assets to the receiving entity in its separate financial statements. However, any gain or loss would be eliminated in the parent’s consolidated financial statements.

The guidance in ASC 860-10-40-5 does not apply to transfers of financial assets between a parent and its subsidiaries, only to transfers between subsidiaries of a common parent. Entities should consider the guidance in ASC 860-10-55-17D if the transfer of financial assets is between a parent and its subsidiary.

We believe that the guidance in ASC 860-10 applies to transfers of financial assets regardless of whether the nature of such transfers is recurring or nonrecurring. That is, if a transfer’s nature is consistent with that of a transfer of financial assets, entities should apply the guidance in ASC 860-10 rather than the guidance in the “Transactions Between Entities Under Common Control“ subsections of ASC 805-50 or the exception for recurring transactions discussed in the next section. In addition, the guidance in ASC 860-10 does not apply to a transfer of shares or an interest in a subsidiary unless the subsidiary primarily consists of financial assets (i.e., the transfer is essentially a transfer of financial assets). In some cases, an entity may need to use judgment to determine the nature of the transfer (i.e., financial assets or net assets).

B.3.2.2 Exception for Recurring Transactions for Which Valuation Is Not in Question, Such as Those Involving Inventory

A transfer of net assets between entities under common control is typically nonrecurring. However, for recurring transfers of assets (rather than net assets) whose valuation is not in question, such as routine inventory transfers in the ordinary course of business, the transferring entity typically recognizes a gain in its separate financial statements, and the receiving entity recognizes the assets at their stepped-up values in its separate financial statements. The accounting for routine transfers between entities under common control was addressed in EITF Issue 85-21, which states, in part:

The SEC Observer stated that the SEC staff’s views on carrying over historical cost to record, in the separate financial statements of each entity, transfers between companies under common control or between a parent and its subsidiary run primarily to transfers of net assets (as in a business combination) or long-lived assets. Those views would not normally apply to recurring transactions for which valuation is not in question (such as routine transfers of inventory) in the separate financial statements of each entity that is a party to the transaction. [Emphasis added]

Although the EITF did not reach a consensus on this Issue, the above guidance continues to be applied in practice. Any gain recognized in the transferring entity’s separate financial statements is eliminated in the parent’s consolidated financial statements unless the sale is to a regulated affiliate and the criteria in ASC 980-810-45-1 and 45-2 are met.

As described in the SEC Observer’s comments on EITF Issue 85-21, the SEC staff’s views apply to routine transfers of assets rather than transfers of “net assets (as in a business combination) or long-lived assets.” An entity may need to apply significant judgment to determine whether certain transactions (e.g., certain perpetual or exclusive licensing arrangements) represent (1) a recurring transaction for which valuation is not in question or (2) a transfer of net assets or long-lived assets. Therefore, discussion with accounting advisers is encouraged.

B.3.2.3 Goodwill

If the net assets or equity interest transferred in a common-control transaction constitute a business in accordance with ASC 805-10 (see Section 2.4), the transferring entity will need to determine how much goodwill to include with the net assets transferred. If the net assets or equity interest transferred do not constitute a business, no goodwill would be transferred to the receiving entity.

An entity must often use judgment in determining the amount of goodwill to include with the net assets transferred. Sometimes this goodwill amount may be specifically identified, while other times it may be based fully or partially on a relative fair value allocation, in which case the entity would be expected to consider the guidance in ASC 350-20-40-1 through 40-7. For example, an entity may specifically identify the goodwill to be included in the net assets transferred when the net assets consist entirely of a subsidiary previously acquired in a business combination. In this scenario, an entity typically would identify the goodwill related to the prior acquisition as included in the net assets transferred, regardless of whether the subsidiary had previously applied pushdown accounting. However, an entity may need to use greater judgment when assessing transferred assets that do not entirely constitute a subsidiary previously acquired in a business combination. For example, an entity may transfer a subsidiary that was acquired in a prior business combination and other businesses that were not. In this scenario, the entity may specifically identify the goodwill for the subsidiary that was previously acquired and may use a relative fair value allocation for the rest of the transferred businesses. Alternatively, the entity may determine that using a relative fair value allocation for the entire transfer is appropriate.

A common-control transfer may also result in a reorganization of reporting structure in the receiving entity’s, transferring entity’s, or parent’s financial statements. Such a reorganization could result in changes in operating segments and reporting units (see Section B.3.3.2).

B.3.3 Other Issues That May Affect the Receiving or Transferring Entities

B.3.3.1 Income Taxes

Paragraphs 270–272 of FASB Statement 109 had provided guidance on accounting for income taxes in a business combination accounted for as a pooling of interests. Because FASB Statement 141 eliminated the pooling-of-interests method, the guidance in Statement 109 was nullified and was not codified. However, we believe it is appropriate to continue to apply that guidance to a common-control transfer. That guidance stated:

270. The separate financial statements of combining enterprises for prior periods are restated on a combined basis when a business combination is accounted for by the pooling-of-interests method. [Footnote omitted] For restatement of periods prior to the combination date, a combining enterprise’s operating loss carryforward does not offset the other enterprise’s taxable income because consolidated tax returns cannot be filed for those periods. However, provisions in the tax law may permit an operating loss carryforward of either of the combining enterprises to offset combined taxable income subsequent to the combination date.

271. If the combined enterprise expects to file consolidated tax returns, a deferred tax asset is recognized for either combining enterprise’s operating loss carryforward in a prior period. A valuation allowance is necessary to the extent it is more likely than not that a tax benefit will not be realized for that loss carryforward through offset of either (a) the other enterprise’s deferred tax liability for taxable temporary differences that will reverse subsequent to the combination date or (b) combined taxable income subsequent to the combination date. Determined in that manner, the valuation allowance may be less than the sum of the valuation allowances in the separate financial statements of the combining enterprises prior to the combination date. That tax benefit is recognized as part of the adjustment to restate financial statements on a combined basis for prior periods. The same requirements apply to deductible temporary differences and tax credit carryforwards.

272. A taxable business combination may sometimes be accounted for by the pooling-of-interests method. The increase in the tax basis of the net assets acquired results in temporary differences. The deferred tax consequences of those temporary differences are recognized and measured the same as for other temporary differences. As of the combination date, recognizable tax benefits attributable to the increase in tax basis are allocated to contributed capital. Tax benefits attributable to the increase in tax basis that become recognizable after the combination date (that is, by elimination of a valuation allowance) are reported as a reduction of income tax expense.

For more information about income tax issues related to common-control transactions, see Deloitte’s Roadmap Income Taxes.

B.3.3.2 Reorganization of Reporting Structure and Goodwill Impairment Testing

A common-control transfer may result in a reorganization of the reporting structure in the receiving entity’s, the transferring entity’s, or the parent’s financial statements. Thus, if any of the entities involved (i.e., the receiving entity, the transferring entity, or the parent) in the common-control transfer is an SEC registrant, it must assess whether the common-control transfer causes a change in the composition of its reportable segments. Under ASC 280-10-50-34, “[i]f a public entity changes the structure of its internal organization in a manner that causes the composition of its reportable segments to change or the public entity changes the segment information that is regularly provided to the chief operating decision maker in a manner that causes the identification of significant segment expenses to change, the corresponding information for earlier periods, including interim periods, shall be recast unless it is impracticable to do so.”

Similarly, entities must also assess whether the common-control transfer results in a change in reporting units. ASC 350-20-35-45 states that “[w]hen an entity reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, the guidance in paragraphs 350-20-35-39 through 35-40 shall be used to reassign assets and liabilities to the reporting units affected [but] goodwill shall be reassigned to the reporting units affected using a relative fair value allocation approach similar to that used when a portion of a reporting unit is to be disposed of (see paragraphs 350-20-40-1 through 40-7).” ASC 350-20-40-1 through 40-7 provide guidance on allocating goodwill when a portion of a reporting unit is disposed of.

We do not believe that the receiving entity, the transferring entity, or the parent needs to retrospectively test goodwill for impairment in the historical periods before the date of the transfer. However, ASC 350-20-40-7 requires that when a portion of a reporting unit is disposed of, an entity must test for impairment any “goodwill remaining in the portion of the reporting unit to be retained.” Therefore, if the transferred net assets represent a business and only a portion of a reporting unit of the transferring entity, the transferring entity must test the remaining portion of the goodwill in the reporting unit for impairment as of the date of the transfer. Similarly, if the transferred net assets represent a business and only a portion of a reporting unit of the parent, the parent must test the remaining portion of the goodwill in the reporting unit for impairment as of the date of the transfer. In addition, we believe that the receiving entity should consider whether, as of the date of the transfer, it is more likely than not that the fair value of any of its reporting units is below its carrying amount as a result of the transfer. If so, the receiving entity should test the reporting unit for impairment on the date of the transfer in accordance with ASC 350-20.

B.3.3.3 Noncontrolling Interests in a Common-Control Transaction

The ASC master glossary defines a noncontrolling interest (which is sometimes called a “minority interest”) as “[t]he portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.”

If there is an outstanding noncontrolling interest in either the receiving entity or the transferring entity, the effect of the transfer on the noncontrolling interest should be accounted for in accordance with ASC 810-10. Any changes in the parent’s ownership interest in a subsidiary while it maintains control of the subsidiary are accounted for as an equity transaction. The carrying amount of the noncontrolling interest is adjusted to reflect its change in ownership in the subsidiary. See the implementation guidance in ASC 810-10-55 for examples illustrating how to account for a change in the parent’s ownership interest in a subsidiary. Also see Deloitte’s Roadmap Noncontrolling Interests.