Appendix C — Accounting for Asset Acquisitions

C.1 Overview and Scope

The term “asset acquisition” is used to describe an acquisition of an asset, or a group of assets, that does not meet the U.S. GAAP definition of a business. An asset acquisition may also involve the assumption of liabilities. Entities should use the guidance in ASC 805-10 to determine whether the acquired assets meet the definition of a business. See Section 2.4 for more information.

An asset acquisition is accounted for in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50 by using a cost accumulation model. In a cost accumulation model, the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. By contrast, a business combination is accounted for by using a fair value model under which the assets and liabilities are generally recognized at their fair values, and the difference between the consideration transferred, excluding acquisition-related costs, and the fair values of the assets and liabilities is recognized as goodwill. As a result, there are significant differences between the accounting for an asset acquisition and the accounting for a business combination.

Changing Lanes

The FASB had a project to improve the accounting for asset acquisitions and business combinations by narrowing the differences between the two accounting models. However, at its June 15, 2022, meeting, the FASB decided to remove this project from its agenda. As a result, the differences between the two acquisition models will continue to exist in practice.

C.1.1 Summary of Significant Differences Between the Accounting for a Business Combination and the Accounting for an Asset Acquisition

The table below summarizes the significant differences between the accounting for a business combination and that for an asset acquisition. Each of these differences is described in further detail in later sections.

Issue	Accounting in a Business Combination	Accounting in an Asset Acquisition
General principle	Fair value model: assets and liabilities are recognized at fair value, with certain exceptions.	Cost accumulation model: the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values, with some exceptions. This allocation results in the recognition of those assets at other than their fair values (see Sections C.1 and C.3).
Scope	Acquisition of a business as defined in ASC 805-10.	Acquisition of an asset or a group of assets (and liabilities) that does not meet the definition of a business in ASC 805-10 or qualify as a VIE under ASC 810-10 (see Section C.1.2).
Acquisition-related costs or transaction costs	Acquisition-related costs are expensed as incurred, except for costs of issuing debt and equity securities, which are accounted for under other GAAP.	Direct and incremental costs are included in the cost of the acquisition, except for costs of issuing debt and equity securities, which are accounted for under other GAAP. Indirect costs are expensed as incurred (see Section C.2.3).
Contingent consideration	Recognized at fair value and classified as a liability, equity, or an asset on the acquisition date on the basis of the terms of the arrangement. Subsequently, any changes in the fair value of contingent consideration classified as a liability or as an asset are recognized in earnings until settled.	Contingent consideration that is accounted for as a derivative is recognized at fair value under ASC 815. Otherwise, such consideration generally is recognized under ASC 450 when it becomes probable and reasonably estimable or when the contingency is resolved by analogy to FASB Statement 141 (see Section C.2.2).
Form of consideration given — Acquiring entity’s equity instruments (measurement date)	The acquiring entity’s equity instruments are required to be measured at fair value as of the acquisition date (see Section 5.5).	ASC 805-50 does not provide guidance on the measurement date for the acquiring entity’s equity securities issued as consideration in an asset acquisition (see Sections 5.5 and C.2).
Goodwill	If the sum of the consideration transferred, the fair value of any noncontrolling interests, and the fair value of any previously held interests exceeds the sum of the identifiable assets acquired and liabilities assumed, goodwill is recognized as the amount of the excess.	Goodwill is not recognized. Instead, any excess of the cost of the acquisition over the fair value of the net assets acquired is allocated to certain assets on the basis of relative fair values (see Section C.3).
Gain from bargain purchase	Recognized in earnings on the acquisition date.	Generally not recognized in earnings. Instead, any excess of the fair value of the net assets acquired over the cost of the acquisition is typically allocated to certain assets on the basis of relative fair values (see Section C.3).
Contingencies	Measured at fair value, if determinable; otherwise, measured at their estimated amounts if probable and reasonably estimable. If such assets or liabilities cannot be measured during the measurement period, they are accounted for separately from the business combination in accordance with ASC 450.	Accounted for in accordance with ASC 450 on the acquisition date and subsequently. Loss contingencies are recognized when they are probable and reasonably estimable. Gain contingencies are recognized on the earlier of when they are realized or are realizable and are thus not recognizable in an asset acquisition (see Section C.3.2).
Intangible assets	Recognized at fair value if they are identifiable (i.e., if they are separable or arise from contractual rights).	Finite-lived intangible assets recognized on the basis of relative fair value under ASC 350-10 if they meet the asset recognition criteria in FASB Concepts Statement 5. Indefinite-lived intangible assets are recognized at amounts that do not exceed fair value (see Section C.3.4).
Assembled workforce	Not recognized because it is presumed not to be identifiable.	Recognized because it is presumed to meet the asset recognition criteria in FASB Concepts Statement 5 (see Section C.3.4.1).
IPR&D	Measured at fair value and recognized as an indefinite-lived intangible asset until completion or abandonment of the related project, then reclassified as a finite-lived intangible asset and amortized.	Expensed under ASC 730 unless the IPR&D has an alternative future use (see Section C.3.4.2).
Deferred taxes	Generally recognized for most temporary book/tax differences related to assets acquired and liabilities assumed under ASC 740.	Generally recognized for temporary book/tax differences in an asset acquisition by using the simultaneous equations method in accordance with ASC 740 (see Section C.3.5).
Lease classification	Under ASC 842-10-55-11, the acquirer retains the acquiree’s previous lease classification “unless there is a lease modification and that modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8.”	ASC 805-50 does not provide guidance on an entity’s classification of a lease acquired in an asset acquisition (see Section C.3.6).
Measurement period	In accordance with ASC 805-10-25-13, the acquirer reports provisional amounts for the items for which the accounting “is incomplete by the end of the reporting period in which the combination occurs” and is allowed up to one year to adjust those provisional amounts. This time frame is referred to as the measurement period.	ASC 805-50 does not address a measurement period in the context of an asset acquisition (see Section C.3.8).

SEC Considerations

A registrant must also consider certain SEC reporting requirements when it acquires an asset or a group of assets. For instance, the registrant must separately evaluate whether the asset or group of assets meets the definition of a business for SEC reporting purposes under SEC Regulation S-X, Rule 11-01(d), since this definition differs from the U.S. GAAP definition of a business under ASC 805-10. The SEC reporting requirements for an asset acquisition are addressed in Section C.5.

C.1.2 Scope

ASC 805-50

Entities

15-2 The guidance in the Acquisition of Assets Rather than a Business Subsections applies to all entities.

Transactions

15-3 The guidance in the Acquisition of Assets Rather than a Business Subsections applies to a transaction or event in which assets acquired and liabilities assumed do not constitute a business.

15-4 The guidance in the Acquisition of Assets Rather than a Business Subsections does not apply to the initial measurement and recognition by a primary beneficiary of the assets and liabilities of a variable interest entity (VIE) when the VIE does not constitute a business. Guidance for such a VIE is provided in Section 810-10-30.

The guidance in the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50 applies to the acquisition of an asset or group of assets (and possibly the assumption of any liabilities) that do not meet the definition of a business in ASC 805-10 or qualify as a VIE under ASC 810-10 (see Section C.1.2.1 for more information). As a result, entities first need to assess whether the assets acquired and any liabilities assumed meet the definition of a business by applying the guidance in ASC 805-10. See Section 2.4 for more information about the U.S. GAAP definition of a business in ASC 805-10.

As discussed in Section 6.8, a reverse acquisition occurs when the entity that issues its shares or gives other consideration to effect the transaction is determined for accounting purposes to be the acquiree (also called the accounting acquiree or legal acquirer), while the entity whose shares are acquired is determined for accounting purposes to be the acquirer (also called the accounting acquirer or legal acquiree). We believe that if circumstances suggest the accounting acquiree/legal acquirer does not meet the definition of a business in ASC 805-10 and the nature of the transaction is an acquisition of assets (rather than a recapitalization), it is possible for the transaction to be accounted for as a reverse asset acquisition if the transaction is primarily effected by exchanging equity interests and the indicators in ASC 805-10-55-11 through 55-15 support such a conclusion. In the case of a reverse asset acquisition, the accounting acquiree’s assets and liabilities are measured in accordance with the subsections in ASC 805-50 related to the acquisition of assets rather than a business. However, if the entity identified as the accounting acquiree has no substantive assets other than cash and investments, the nature of the transaction may be a reverse recapitalization rather than an acquisition. We believe that this approach (i.e., applying the indicators to identify the accounting acquirer and then determining the nature of the transaction) would still be applicable even if the legal acquiree does not constitute a business.

In addition, the SEC staff considers the acquisition of a private operating company by a nonoperating public shell company to be, in substance, a capital transaction rather than a business combination or an asset acquisition. Such a transaction is equivalent to the issuance of shares by the private company for the net monetary assets of the shell company, accompanied by a recapitalization, and is typically referred to as a reverse recapitalization (see Section 6.8.8 for more information).

SEC Considerations

SEC registrants are required to use the definition of a business in SEC Regulation S-X, Rule 11-01(d), when evaluating the requirements of SEC Regulation S-X, Rule 3-05, and SEC Regulation S-X, Article 11. The definition of a business in Rule 11-01(d) is different from the definition for U.S. GAAP accounting purposes. See Section C.5 for more information.

Example C-1

Reverse Asset Acquisition

Company A is a publicly traded entity looking to enter into an M&A transaction with an interested party. Company B is a privately held company also considering an M&A transaction with the goal of becoming a publicly traded company. Companies A and B ultimately enter into a transaction in which A (the legal acquirer) acquires 100 percent of B (the legal acquiree) via a share-exchange transaction. Neither A nor B constitutes a business under ASC 805 (as a result of the application of the screen test). In addition, A is not considered to be a nonoperating public shell company, nor are Company A’s assets primarily cash or investments. Companies A and B evaluate the relevant guidance in ASC 805-10-55-11 through 55-15 and determine that B (the legal acquiree) is the accounting acquirer. Therefore, the transaction would be accounted for as a reverse asset acquisition (as opposed to an asset acquisition or reverse recapitalization), and B would record A’s assets and liabilities in accordance with ASC 805-50.

C.1.2.1 Scope Exception for Variable Interest Entities

ASC 805-50-15-4 states that “[t]he guidance in the Acquisition of Assets Rather than a Business Subsections does not apply to the initial measurement and recognition by a primary beneficiary of the assets and liabilities of a VIE when the VIE does not constitute a business. Guidance for such a VIE is provided in Section 810-10-30.” ASC 810-10-30-3 and 30-4 provide guidance on such acquisitions.

ASC 810-10

30-3 When a reporting entity becomes the primary beneficiary of a VIE that is not a business, no goodwill shall be recognized. The primary beneficiary initially shall measure and recognize the assets (except for goodwill) and liabilities of the VIE in accordance with Sections 805-20-25 and 805-20-30. However, the primary beneficiary initially shall measure assets and liabilities that it has transferred to that VIE at, after, or shortly before the date that the reporting entity became the primary beneficiary at the same amounts at which the assets and liabilities would have been measured if they had not been transferred. No gain or loss shall be recognized because of such transfers.

30-4 The primary beneficiary of a VIE that is not a business shall recognize a gain or loss for the difference between (a) and (b):

The sum of:
1. The fair value of any consideration paid
2. The fair value of any noncontrolling interests
3. The reported amount of any previously held interests
The net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with Topic 805. . . .

The primary beneficiary of a VIE that does not meet the definition of a business should initially measure and recognize the assets and liabilities of the VIE in accordance with ASC 805-20-25 and ASC 805-20-30 but should not recognize goodwill. Because goodwill is not recognized, the primary beneficiary recognizes a gain or loss calculated on the basis of the requirements in ASC 810-10-30-4. The primary beneficiary recognizes the identifiable assets acquired (excluding goodwill), the liabilities assumed, and any noncontrolling interests as though the VIE was a business and subject to the guidance on recognition and measurement in a business combination. As a result, the assets acquired (excluding goodwill), liabilities assumed, and any noncontrolling interests are measured and recognized the same way as they would be in a business combination. IPR&D and contingent consideration therefore would be recognized at fair value upon acquisition, and the applicable recognition and fair value measurement exceptions would be the same as those for a business combination.

However, to prevent the improper recognition of gains or losses resulting from transfers of assets and liabilities to VIEs, the FASB developed the guidance in ASC 810-10-30-3. Under this guidance, assets and liabilities that a legal entity transfers to a VIE that is not a business “at, after, or shortly before the date that the reporting entity became the [VIE’s] primary beneficiary [should be measured] at the same amounts at which the assets and liabilities would have been measured if they had not been transferred.” In addition, under ASC 810-10-30-4, if the VIE is acquired in stages (i.e., step acquisition), the reported amount of the previously held interest must be used to calculate the gain or loss.

A legal entity’s failure to meet the business scope exception in ASC 810-10-15-17(d) does not mean that the legal entity does not qualify as a business under ASC 805-10. The determination of whether a legal entity is a business under ASC 810-10-30-2 is strictly related to whether the legal entity qualifies as a business under ASC 805-10. That is, even if the business scope exception is not applicable because one or more of the four additional conditions in that paragraph are met, as long as the definition of a business in ASC 805-10 is met, goodwill, if any, should be recorded. See Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for more information about the business scope exception.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.