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). |
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 840-10-25-27, the acquirer
retains the acquiree’s previous lease
classification “unless the provisions of
the lease are modified as indicated in
paragraph 840-10-35-5.” 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:
- The fair value of any consideration paid
- The fair value of any noncontrolling interests
- 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.