Appendix C — Accounting for Asset Acquisitions

C.2 Measuring the Cost of an Asset Acquisition

ASC 805-50

Acquisition Date Recognition of Consideration Exchanged

25-1 Assets commonly are acquired in exchange transactions that trigger the initial recognition of the assets acquired and any liabilities assumed. If the consideration given in exchange for the assets (or net assets) acquired is in the form of assets surrendered (such as cash), the assets surrendered shall be derecognized at the date of acquisition. If the consideration given is in the form of liabilities incurred or equity interests issued, the liabilities incurred and equity interests issued shall be initially recognized at the date of acquisition. However, if the assets surrendered are nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, the assets surrendered shall be derecognized in accordance with the guidance in Subtopic 610-20 and the assets acquired shall be treated as noncash consideration in accordance with Subtopic 610-20.

Determining Cost

30-1 Paragraph 805-50-25-1 discusses exchange transactions that trigger the initial recognition of assets acquired and liabilities assumed. Assets are recognized based on their cost to the acquiring entity, which generally includes the transaction costs of the asset acquisition, and no gain or loss is recognized unless the fair value of noncash assets given as consideration differs from the assets’ carrying amounts on the acquiring entity’s books. For transactions involving nonmonetary consideration within the scope of Topic 845, an acquirer must first determine if any of the conditions in paragraph 845-10-30-3 apply. If the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.

30-2 Asset acquisitions in which the consideration given is cash are measured by the amount of cash paid, which generally includes the transaction costs of the asset acquisition. However, if the consideration given is not in the form of cash (that is, in the form of noncash assets, liabilities incurred, or equity interests issued) and no other generally accepted accounting principles (GAAP) apply (for example, Topic 845 on nonmonetary transactions or Subtopic 610-20), measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable. For transactions involving nonmonetary consideration within the scope of Topic 845, an acquirer must first determine if any of the conditions in paragraph 845-10-30-3 apply. If the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.

An asset acquisition is an exchange transaction that triggers the acquiring entity’s initial recognition of the assets acquired or liabilities assumed and the derecognition of any consideration given on the date of the acquisition. ASC 805-50-30-2 provides the general principle for measuring the cost of an asset acquisition and specifies, in part, that an asset acquisition should be recognized at cost, which is measured on the basis of either (1) “the fair value of the consideration given,” or (2) “the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.”

In many asset acquisitions, the consideration is cash and, therefore, determining the cost of the acquisition is relatively straightforward. If the consideration given is wholly in the form of cash, the cost of the asset acquisition is measured on the basis of the cash paid plus the direct transaction costs incurred to effect the acquisition (see Section C.2.3).

In some asset acquisitions, part or all of the consideration given may consist of noncash assets, equity interests, or liabilities incurred by the seller (e.g., contingent consideration). When consideration other than cash is used, entities should first determine whether the exchange is within the scope of other GAAP and, if so, apply the applicable standard’s guidance. If no other GAAP applies, an entity would refer to the general principle in ASC 805-50 (i.e., measure cost on the basis of the fair value of the consideration given or the assets acquired, whichever is more clearly evident, plus transaction costs).

The table below provides guidance on determining the GAAP to apply when the consideration given is not in the form of cash.

Form of the Consideration Given	Measurement of the Cost of the Assets Acquired
Nonfinancial assets (or in-substance nonfinancial assets) given to a noncustomer, or goods or services given to a customer that do not meet the definition of a business in ASC 805-10 (after adoption of ASC 606-10 and ASC 610-20)	Fair value of the assets acquired in accordance with ASC 606-10-32-21 if their fair value can be reasonably estimated. Otherwise, based on the assets transferred or stand-alone selling price of the goods or services in accordance with ASC 606-10-32-22. See also ASC 610-20-32-3. See Section C.2.1.
Nonmonetary assets (not within the scope of ASC 606-10 or 610-20)	Fair value of the assets given (i.e., after recognizing a gain or loss) in accordance with ASC 845-10-30-4 unless the exchange meets any of the following conditions in ASC 845-10-30-3: “The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits.” “The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.” “The transaction lacks commercial substance.” If any of those conditions are met, then the carrying amount of the assets given (i.e., no gain or loss recognized). See Section C.2.1.
Contingent consideration	See Section C.2.2.
Acquiring entity’s equity instruments	ASC 805-50-30-2 states, in part, that “if the consideration given is not in the form of cash . . . and no other generally accepted accounting principles (GAAP) apply . . . , measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.” We are aware of two views in practice regarding the date upon which the acquiring entity should measure the equity instruments it issues in an asset acquisition. The first view is that the guidance in ASC 805-50-25-1 requires the acquiring entity’s equity instruments to be measured on the date of the asset acquisition. The second view is that the issuance of shares as consideration in an asset acquisition represents a share-based payment to nonemployees in exchange for goods. Under that view, the acquiring entity would apply ASC 718 (after adoption of ASU 2018-07) or ASC 505-50-30-2 (before adoption of ASU 2018-07) when measuring the equity instruments it issued as consideration in an asset acquisition. Applying ASC 718 may result in a measurement date (i.e., the grant date) that precedes the acquisition date for the shares issued. At its March 3, 2021, agenda prioritization meeting, the FASB decided not to add an agenda item related to the clarification of guidance on certain asset acquisition and nonemployee share-based payment transactions. However, on the basis of the discussion at that meeting, we believe that either view is acceptable provided that entities apply a consistent view.
Assets (or net assets) that meet the definition of a business in ASC 805-10	Fair value of the assets acquired in accordance with ASC 810-10-40-5.
Noncash assets (or liabilities) given as consideration that remain within the combined entity after the acquisition	Carrying amount of the assets (or liabilities) in the acquiring entity’s financial statements immediately before the acquisition by analogy to ASC 805-30-30-8. See Section C.2.7 for more information.

The acquiring entity applies the guidance in ASC 820 to measure fair value; if such value differs from the carrying amount of the noncash assets given, the acquiring entity remeasures those noncash assets to fair value and recognizes a gain or loss on the date of acquisition for the difference (unless any of the conditions in ASC 845-10-30-3 are met).

A significant difference between the cost of an asset acquisition and the fair value of the net assets acquired may indicate that not all of the assets acquired or liabilities assumed have been recognized or that the cost of the asset acquisition includes a payment for something other than the acquired net assets that should be accounted for separately from the acquisition (see Section C.2.4).

C.2.1 Consideration in the Form of Nonmonetary Assets or Nonfinancial Assets — After Adoption of ASC 606-10 and ASC 610-20

While ASC 805-50 provides a general principle for measuring the cost of an asset acquisition, it refers to other GAAP if the noncash consideration is in the form of nonmonetary assets or nonfinancial assets (or in-substance nonfinancial assets). ASC 805-50-30-1 states, in part:

For transactions involving nonmonetary consideration within the scope of Topic 845, an acquirer must first determine if any of the conditions in paragraph 845-10-30-3 apply. If the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.

Therefore, an entity begins its evaluation by determining whether the transaction meets any of the exceptions in ASC 845-10-30-3, which states:

A nonmonetary exchange shall be measured based on the recorded amount (after reduction, if appropriate, for an indicated impairment of value as discussed in paragraph 360-10-40-4) of the nonmonetary asset(s) relinquished, and not on the fair values of the exchanged assets, if any of the following conditions apply:

The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits.
The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
The transaction lacks commercial substance (see the following paragraph [ASC 845-10-30-4]).

We believe that it is unlikely that the condition in ASC 845-10-30-3(a) above would be met because the fair value of either or both of the assets that were surrendered or the assets (or net assets) that were received should be determinable “within reasonable limits.” Entities therefore should consider whether the transaction (1) represents “an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange” or (2) lacks commercial substance. Entities should consider the guidance in ASC 845-10 in making that determination. If the transaction meets any of the three conditions in ASC 845-10-30-3, the acquiring entity accounts for the transaction on the basis of the carrying amount of the nonmonetary asset given and recognizes no gain or loss (other than for impairment, if necessary).

If the transaction does not meet any of the three conditions in ASC 845-10-30-3, we believe that entities should then consider whether the consideration given is in the form of nonfinancial assets (or in-substance nonfinancial assets). If so, the transaction is within the scope of ASC 610-20 if the transaction is with a noncustomer (or ASC 606-10 if the transaction is with a customer).

ASC 805-50-30-1 states, in part, that “[i]f the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.” Therefore, regardless of whether the assets are being received from a customer or a noncustomer, an entity applies the guidance in ASC 606-10-32-21 and 32-22 for measuring noncash consideration. However, the guidance an entity applies for recognizing the gain or loss depends on whether the assets are being received from a noncustomer or a customer. If the assets are received from a noncustomer, the entity applies the guidance in ASC 610-20 for recognizing the gain or loss, whereas if the assets are received from a customer in exchange for goods or services and the transaction is within the scope of ASC 606-10, the entity applies the guidance in ASC 606-10 on recognizing the gain or loss.

ASC 610-20-15-2 indicates that “[n]onfinancial assets . . . include intangible assets, land, buildings, or materials and supplies and may have a zero carrying value.” In addition, ASC 610-20-15-5 describes an in-substance nonfinancial asset as follows:

[A] financial asset (for example, a receivable) promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to a counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty in the contract are in substance nonfinancial assets. For purposes of this evaluation, when a contract includes the transfer of ownership interests in one or more consolidated subsidiaries that is not a business, an entity shall evaluate the underlying assets in those subsidiaries.

According to ASC 610-20-15-4(g), ASC 610-20 does not apply to a “nonmonetary transaction within the scope of Topic 845 on nonmonetary transactions.” Therefore, if the assets are not nonfinancial assets (or in-substance nonfinancial assets), entities should consider whether the assets are nonmonetary assets. The ASC master glossary defines nonmonetary assets and liabilities as “assets and liabilities other than monetary ones” and notes that examples of such assets and liabilities include “inventories; investments in common stocks; property, plant, and equipment; and liabilities for rent collected in advance.” We believe that it may be challenging for entities to determine whether an exchange of noncash assets is an exchange of nonfinancial assets within the scope of ASC 610-20 or a nonmonetary exchange within the scope of ASC 845, and there is no additional guidance in U.S. GAAP on how to make this determination. However, we believe that the definition of nonmonetary assets and liabilities is broader than the definitions of nonfinancial assets and in-substance nonfinancial assets.

Entities are required to adopt ASC 610-20 at the same time that they adopt ASC 606. See Deloitte’s Roadmap Revenue Recognition for more information.

C.2.2 Contingent Consideration

The ASC master glossary 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.

While that definition applies to contingent consideration issued in a business combination, contingent consideration may also be issued in an asset acquisition. The acquiring entity should assess the terms of the transaction to determine whether consideration payable at a future date is contingent consideration or seller financing. If the payment depends on the occurrence of a specified future event or the meeting of a condition and the event or condition is substantive, the additional consideration should be accounted for as contingent consideration. If the additional payment depends only on the passage of time or is based on a future event or the meeting of a condition that is not substantive, the arrangement should be accounted for as seller financing.

ASC 805-50 states that any liabilities incurred by the acquiring entity are part of the cost of the asset acquisition, but it does not provide any specific guidance on accounting for contingent consideration in an asset acquisition. However, in EITF Issue 09-2, the Task Force addressed contingent consideration in an asset acquisition. While a final consensus was not reached, the minutes from the September 9–10, 2009, EITF meeting state that “the Task Force reached a consensus-for-exposure that contingent consideration in an asset acquisition shall be accounted for in accordance with existing U.S. GAAP.” The following examples (not all-inclusive) were provided:

“[I]f the contingent consideration meets the definition of a derivative, Topic 815 (formerly Statement 133) would require that it be recognized at fair value.”
“Topic 450 (formerly Statement 5) may require recognition of the contingent consideration if it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated.”
“Subtopic 323-10 (formerly [EITF] Issue 08-6) may require the recognition of the contingent consideration if it relates to the acquisition of an investment that is accounted for under the equity method.”

Another example would be if the contingent consideration arrangement is settleable in, or is indexed to, the acquirer’s equity shares, the acquirer may be required to measure the contingent consideration arrangement at its acquisition-date fair value in accordance with the guidance in ASC 480 or ASC 815. See Deloitte’s Roadmap Contracts on an Entity’s Own Equity for more information.

The minutes also state that when contingent consideration related to an asset acquisition is recognized at inception, “such [an] amount would be included in the initial measurement of the cost of the acquired assets. . . . However, if the contingent consideration arrangement is a derivative, changes in the carrying value of a derivative instrument subsequent to inception [would be recognized in accordance with ASC 815 and] would not be recognized as part of the cost of the asset.”

Connecting the Dots

We understand that in the absence of a final consensus on EITF Issue 09-2, diversity in practice exists for contingent consideration that is outside the scope of ASC 815 and ASC 323-10 (i.e., contingent consideration that is neither a derivative nor related to the acquisition of an equity method investment). While some practitioners refer to the guidance in ASC 450, others continue to analogize to the guidance in FASB Statement 141, paragraph 27, which states that “contingent consideration usually should be recorded when the contingency is resolved and consideration is issued or becomes issuable.” Given the lack of authoritative guidance, we believe that either approach would be acceptable.

Contingent consideration that is recognized at a later date (i.e., not recognized as of the acquisition date) should be capitalized as part of the cost of the assets acquired and allocated to increase the eligible assets on a relative fair value basis. However, if the contingent consideration is related to IPR&D assets with no alternative future use, the amount of the contingent payment should be expensed (see Deloitte’s Life Sciences Industry Accounting Guide). Similarly, we believe that if the acquiring entity receives a payment from the seller for the return of previously transferred consideration (i.e., a contingent consideration asset), the entity should allocate that amount to reduce the eligible assets on a relative fair value basis.

Diversity in practice has been observed regarding how entities that recognize contingent consideration at a later date make the resulting adjustments to amortizable or depreciable identifiable assets (e.g., PP&E or a finite-lived intangible asset). Some entities have recognized a cumulative catch-up in the amortization or depreciation of the asset as if the amount had been capitalized as of the date of acquisition, and other entities have accounted for the adjustment prospectively in a manner similar to a change in estimate. In the absence of guidance, we believe that either approach is acceptable.

C.2.2.1 Contingent Consideration When the Fair Value of the Assets Acquired Exceeds the Initial Consideration Paid

We believe that if the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement, an entity may analogize to the guidance in ASC 323-10-25-2A and ASC 323-10-30-2B on recognizing contingent consideration in the acquisition of an equity method investment (unless the contingent consideration arrangement meets the definition of a derivative, in which case it would be accounted for in accordance with ASC 815). That guidance states that if an entity acquires an equity method investment in which the fair value of its share of the investee’s net assets exceeds its initial cost and the agreement includes contingent consideration, the entity recognizes a liability equal to the lesser of:

The maximum amount of contingent consideration.
The excess of its share of the investee’s net assets over the initial cost measurement.

Like acquisitions of equity method investments, asset acquisitions are accounted for by using a cost accumulation model. Therefore, we believe that the guidance above could be applied to asset acquisitions by analogy. (However, if the contingent payment is related to IPR&D assets with no alternative future use, the amount of the contingent payment would be expensed. See Deloitte’s Life Sciences Industry Accounting Guide.) Accordingly, if an entity acquires a group of assets in which the fair value of the net assets exceeds its initial cost and the agreement includes contingent consideration that does not meet the definition of a derivative, the entity could recognize a liability equal to the lesser of:

The maximum amount of contingent consideration.
The excess of the fair value of the net assets acquired over the initial consideration paid.

Once recognized, the contingent consideration liability is not derecognized until the contingency is resolved or the consideration is issued. In accordance with the requirements of ASC 323-10-35-14A for equity method investments, the entity recognizes “any excess of the fair value of the contingent consideration issued or issuable over the amount that was [initially] recognized as a liability . . . as an additional cost” of the asset acquisition (i.e., the amount is allocated to increase the eligible assets on a relative fair value basis). Further, “[i]f the amount initially recognized as a liability exceeds the fair value of the [contingent] consideration issued or issuable,” the entity recognizes that amount as a reduction of the cost of the asset acquisition (i.e., the amount is allocated to reduce the eligible assets on a relative fair value basis).

C.2.3 Transaction Costs, Including Costs of Issuing Debt or Equity Securities

ASC 805-50-30-1 states that in an asset acquisition, “[a]ssets are recognized based on their cost to the acquiring entity, which generally includes the transaction costs.” ASC 805-50 does not, however, define transaction costs. We believe that transaction costs should be limited to the direct and incremental costs incurred to complete the asset acquisition, such as third-party costs for finders’ fees and advisory, legal, accounting, valuation, and other professional or consulting fees. Costs such as general and administrative expenses, and salaries and benefits of the acquiring entity’s employees who work on the acquisition, should not be considered transaction costs.

We also believe that the acquiring entity should recognize the costs of issuing debt or equity securities in an asset acquisition in accordance with applicable GAAP, which is how those costs are recognized in a business combination. SAB Topic 5.A provides guidance on accounting for the costs of issuing equity securities and states, in part, that “[s]pecific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering.” Therefore, the costs of issuing equity securities are generally reflected as a reduction of the amount that would have otherwise been recognized in APIC.

If the acquiring entity incurs debt to fund the asset acquisition, it should present the debt issuance costs on the balance sheet as a direct deduction from the face amount of the debt and amortize them as interest expense in accordance with ASC 835-30-45 (unless the debt financing is from a revolving arrangement, in which case the acquiring entity can elect to either deduct the costs from the drawn balance or recognize them as an asset).

See Section 5.4 for more information about accounting for acquisition-related costs in a business combination.

C.2.4 Transactions That Are Separate From an Asset Acquisition

An acquiring entity and the seller of the assets may have a preexisting relationship or other arrangement before negotiations for the acquisition begin, or they may enter into an arrangement during the negotiations that is separate from the acquisition of the assets. ASC 805-50 includes only general principles related to accounting for an asset acquisition. We believe that those principles presume that the cost of the acquisition includes only amounts related to the acquisition of the asset or group of assets and not amounts related to separate transactions, even though the guidance does not explicitly say so. Further, we believe that in the absence of specific guidance, an entity should analogize to ASC 805-10-25-20 through 25-22, which provide guidance on identifying and accounting for transactions that are separate from a business combination. Under this guidance, the acquirer must, when applying the acquisition method, recognize “only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree.” Any separate transactions must be accounted for separately from the business combination in accordance with the relevant GAAP. See Section 6.2 for more information about transactions that should be accounted for separately from a business combination.

Example C-2

Asset Acquisition and Related Supply Agreement

Company A enters into an agreement with Company B to acquire machinery and equipment that will be used to manufacture Product X. The machinery and equipment do not meet the definition of a business in ASC 805-10. In addition to stipulating a cash amount to be paid by A upon transfer of the machinery and equipment, the agreement specifies that A will provide B with a specified number of units of Product X for two years after the acquisition at a fixed per-unit price that is determined to be below market.

In determining the cost of the asset acquisition, A should take into account both the amount it paid upon transfer of the machinery and equipment and the value transferred to B under the below-market fixed-price supply agreement. Company A would recognize a balance sheet credit on the date of acquisition for the unfavorable supply contract; the credit would be recognized in income as units of Product X are delivered.

Example C-3

Asset Acquisition That Settles a Dispute

Company A has an agreement with Company B that gives B the exclusive right to distribute A’s goods in a specific region. Company B asserts that A has inappropriately given the distribution right to B’s competitor. Company A and B decide to settle the dispute so that A reacquires the distribution right from B. The distribution right does not meet the definition of a business in ASC 805-10. Company A believes that if it does not reacquire the distribution right, it is liable to B for breach of contract.

In determining the cost of the asset acquisition, A should exclude from this cost any amount related to the dispute’s settlement to avoid the capitalization of what would otherwise be an operating expense if paid separately from the asset acquisition.

In prepared remarks at the 2007 AICPA Conference on Current SEC and PCAOB Developments, Eric West, then associate chief accountant in the SEC’s OCA, discussed a fact pattern in which a company pays cash and conveys licenses to a plaintiff to settle a claim related to patent infringement and misappropriation of trade secrets. In exchange, the company receives a promise to drop the patent infringement lawsuit, a covenant not to sue with respect to the misappropriation of trade secrets claim, and a license to use the patents subject to the litigation. Mr. West notes that “[t]o properly account for this arrangement, a company must identify each item given and received and determine whether those items should be recognized.” In addition, Mr. West states the following regarding the valuation of the elements of the transaction:

[W]e believe that it would be acceptable to value each element of the arrangement and allocate the consideration paid to each element using relative fair values. To the extent that one of the elements of the arrangement just can’t be valued, we believe that a residual approach may be a reasonable solution. In fact, we have found that many companies are not able to reliably estimate the fair value of the litigation component of any settlement and have not objected to judgments made when registrants have measured this component as a residual. In a few circumstances companies have directly measured the value of the litigation settlement component. In the fact pattern that I just described, the company may be able to calculate the value of the settlement by applying a royalty rate to the revenues derived from the products sold using the patented technology during the infringement period. Admittedly, this approach requires judgment and we are willing to consider reasonable judgments.

Accordingly, we believe that the elements of the transaction should be valued on the basis of relative fair values unless the fair value of one of the elements cannot be estimated. In that case, a residual approach may be acceptable.

C.2.5 Asset Acquisitions in Which a Noncontrolling Interest Remains

In some asset acquisitions, the acquiring entity may obtain control, but less than 100 percent of the equity interests, in a legal entity holding only an asset or group of assets such that a noncontrolling interest in the legal entity remains after the acquisition. We believe that if the legal entity is not a VIE, the acquiring entity in an asset acquisition should include the fair value of any noncontrolling interests remaining as of the date of acquisition in determining the cost to allocate to the assets or group of assets acquired by analogy to the guidance for business combinations in ASC 805-30-30-1. Under that guidance, an acquirer in a business combination must add the fair value of any noncontrolling interests remaining as of the date of acquisition to the consideration transferred to determine the amount recognized for the assets acquired and liabilities assumed. If the acquiring entity in an asset acquisition does not include the fair value of any noncontrolling interests remaining as of the date of acquisition, the asset or group of assets acquired may be recognized at an amount lower than their current fair value.

If the acquired legal entity is a VIE, entities should apply the guidance in ASC 810-10-30-4. See Section C.1.2.1.

Example C-4

Acquisition in Which a Noncontrolling Interest Remains

Company A acquires an 80 percent controlling interest in a legal entity whose only asset is a finite-lived license for intellectual property. As part of the acquisition, A pays $800,000 in cash and incurs $50,000 in transaction costs for third-party advisory fees. Company A determines that the license does not meet the definition of a business in ASC 805-10 and that the entity is not a VIE. The seller of the license retains a 20 percent noncontrolling interest in the entity. The fair value of the noncontrolling interest is determined to be $195,000.

Although the fair value of the noncontrolling interest is used to measure the cost of the acquisition, A would recognize the noncontrolling interest at its proportionate share of the relative fair value of the assets (and liabilities) acquired ($1,045,000 × 20 percent, or $209,000).

C.2.6 Asset Acquisitions in Which the Acquiring Entity Previously Held an Interest

In some asset acquisitions, the acquiring entity may obtain control of an asset or group of assets that are held in a legal entity in which it held a noncontrolling interest immediately before the date of acquisition. ASC 805-50 provides no guidance on how an entity should account for a previously held interest in an asset acquisition when measuring the asset or group of assets acquired. In the absence of guidance, we believe that there are two alternatives if the legal entity is not a VIE. Under the first alternative, the acquiring entity in an asset acquisition would include the carrying amount of any previously held interest along with the consideration paid and transaction costs incurred in determining the cost to allocate to the assets acquired. This view is consistent with the cost accumulation model because each step is measured on the basis of the respective cost incurred.

Under the second alternative, the acquiring entity in an asset acquisition would include the fair value of any previously held interest (after recognizing a gain or loss for the difference between the interest’s fair value and its carrying value) along with the consideration paid and transaction costs incurred in determining the cost to allocate to the assets acquired by analogy to the guidance for business combinations in ASC 805-30-30-1. Under that guidance, an acquirer in a business combination must add the fair value of any previously held interest to the consideration transferred to determine the amount recognized for the assets acquired and liabilities assumed.

If the acquired legal entity is a VIE, entities should apply the guidance in ASC 810-10-30-4. See Section C.1.2.1.

Example C-5

Acquisition in Which the Acquiring Entity Previously Held an Interest

Company A has a 20 percent noncontrolling interest in a legal entity whose only asset is a finite-lived license for intellectual property. The carrying value of A’s investment is $100,000, and its fair value is $200,000. Company A acquires the remaining 80 percent interest for $800,000 in cash and incurs $50,000 in transaction costs for third-party advisory fees. Company A determines that the license does not meet the definition of a business in ASC 805-10 and that the entity is not a VIE.

Under alternative 1, $950,000 would be allocated to the license as follows:

Under Alternative 2, $1,050,000 would be allocated to the license as follows:

C.2.7 Noncash Assets Given as Consideration That Remain Within the Combined Entity After the Acquisition

In some asset acquisitions, the consideration given may include assets or liabilities that remain within the combined entity after the acquisition. Therefore, the acquiring entity controls them before and after the asset acquisition. Under ASC 805-30-30-8, in a business combination, the acquirer must recognize those assets and liabilities at their carrying amounts immediately before the acquisition date; the acquirer is precluded from recognizing a gain or loss on assets or liabilities it controls both before and after the business combination. While ASC 805-50 does not address this issue, we believe that it is appropriate to apply the guidance in ASC 805-30-30-8 to asset acquisitions by analogy.

In addition, ASC 805-50 does not address the measurement of any noncontrolling interests, and thus alternatives may exist in practice, such as those shown in the example below. In alternative 1 of the example, the fair value of the noncontrolling interest is used to measure the cost of the asset acquisition by analogy to the business combinations guidance (although the noncontrolling interest is recognized at its proportionate share of the relative fair value of the assets and liabilities acquired). In alternative 2, the noncontrolling interest is measured at a part fair value and a part carryover basis.

Example C-6

Assets Transferred as Consideration That Remain Under the Control of the Acquiring Entity

Company A enters into an agreement to acquire an 80 percent interest in Entity B for $875,000 in cash and equipment; A incurs $50,000 in transaction costs for third-party advisory fees. Entity B’s only assets include three buildings, which do not meet the definition of a business in ASC 805-10. The equipment A gives as consideration will be transferred not to the seller but to B and will therefore remain in the combined entity. This equipment has a carrying value of $500,000 and a fair value of $625,000. The three buildings A acquires have fair values of $300,000, $500,000, and $450,000, a total of $1,250,000.

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.