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:
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
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
If the contingent consideration issued in an asset acquisition meets the
definition of a derivative under ASC 815 and is
recorded at fair value, and the fair value of the
assets acquired still exceeds the initial
consideration paid as of the acquisition date, we
believe that an entity should apply the allocation
principles discussed in Section C.3.1 to address any excess.
However, if the contingent consideration does not
meet the definition of a derivative under ASC 815
and the fair value of the assets acquired exceeds
the initial consideration paid, we believe that 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 in lieu of applying the guidance in either ASC 450 or paragraph 27 of FASB Statement 141 (by analogy), as discussed in
Section
C.2.2
Like acquisitions of equity method investments, asset acquisitions are accounted
for by using a cost accumulation model.
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 under this approach, 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). See Section
4.2.2.5.4 of Deloitte’s Life Sciences Industry Accounting
Guide for additional accounting
considerations when the fair value of an asset
group that represents IPR&D exceeds its cost
and the acquisition involves contingent
consideration.
While we believe that it would be acceptable to
analogize to the guidance in ASC 323-10, we are
aware of divergent views on this topic.
Accordingly, an entity that elects to apply the
guidance in ASC 323-10 by analogy should consider
(1) consulting with its accounting advisers and
(2) discussing its approach with the SEC staff on
a prefiling basis (if the entity is an SEC
registrant).
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.