Appendix C — Accounting for Asset Acquisitions

C.3 Allocating the Cost in an Asset Acquisition

ASC 805-50

Allocating Cost

30-3 Acquiring assets in groups requires not only ascertaining the cost of the asset (or net asset) group but also allocating that cost to the individual assets (or individual assets and liabilities) that make up the group. The cost of such a group is determined using the concepts described in the preceding two paragraphs. The cost of a group of assets acquired in an asset acquisition shall be allocated to the individual assets acquired or liabilities assumed based on their relative fair values and shall not give rise to goodwill. The allocated cost of an asset that the entity does not intend to use or intends to use in a way that is not its highest and best use, such as a brand name, shall be determined based on its relative fair value. See paragraph 805-50-55-1 for an illustration of the relative fair value method to assets acquired outside a business combination.

30-4 See paragraphs 740-10-25-49 through 25-55 for guidance on the accounting for acquired temporary differences in certain purchase transactions that are not accounted for as business combinations.

An acquiring entity allocates the cost of an asset acquisition to the assets acquired (and liabilities assumed) on the basis of their relative fair values and is not permitted to recognize goodwill. However, if the fair values of the assets acquired and liabilities assumed are more reliably determinable (e.g., because the consideration is in the form of noncash assets), the entity measures the cost of the transaction by using these fair values. Fair value is measured in accordance with ASC 820.

Goodwill is recognized only if a business is acquired. Thus, no goodwill is recognized in an asset acquisition. If initial indications are that the cost of the acquisition is in excess of the fair value of acquired assets, an entity should carefully consider whether the acquired assets represent a business or an asset acquisition, whether the entity has appropriately identified all assets acquired, and whether the entity has appropriately measured the cost of the acquisition and the fair values of assets acquired. If, after this exercise, it is determined that the cost of the acquisition exceeds the fair value of the assets acquired, the acquiring entity allocates the difference pro rata on the basis of relative fair values to increase certain of the assets acquired (see Section C.3.1).

Bargain purchase gains are generally not recognized in an asset acquisition. If the fair value of the net assets acquired exceeds the acquiring entity’s cost, the acquiring entity allocates the difference pro rata on the basis of relative fair values to reduce certain of the assets acquired (see Section C.3.1). However, such pro rata allocation cannot reduce monetary assets below their fair values. In unusual cases, pro rata allocation either reduces the eligible assets to zero or there are no eligible assets to reduce; we do not believe that an entity should reduce monetary assets below their fair values in such circumstances. However, before recognizing a gain, the entity should consider whether (1) it has appropriately recognized all of the liabilities assumed, any contingent consideration, and any separate transactions or (2) whether the assets received are more reliably measurable than the assets given. If only monetary assets are acquired, the entity should also consider whether the transaction is, in substance, an asset acquisition. For example, if the assets being acquired are primarily cash, the substance of the transaction may be a recapitalization.

C.3.1 Exceptions to Pro Rata Allocation

Pro rata allocation of the acquiring entity’s cost to the assets acquired on a relative fair value basis results in the recognition of assets at amounts that are more (or less if a bargain purchase) than their fair values. In deliberating ASC 805-10, ASC 805-20, and ASC 805-30, the FASB discussed a number of exceptions to the recognition and fair value measurement principles in a business combination for assets or liabilities for which the subsequent accounting is prescribed by other GAAP and application of such GAAP would result in the acquirer’s recognition of an immediate gain or loss. Examples of such exceptions include assets held for sale, employee benefits, and income taxes. ASC 805-50 provides only general guidance on allocating cost in an asset acquisition. However, we believe that the same principles should apply to an asset acquisition. That is, an acquiring entity should not recognize an asset at an amount that would result in the entity’s recognition of an immediate gain or loss as a result of the subsequent application of GAAP if no economic gain or loss has occurred (with the exception of IPR&D assets with no alternative future use, which are discussed in Section C.3.4.2).

Therefore, we believe that certain assets should be recognized at the amounts required by applicable U.S. GAAP or should not be recognized at amounts that exceed their fair values. Such assets (and liabilities) include:

Cash and other financial assets (other than equity method investments).
Other current assets.
Assets subject to fair value impairment testing, such as indefinite-lived intangible assets.
Assets held for sale.
Income taxes.
Employee benefits.
Indemnification assets (see Section C.3.3).
Indefinite-lived intangible assets (see Section C.3.4).
Contract assets measured in accordance with ASC 606 (after adoption of ASU 2021-08).

Example C-7

Excess of Cost Over the Fair Values of the Assets Acquired

Company A acquires three assets from Company B: machinery and equipment with a fair value of $20,000, a building with a fair value of $50,000, and an indefinite-lived intangible asset with a fair value of $30,000. The total cost of the acquisition, including transaction costs, is $120,000. Company A has determined that the assets do not constitute a business and allocates the cost as follows:

Sometimes the fair value of the net assets acquired exceeds the acquiring entity’s cost (i.e., a bargain purchase), though this is unusual. Allocation of a bargain purchase will reduce the values of assets below their fair values. In such cases, we generally believe that in the allocation of the acquiring entity’s cost, any asset that is ineligible for pro rata allocation when the acquiring entity’s cost exceeds the fair value of the assets acquired should also be ineligible for pro rata allocation in a bargain purchase. However, in the case of a potential bargain purchase, we believe that an allocation to indefinite-lived intangibles or assets held for sale (see Example C-8) would also be allowable. This is because unlike the above scenario in which the acquiring entity’s cost exceeds the fair value of the assets acquired, a write-down of such assets in a bargain purchase would not lead to an immediate gain or loss as a result of the subsequent application of GAAP. That said, we acknowledge that diversity in practice may exist, and discussion with accounting advisers is encouraged.

Example C-8

Excess of Fair Values of the Assets Acquired Over Cost

Assume the same facts as in Example C-7, except that the total cost of the acquisition, including transaction costs, is $90,000. Company A’s cost is allocated as follows:

C.3.2 Contingencies

An entity accounts for gain or loss contingencies acquired or assumed in an asset acquisition in accordance with ASC 450. A loss contingency is recognized when it is probable that a loss has been incurred and the loss can be reasonably estimated. A gain contingency is not recognized until the earlier of when the gain is realized or is realizable and therefore is not recognizable in an asset acquisition. If an acquiring entity acquires a gain or loss contingency in an asset acquisition but the contingency does not qualify for recognition on the date of acquisition, the entity would allocate the cost of the acquisition only to the recognizable assets acquired and may initially recognize certain assets at more or less than their fair values because of the nonrecognition of the contingency.

C.3.3 Indemnification Assets

The seller in an asset acquisition may contractually indemnify the acquiring entity for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability. For example, the seller may indemnify the acquiring entity against losses above a specified amount on a liability that arises from a particular contingency; in other words, the seller will guarantee that the acquiring entity’s liability will not exceed a specified amount. As a result, the acquiring entity obtains an indemnification asset.

Under ASC 805-20-25-27, an acquirer in a business combination must “recognize an indemnification asset at the same time that it recognizes the indemnified item, measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts.” We believe that an entity should also apply this guidance by analogy in an asset acquisition. See Section 4.3.4 for more information about the accounting for indemnification assets in a business combination.

C.3.4 Intangible Assets

An entity recognizes intangible assets that are acquired in an asset acquisition if they meet the asset recognition criteria in FASB Concepts Statement 5, even if they are not separable or do not arise from contractual rights. There is a lower threshold for recognizing intangible assets in an asset acquisition than in a business combination (with the exception of IPR&D, which is discussed in Section C.3.4.2). In a business combination, if the consideration transferred includes amounts for intangible assets that do not qualify for recognition (e.g., assembled workforce), those unrecognized intangible assets are subsumed into goodwill but the assets acquired are still generally recognized at their fair values. However, in an asset acquisition, no goodwill is recognized. If the consideration paid includes amounts for intangible assets that were not separately recognized, the cost of the acquisition would be allocated to the recognizable assets and those assets may be recognized at amounts that exceed their fair values. Since there is no residual into which unrecognized intangible assets could be subsumed, the FASB decided that the threshold for recognizing intangible assets in an asset acquisition should be lower than in a business combination.

Entities recognize finite-lived intangible assets acquired in an asset acquisition on the basis of relative fair values. However, because indefinite-lived intangible assets are subject to fair value impairment testing after the acquisition date, we believe that they should not be recognized at an amount that exceeds fair value, as discussed in Section C.3.1 and illustrated in Examples C-6 through C-8.

C.3.4.1 Assembled Workforce

ASC 805-20-55-6 defines an assembled workforce as “an existing collection of employees that permits the acquirer to continue to operate an acquired business from the acquisition date.” Under ASC 805-20-55-6, an assembled workforce is not recognized in a business combination because it neither is separable nor arises from contractual rights (i.e., identifiable). However, in an asset acquisition, an assembled workforce would generally meet the asset recognition criteria in FASB Concepts Statement 5 and would be separately recognized. But because an assembled workforce is often associated with substantive processes, the presence of an assembled workforce may indicate that the acquisition involves a business rather than an asset or a group of assets. An entity must evaluate all facts and circumstances in determining whether a group of acquired assets constitutes a business under ASC 805.

C.3.4.2 IPR&D Assets

An acquiring entity must allocate, on the basis of relative fair values, the cost of the acquisition to both the tangible and intangible R&D assets acquired. On the date of acquisition, the acquiring entity expenses IPR&D assets with no alternative future use and capitalizes those with an alternative future use in accordance with ASC 730.

One of the most significant differences between the accounting for an asset acquisition and that for a business combination lies in the accounting for IPR&D assets. In a business combination, the acquirer must recognize all IPR&D assets at fair value and initially characterize them as indefinite-lived intangible assets, regardless of whether the IPR&D assets have an alternative future use. In EITF Issue 09-2, the Task Force considered amending ASC 730 with respect to IPR&D assets acquired in an asset acquisition; however, the Task Force was unable to reach a consensus and removed the project from its agenda. Therefore, entities continue to apply the guidance in ASC 730 in accounting for IPR&D assets acquired in an asset acquisition.

C.3.4.3 Defensive Intangible Assets

ASC 805-20-30-6 states that “[t]o protect its competitive position, or for other reasons, the acquirer may intend not to use an acquired nonfinancial asset actively, or it may not intend to use the asset according to its highest and best use.” While such assets are not being actively used, they are most likely contributing to an increase in the value of other assets owned by the acquiring entity. Common examples of such assets, which are known as “defensive assets,” include brand names and patents.

While ASC 805-50 does not address the accounting for defensive intangible assets, we believe that because such assets must be recognized under ASC 805-20, they meet the asset recognition criteria in FASB Concepts Statement 5 and therefore should be recognized in an asset acquisition on the basis of their relative fair values. Fair value would be measured in accordance with ASC 820-10, and the asset’s highest and best use by market participants would be assumed, both initially and for subsequent impairment testing. See Section 4.10.4.8 for more information about the accounting for defensive intangible assets in a business combination.

C.3.5 Deferred Taxes

ASC 740-10-25-49 through 25-54 provide guidance on accounting for acquired temporary differences in certain purchase transactions that are not accounted for as business combinations (i.e., asset acquisitions). Because goodwill is not recognized in an asset acquisition, an entity generally recognizes deferred taxes for temporary book/tax differences in an asset acquisition by using the simultaneous equations method.

For more information about accounting for income taxes in an asset acquisition, see Deloitte’s Roadmap Income Taxes.

C.3.6 Lease Classification

ASC 805-50 does not provide guidance on how an acquiring entity should classify a lease acquired in an asset acquisition. In the absence of such guidance, one approach is to analogize to the guidance applied by an acquirer in a business combination. Specifically, ASC 842-10-55-11 states that for leases under ASC 842, 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.” Under this approach, an entity would not reassess the lease classification when a lease is acquired in a business combination, provided that only the identity of the lessee or lessor, but not any other lease provision, is changed. This is because ASC 842-20-20 defines a lease modification as a “change to the terms and conditions of a contract that results in a change in the scope of or the consideration for a lease.” We do not believe that a change only in the parties to a lease is contemplated in this definition since such a change does not alter scope or consideration. Thus, in these circumstances, an entity would view the asset acquisition as a continuation of the historical lease agreement. See Section 4.3.11 for further discussion of the accounting for leases in a business combination.

Another approach to determining the classification of a lease acquired in an asset acquisition is to apply ASC 842 and consider each lease acquired as a new lease on the acquisition dates since the FASB provided specific guidance related to business combinations but did not extend that guidance to asset acquisitions. In addition, unlike an acquirer in a business combination, an acquiring entity in an asset acquisition may not have the information necessary to determine the original classification of the lease. Under this alternative, an acquiring entity in an asset acquisition would reassess lease classification as of the acquisition date since that date marks the entity’s first involvement with the lease (i.e., it is a new lease from the acquiring entity’s perspective). Thus, if this alternative is used, an acquiring entity’s lease classification may be different from that of the seller even in the absence of a lease modification as defined in ASC 842.

While either approach to classifying a lease acquired in an asset acquisition is considered acceptable, application of more than one approach within the same asset acquisition transaction would not be expected.

If the acquiring entity becomes the lessor in an acquired lease arrangement, the guidance in ASC 350-30 applies. The cost of the acquisition is allocated to tangible assets (e.g., land and buildings) and any in-place lease intangible asset on the basis of their relative fair values. The fair value of assets does not incorporate any value from the leases. For example, the fair value of the land and building is measured as if the building was vacant.

For more information, see Deloitte’s Roadmap Leases.

C.3.7 Purchased Financial Assets — After Adoption of ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, which not only provides a model for recognizing credit losses on financial assets held at amortized cost and AFS debt securities but also amends ASC 805 to provide guidance on accounting for purchased financial assets in a business combination. After an entity adopts ASU 2016-13, the accounting for acquired financial assets within the scope of ASC 326 will depend on whether the assets have experienced more-than-insignificant deterioration in credit quality since origination.

We believe that the purchased financial assets acquired in an asset acquisition should be accounted for in the same manner as in a business combination. Paragraph BC88 of ASU 2016-13 states, in part, that “the Board concluded that there is no inherent difference between assets acquired in a business combination and those that are purchased outside a business combination.” See Section 4.3.10 for more information about the accounting for purchased financial assets in a business combination. Also, see Deloitte’s Roadmap Current Expected Credit Losses for more information.

Changing Lanes

As discussed in Section 4.3.10, in June 2023, the FASB issued a proposed ASU that would amend the guidance in ASU 2016-13 on the accounting upon the acquisition of financial assets acquired in (1) a business combination, (2) an asset acquisition, or (3) the consolidation of a VIE that is not a business. For financial assets acquired as a result of an asset acquisition or through consolidation of a VIE that is not a business, the asset acquirer would apply the gross-up approach to seasoned assets, which are acquired assets unless the asset is deemed akin to an in-substance origination. A seasoned asset is an asset (1) that is acquired more than 90 days after origination and (2) for which the acquirer was not involved with the origination. Practitioners should monitor the proposed ASU for any developments that might change the current accounting. See Section 4.3.10 for more information about the accounting for purchased financial assets in a business combination. Also, see Deloitte’s Roadmap Current Expected Credit Losses for more information.

C.3.8 Measurement Period

In a business combination, an acquirer is allowed a period during which it may adjust provisional amounts recognized as of the acquisition date. This time frame is referred to as the measurement period. ASC 805-50 does not address the concept of a measurement period and, in practice, entities have not been provided a measurement period in an asset acquisition. We believe that because asset acquisitions are generally less complex than business combinations, the acquiring entity should be able to obtain any valuations and information necessary to complete its accounting for an asset acquisition before its next reporting date.

C.3.9 Subsequent Accounting for Assets Acquired or Liabilities Assumed in an Asset Acquisition

ASC 805-50

Accounting After Acquisition

35-1 After the acquisition, the acquiring entity accounts for the asset or liability in accordance with the appropriate generally accepted accounting principles (GAAP). The basis for measuring the asset acquired or liability assumed has no effect on the subsequent accounting for the asset or liability.

The initial measurement of an asset acquired or liability assumed in an asset acquisition does not affect its subsequent accounting. The subsequent accounting for contingent consideration is described in Section C.2.2. Otherwise, the acquirer subsequently accounts for the assets or any liabilities assumed or incurred in accordance with the appropriate GAAP, as applicable.

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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.