Appendix C — Accounting for Asset Acquisitions
Appendix C — Accounting for Asset Acquisitions
C.1 Overview and Scope
The term “asset acquisition” is used to describe an acquisition of an asset, or a group of assets, that
does not meet the U.S. GAAP definition of a business. An asset acquisition may also involve the
assumption of liabilities. Entities should use the guidance in ASC 805-10 to determine whether the
acquired assets meet the definition of a business. See Section 2.4 for more information.
An asset acquisition is accounted for in accordance with the “Acquisition of Assets Rather Than a
Business” subsections of ASC 805-50 by using a cost accumulation model. In a cost accumulation model,
the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on
the basis of relative fair values. By contrast, a business combination is accounted for by using a fair
value model under which the assets and liabilities are generally recognized at their fair values, and
the difference between the consideration transferred, excluding acquisition-related costs, and the fair
values of the assets and liabilities is recognized as goodwill. As a result, there are significant differences
between the accounting for an asset acquisition and the accounting for a business combination.
Changing Lanes
The FASB had a project to improve the accounting for asset acquisitions and
business combinations by narrowing the differences
between the two accounting models. However, at its
June 15, 2022, meeting, the FASB decided to remove
this project from its agenda. As a result, the
differences between the two acquisition models
will continue to exist in practice.
C.1.1 Summary of Significant Differences Between the Accounting for a Business Combination and the Accounting for an Asset Acquisition
The table below summarizes the significant
differences between the accounting for a business
combination and that for an asset acquisition.
Each of these differences is described in further
detail in later sections.
Issue | Accounting in a Business Combination | Accounting in an Asset Acquisition |
---|---|---|
General principle | Fair value model: assets and liabilities
are recognized at fair value, with certain
exceptions. | Cost accumulation model: the cost of the
acquisition, including certain transaction
costs, is allocated to the assets acquired
on the basis of relative fair values, with
some exceptions. This allocation results
in the recognition of those assets at other
than their fair values (see Sections C.1 and C.3). |
Scope | Acquisition of a business as defined in
ASC 805-10. | Acquisition of an asset or a group of assets (and liabilities) that does not
meet the definition of a business in ASC 805-10 or
qualify as a VIE under ASC 810-10 (see Section
C.1.2). |
Acquisition-related
costs or transaction
costs | Acquisition-related costs are expensed as
incurred, except for costs of issuing debt
and equity securities, which are accounted
for under other GAAP. | Direct and incremental costs are included in the
cost of the acquisition, except for costs of
issuing debt and equity securities, which
are accounted for under other GAAP.
Indirect costs are expensed as incurred (see Section C.2.3). |
Contingent consideration | Recognized at fair value and classified
as a liability, equity, or an asset on the
acquisition date on the basis of the terms
of the arrangement. Subsequently, any
changes in the fair value of contingent
consideration classified as a liability or as
an asset are recognized in earnings until
settled. | Contingent consideration that is accounted for as a derivative is recognized at
fair value under ASC 815. Otherwise, such consideration generally is recognized under ASC 450 when it becomes probable and reasonably estimable or when the contingency is resolved by analogy to FASB Statement 141 (see Section
C.2.2). |
Goodwill | If the sum of the consideration
transferred, the fair value of any
noncontrolling interests, and the fair
value of any previously held interests
exceeds the sum of the identifiable assets
acquired and liabilities assumed, goodwill
is recognized as the amount of the excess. | Goodwill is not recognized. Instead, any
excess of the cost of the acquisition over
the fair value of the net assets acquired is
allocated to certain assets on the basis of
relative fair values (see Section C.3). |
Gain from bargain
purchase | Recognized in earnings on the acquisition
date. | Generally not recognized in earnings.
Instead, any excess of the fair value of the
net assets acquired over the cost of the
acquisition is typically allocated to certain
assets on the basis of relative fair values (see Section C.3). |
Contingencies | Measured at fair value, if determinable;
otherwise, measured at their estimated
amounts if probable and reasonably
estimable. If such assets or liabilities
cannot be measured during the
measurement period, they are accounted
for separately from the business
combination in accordance with ASC 450. | Accounted for in accordance with ASC 450 on the acquisition date and
subsequently. Loss contingencies are recognized
when they are probable and reasonably estimable.
Gain contingencies are recognized on the earlier
of when they are realized or are realizable and
are thus not recognizable in an asset acquisition
(see Section
C.3.2). |
Intangible assets | Recognized at fair value if they are
identifiable (i.e., if they are separable or
arise from contractual rights). | Finite-lived intangible assets recognized on the basis of relative fair value under ASC 350-10 if they meet the asset recognition criteria in FASB Concepts Statement 5.
Indefinite-lived intangible assets are recognized
at amounts that do not exceed fair value (see
Section C.3.4). |
Assembled workforce | Not recognized because it is presumed
not to be identifiable. | Recognized because it is presumed to meet the asset recognition criteria in FASB Concepts Statement 5 (see Section C.3.4.1). |
IPR&D | Measured at fair value and recognized
as an indefinite-lived intangible asset
until completion or abandonment of the
related project, then reclassified as a
finite-lived intangible asset and amortized. | Expensed under ASC 730 unless the
IPR&D has an alternative future use (see Section C.3.4.2). |
Deferred taxes | Generally recognized for most temporary
book/tax differences related to assets
acquired and liabilities assumed under
ASC 740. | Generally recognized for temporary
book/tax differences in an asset
acquisition by using the simultaneous
equations method in accordance with
ASC 740 (see Section C.3.5). |
Lease classification | Under ASC 840-10-25-27, the acquirer
retains the acquiree’s previous lease
classification “unless the provisions of
the lease are modified as indicated in
paragraph 840-10-35-5.” Under ASC 842-10-55-11, the acquirer
retains the acquiree’s previous lease
classification “unless there is a lease
modification and that modification is not
accounted for as a separate contract in
accordance with paragraph 842-10-25-8.” | ASC 805-50 does not provide guidance
on an entity’s classification of a lease
acquired in an asset acquisition (see Section C.3.6). |
Measurement period | In accordance with ASC 805-10-25-13,
the acquirer reports provisional amounts
for the items for which the accounting “is
incomplete by the end of the reporting
period in which the combination occurs”
and is allowed up to one year to adjust
those provisional amounts. This time
frame is referred to as the measurement
period. | ASC 805-50 does not address a
measurement period in the context of an
asset acquisition (see Section C.3.8). |
SEC Considerations
A registrant must also consider certain SEC reporting requirements when it acquires an asset
or a group of assets. For instance, the registrant must separately evaluate whether the asset
or group of assets meets the definition of a business for SEC reporting purposes under SEC Regulation S-X, Rule 11-01(d), since this definition differs from the U.S. GAAP definition of a
business under ASC 805-10. The SEC reporting requirements for an asset acquisition are
addressed in Section C.5.
C.1.2 Scope
ASC 805-50
Entities
15-2 The guidance in the Acquisition of Assets Rather than a Business Subsections applies to all entities.
Transactions
15-3 The guidance in the Acquisition of Assets Rather than a Business Subsections applies to a transaction or
event in which assets acquired and liabilities assumed do not constitute a business.
15-4 The guidance in the Acquisition of Assets Rather than a Business Subsections does not apply to the initial
measurement and recognition by a primary beneficiary of the assets and liabilities of a variable interest entity
(VIE) when the VIE does not constitute a business. Guidance for such a VIE is provided in Section 810-10-30.
The guidance in the “Acquisition of Assets Rather Than a Business” subsections
of ASC 805-50 applies to the acquisition of an
asset or group of assets (and possibly the
assumption of any liabilities) that do not meet
the definition of a business in ASC 805-10 or
qualify as a VIE under ASC 810-10 (see Section C.1.2.1 for
more information). As a result, entities first
need to assess whether the assets acquired and any
liabilities assumed meet the definition of a
business by applying the guidance in ASC 805-10.
See Section 2.4 for
more information about the U.S. GAAP definition of
a business in ASC 805-10.
As discussed in Section
6.8, a reverse acquisition occurs when the entity that issues its
shares or gives other consideration to effect the transaction is determined for
accounting purposes to be the acquiree (also called the accounting acquiree or
legal acquirer), while the entity whose shares are acquired is determined for
accounting purposes to be the acquirer (also called the accounting acquirer or
legal acquiree). We believe that if circumstances suggest the accounting
acquiree/legal acquirer does not meet the definition of a business in ASC 805-10
and the nature of the transaction is an acquisition of assets (rather than a
recapitalization), it is possible for the transaction to be accounted for as a
reverse asset acquisition if the transaction is primarily effected by exchanging
equity interests and the indicators in ASC 805-10-55-11 through 55-15 support
such a conclusion. In the case of a reverse asset acquisition, the accounting
acquiree’s assets and liabilities are measured in accordance with the
subsections in ASC 805-50 related to the acquisition of assets rather than a
business. However, if the entity identified as the accounting acquiree has no
substantive assets other than cash and investments, the nature of the
transaction may be a reverse recapitalization rather than an acquisition. We
believe that this approach (i.e., applying the indicators to identify the
accounting acquirer and then determining the nature of the transaction) would
still be applicable even if the legal acquiree does not constitute a
business.
In addition, the SEC staff considers the
acquisition of a private operating company by a
nonoperating public shell company to be, in
substance, a capital transaction rather than a
business combination or an asset acquisition. Such
a transaction is equivalent to the issuance of
shares by the private company for the net monetary
assets of the shell company, accompanied by a
recapitalization, and is typically referred to as
a reverse recapitalization (see Section 6.8.8 for more
information).
SEC Considerations
SEC registrants are required to use the definition of a business in SEC
Regulation S-X, Rule 11-01(d), when evaluating the
requirements of SEC Regulation S-X, Rule 3-05, and
SEC Regulation S-X, Article 11. The definition of
a business in Rule 11-01(d) is different from the
definition for U.S. GAAP accounting purposes. See
Section C.5 for more information.
Example C-1
Reverse Asset Acquisition
Company A is a publicly traded
entity looking to enter into an M&A
transaction with an interested party. Company B is
a privately held company also considering an
M&A transaction with the goal of becoming a
publicly traded company. Companies A and B
ultimately enter into a transaction in which A
(the legal acquirer) acquires 100 percent of B
(the legal acquiree) via a share-exchange
transaction. Neither A nor B constitutes a
business under ASC 805 (as a result of the
application of the screen test). In addition, A is
not considered to be a nonoperating public shell
company, nor are Company A’s assets primarily cash
or investments. Companies A and B evaluate the
relevant guidance in ASC 805-10-55-11 through
55-15 and determine that B (the legal acquiree) is
the accounting acquirer. Therefore, the
transaction would be accounted for as a reverse
asset acquisition (as opposed to an asset
acquisition or reverse recapitalization), and B
would record A’s assets and liabilities in
accordance with ASC 805-50.
C.1.2.1 Scope Exception for Variable Interest Entities
ASC 805-50-15-4 states that “[t]he guidance in the Acquisition of Assets Rather
than a Business Subsections does not apply to the
initial measurement and recognition by a primary
beneficiary of the assets and liabilities of a VIE
when the VIE does not constitute a business.
Guidance for such a VIE is provided in Section
810-10-30.” ASC 810-10-30-3 and 30-4 provide
guidance on such acquisitions.
ASC 810-10
30-3 When a reporting entity becomes the primary beneficiary of a VIE that is not a business, no goodwill shall
be recognized. The primary beneficiary initially shall measure and recognize the assets (except for goodwill) and
liabilities of the VIE in accordance with Sections 805-20-25 and 805-20-30. However, the primary beneficiary
initially shall measure assets and liabilities that it has transferred to that VIE at, after, or shortly before the date
that the reporting entity became the primary beneficiary at the same amounts at which the assets and liabilities
would have been measured if they had not been transferred. No gain or loss shall be recognized because of
such transfers.
30-4 The primary beneficiary of a VIE that is not a business shall recognize a gain or loss for the difference
between (a) and (b):
- The sum of:
- The fair value of any consideration paid
- The fair value of any noncontrolling interests
- The reported amount of any previously held interests
- The net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with Topic 805. . . .
The primary beneficiary of a VIE that does not meet the definition of a business should initially measure
and recognize the assets and liabilities of the VIE in accordance with ASC 805-20-25 and ASC 805-20-30
but should not recognize goodwill. Because goodwill is not recognized, the primary beneficiary
recognizes a gain or loss calculated on the basis of the requirements in ASC 810-10-30-4. The primary
beneficiary recognizes the identifiable assets acquired (excluding goodwill), the liabilities assumed,
and any noncontrolling interests as though the VIE was a business and subject to the guidance on
recognition and measurement in a business combination. As a result, the assets acquired (excluding
goodwill), liabilities assumed, and any noncontrolling interests are measured and recognized the same
way as they would be in a business combination. IPR&D and contingent consideration therefore would
be recognized at fair value upon acquisition, and the applicable recognition and fair value measurement
exceptions would be the same as those for a business combination.
However, to prevent the improper recognition of gains or losses resulting from
transfers of assets and liabilities to VIEs, the
FASB developed the guidance in ASC 810-10-30-3.
Under this guidance, assets and liabilities that a
legal entity transfers to a VIE that is not a
business “at, after, or shortly before the date
that the reporting entity became the [VIE’s]
primary beneficiary [should be measured] at the
same amounts at which the assets and liabilities
would have been measured if they had not been
transferred.” In addition, under ASC 810-10-30-4,
if the VIE is acquired in stages (i.e., step
acquisition), the reported amount of the
previously held interest must be used to calculate
the gain or loss.
A legal entity’s failure to meet the business scope exception in ASC
810-10-15-17(d) does not mean that the legal
entity does not qualify as a business under ASC
805-10. The determination of whether a legal
entity is a business under ASC 810-10-30-2 is
strictly related to whether the legal entity
qualifies as a business under ASC 805-10. That is,
even if the business scope exception is not
applicable because one or more of the four
additional conditions in that paragraph are met,
as long as the definition of a business in ASC
805-10 is met, goodwill, if any, should be
recorded. See Deloitte’s Roadmap Consolidation — Identifying a Controlling
Financial Interest for more
information about the business scope
exception.
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
(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.
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 assets below their fair values. We believe there are two acceptable views on how to allocate the acquiring entity’s cost in such cases. Under the first alternative, the same assets that are ineligible for pro rata allocation when cost exceeds the fair value of the assets should also be ineligible for pro rata allocation in a bargain purchase.
Example C-8
Excess of Fair Values of the Assets Acquired Over Cost (Alternative 1)
Assume the same facts as in the example above, except that the total cost of the
acquisition, including transaction costs, is
$90,000. Company A’s cost is allocated as
follows:
Under the second alternative, it is appropriate to allocate a bargain purchase to any asset for which
the subsequent application of U.S. GAAP would not result in an immediate gain, such as indefinite-lived
intangible assets or assets held for sale.
Example C-9
Excess of Fair Values of the Assets Acquired Over Cost (Alternative 2)
Assume the same facts as in Example C-6,
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 840-10-25-27 states that for leases under ASC
840, the acquirer retains the acquiree’s previous classification “unless the
provisions of the lease are modified as indicated in paragraph 840-10-35-5,”
whereas ASC 842-10-35-3 specifies that for leases under ASC 842, the acquirer
retains the acquiree’s previous lease classification “unless the lease is
modified 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 840 or ASC 842 (as applicable) 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 840 or 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.
C.4 Disclosures
ASC 805-50 does not prescribe any disclosure requirements for asset acquisitions. However, the
acquiring entity will need to provide disclosures in accordance with other GAAP depending on the assets
acquired or the liabilities assumed or incurred. For example:
- ASC 360-10-50-1 requires disclosure of the balances of major classes of depreciable assets, by nature or function, and accumulated depreciation on the balance sheet date; depreciation expense for the period; and a general description of the method or methods used to compute depreciation with respect to major classes of depreciable assets.
- ASC 350-30-50-1 includes disclosure requirements for intangible assets acquired either individually or as part of a group of assets.
- ASC 450-20-50 requires disclosures regarding loss contingencies.
- ASC 845-10-50-1 includes specific disclosure requirements for nonmonetary transactions.
In addition, depending on the size of the asset acquisition, acquiring entities may decide to provide
some of the disclosures prescribed in ASC 805-10-50, ASC 805-20-50, or ASC 805-30-50 for a business
combination. For example, disclosures about the reason for the acquisition, the amounts recognized
as of the date of acquisition for each major class of assets acquired and liabilities assumed, and
information about any separate transactions may enhance users’ understanding of the transaction.
C.5 SEC Reporting Considerations Related to Asset Acquisitions
When an SEC registrant acquires an asset or a group of assets, the registrant
may be required to report the acquisition on Form
8-K, Item 2.01. The nature of the registrant’s
disclosures depends on whether the asset or group
of assets (1) represents a business for SEC
reporting purposes or (2) is significant.
The definition of a business in SEC Regulation S-X, Rule 11-01(d), for SEC
reporting purposes differs from the definition of
a business in ASC 805-10 for U.S. GAAP accounting
purposes. Accordingly, the registrant must perform
a separate evaluation under Rule 11-01(d) to
determine its SEC reporting requirements. See
Section 2.1.1 of Deloitte’s Roadmap
SEC Reporting
Considerations for Business
Acquisitions for discussion of the
definition of a business for SEC reporting
purposes, and see Appendix D of this publication for
further information on SEC reporting requirements
for acquisitions that meet that definition.
If an asset acquisition does
not represent a business for SEC reporting
purposes, a registrant must evaluate the
significance of the transaction by using a
different test, as discussed in Section
2.1.3 of Deloitte’s Roadmap
SEC Reporting
Considerations for Business
Acquisitions.
Under Form 8-K, Item 2.01, the registrant must file a Form 8-K
within four business days after consummation of an
acquisition of a significant amount of assets. Instruction 4 of Item 2.01 discusses
significance and states, in part:
An acquisition or disposition shall be deemed to involve a
significant amount of assets:
(i) if the registrant’s and its other subsidiaries’ equity in the
net book value of such assets or the amount paid or received for the
assets upon such acquisition or disposition exceeded 10% of the
total assets of the registrant and its consolidated subsidiaries . .
. .
Connecting the Dots
A registrant may also be required by Form 8-K, Item 1.01, to
file a Form 8-K when it has entered into a material definitive agreement for
an acquisition (e.g., when it executes a contract for an acquisition). Item
1.01 is generally filed earlier than Item 2.01, which the registrant is not
required to file until the acquisition is consummated.
The required disclosures for acquisitions of significant assets
differ from the disclosures required for a significant business acquisition. Since
Rule 3-05 does not apply, no historical financial statements need to be filed.
However, the disclosures in Item 2.01 of Form 8-K should clearly (1) describe the
assets acquired, (2) describe the anticipated effects on the registrant’s financial
condition, and (3) indicate that the acquisition did not constitute the acquisition
of a business. When such information would be material to investors, the registrant
may consider including limited pro forma balance sheet information reflecting the
effects of the asset acquisition (or include a narrative discussion, for example,
when adjustments are easily understood). See Chapter 4 of Deloitte’s Roadmap SEC Reporting Considerations for
Business Acquisitions for further information.