1.1 Summary of Accounting for Business Combinations | DART

1.1.1 Identifying a Business Combination

Before an entity can apply the acquisition method, it must determine whether a transaction meets the definition of a business combination. The ASC master glossary defines a business combination as “[a] transaction or other event in which an acquirer obtains control of one or more businesses.” Typically, a business combination occurs when an entity purchases the equity interests or the net assets of one or more businesses in exchange for cash, equity interests of the acquirer, or other consideration. However, the definition of a business combination applies to more than just purchase transactions: it incorporates all transactions or events in which an entity or individual obtains control of a business.

Control has the same meaning as “controlling financial interest,” and an entity applies the guidance in ASC 810-10 to determine whether it has obtained a controlling financial interest in a business. Under ASC 810-10, an entity determines whether it has obtained a controlling financial interest by applying the variable interest entity (VIE) model or the voting interest entity model. Chapter 2 addresses the determination of whether a transaction should be accounted for as a business combination.

1.1.2 Determining Whether the Acquiree Meets the Definition of a Business

For a transaction to meet the definition of a business combination, the entity or net assets acquired must meet the definition of a business in ASC 805. In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business because the previous definition in ASC 805 was often applied so broadly that transactions that were more akin to asset acquisitions were being accounted for as business combinations. The ASU introduces a screen for determining when a set of activities and assets is not a business. An entity uses the screen to assess whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set is not a business. The screen is intended to reduce the number of transactions that an entity must further evaluate to determine whether they are business combinations or asset acquisitions.

If the screen is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create outputs. Under the previous definition of a business, it was not always clear whether an element was an input or a process or whether a process had to be substantive to affect the determination. Therefore, the ASU provides a framework to help entities evaluate whether both an input and a substantive process are present.

Chapter 2 addresses whether the entity or the net assets acquired meet the definition of a business.

1.1.3 Steps to Applying the Acquisition Method

As described in ASC 805-10-05-4, applying the acquisition method requires all the following steps:

“Identifying the acquirer” — see Section 1.1.4.
“Determining the acquisition date” — see Section 1.1.5.
“Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree” — see Section 1.1.6.
“Recognizing and measuring goodwill or a gain from a bargain purchase” — see Section 1.1.7.

1.1.4 Identifying the Acquirer

The acquisition method includes four steps, the first of which is identifying the acquirer. Before adoption of ASU 2025-03, the ASC master glossary defines an acquirer as “[t]he entity that obtains control of the acquiree. However, in a business combination in which a variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.” The process of identifying the acquirer begins with consideration of the guidance in ASC 810-10, which will often clearly indicate which of the parties is the acquirer. However, if it is not clear which of the combining entities has obtained control of the other after the guidance in ASC 810-10 has been considered, entities should identify the acquirer by applying the factors in ASC 805. Chapter 3 addresses the determination of the acquirer.

Changing Lanes

On May 12, 2025, the FASB issued ASU 2025-03, which revises the guidance on identifying the accounting acquirer in a business in which the legal acquiree is a VIE. Under ASU 2025-03, a reporting entity involved in a business combination effected primarily by the exchange of equity interests must consider the factors in ASC 805-10-55-12 through 55-15 to determine which entity is the accounting acquirer regardless of whether the legal acquiree is a VIE. More specifically, when considering those factors, the reporting entity can determine that a transaction in which the legal acquiree is a VIE represents a reverse acquisition (in which the legal acquirer is identified as the acquiree for accounting purposes). As a result, the ASU increases the comparability between business combinations that involve VIEs and those that do not. ASU 2025-03 is effective for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years. Early adoption is permitted.

1.1.5 Determining the Acquisition Date

The second step in the acquisition method is determining the acquisition date, which is the date on which the acquirer obtains control of the acquiree and usually is the date on which the acquirer legally transfers the consideration to the seller, receives the assets, and incurs or assumes the liabilities (i.e., the closing date). However, in unusual circumstances, the acquisition date can be before or after the closing date. Chapter 3 addresses the determination of the acquisition date.

1.1.6 Recognizing and Measuring the Identifiable Assets, Liabilities, and Noncontrolling Interests in the Acquiree

The third step in the acquisition method is recognizing and measuring the identifiable assets, liabilities, and any noncontrolling interest in the acquiree. According to the recognition principle in ASC 805-20-25-1, an acquirer must “recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.” Under the measurement principle in ASC 805-20-30-1, the acquirer must then “measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.” However, certain assets or liabilities are exceptions to the recognition principle, the measurement principle, or both, and are measured in accordance with other GAAP. For example:

Income taxes are recognized and measured in accordance with ASC 740.
Acquired contingencies whose fair value is not determinable during the measurement period are recognized only if they are probable and reasonably estimable.
Assumed pension and postretirement benefit obligations are measured and recognized in accordance with ASC 715. The effects of expected terminations, curtailments, or amendments of an assumed acquiree benefit plan are not included in acquisition accounting.
Indemnification assets associated with assets or liabilities recognized in a business combination are recognized and measured by using assumptions that are consistent with those used to measure the item they are related to, subject to any contractual limitations on the indemnification amount and management’s assessment of collectibility.

Chapter 4 addresses the measurement and recognition of identifiable assets, liabilities, and noncontrolling interests.

1.1.7 Recognizing and Measuring the Consideration Transferred and Goodwill or a Bargain Purchase Gain

The fourth and final step in the acquisition method is recognizing and measuring goodwill or a gain from a bargain purchase. Because goodwill is not separately identifiable, it cannot be measured directly. Goodwill is measured as a residual and is calculated as the excess of the sum of (1) the consideration transferred, (2) the fair value of any noncontrolling interest in the acquiree, and (3), in a business combination achieved in stages, the acquisition-date fair value of the acquiree’s previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed. If the sum of items (1) through (3) above is less than the net assets acquired, the acquirer recognizes a gain, referred to as a bargain purchase gain, in earnings, but only after reassessing whether the items exchanged in the business combination were appropriately recognized and measured.

The consideration transferred by the acquirer to the seller can take many forms, including cash, other tangible or intangible assets, contingent consideration, and the acquirer’s equity interests such as common or preferred shares, options, warrants, and share-based payment awards. It can also include noncash assets, which may or may not stay within the combined entity after the acquisition. Items of consideration transferred in a business combination are measured at fair value on the acquisition date, with the exception of acquirer share-based payment awards, which are measured by using a fair-value-based measure in accordance with ASC 718.

Chapter 5 addresses the measurement of goodwill or a bargain purchase gain as well as the items of consideration transferred in a business combination.

In some business combinations, no consideration is transferred and goodwill must be measured by using the fair value of the acquiree. In other business combinations, the acquirer obtains a controlling, but less than a 100 percent, interest in the acquiree or has an equity interest in the acquiree before the date on which it obtains control. Chapter 6 addresses the measurement of goodwill or a bargain purchase gain in these scenarios.

1.1.8 Measurement Period

Because it may take time for an entity to obtain the information necessary to recognize and measure all the items exchanged in a business combination, the acquirer is allowed a period in which to complete its accounting for the acquisition. That period — referred to as the measurement period — ends as soon as the acquirer (1) receives the information it had been seeking about facts and circumstances that existed as of the acquisition date or (2) learns that it cannot obtain further information. However, the measurement period cannot be more than one year after the acquisition date. During the measurement period, the acquirer recognizes provisional amounts for the items for which the accounting is incomplete. Adjustments to any of these items will affect the amount of goodwill recognized or bargain purchase gain.

ASC 805 originally required that if a measurement-period adjustment was identified, the acquirer retrospectively revised comparative information for prior periods, including making any change in depreciation, amortization, or other income effects as if the accounting for the business combination had been completed as of the acquisition date. However, revising prior periods to reflect measurement-period adjustments added cost and complexity to financial reporting and many believed it did not significantly improve the usefulness of the information provided to users. To address those concerns, the FASB issued ASU 2015-16 in September 2015. Under the ASU, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined rather than retrospectively. The acquirer would include the effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date. Chapter 6 addresses issues related to the measurement period.

1.1.9 Determining What Is Part of the Business Combination

An acquirer must assess whether any assets acquired, liabilities assumed, or portion of the consideration transferred is not part of the exchange for the acquiree. Examples of items that are not part of the exchange for the acquiree include payments that effectively settle preexisting relationships between the acquirer and acquiree, payments to compensate employees or former shareholders of the acquiree for future services, and reimbursement of the acquirer’s transaction costs. Such items must be accounted for separately from the business combination. Chapter 6 addresses items that should be accounted for separately from a business combination.

1.1.10 Presentation and Disclosure

The FASB developed an overall disclosure objective for information related to a business combination. In accordance with this objective, an acquirer must disclose enough information for users to evaluate the nature and financial effect of a business combination. ASC 805 also contains detailed requirements related to the disclosures an entity must provide at a minimum to meet that disclosure objective. However, if the disclosures an entity provides under these requirements (along with those provided under other GAAP) do not meet the overall disclosure objective, an acquirer must disclose any additional information necessary. Chapter 7 addresses presentation and disclosure requirements for business combinations.

1.1.11 Private-Company and Not-for-Profit Entity Accounting Alternatives

In 2012, the Financial Accounting Foundation, which oversees the FASB, established the Private Company Council (PCC), which is tasked with improving accounting standard setting for private companies. The PCC has two principal responsibilities:

To determine whether exceptions or modifications to existing nongovernmental U.S. GAAP are necessary to address the needs of users of private-company financial statements. The PCC identifies, deliberates, and votes on any proposed changes, which are subject to endorsement by the FASB and submitted for public comment before being incorporated into GAAP.
To advise the FASB regarding how private companies should treat items under active consideration on the FASB’s technical agenda.

In December 2014, the FASB issued ASU 2014-18, which gives private companies the option of not recognizing separately from goodwill the following intangible assets: (1) customer-related intangible assets, unless they can be sold or licensed independently from other assets of a business, and (2) noncompetition agreements. In May 2019, the FASB issued ASU 2019-06, which extends the private-company accounting alternatives for certain identifiable intangible assets and goodwill to not-for-profit entities. Chapter 8 addresses the private-company and not-for-profit entity accounting alternatives related to business combinations.

For more information on the subsequent accounting for goodwill, see Deloitte’s Roadmap Goodwill and Intangible Assets.