In the first phase of its business combinations project, which was completed in 2001, the FASB issued Statements 141 and 142. Statement 141 required that a single method — the purchase method — be used to account for all acquisitions of businesses and eliminated the pooling-of-interest method of accounting for business combinations. Statement 142 (codified in ASC 350) introduced new criteria for recognizing intangible assets separately from goodwill, provided criteria for testing goodwill for impairment, and eliminated the amortization of goodwill.
1.1.6 Recognizing and Measuring the Identifiable Assets, Liabilities, and Noncontrolling Interests in the Acquiree
1.1.7 Recognizing and Measuring the Consideration Transferred and Goodwill or a Bargain Purchase Gain
When an entity obtains control of a business, a new basis of accounting is established in the acquirer’s financial statements for the assets acquired and liabilities assumed. Sometimes the acquiree prepares separate financial statements after its acquisition. Use of the acquirer’s basis of accounting in the preparation of an acquiree’s separate financial statements is called “pushdown accounting.”
A common-control transaction does not meet the definition of a business combination because there is no change in control over the net assets. The accounting for these transactions is addressed in the “Transactions Between Entities Under Common Control” subsections of ASC 805-50.
An asset acquisition is an acquisition of an asset, or a group of assets, that does not meet the definition of a business; such an acquisition therefore does not meet the definition of a business combination. The accounting for these transactions is addressed in the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50. Asset acquisitions are accounted for by using a cost accumulation model (i.e., 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). In contrast, a business combination is accounted for by using a fair value model (i.e., the assets and liabilities are generally recognized at their fair values, and the difference between the consideration paid, excluding transaction costs, and the fair values of the assets and liabilities is recognized as goodwill or, in unusual circumstances, a bargain purchase gain). As a result, there are differences between the accounting for an asset acquisition and the accounting for a business combination. Appendix C of this publication addresses asset acquisitions as well as the differences between the accounting for asset acquisitions and the accounting for business combinations.
When an acquirer is an SEC registrant and consummates — or it is probable that it will consummate — a significant business acquisition, the SEC may require the filing of certain financial statements for the acquired or to be acquired business (the acquiree) under SEC Regulation S-X, Rule 3-05. For example, if the acquirer files a registration statement or a proxy statement, separate financial statements for the acquiree may be required in addition to the financial statements of the registrant. Including the separate preacquisition financial statements of the acquiree in a filing allows current and prospective investors to evaluate the future impact of the acquiree on the registrant’s consolidated results. Pro forma information may also be required under SEC Regulation S-X, Article 11, for the acquisition or probable acquisition of a business.
ASC 805 is the primary source of guidance in U.S. GAAP on the accounting for business combinations and related matters. IFRS 3 is the primary source of such guidance under IFRS® Accounting Standards. Although the standards are largely converged, some differences remain. See Appendix E for a discussion of those differences.