2.1 Definition of a Business Combination
ASC 805-10
25-1 An entity shall determine whether a transaction or other event
is a business combination by applying the definition in this Subtopic, which requires that
the assets acquired and liabilities assumed constitute a business. If the assets acquired
are not a business, the reporting entity shall account for the transaction or other event
as an asset acquisition. An entity shall account for each business combination by applying
the acquisition method.
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. Transactions
sometimes referred to as true mergers or mergers of equals also are business combinations.
A business combination typically occurs when an acquirer purchases the equity
interests or 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 is broader
and applies to all transactions or events in which an acquirer obtains control of a business.
ASC 805-10 includes examples of ways in which an acquirer may obtain control of a business:
ASC 805-10
55-2 Paragraph 805-10-25-1 requires an entity to determine whether a transaction or event is a business
combination. In a business combination, an acquirer might obtain control of an acquiree in a variety of ways,
including any of the following:
- By transferring cash, cash equivalents, or other assets (including net assets that constitute a business)
- By incurring liabilities
- By issuing equity interests
- By providing more than one type of consideration
- Without transferring consideration, including by contract alone (see paragraph 805-10-25-11).
55-3 A business combination may be structured in a variety of ways for legal, taxation, or other reasons, which
include but are not limited to, the following:
- One or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer.
- One combining entity transfers its net assets or its owners transfer their equity interests to another combining entity or its owners.
- All of the combining entities transfer their net assets or the owners of those entities transfer their equity interests to a newly formed entity (sometimes referred to as a roll-up or put-together transaction).
- A group of former owners of one of the combining entities obtains control of the combined entity.
The ASC master glossary indicates that the term “control” has the same meaning as the term “controlling
financial interest” in ASC 810-10-15-8. Therefore, an entity applies the guidance in ASC 810-10 to
determine whether it has obtained a controlling financial interest in a business. ASC 810-10-15-8 states:
For legal entities other than limited partnerships, the usual condition for a controlling financial interest is
ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity,
directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition
pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for
example, by contract, lease, agreement with other stockholders, or by court decree.
In assessing whether it has obtained control of a business under ASC 810-10, an
entity begins with an assessment of whether the acquiree is a VIE under the VIE model, which was
established for situations in which control may be demonstrated other than by the possession of
a majority of the voting rights in a legal entity. Accordingly, the evaluation of whether an
entity has a controlling financial interest in a VIE focuses on “the power to direct the
activities of a VIE that most significantly impact the VIE’s economic performance” and “the
obligation to absorb losses of the VIE that could potentially be significant to the VIE or the
right to receive benefits from the VIE that could potentially be significant to the VIE.” Under
ASC 810-10-30-2, if the acquired business is determined to be a VIE on the basis of the guidance
in ASC 810-10, “[t]he initial consolidation of a VIE that is a business is a business
combination and shall be accounted for in accordance with the provisions in Topic 805.”
If a VIE does not meet the definition of a business, the primary beneficiary
applies the initial-measurement guidance in ASC 805 to the VIE’s assets and liabilities, except
for goodwill. The primary beneficiary is prohibited from recognizing goodwill that otherwise
might be measured and instead recognizes a loss. ASC 810-10-30-3 and 30-4 state:
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.
If the acquiree is not a VIE, an entity proceeds to the voting interest model. Under that model, an entity
with ownership of a majority of the voting interests of a legal entity is generally considered to have a
controlling financial interest in the entity. However, ASC 810-10-15-8 notes that “control may also exist
with a lesser percentage of ownership” in certain situations. In limited situations, an entity may obtain
control over another entity that is not a VIE through a contractual arrangement rather than through
voting interests (see Section 6.6.3 for more information).
For more information, see Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial
Interest.