2.2 Transactions Within the Scope of ASC 805-10, ASC 805-20, and ASC 805-30
ASC 805-10
15-2 The guidance in the Business Combinations Topic applies to all entities, with specific qualifications and
exceptions in paragraph 805-10-15-4.
15-3 The guidance in the Business Combinations Topic applies to all transactions or other events that meet the
definition of a business combination or an acquisition by a not-for-profit entity.
The guidance in ASC 805-10, ASC 805-20, and ASC 805-30 applies to all transactions or events in which
an entity obtains control over one or more businesses. ASC 805-10 specifies that the acquisition method
should be used to account for the following types of transactions:
- Roll-up or put-together transactions — see Section 2.2.1.
- Combinations between two or more mutual entities — see Section 2.2.2.
- True mergers or mergers of equals — see Section 2.2.3.
- Acquisitions in which control, but less than 100 percent of the equity interests, is obtained (partial acquisitions) — see Section 6.4.
- Business combinations achieved in stages (step acquisitions) — see Section 6.5.
- Business combinations achieved without the transfer of consideration — see Section 6.6.
2.2.1 Roll-Up or Put-Together Transactions
In some transactions, all the combining entities transfer their net assets or the owners of those entities
transfer their equity interests to a newly formed entity. Often, the entities are in the same or similar lines
of business. Such transactions are sometimes referred to as “roll-up” or “put-together” transactions. In
some cases, one of the owners receives a majority of the voting interests of the combined entity, but
in other cases no one individual owner does. Regardless, ASC 805-10-55-3(c) indicates that roll-up or
put-together transactions should be accounted for by using the acquisition method.
The FASB discussed its view on roll-up or put-together transactions in paragraph
B27 of Statement 141(R), which states:
The Boards concluded
that most business combinations, both two-party transactions and those
involving three or more entities (multiparty combinations) are acquisitions.
The Boards acknowledged that some multiparty combinations (in particular,
those that are commonly referred to as roll-up or put-together transactions)
might not be acquisitions; however, they noted that the acquisition method
has generally been used to account for them. The Boards decided not to
change that practice at this time. Consequently, [ASC 805-10, ASC 805-20,
and ASC 805-30 require] the acquisition method to be used to account for all
business combinations, including those that some might not consider
acquisitions.
As a result, in a roll-up or put-together transaction, one entity is identified
as the acquirer (see Section
3.1) and the net assets of the other entities are recognized by
using the acquisition method.
2.2.2 Combinations Between Two or More Mutual Entities
Business combinations between two or more mutual entities are within the scope of ASC 805. The ASC
master glossary defines a mutual entity as:
An entity other than an investor-owned entity that provides dividends, lower costs, or other economic benefits
directly and proportionately to its owners, members, or participants. Mutual insurance entities, credit unions,
and farm and rural electric cooperatives are examples of mutual entities.
Because a combination of mutual entities involves an exchange, albeit typically
of membership interests, ASC 805 makes no concession regarding application of
the acquisition method of accounting. Consequently, in a combination between
mutual entities, one of the entities must be identified as the acquirer (see
Section 3.1)
and the acquirer must apply the acquisition method to the acquired assets and
assumed liabilities. ASC 805 provides guidance on measuring the consideration
transferred in a combination between mutual entities, as addressed in Section 5.10.1.
2.2.3 True Mergers or Mergers of Equals
The term “merger of equals” is sometimes used to describe a transaction in which two entities of
approximately equal size combine to form a new company. The definition of a business combination in
the ASC master glossary specifies that “[t]ransactions sometimes referred to as true mergers or mergers
of equals also are business combinations.” The FASB’s rationale for including mergers of equals within
the scope of ASC 805-10, ASC 805-20, and ASC 805-30 was that mergers of equals between for-profit
businesses or mutual entities may not be frequent enough in practice to warrant developing a separate
accounting model for them. As a result, in a merger between two businesses, one of the entities must
be identified as the acquirer, and the acquirer must apply the acquisition method to the acquired assets
and assumed liabilities even when, for example, the parties characterize the transaction as a merger of
equals, the entities are of approximately equal size, or the initial composition of the governing body and
of management are equal or close to equal. However, determining whether a transaction is a merger
of equals or a joint venture can be challenging. As discussed below, joint control is not the only defining
characteristic of a joint venture. A joint venture is also expected to meet the definition of a “corporate
joint venture” in the ASC master glossary. See Section 2.3.1 for information about identifying a joint
venture arrangement.
2.2.4 Multiple Arrangements With a Seller That Result in a Business Combination
An acquirer and a seller may agree to transfer a business in more than one
transaction for regulatory or other purposes. Sometimes, the parties execute the
acquisition as part of a single agreement; other times, the parties enter into
multiple separate agreements. In certain cases, each individual acquisition may
not meet the definition of a business but would meet it if all the acquisitions
were evaluated together. For example, the acquirer and seller may agree to
transfer what would constitute a business in the first transaction and agree to
transfer only inputs (e.g., customer contracts) in a second transaction. In
other cases, the parties may enter into a contract to transfer multiple
individual businesses under which each of the individual acquisitions close at
different times and in various reporting periods. In such cases, the acquisition
agreement may include a single acquisition price for all the acquisitions.
Alternatively, each business may be priced separately and, while each individual
amount may not represent the fair value of the related business, the total
acquisition price will represent the fair value of all the businesses together.
In some instances, it may be appropriate to evaluate the separate transactions as
a single acquisition. We believe that when performing this evaluation, an entity
should consider the following factors listed in ASC 810-10-40-6 related to
identifying when multiple deconsolidation arrangements should be accounted for
as a single transaction:
- “They are entered into at the same time or in contemplation of one another.”
- “They form a single transaction designed to achieve an overall commercial effect.”
- “The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.”
- “One arrangement considered on its own is not economically justified, but they are economically justified when considered together. An example is when one disposal is priced below market, compensated for by a subsequent disposal priced above market.”
All facts and circumstances associated with such arrangements should be
considered in the evaluation. When the facts and circumstances indicate that
multiple arrangements should be accounted for as a single transaction
representing a business combination, an entity may need to use judgment in
applying acquisition accounting to each arrangement if closing dates are in
different reporting periods. For example, when goodwill is expected to be
recognized if all the transactions are accounted for together, a bargain
purchase gain should not be recognized, even provisionally, when no bargain
purchase gain is expected to result in total.
See Section 6.5 for information about
business combinations that are achieved in stages when an acquirer obtains
control of an acquiree in which it held a noncontrolling equity interest
immediately before the acquisition date.