2.3 Transactions Outside the Scope of ASC 805-10, ASC 805-20, and ASC 805-30
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. However, ASC 805-10-15-4 includes a list of
scope exceptions, which are described in further detail below.
ASC 805-10
15-4 The guidance in the
Business Combinations Topic does not apply to any of the
following:
- The formation of a joint venture or a corporate joint venture (except as described in Subtopic 805-60)
- The acquisition of an asset or a group of assets that does not constitute a business or a nonprofit activity
- A combination between entities, businesses, or nonprofit activities under common control (see paragraph 805-50-15-6 for examples)
- An acquisition by a not-for-profit entity for which the acquisition date is before December 15, 2009 or a merger of not-for-profit entities (NFPs)
- A transaction or other event in which an NFP obtains control of a not-for-profit entity but does not consolidate that entity, as described in paragraph 958-810-25-4. The Business Combinations Topic also does not apply if an NFP that obtained control in a transaction or other event in which consolidation was permitted but not required decides in a subsequent annual reporting period to begin consolidating a controlled entity that it initially chose not to consolidate.
- Financial assets and financial liabilities of a consolidated variable interest entity that is a collateralized financing entity within the scope of the guidance on collateralized financing entities in Subtopic 810-10.
2.3.1 Joint Venture Formations
The formation of a joint venture is outside the scope of ASC 805-10, ASC 805-20, and ASC 805-30. Paragraph B61 of FASB Statement 141(R) states:
In developing Statement 141, the FASB noted that
constituents consider the guidance in paragraph 3(d) of APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock,
in assessing whether an entity is a joint venture, and it decided not to
change that practice in its project on business combinations.
The ASC master glossary defines a corporate joint venture as:
A corporation owned and operated by a small group of
entities (the joint venturers) as a separate and specific business or
project for the mutual benefit of the members of the group. A government may
also be a member of the group. The purpose of a corporate joint venture
frequently is to share risks and rewards in developing a new market, product
or technology; to combine complementary technological knowledge; or to pool
resources in developing production or other facilities. A corporate joint
venture also usually provides an arrangement under which each joint venturer
may participate, directly or indirectly, in the overall management of the
joint venture. Joint venturers thus have an interest or relationship other
than as passive investors. An entity that is a subsidiary of one of the
joint venturers is not a corporate joint venture. The ownership of a
corporate joint venture seldom changes, and its stock is usually not traded
publicly. A noncontrolling interest held by public ownership, however, does
not preclude a corporation from being a corporate joint venture.
To be considered a joint venture, an entity should also be jointly controlled by
its investors.
In identifying whether a transaction meets the definition of a corporate joint
venture, an entity must use judgment and consider its particular facts and
circumstances. In his remarks at the 2014 AICPA Conference on Current SEC and
PCAOB Developments, Christopher Rogers, then a professional accounting fellow in
the SEC’s Office of the Chief Accountant (OCA), reiterated the following
long-standing SEC staff view:
In evaluating joint venture
formation transactions, the staff continues to believe that joint control is
not the only defining characteristic of a joint venture. Rather, each of the
characteristics in the definition of a joint venture in Topic 323 should be
met for an entity to be a joint venture, including that the “purpose” of the
entity is consistent with that of a joint venture. [Footnotes omitted]
In addition, ASC 805-10-S99-8 notes a comment made by an SEC observer at an EITF
meeting, stating that:
The SEC staff will object to a
conclusion that did not result in the application of Topic 805 to
transactions in which businesses are contributed to a newly formed, jointly
controlled entity if that entity is not a joint venture. The SEC staff also
would object to a conclusion that joint control is the only defining
characteristic of a joint venture.
See Appendix
D as well as Deloitte’s Roadmap Equity Method Investments and Joint
Ventures for more information about identifying joint
ventures, joint venture formation transactions, and ASU 2023-05.
2.3.2 Common-Control Transactions
A common-control transaction is similar to a business combination for the entity that receives the
net assets or equity interests; however, such a transaction does not meet the definition of a business
combination because there is no change in control over the net assets. Therefore, the accounting
and reporting for a transaction between entities under common control is outside the scope of the
business combinations guidance in ASC 805-10, ASC 805-20, and ASC 805-30 and is addressed in the
“Transactions Between Entities Under Common Control” subsections of ASC 805-50. Since there is no
change in control over the net assets from the parent’s perspective, there is no change in the parent’s
basis in the net assets. See Appendix B for more information about common-control transactions.
2.3.3 Common-Ownership Transactions
Common ownership exists when two or more entities have the same shareholders but no one
shareholder controls all of the entities. Transfers of net assets or equity interests among entities that
have common ownership are not common-control transactions. However, they may be accounted for
similarly to common-control transactions if the transfer lacks economic substance. See Appendix B for
more information about common-ownership transactions.
2.3.4 Asset Acquisitions
For an acquisition to meet the definition of a business combination, the net assets acquired must meet
the definition of a business in ASC 805-10 (see Section 2.4). The acquisition of an asset, or a group of
assets, that does not meet the definition of a business is called an asset acquisition and is accounted for
in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50. See
Appendix C for more information about accounting for asset acquisitions.
2.3.5 Combinations of Not-for-Profit Entities
Combinations between not-for-profit entities and acquisitions of for-profit businesses by not-for-profit
entities are not within the scope of ASC 805-10, ASC 805-20, and ASC 805-30, although these subtopics
apply when a for-profit entity acquires a not-for-profit business.
The ASC master glossary defines a not-for-profit entity as follows:
An entity that possesses the following characteristics, in
varying degrees, that distinguish it from a business entity:
-
Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
-
Operating purposes other than to provide goods or services at a profit
-
Absence of ownership interests like those of business entities.
-
All investor-owned entities
-
Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Combinations between not-for-profit entities or acquisitions of a for-profit business by a not-for-profit
entity are accounted for in accordance with ASC 958-805. In contrast to the FASB’s decision regarding
mergers of equals between for-profit entities (see Section 2.2.3), ASC 958-805 requires that entities
determine whether a combination between not-for-profit entities is a merger or an acquisition. Not-for-profit
entities apply the carryover method to account for a merger and the acquisition method to
account for an acquisition. However, ASC 805-10, ASC 805-20, and ASC 805-30 apply when a for-profit
entity acquires a not-for-profit business.
In May 2019, the FASB issued ASU 2019-06, which extends the
private-company accounting alternatives on certain identifiable intangible
assets and goodwill to not-for-profit entities. See Chapter 8 for more information about the
accounting alternatives available to not-for-profit entities.
2.3.6 Collateralized Financing Entities
ASU 2014-13 amended ASC 805-10 to exclude from the scope of the business combinations guidance
financial assets and financial liabilities of a consolidated VIE that is a collateralized financing entity within
the scope of the guidance on collateralized financing entities in ASC 810-10. The ASC master glossary
defines a collateralized financing entity as:
A variable interest entity that holds financial assets, issues beneficial interests in those financial assets, and has
no more than nominal equity. The beneficial interests have contractual recourse only to the related assets of
the collateralized financing entity and are classified as financial liabilities. A collateralized financing entity may
hold nonfinancial assets temporarily as a result of default by the debtor on the underlying debt instruments
held as assets by the collateralized financing entity or in an effort to restructure the debt instruments held
as assets by the collateralized financing entity. A collateralized financing entity also may hold other financial
assets and financial liabilities that are incidental to the operations of the collateralized financing entity and have
carrying values that approximate fair value (for example, cash, broker receivables, or broker payables).