Chapter 2 — Identifying a Business Combination

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
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.

Pending Content (Transition Guidance: ASC 805-60-65-1)

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.

Changing Lanes

In August 2023, the FASB issued ASU 2023-05, under which an entity that qualifies as either a joint venture or a corporate joint venture, as defined in the ASC master glossary, is required to apply a new basis of accounting upon the formation of the joint venture. Specifically, the ASU provides that a joint venture or a corporate joint venture (collectively, “joint ventures”) must initially measure its assets and liabilities at fair value on the formation date. The amendments in ASU 2023-05 apply to the formation of all joint ventures regardless of whether the venture meets the definition of a business in ASC 805-10. Further, under the ASU:

The formation of a joint venture results in the “creation of a new reporting entity,” and no accounting acquirer is identified under ASC 805. Accordingly, a new basis of accounting is established on the formation date. Paragraph BC23 of the ASU notes that this treatment is “generally consistent with other new basis of accounting models in GAAP, such as fresh-start reporting” under ASC 852.
A joint venture measures the net assets and liabilities on the formation date, which the ASU defines as “the date on which an entity initially meets the definition of a joint venture.” Thus, the formation date is not necessarily the date on which the legal entity was formed (e.g., the assets of the joint venture may be contributed by one or both of the parties to the joint venture at a later point in time).
A joint venture may establish a measurement period in a manner consistent with the measurement-period guidance in ASC 805-10 for business combinations when it identifies and measures the net assets received.
The excess of the fair value of a joint venture as a whole over the net assets of the joint venture is recognized as goodwill. On the formation date, the joint venture’s measurement of its net assets should be “equal to the fair value of 100 percent of [its] equity.” Although the ASU does not preclude a joint venture from recognizing goodwill if it does not meet the definition of a business, paragraph BC48 of the ASU notes, in a manner consistent with the guidance in ASC 805-10-55-9, that “the Board does not expect that an entity that meets the definition of a joint venture will have more than an insignificant amount of goodwill if it does not already meet the definition of a business.”
In situations in which the net assets of a joint venture exceed the venture’s fair value as a whole, the joint venture is required to recognize any “negative goodwill” as an adjustment to equity.
The treatment of in-process research and development (IPR&D) contributed to a joint venture at formation is aligned with the treatment of IPR&D acquired in a business combination. Therefore, the joint venture should account for IPR&D as capitalized indefinite-lived intangible assets regardless of whether the R&D asset has an alternative future use.

A joint venture is required to provide specific disclosures aimed at giving financial statement users a better understanding of the nature and financial effect of the joint venture’s formation in the period in which the formation occurred. Those disclosures should include (1) a description of the joint venture’s purpose, (2) the fair value of the joint venture on the formation date, (3) the “amounts recognized by the joint venture for each major class of assets and liabilities,” and (4) a “qualitative description of the factors that make up any goodwill recognized.”

See Deloitte’s September 8, 2023, Heads Up, as well as Deloitte’s Roadmap Equity Method Investments and Joint Ventures for more information about identifying joint ventures, joint venture formation transactions, and the newly issued ASU.

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.

Entities that clearly fall outside this definition include the following:

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 of this publication 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).

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.