Chapter 4 — Recognizing and Measuring the Identifiable Assets Acquired and Liabilities Assumed

4.1 Recognition and Measurement Principles

ASC 805-20

25-1 As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 805-20-25-2 through 25-3. However, an entity (the acquirer) within the scope of paragraph 805-20-15-2 may elect to apply the accounting alternative for the recognition of identifiable intangible assets acquired in a business combination as described in paragraphs 805-20-25-29 through 25-33.

Recognition Conditions

25-2 To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements, at the acquisition date. For example, costs the acquirer expects but is not obligated to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs in its postcombination financial statements in accordance with other applicable generally accepted accounting principles (GAAP).

25-3 In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 805-10-25-20 through 25-23 to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable GAAP.

25-4 The acquirer’s application of the recognition principle and conditions may result in recognizing some assets and liabilities that the acquiree had not previously recognized as assets and liabilities in its financial statements. For example, the acquirer recognizes the acquired identifiable intangible assets, such as a brand name, a patent, or a customer relationship, that the acquiree did not recognize as assets in its financial statements because it developed them internally and charged the related costs to expense.

30-1 The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.

The accounting for a business combination is based on two key principles, which ASC 805 calls the recognition principle and the measurement principle. The objective of the principles is to provide guidance that an acquirer can apply when ASC 805 does not contain specific recognition or measurement guidance for a particular asset or liability.

Under the recognition principle in ASC 805-20-25-1, an acquirer must “recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.” To qualify for recognition as part of a business combination, an item must:

Meet the definition of an asset or a liability on the acquisition date (see ASC 805-20-25-2).
Be part of the business combination transaction and not the result of separate transactions (see Section 6.2).

As a result of applying the recognition principle, an acquirer may recognize certain of the acquiree’s assets and liabilities that were not previously recognized in the acquiree’s financial statements, such as customer-related intangible assets.

Under the measurement principle in ASC 805-20-30-1, an acquirer is required to measure “the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.” Thus, most assets and liabilities and items of consideration are measured at fair value in accordance with the principles of ASC 820. However, there are exceptions to ASC 805’s fair value measurement principle. For example, an acquirer must measure an acquiree’s deferred taxes, employee benefits, share-based payments, and assets held for sale in accordance with other applicable GAAP rather than the general principles discussed in ASC 805. The exceptions to the measurement principle are discussed in Section 4.3. Also see Section 2.3.6 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option) for additional details on the exception to the measurement principle.

Changing Lanes

In December 2021, the FASB issued FASB Concepts Statement 8, Chapter 4, which supersedes FASB Concepts Statement 6 and includes new definitions of elements of financial statements, including definitions of assets and liabilities. In addition, the Board currently has an ongoing project on codification improvements that considers removing from the Codification any references to the Concepts Statements. While we do not believe that the new definitions in FASB Concepts Statement 8, Chapter 4, or the project to remove references from the Codification will result in any significant changes to the recognition of assets and liabilities in a business combination, practitioners should monitor that project for developments.

4.1.1 Use of a Third-Party Specialist to Measure Fair Value

Some entities elect to engage a third-party specialist to assist management in the valuation of some or all of the assets acquired and liabilities assumed in a business combination, especially if the fair value measurements are unusually complex or management wishes to otherwise supplement its internal valuation expertise. The SEC staff has indicated that under certain conditions, a registrant’s filings do not need to refer to the third-party valuation firm that provided assistance. On November 26, 2008, the SEC’s Division of Corporation Finance issued revised Compliance and Disclosure Interpretations (C&DIs) of Securities Act Sections related to the use of third-party specialists. C&DI Question 141.02 of the Securities Act Sections states:

Question: A registrant has engaged a third party expert to assist in determining the fair values of certain assets or liabilities disclosed in the registrant’s Securities Act registration statement. Must the registrant disclose in the registration statement that it used a third party expert for this purpose? In what circumstances must the registrant disclose the name of the third party expert in its registration statement and obtain the third party’s consent to be named?

Answer: The registrant has no requirement to make reference to a third party expert simply because the registrant used or relied on the third party expert’s report or valuation or opinion in connection with the preparation of a Securities Act registration statement. The consent requirement in Securities Act Section 7(a) applies only when a report, valuation or opinion of an expert is included or summarized in the registration statement and attributed to the third party and thus becomes “expertised” disclosure for purposes of Securities Act Section 11(a), with resultant Section 11 liability for the expert and a reduction in the due diligence defense burden of proof for other Section 11 defendants with respect to such disclosure, as provided in Securities Act Section 11(b).

If the registrant determines to make reference to a third party expert, the disclosure should make clear whether any related statement included or incorporated in a registration statement is a statement of the third party expert or a statement of the registrant. If the disclosure attributes a statement to a third party expert, the registrant must comply with the requirements of Securities Act Rule 436 with respect to such statement. For example, if a registrant discloses purchase price allocation figures in the notes to its financial statements and discloses that these figures were taken from or prepared based on the report of a third party expert, or provides similar disclosure that attributes the purchase price allocation figures to the third party expert and not the registrant, then the registrant should comply with Rule 436 with respect to the purchase price allocation figures. On the other hand, if the disclosure states that management or the board prepared the purchase price allocations and in doing so considered or relied in part upon a report of a third party expert, or provides similar disclosure that attributes the purchase price allocation figures to the registrant and not the third party expert, then there would be no requirement to comply with Rule 436 with respect to the purchase price allocation figures as the purchase price allocation figures are attributed to the registrant.

Independent of Section 7(a) considerations, a registrant that uses or relies on a third party expert report, valuation or opinion should consider whether the inclusion or summary of that report, valuation or opinion is required in the registration statement to comply with specific disclosure requirements, such as Item 1015 of Regulation M-A, Item 601(b) of Regulation S-K or the general disclosure requirement of Securities Act Rule 408.

According to the SEC, a registrant that does not refer to a valuation firm in its filing must provide disclosures explaining the method and assumptions that were used in the valuation. A registrant that does refer to a valuation firm must provide:

The valuation firm’s name.
A consent from the valuation firm as required by of SEC Regulation S-K, Item 601(b)(23).
The registrant’s analysis of the qualifications of those assisting management in preparing the valuation.

The staff also cautioned that registrants seeking to incorporate their financial statements into their registration statement must amend the financial statements to include the valuation firm’s name and consent, if the statements do not already do so.

Regardless of whether a fair value measurement is prepared entirely by the entity or with the assistance of a third-party specialist, a similar level of evidence is needed to support the measurement; and management is ultimately responsible for the appropriateness of the accounting and reporting of all the fair value measurements — including the valuation techniques, the underlying assumptions, and the completeness and accuracy of the data provided to, and received from, specialists.

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.