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).
Pending Content (Transition Guidance: ASC
105-10-65-9)
25-2 To qualify for recognition as part
of applying the acquisition method, the
identifiable assets acquired and liabilities
assumed must exist 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, in March 2024, the FASB issued
ASU
2024-02, which removes references to various Concepts
Statements from the Codification. The Board believes that removing such
references to various Concepts Statements will simplify the Codification. We
do not believe that the new definitions contained in FASB Concepts Statement
8, Chapter 4, or the amendments in ASU 2024-02 have resulted (or will
result) in any significant changes to the recognition of assets and
liabilities in a business combination. ASU 2024-02 is effective for public
business entities for fiscal years beginning after December 15, 2024. For
all other entities, the amendments are effective for fiscal years beginning
after December 15, 2025. Early application is permitted for all entities for
any fiscal year or interim period for which financial statements have not
yet been issued.
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.