4.2 Classifying or Designating the Assets Acquired and Liabilities Assumed
ASC 805-20
25-6 At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired
and liabilities assumed as necessary to subsequently apply other GAAP. The acquirer shall make those
classifications or designations on the basis of the contractual terms, economic conditions, its operating or
accounting policies, and other pertinent conditions as they exist at the acquisition date.
25-7 In some situations, GAAP provides for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the acquirer shall make
on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to the
following:
- Classification of particular investments in securities as trading, available for sale, or held to maturity in accordance with Section 320-10-25
- Designation of a derivative instrument as a hedging instrument in accordance with paragraph 815-10- 05-4
- Assessment of whether an embedded derivative should be separated from the host contract in accordance with Section 815-15-25 (which is a matter of classification as this Subtopic uses that term).
Because a business combination results in the initial recognition of the assets
acquired and liabilities assumed in the acquirer’s
financial statements, the acquiree’s assets and
liabilities are recognized even if they did not
qualify for recognition before the business
combination, and they are generally remeasured at
fair value. Similarly, any prior classifications
or designations by the acquiree are reconsidered
as of the acquisition date. The subsequent
accounting for some assets and liabilities differs
depending on how they are classified or
designated. As noted above, ASC 805-20-25-7
provides three examples:
-
Classification of particular investments in securities as trading, available for sale, or held to maturity in accordance with Section 320-10-25
-
Designation of a derivative instrument as a hedging instrument in accordance with paragraph 815-10-05-4
-
Assessment of whether an embedded derivative should be separated from the host contract in accordance with Section 815-15-25 (which is a matter of classification as this Subtopic uses that term).
Other examples include classifying newly acquired assets as held for sale or
electing the fair value option for eligible items acquired in a business
combination. Under ASC 805-20-25-6, an acquirer must classify or designate the
acquiree’s assets and liabilities on the basis of all relevant facts as of the
acquisition date in the context of the contractual terms, its accounting policies,
and other pertinent factors as of that date, with two exceptions that are discussed
below.