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. 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.