4.6 Financial Instruments

An acquiree’s equity investments are measured and recognized at fair value on the acquisition date in accordance with ASC 820. If the equity securities do not have a readily determinable fair value (i.e., are not exchange traded), an acquirer must use other valuation techniques to measure the fair value as of the acquisition date. According to ASC 805-20-25-6, an acquirer must classify the assets acquired and liabilities assumed in a business combination “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” (see Section 4.2). ASC 805 does not provide an exception for financial instruments within the scope of ASC 815 (see Section 4.6.2).

An acquiree will often have outstanding financial instruments that meet the definition of a derivative or are designated in a hedging relationship under ASC 815. The acquirer should reevaluate these instruments as of the acquisition date to determine their designation. ASC 805-20-25-7 states that an acquirer should consider the “[d]esignation of a derivative instrument as a hedging instrument” and assess “whether an embedded derivative should be separated from the host contract” in accordance with ASC 815 on the basis of “pertinent conditions as they exist at the acquisition date.” This could include redesignating preexisting hedging relationships and reevaluating certain contracts of the acquiree. See Section 2.5.2.1.4 of Deloitte’s Roadmap Hedge Accounting for more information.