Chapter 5 — Measurement of Goodwill or Gain From a Bargain Purchase, and Consideration Transferred in a Business Combination

5.10 When Consideration Transferred Is Not Reliably Measurable or a Business Is Acquired Without the Transfer of Consideration

Copying or printing Roadmaps is currently disabled. If you are a DART subscriber, please log in to enable these features. Deloitte clients who are not DART subscribers may request printed copies of Roadmaps from their engagement teams.

5.10 When Consideration Transferred Is Not Reliably Measurable or a Business Is Acquired Without the Transfer of Consideration

ASC 805-30

30-2 In a business combination in which the acquirer and the acquiree (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer shall determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred.

30-3 To determine the amount of goodwill in a business combination in which no consideration is transferred, the acquirer shall use the acquisition-date fair value of the acquirer’s interest in the acquiree determined using a valuation technique in place of the acquisition-date fair value of the consideration transferred (see paragraph 805-30-30-1(a)(1)). Paragraphs 805-30-55-3 through 55-5 provide additional guidance on applying the acquisition method to combinations of mutual entities, including measuring the acquisition-date fair value of the acquiree’s equity interests using a valuation technique.

55-2 In a business combination achieved without the transfer of consideration, the acquirer must substitute the acquisition-date fair value of its interest in the acquiree for the acquisition-date fair value of the consideration transferred to measure goodwill or a gain on a bargain purchase (see paragraphs 805-30-30-1 through 30-4). Subtopic 820-10 provides guidance on using valuation techniques to measure fair value.

Most business combinations include the transfer of consideration, and that consideration is used to measure the fair value of the business acquired. In some acquisitions, however, either no consideration is transferred or the consideration transferred is less reliably measurable than a direct measurement of the business acquired (e.g., when the acquiree’s shares were publicly traded before the business combinations and the acquirer’s shares were not). ASC 805-30-30-2 states that when only equity interests are exchanged, goodwill should be calculated by using the fair value of the acquiree’s equity interests if they are more reliably measurable than the fair value of the acquirer’s equity interests. When no consideration is transferred (e.g., if control is obtained through a lapse in minority veto rights) or the consideration transferred is not reliably measurable, the acquirer substitutes the acquisition-date fair value of its interest in the acquiree for the acquisition-date fair value of the consideration transferred to measure goodwill or a gain on a bargain purchase. The acquisition-date fair value of the acquirer’s interest in the acquiree is determined by using appropriate valuation techniques instead of the fair value of the consideration transferred.

5.10.1 Business Combinations Between Mutual Entities

ASC 805-30

Special Consideration in Applying the Acquisition Method to Combinations of Mutual Entities

55-3 When two mutual entities combine, the fair value of the equity or member interests in the acquiree (or the fair value of the acquiree) may be more reliably measurable than the fair value of the member interests transferred by the acquirer. In that situation, paragraph 805-30-30-2 through 30-3 requires the acquirer to determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the acquirer’s equity interests transferred as consideration. In addition, the acquirer in a combination of mutual entities shall recognize the acquiree’s net assets as a direct addition to capital or equity in its statement of financial position, not as an addition to retained earnings, which is consistent with the way in which other types of entities apply the acquisition method.

55-4 Although they are similar in many ways to other businesses, mutual entities have distinct characteristics that arise primarily because their members are both customers and owners. Members of mutual entities generally expect to receive benefits for their membership, often in the form of reduced fees charged for goods and services or patronage dividends. The portion of patronage dividends allocated to each member is often based on the amount of business the member did with the mutual entity during the year.

55-5 A fair value measurement of a mutual entity should include the assumptions that market participants would make about future member benefits as well as any other relevant assumptions market participants would make about the mutual entity. For example, an estimated cash flow model may be used to determine the fair value of a mutual entity. The cash flows used as inputs to the model should be based on the expected cash flows of the mutual entity, which are likely to reflect reductions for member benefits, such as reduced fees charged for goods and services.

A mutual entity is a private company whose owners are also its customers. As owner-customers, they are entitled to receive the profits or income generated by the mutual entity. Such profits may be in the form of dividends or lower costs that are distributed pro rata on the basis of the amount of business each customer conducts with the mutual entity. Examples of mutual entities include mutual insurance companies, cooperatives, credit unions, and savings and loans.

As discussed in Section 2.2.2, acquisitions between mutual entities are within the scope of ASC 805. Accordingly, one of the combining entities must be identified as the acquirer on the basis of the factors in ASC 805-10-55-11 through 55-15 (see Section 3.1). Typically, no consideration is transferred in a combination between mutual entities. The combination is effected through the exchange of member interests. To apply the acquisition method, the entity must determine which is more reliably measurable, the fair value of the member interests transferred by the entity identified as the acquirer or the fair value of the member interests of the entity identified as the acquiree (i.e., the fair value of the acquiree as a whole). In some cases, because member interests of mutual entities are not publicly traded, the fair value of the entity identified as the acquiree is more reliably measurable. Therefore, the fair value of the acquiree as a whole would be used as a substitute for the consideration transferred. In a business combination between mutual entities, goodwill is measured on the basis of the amount by which the acquiree’s fair value as a whole exceeds the fair value of its net assets. The acquiree’s assets acquired, including identifiable intangible assets, and liabilities assumed must be measured in accordance with ASC 805, generally at their fair values. The fair value of the acquiree is added directly to the acquirer’s equity (e.g., generally APIC) and not to its retained earnings.

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.