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

5.4 Acquisition-Related Costs

ASC 805-10

25-23 Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.

Both the acquirer and the acquiree may incur costs related to effecting the business combination. Because acquisition-related costs incurred by the acquirer are not part of the fair value exchanged between the acquirer and the seller for the acquired business, those costs are accounted for separately from the business combination in accordance with their nature.

5.4.1 Acquirer’s Acquisition-Related Costs

The acquirer’s acquisition-related costs are the costs that the acquirer incurs to effect a business combination and include:

Direct costs of the acquisition, such as third-party costs for finders’ fees as well as advisory, legal, accounting, valuation, and other professional or consulting fees.
Indirect costs of the acquisition, such as general and administrative costs, including the costs of maintaining an internal acquisitions department.
Financing costs, such as the costs of registering and issuing debt or equity securities to fund the acquisition.

The acquirer’s acquisition-related costs are not part of the consideration transferred. ASC 805-10-25-23 states that “[t]he acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.” Therefore, the acquirer should account for the direct and indirect costs of the acquisition as expenses in the periods in which the costs are incurred and the services are received.

In SAB Topic 5.A, the SEC staff states that “[s]pecific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering.” Therefore, the costs to issue equity securities are generally reflected as a reduction of the amount that would have otherwise been recognized in additional paid-in capital (APIC).

SAB Topic 5.A goes on to say:

[M]anagement salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering.

If the acquirer incurs debt to fund the acquisition, it should present the debt issuance costs in the balance sheet as a direct deduction from the face amount of the debt and amortize the costs as interest expense in accordance with ASC 835-30-45.

Connecting the Dots

In April 2015, the FASB issued ASU 2015-03, which amends ASC 835-30 by (1) requiring “debt issuance costs related to a note [to] be reported in the balance sheet as a direct deduction from the face amount of that note” and (2) eliminating the guidance that allowed entities to report “issue costs . . . as deferred charges.”

In our discussions with the FASB staff, the staff confirmed that the ASU does not address the presentation of issuance costs associated with line-of-credit or revolving-debt arrangements. Accordingly, an entity should elect an accounting policy for the presentation of such costs.

At the EITF’s June 18, 2015, meeting, the SEC staff made an announcement clarifying that the ASU does not address issuance costs associated with revolving-debt arrangements and announced that it would “not object to an entity deferring and presenting [such] costs as an asset and subsequently amortizing the . . . costs ratably over the term of the line-of-credit arrangement.”

If an entity adopts the method outlined by the SEC staff on June 18, 2015, as its accounting policy, it would present remaining unamortized debt issuance costs associated with a line-of-credit or revolving-debt arrangement as an asset even if the entity currently has a recognized debt liability for amounts outstanding under the arrangement. Further, such costs are amortized over the life of the arrangement even if the entity repays previously drawn amounts.

The SEC staff’s announcement does not address whether other accounting policies might be acceptable. Therefore, when previously drawn amounts are repaid or the remaining unamortized costs exceed the amount of the obligation, an entity is encouraged to consult with its accounting adviser before electing a policy that could result in (1) a write-off of remaining unamortized costs before the end of the term of the arrangement or (2) the presentation of a negative liability balance for the arrangement.

This guidance is limited to line-of-credit or revolving-debt arrangements that are not reported at fair value and should not be applied by analogy to other types of debt liabilities.

SAB Topic 2.A.6 discusses a scenario in which an investment banker provides both advisory services and underwriting services associated with issuing debt or equity securities in connection with a business combination and the costs are billed to the acquirer as a single amount. The interpretative response to Question 1 of SAB Topic 2.A.6 states:

Fees paid to an investment banker in connection with a business combination or asset acquisition, when the investment banker is also providing interim financing or underwriting services, must be allocated between acquisition related services and debt issue costs.

When an investment banker provides services in connection with a business combination or asset acquisition and also provides underwriting services associated with the issuance of debt or equity securities, the total fees incurred by an entity should be allocated between the services received on a relative fair value basis. The objective of the allocation is to ascribe the total fees incurred to the actual services provided by the investment banker.

While SAB Topic 2.A.6 states that “the total fees incurred by an entity should be allocated between the services received on a relative fair value basis,” we believe that the amounts allocated to debt issuance costs should result in an effective interest rate on the debt that is consistent with an effective market interest rate. Likewise, we believe that the amounts allocated to equity issuance costs should be consistent with fees an underwriter would charge.

The interpretive response to Question 2 of SAB Topic 2.A.6 also addresses the amortization of debt issue costs related to interim “bridge financing.” It states:

Debt issue costs should be amortized by the interest method over the life of the debt to which they relate. Debt issue costs related to the bridge financing should be recognized as interest cost during the estimated interim period preceding the placement of the permanent financing with any unamortized amounts charged to expense if the bridge loan is repaid prior to the expiration of the estimated period. Where the bridged financing consists of increasing rate debt, the guidance issued in FASB ASC Topic 470, Debt, should be followed. [Footnote omitted]

Any debt issuance costs allocated to bridge financing should be amortized over the estimated term of the bridge financing. If the bridge financing is repaid before the end of the originally estimated term, the unamortized amount of the debt issuance costs of such financing is written off as interest cost in accordance with ASC 340-10-S99. When bridge financing consists of increasing-rate debt and term-extending debt (i.e., debt that can be extended upon maturity at the option of the issuer with specified interest rate increases each time the maturity is extended), acquirers should consider the guidance in ASC 470-10-35-1 and 35-2 and ASC 835-30 on the application of the effective interest method. They should also consider the guidance in ASC 815-15 and ASC 815-10-55-19 through 55-21 on determining whether to bifurcate embedded derivatives related to the option to extend.

5.4.1.1 Reimbursing the Acquiree for Paying the Acquirer’s Acquisition-Related Costs

ASC 805-10-25-21 provides examples of separate transactions that are not to be included in the application of the acquisition method, including “[a] transaction that reimburses the acquiree or its former owners for paying the acquirer’s acquisition-related costs.” Accordingly, any such payments to the acquiree or its former owners do not represent a cost of the acquisition but instead should be reflected in the acquirer’s financial statements in accordance with the payment’s nature (i.e., direct, indirect, financing), as described above.

5.4.2 Acquiree’s Acquisition-Related Costs

An acquiree’s acquisition-related costs associated with the business combination, such as legal fees or sell-side due diligence costs, should be recognized in the acquiree’s separate financial statements in the periods in which the services are received. On the acquisition date, the acquiree may have a liability recognized related to its acquisition-related expenses incurred but not yet paid. The acquirer may agree to pay the liability for the acquiree’s acquisition-related expenses on, or shortly after, the acquisition date. Generally, only amounts given to former owners of the acquiree are reported as consideration transferred. Therefore, the amounts paid should be presented as a liability assumed in the accounting for the acquisition.

We believe that the acquirer’s direct expenses for acquisition-related costs should not be recognized in the acquiree’s separate financial statements unless the acquirer incurred such costs on behalf of, or for the benefit of, the acquiree. The interpretive response to Question 1 of SAB Topic 1.B.1 states, in part, that “[i]n general, the staff believes that the historical income statements of a registrant should reflect all of its costs of doing business. Therefore, in specific situations, the staff has required the subsidiary to revise its financial statements to include certain expenses incurred by the parent on its behalf.” See Section A.12 for more information.

SAB Topic 5.T also discusses the concept of reflecting costs incurred by a shareholder on behalf of a company in the company’s financial statements. It states that a transaction in which “a principal stockholder pays an expense for the company, unless the stockholder’s action is caused by a relationship or obligation completely unrelated to his position as a stockholder or such action clearly does not benefit the company,” should be reflected as an expense in the company’s financial statements, with a corresponding credit to APIC. While the guidance in SAB Topics 1.B and 5.T pertains to public companies, we believe that private companies should also apply it when evaluating the recognition of acquisition-related costs.

5.4.3 Success Fees

In some situations, an acquirer or an acquiree may agree to make a payment to a third party (e.g., adviser, investment banker) that is contingent on the closing of the transaction. Such a payment may be called a success fee. Because there is no obligation to pay the fee until the business combination closes, we generally believe that by analogy to the guidance in ASC 805-20-55-51, it would not be appropriate for either the acquirer or the acquiree to recognize the success fee as a liability until the acquisition date. ASC 805-20-55-51, which addresses a liability that will be triggered by a business combination for contractual termination benefits and curtailment losses under employee benefit plans, states that the liability “shall not be recognized when it is probable that the business combination will be consummated; rather it shall be recognized when the business combination is consummated.”

If the success fee is the legal obligation of the acquirer, an entity recognizes it as an expense in the acquirer’s financial statements at the time of the business combination. See Section A.16.1 for guidance on accounting for expenses of the acquiree triggered by a business combination in the separate financial statements of an acquiree that applies pushdown accounting.

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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.