Chapter 6 — Other Acquisition Method Guidance

6.1 Measurement Period

ASC 805-10

25-15 The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination. The measurement period provides the acquirer with a reasonable time to obtain the information necessary to identify and measure any of the following as of the acquisition date in accordance with the requirements of this Topic:

The identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree (see Subtopic 805-20)
The consideration transferred for the acquiree (or the other amount used in measuring goodwill in accordance with paragraphs 805-30-30-1 through 30-3)
In a business combination achieved in stages, the equity interest in the acquiree previously held by the acquirer (see paragraph 805-30-30-1(a)(3))
The resulting goodwill recognized in accordance with paragraph 805-30-30-1 or the gain on a bargain purchase recognized in accordance with paragraph 805-30-25-2.

30-1 Paragraph 805-10-25-15 establishes that the measurement period provides the acquirer with a reasonable time to obtain the information necessary to identify and measure various items in a business combination.

An acquirer may not have the information necessary to complete the accounting for a business combination by the end of the reporting period after the acquisition, especially when the business combination closes shortly before the end of the acquirer’s reporting period or when the acquiree’s operations are significant or complex. Thus, ASC 805-10-25-15 provides a measurement period during which an acquirer can obtain the information it needs to identify and measure the consideration transferred, assets acquired, and liabilities assumed, as well as any previously held or noncontrolling interests. The objective of the measurement period is to give the acquirer a reasonable period in which to obtain the information necessary to complete the accounting for the business combination while maintaining normal reporting schedules.

The measurement period for a particular asset, liability, or equity instrument ends once the acquirer determines that either (1) the necessary information has been obtained or (2) the information is not available. However, the measurement period for all items is limited to one year from the acquisition date. See Section 7.11 for a discussion of the specific disclosure requirements for situations in which the accounting for a business combination has not been completed by the end of the acquirer’s reporting period.

6.1.1 Recognition of Provisional Amounts

ASC 805-10

25-13 If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, in accordance with paragraph 805-10-25-17, the acquirer shall adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

25-14 During the measurement period, the acquirer also shall recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date.

55-16 Paragraphs 805-10-25-14 through 25-19 and 805-10-30-2 through 30-3 discuss requirements related to the measurement period in a business combination. If the initial accounting for a business combination is incomplete at the end of the financial reporting period in which the combination occurs, paragraph 805-10-25-13 requires that the acquirer recognize in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer recognizes adjustments to the provisional amounts needed to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Paragraph 805-10-25-17 requires the acquirer to recognize such adjustments with a corresponding adjustment to goodwill in the reporting period the adjustments are determined. The effects of adjustments to provisional amounts to periods after the acquisition date are included in the earnings of the adjustment period.

If the acquirer does not have the information necessary to complete the accounting for the business combination by the next reporting date, it must recognize provisional amounts for those items for which the accounting is incomplete by using its best estimates of their fair value (or other measurement as required by ASC 805) on the basis of the information available. See Section 7.11 for a discussion of the specific disclosure requirements for provisional measurements.

When the accounting for a business combination is incomplete at the end of the reporting period, the acquirer must not knowingly understate or overstate an asset or liability, as might be the case if no amount, a nominal amount, or the acquiree’s carrying amount were to be used as the provisional amount until the measurement has been completed. Instead, the acquirer must determine provisional amounts by using the best information available. If the acquirer becomes aware of new information during the measurement period related to conditions that existed as of the acquisition date, it must make subsequent adjustments to the provisional amounts, and additional assets acquired or liabilities assumed might be identified for recognition and measurement.

6.1.2 Adjustments Identified During the Measurement Period

ASC 805-10

25-16 The acquirer recognizes an increase (decrease) in the provisional amount recognized for an identifiable asset (liability) by means of a decrease (increase) in goodwill. However, new information obtained during the measurement period sometimes may result in an adjustment to the provisional amount of more than one asset or liability. For example, the acquirer might have assumed a liability to pay damages related to an accident in one of the acquiree’s facilities, part or all of which are covered by the acquiree’s liability insurance policy. If the acquirer obtains new information during the measurement period about the acquisition-date fair value of that liability, the adjustment to goodwill resulting from a change to the provisional amount recognized for the liability would be offset (in whole or in part) by a corresponding adjustment to goodwill resulting from a change to the provisional amount recognized for the claim receivable from the insurer.

25-17 During the measurement period, the acquirer shall recognize adjustments to the provisional amounts with a corresponding adjustment to goodwill in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. Paragraph 805-10-55-16 and Example 1 (see paragraph 805-10-55-27) provide additional guidance.

25-18 Paragraphs 805-10-30-2 through 30-3 require consideration of all pertinent factors in determining whether information obtained after the acquisition date should result in an adjustment to the provisional amounts recognized or whether that information results from events that occurred after the acquisition date.

30-2 The acquirer shall consider all pertinent factors in determining whether information obtained after the acquisition date should result in an adjustment to the provisional amounts recognized or whether that information results from events that occurred after the acquisition date. Pertinent factors include the time at which additional information is obtained and whether the acquirer can identify a reason for a change to provisional amounts.

30-3 Information that is obtained shortly after the acquisition date is more likely to reflect circumstances that existed at the acquisition date than is information obtained several months later. For example, unless an intervening event that changed its fair value can be identified, the sale of an asset to a third party shortly after the acquisition date for an amount that differs significantly from its provisional fair value determined at that date is likely to indicate an error in the provisional amount.

In September 2015, the FASB issued ASU 2015-16, which amended the guidance in ASC 805 on the accounting for measurement-period adjustments. As described in paragraph BC3 of the ASU, an acquirer must “recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined.” The adjustments are calculated as if the accounting had been completed on the acquisition date. When an acquirer adjusts a provisional amount, the offsetting entry generally increases or decreases goodwill but may also result in adjustments to other assets and liabilities. For example, if an acquirer recognizes a liability for a contingency and has an offsetting indemnification asset, an adjustment to the liability may result in an offsetting increase or decrease in the indemnification asset.

Measurement-period adjustments may also affect the income statement. In accordance with the guidance in ASU 2015-16, an acquirer must recognize, in the reporting period in which the adjustment amounts are determined (rather than retrospectively), the “effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.” For example, if a measurement-period adjustment increases the value of fixed assets or finite-lived intangible assets, the acquirer should recognize any catch-up depreciation or amortization in the reporting period in which the adjustment is determined.

According to ASU 2015-16, acquirers must also “present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.” See Section 7.11 for more information about the disclosure requirements for measurement-period adjustments.

ASC 805-10 provides the following example illustrating the accounting for measurement-period adjustments:

ASC 805-10

Example 1: Appraisal That Is Incomplete at the Reporting Date

55-27 This Example illustrates the measurement period guidance in paragraph 805-10-55-16. Acquirer acquires Target on September 30, 20X7. Acquirer seeks an independent appraisal for an item of property, plant, and equipment acquired in the combination, and the appraisal was not complete by the time Acquirer issued its financial statements for the year ended December 31, 20X7. In its 20X7 annual financial statements, Acquirer recognized a provisional fair value for the asset of $30,000. At the acquisition date, the item of property, plant, and equipment had a remaining useful life of five years. Six months after the acquisition date, Acquirer received the independent appraisal, which estimated the asset’s acquisition-date fair value as $40,000.

55-28 In its interim financial statements for the quarter ended March 31, 20X8, Acquirer adjusts the provisional amounts recorded and the related effects on that period’s earnings as follows:

The carrying amount of property, plant, and equipment as of March 31, 20X8, is increased by $9,000. That adjustment is measured as the fair value adjustment at the acquisition date of $10,000 less the additional depreciation that would have been recognized had the asset’s fair value at the acquisition date been recognized from that date ($1,000 for 6 months’ depreciation).
The carrying amount of goodwill as of March 31, 20X8, is decreased by $10,000.
Depreciation expense for the period ended March 31, 20X8, is increased by $1,000 to reflect the effect on earnings as a result of the change to the provisional amount recognized.

55-29 In accordance with paragraph 805-20-50-4A, Acquirer discloses both of the following:

In its 20X7 financial statements, that the initial accounting for the business combination has not been completed because the appraisal of property, plant, and equipment has not yet been received
In its March 31, 20X8 financial statements, the amounts and explanations of the adjustments to the provisional values recognized during the current reporting period. Therefore, Acquirer discloses that the increase to the fair value of the item of property, plant, and equipment was $10,000, with a corresponding decrease to goodwill. Additionally, the change to the provisional amount resulted in an increase in depreciation expense and accumulated depreciation of $1,000, of which $500 relates to the previous quarter.

The measurement period is not intended to allow for subsequent adjustments of the amounts recognized as part of the business combination that result from the uncertainties and related risks the acquirer assumed in the combination. Adjustments that are due to decisions made by the combined company or changes in facts and circumstances or economic conditions that occurred after the acquisition date are not measurement-period adjustments; rather, they are included in the determination of net income in the period in which they are made. For example, if acquired equipment is damaged after the acquisition date, the decrease in the equipment’s value is the result of changes in facts and circumstances after the acquisition date and should not be recognized as a measurement-period adjustment.

Determining whether an adjustment to an item’s value is a measurement-period adjustment or is due to a change in fact or circumstance after the acquisition date may require significant judgment. New information received soon after a business combination is more likely to reflect facts and circumstances that existed as of the acquisition date than information received later during an open measurement period; however, before reaching a conclusion, an acquirer must consider all pertinent factors to determine whether information it obtained after the acquisition date is related to facts and circumstances that existed as of the acquisition date or occurred after the acquisition date. For example, deferred taxes recognized in a business combination should reflect the structure of the combined entity as it existed on the acquisition date. Generally, the tax effects of subsequent transaction steps that may be considered acquisition-related integration steps are not measurement-period adjustments and are accounted for separately from the business combination.

Example 6-1

Potential Litigation Known as of the Acquisition Date

On January 1, 20X9, Company A acquires Company B in a transaction accounted for as a business combination. As a result of due diligence activities associated with the acquisition, A was aware of a potential liability related to a claim that B had breached a contract with a customer before the business combination. On the basis of its understanding of the claim as of the acquisition date, A recognizes a provisional liability of $500,000 as part of its initial accounting for the acquisition and asks its legal counsel to fully evaluate the claim. On April 1, 20X9, A’s legal counsel confirms to A’s management that the claim does have merit since it appears that B breached the contract. On the basis of this legal analysis, A determines that it should increase the provisional liability it recognized to $750,000.

Because the new information became available during the measurement period and is related to a circumstance that existed on the acquisition date, A should recognize an increase of $250,000 to the liability, with a corresponding adjustment to goodwill.

Example 6-2

Potential Litigation Not Known as of the Acquisition Date

Assume the same facts as in the example above, except that Company A did not know about Company B’s breach of contract as of the acquisition date. Therefore, in the initial accounting for the acquisition of B, A did not recognize a liability. On March 1, 20X9, A becomes aware of B’s potential breach of contract and asks its legal counsel to evaluate the claim. On May 1, 20X9, A’s legal counsel notifies A’s management that the claim does have merit and that B may have breached the contract. Company A determines that it should have recognized a liability of $750,000 as part of the initial accounting for the acquisition.

The breach of contract was a circumstance that existed as of the acquisition date, even though A was not aware of it on that date. Because the new information became available during the measurement period and was related to a circumstance that existed as of the acquisition date, A should recognize a liability for $750,000 as part of the business combination accounting with a corresponding adjustment to goodwill.

6.1.2.1 Settlement of Litigation Shortly After the Acquisition Date

An acquiree may have ongoing litigation at the time of the business combination. We believe that, by analogy to the subsequent-events guidance in ASC 855, if the litigation is settled shortly after the acquisition date during an open measurement period, the acquirer should consider whether that settlement provides evidence about facts and circumstances that existed as of the acquisition date. ASC 855-10-25-1 states, in part, that “[a]n entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet” (i.e., recognized subsequent events). ASC 855-10-55-1 provides the following example of a recognized subsequent event:

If the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts, then the settlement amount should be considered in estimating the amount of liability recognized in the financial statements at the balance sheet date.

If an adjustment results from a settlement that occurs after the measurement period — either because it occurs after the one-year anniversary of the acquisition or because the acquirer concludes that it is no longer waiting for information about that item — the change should be recognized in the income statement. In addition, if the event that gives rise to the claim takes place after the acquisition date, settlement of litigation does not result in a measurement-period adjustment and should be recognized in the income statement.

6.1.3 Adjustments Identified After the Measurement Period Has Ended

ASC 805-10

25-19 After the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an error in accordance with Topic 250.

ASC 805-10-25-19 states that “[a]fter the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an error in accordance with Topic 250” (emphasis added). ASC 250-10-45-23 requires that an “error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued . . . shall be reported as an error correction, by restating the prior-period financial statements.” If an adjustment identified after the measurement period is not the result of an error, it must be recognized in current-period earnings. Entities must use judgment in determining whether an identified adjustment should be considered an error correction or the result of events occurring after the acquisition date that require prospective treatment in a manner consistent with a change in estimate.

ASC 250-10-20 defines an error in previously issued financial statements (an “error”) as follows:

An error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, mistakes in the application of generally accepted accounting principles (GAAP), or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error.

When considering whether a change is a correction of an error, an entity should use judgment to determine (1) whether the correct information was or should have been “reasonably knowable” or was “readily accessible” from the acquiree’s books and records in a prior reporting period and (2) whether use of that information at that time would have resulted in different reporting.

Connecting the Dots

In his remarks at the 2016 AICPA Conference on Current SEC and PCAOB Developments, then SEC OCA Associate Chief Accountant Jonathan Wiggins noted that although ASU 2015-16 eliminated the requirement to retrospectively account for measurement-period adjustments, it “does not change the measurement period or apply when an adjustment represents the correction of an accounting error.” He also reminded registrants that they “should ensure they have sufficient internal control over financial reporting to identify and account for measurement period adjustments appropriately and separately identify accounting errors.”

Example 6-3

Accounting for an Adjustment Outside the Measurement Period

Company A acquires Company B on November 30, 20X1, in a nontaxable business combination accounted for under ASC 805. Company A sought an independent valuation for several of the intangible assets it acquired in the combination, but the valuation has not been completed as of the time A issues its financial statements for the year ended December 31, 20X1. Thus, A includes a provisional measurement of the intangible assets and the related deferred tax liabilities in its annual financial statements.

In June 20X2, A receives the final independent valuation of the intangible assets, which increases the fair value it recorded as a provisional amount. Because this information pertained to the facts and circumstances that existed as of the acquisition date, A adjusts its intangible-asset balances and recognizes any catch-up amortization to account for this updated information in its interim financial statements for the quarter ended June 30, 20X2. Company A then concludes that the measurement period has closed because it is not waiting for any additional information regarding the provisional amounts.

In January 20X3 (i.e., after the measurement period has ended), A discovers that although the financial statements were adjusted for the change in fair value of its acquired intangible assets, the related deferred tax liability was not adjusted accordingly. Company A concludes that in accordance with ASC 250, this was an error in the accounting for the business combination.

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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.