6.3 Accounting for Arrangements Entered Into Concurrently With the Business Combination
An acquirer and seller may enter into one or more other agreements in close proximity to, or
simultaneously with, the business combination. For example, an acquirer and seller may enter into a
business combination transaction as well as execute an ongoing supply, distribution, collaboration,
or licensing agreement. Such agreements may be transitional (e.g., for a few months) or more long
term. The acquirer should account for individual agreements in accordance with their nature and
should specifically consider whether each agreement’s stated price reflects an amount that would be
expected in the absence of a concurrent business combination. For example, the consideration for the
business could be overstated while the pricing for the supply agreement could be understated or vice
versa. Therefore, an entity may need to adjust the stated contractual amounts when recognizing each
arrangement.
Example 6-15
Supply Agreement Entered Into Simultaneously With the Acquisition
Company B enters into an agreement with Company C to acquire C’s subsidiary,
Subsidiary S. Subsidiary S has been supplying a specific raw
material to C, and C wants to continue to receive it after
the acquisition. Company B agrees to pay a fixed amount on
the acquisition date and to provide a predetermined amount
of raw materials to C at no cost for one year after the
closing date.
In determining the consideration transferred in the business combination, B
should include the value related to the amount of raw
materials to be provided to C for no cost, because an
arrangement to provide no-cost materials would be unexpected
in the absence of the business combination.