Chapter 6 — Other Acquisition Method Guidance

6.6 Business Combinations Achieved Without the Transfer of Consideration

ASC 805-10

25-11 An acquirer sometimes obtains control of an acquiree without transferring consideration. The acquisition method of accounting for a business combination applies to those combinations. Such circumstances include any of the following:

The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control.
Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting interest.
The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers no consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either on the acquisition date or previously. Examples of business combinations achieved by contract alone include bringing two businesses together in a stapling arrangement or forming a dual-listed corporation.

25-12 In a business combination achieved by contract alone, the acquirer shall attribute to the equity holders of the acquiree the amount of the acquiree’s net assets recognized in accordance with the requirements of this Topic. In other words, the equity interests in the acquiree held by parties other than the acquirer are a noncontrolling interest in the acquirer’s postcombination financial statements even if the result is that all of the equity interests in the acquiree are attributed to the noncontrolling interest.

ASC 805-30

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.

An acquirer may obtain control of an acquiree without transferring any consideration on the acquisition date. Even though no consideration is transferred, the acquirer must still account for the transaction by using the acquisition method. ASC 805-30-55-2 states that “[t]he 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.”

ASC 805-10-25-11 provides three examples of business combinations achieved without the transfer of consideration:

The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control [see Section 6.6.1].
Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting interest [see Section 6.6.2].
The acquirer and acquiree agree to combine their businesses by contract alone [see Section 6.6.3].

These are examples only, and there may be other transactions or events that qualify as business combinations achieved without the transfer of consideration.

6.6.1 Share Repurchases

A business combination can occur when an entity repurchases a sufficient number of its own shares from existing investors and another existing investor obtains control of the entity. In such cases, the acquiree transfers consideration to buy back its own shares, but the acquirer does not transfer any consideration to obtain control of its investee.

Example 6-20

Share Repurchase

Company A holds a 48 percent interest in Company B and accounts for it by using the equity method of accounting. The remaining 52 percent interest in B is widely held. Company B announces a share buyback program. Company A does not sell any of its interest. As a result of B’s share buybacks, A’s percent interest in B increases to greater than 50 percent of the outstanding shares, and A obtains control of B.

Company A should account for this event as a business combination (i.e., an acquisition achieved in stages, since A had a previously held interest). While A did not transfer consideration to obtain control of B, it did obtain control as a result of B’s repurchase of its own shares.

6.6.2 Lapse of Minority Veto Rights or Substantive Participating Rights

A business combination can occur when minority veto rights or substantive participating rights held by one or more shareholders lapse, giving a majority shareholder control over an entity. While it is presumed under the guidance in ASC 810-10 that a voting interest entity is controlled by the holder of more than 50 percent of an entity’s voting interest, noncontrolling interest holders sometimes have the right to either participate in or block certain significant financial and operating decisions that an entity makes in the ordinary course of business. In such situations, the majority investor cannot control the entity. However, if those minority veto rights or substantive participating rights lapse, the holder of the majority interest may obtain control of the entity and would account for that event as a business combination. For more information about minority veto rights and substantive participating rights, see Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest.

Example 6-21

Lapse of Minority Veto Rights

Company A holds a majority interest in Company X, and Company D holds both a noncontrolling interest and minority veto rights in X. The minority veto rights preclude A from exercising control over X, so A accounts for its interest in X by using the equity method of accounting. On the date that D’s veto rights expire, A gains control over X.

Once A obtains control of X, it should account for this event as a business combination.

6.6.3 Control by Contract

A business combination can occur when an acquirer and acquiree agree to combine their businesses by contract alone (e.g., a stapling arrangement or dual-listed corporations). In such cases, one of the entities must be identified as the acquirer for accounting purposes, and the assets and liabilities of the entity determined to be the acquiree for accounting purposes are recognized by using the acquisition method, generally at the acquisition-date fair values. ASC 805-10-25-12 states, in part, that for business combinations achieved by contract alone, “the acquirer shall attribute to the equity holders of the acquiree the amount of the acquiree’s net assets recognized.” In other words, the acquirer should consolidate the acquiree even if the acquirer owns little or none of the acquiree’s outstanding equity. The acquirer should recognize in its postcombination financial statements a noncontrolling interest for the equity in the acquiree owned by other parties even if the result is that the noncontrolling interest represents 100 percent of the acquiree’s net assets.

With the introduction of the VIE model, the relevance of the control by contract model has diminished. This is because a legal entity controlled by contract would most likely be a VIE since one of the conditions for exemption from the VIE model is that the equity investors at risk must control the legal entity’s most significant activities. However, in the rare instances in which such a legal entity is not a VIE, the guidance in ASC 810-10-15-20 through 15-22 applies. See Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for more information about the control-by-contract model.

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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.