7.14 Illustrative Example
The example below is reproduced from ASC 805-10-55-37 through 55-50 and
illustrates some of the disclosure requirements of ASC 805.
ASC 805-10
Example 5: Illustration of Disclosure Requirements
55-37 This Example illustrates some of the disclosure requirements established in the several Subtopics of
this Topic; it is not based on an actual transaction. The Example assumes that Acquirer is a public entity and
that Target is a private entity. The illustration presents the disclosures in a tabular format that refers to the
specific disclosure requirements illustrated. An actual note to financial statements might present many of the
disclosures illustrated in a simple narrative format.
55-38 Paragraph 805-10-50-2(a) through (d)
On June 30, 20X0, Acquirer acquired 15 percent of the outstanding common shares of Target. On June
30, 20X2, Acquirer acquired 60 percent of the outstanding common shares of Target. Target is a provider
of data networking products and services in Canada and Mexico. As a result of the acquisition, Acquirer
is expected to be the leading provider of data networking products and services in those markets. It also
expects to reduce costs through economies of scale.
55-39 Paragraph 805-30-50-1(a) and 805-30-50-1(e)
The goodwill of $2,500 arising from the acquisition consists largely of the synergies and economies of
scale expected from combining the operations of Acquirer and Target. All of the goodwill was assigned to
Acquirer’s network segment.
55-40 Paragraph 805-30-50-1(d)
None of the goodwill recognized is expected to be deductible for income tax purposes.
55-41 Paragraphs 805-10-50-2, 805-20-50-1, and 805-30-50-1
The following table summarizes the consideration paid for Target and the amounts of the assets acquired
and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of
the noncontrolling interest in Target.
At June 30, 20X2
55-42 Paragraph 805-30-50-1(b)(4)
The fair value of the 100,000 common shares issued as part of the consideration paid for Target ($4,000)
was determined on the basis of the closing market price of Acquirer’s common shares on the acquisition
date.
55-43 Paragraph 805-30-50-1(b)(3) and 805-30-50-1(c), and paragraph 805-30-50-4(a)
The contingent consideration arrangement requires Acquirer to pay the former owners of Target 5 percent
of the revenues of an unconsolidated equity investment, referred to as Investee, owned by Target, in
excess of $7,500 for 20X3, up to a maximum amount of $2,500 (undiscounted). The potential undiscounted
amount of all future payments that Acquirer could be required to make under the contingent consideration
arrangement is between $0 and $2,500. The fair value of the contingent consideration arrangement of
$1,000 was estimated by applying the income approach. That measure is based on significant inputs that
are not observable in the market, which Section 820-10-35 refers to as Level 3 inputs. Key assumptions
include a discount rate range of 20 percent to 25 percent and a probability-adjusted level of revenues
in Investee between $10,000 and $20,000. As of December 31, 20X2, the amount recognized for the
contingent consideration arrangement, the range of outcomes, and the assumptions used to develop the
estimates had not changed.
55-44 Paragraph
805-20-50-1(b)
The fair value of the financial assets
acquired includes receivables under sales-type
leases or direct financing leases of data
networking equipment with a fair value of $2,000.
The gross amount due under the contracts is
$3,100, of which $450 is expected to be
uncollectible.
55-45 Paragraph 805-10-50-6
The fair value of the acquired identifiable intangible assets of $3,300 is provisional pending receipt of the
final valuations for those assets.
55-46 Paragraph 805-20-50-1(d)
A liability of $1,000 has been recognized at fair value for expected warranty claims on products sold by
Target during the last 3 years. Acquirer expects that the majority of this expenditure will be incurred in 20X3
and that all will be incurred by the end of 20X4.
55-47 Paragraph 805-20-50-1(e)
The fair value of the noncontrolling interest in Target, a private entity, was estimated by applying the
income approach and a market approach. This fair value measurement is based on significant inputs that
are not observable in the market and thus represents a fair value measurement categorized within Level
3 of the fair value hierarchy as described in Section 820-10-35. Key assumptions include a discount rate
range of 20 percent to 25 percent, a terminal value based on a range of terminal earnings before interest,
taxes, depreciation, and amortization multiples between 3 and 5 (or, if appropriate, based on long-term
sustainable growth rates ranging between 3 percent and 6 percent), financial multiples of entities deemed
to be similar to Target, and adjustments because of the lack of control or lack of marketability that market
participants would consider when measuring the fair value of the noncontrolling interest in Target.
55-48 Paragraph 805-10-50-2(g)(2)
Acquirer recognized a gain of $500 as a result of remeasuring to fair value its 15 percent equity interest
in Target held before the business combination. The gain is included in other income in Acquirer’s income
statement for the year ending December 31, 20X2.
55-49 Paragraph 805-10-50-2(h)(1) through (h)(3)
The amounts of Target’s revenue and earnings included in Acquirer’s consolidated income statement for the
year ended December 31, 20X2, and the revenue and earnings of the combined entity had the acquisition
date been January 1, 20X2 (if comparative financial statements are not presented), and January 1, 20X1 (if
comparative financial statements are presented), are as follows.
55-50 Paragraph 805-10-50-2(h)(4)
20X2 supplemental pro forma earnings were adjusted to exclude $1,250 of acquisition-related costs
incurred in 20X2 and $650 of nonrecurring expense related to the fair value adjustment to acquisition-date
inventory. 20X1 supplemental pro forma earnings were adjusted to include these charges.