Chapter 7 — Disclosure
Chapter 7 — Disclosure
A business combination often results in a significant change in an acquirer’s assets, liabilities, and
operations. ASC 805 describes the overall objectives for disclosing information that permits investors,
creditors, and others to evaluate the financial effects of a business combination. ASC 805-10-50,
ASC 805-20-50, and ASC 805-30-50 provide specific disclosure requirements that are intended to fulfill
those objectives. However, if the information an acquirer discloses under those specific requirements
or other GAAP is not sufficient for meeting the overall objectives in ASC 805, the acquirer must disclose
whatever additional information is necessary to meet those objectives.
7.1 Disclosure Objectives
ASC 805-10
Business Combinations Occurring During a Current Reporting Period or After the Reporting Date
but Before the Financial Statements Are Issued
50-1 The acquirer shall disclose information that enables users of its financial statements to evaluate the
nature and financial effect of a business combination that occurs either:
- During the current reporting period
- After the reporting date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25).
The Financial Effects of Adjustments That Relate to Business Combinations That Occurred in the
Current or Previous Reporting Periods
50-5 The acquirer shall disclose information that enables users of its financial statements to evaluate the
financial effects of adjustments recognized in the current reporting period that relate to business combinations
that occurred in the current or previous reporting periods.
Other Disclosures
50-7 If the specific disclosures required by this Subtopic and other generally accepted accounting principles
(GAAP) do not meet the objectives set out in paragraphs 805-10-50-1 and 805-10-50-5, the acquirer shall
disclose whatever additional information is necessary to meet those objectives.
Entities must provide separate disclosures for each material business combination that occurs during
the reporting period. However, certain disclosures may be provided in the aggregate for immaterial
business combinations that are material collectively (see Section 7.1.1).
The disclosure requirements apply to all acquirers, with the exception of the
pro forma disclosures required by ASC
805-10-50-2(h), which apply only to public
entities (see Section 7.9 for
more information). Further, in accordance with ASC
270-10-50-5 and ASC 270-10-50-7(a), the disclosure
requirements in ASC 805 also apply to interim
financial reports.
7.1.1 Individually Immaterial Business Combinations That Are Material Collectively
Specific disclosures are required if an acquirer completes multiple immaterial business combinations
in a reporting period that are material collectively. For such business combinations, ASC 805-10-50-3,
ASC 805-20-50-2, and ASC 805-30-50-2 require entities to disclose, in the aggregate, the information
required by the following:
- ASC 805-10-50-2 (e)–(h) (i.e., the disclosures in ASC 805-10-50-2 (a)–(d) are not required. See Section 7.2).
- ASC 805-20-50-1.
- ASC 805-30-50-1.
See the next section for more information about assessing materiality.
7.1.2 Assessing Materiality
ASC 805 does not provide guidance on differentiating between material and
immaterial business combinations or on evaluating when individually immaterial
business combinations are material collectively, so entities need to apply
judgment. Although SEC Regulation S-X, Rule 3-05, specifies thresholds for
registrants related to significance (see Appendix D), those thresholds are
generally higher than the materiality thresholds under ASC 805. Therefore,
registrants must separately determine which financial statement disclosures are
required under ASC 805 for an individually material business combination (or for
individually immaterial business combinations that are material collectively) in
the period presented.
We believe that in addition to the quantitative considerations involved in the
assessment of materiality, entities should
consider qualitative factors, such as the amount
of discussion about a business combination in an
entity’s MD&A, annual report, or press
release.
Unless otherwise indicated, the following discussion of disclosure requirements
applies to all material business combinations and
individually immaterial business combinations that
are material collectively occurring during the
reporting period.
7.2 General Information to Be Disclosed
ASC 805-10
50-2 To meet the objective in the preceding paragraph [ASC 805-10-50-1], the acquirer shall disclose the following information for each
business combination that occurs during the reporting period:
- The name and a description of the acquiree
- The acquisition date
- The percentage of voting equity interests acquired
- The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree . . . .
Disclosure of the information provided in ASC 805-10-50-2(a)–(d) is not required for individually
immaterial business combinations that are collectively material (see Section 7.1.1).
7.3 Assets Acquired and Liabilities Assumed
ASC 805-20
50-1 Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination. To
meet that objective, the acquirer shall disclose all of the following information for each business combination
that occurs during the reporting period: . . .
c. The amounts recognized as of the acquisition date for each major class of assets acquired and liabilities
assumed (see Example 5 [paragraph 805-10-55-37]). . . .
The disclosures required by ASC 805-20-50-1(c) are often presented in a tabular format. See
Section 7.14 for a disclosure example.
ASC 805-20-50-1 also includes specific disclosure requirements for certain
acquired assets and liabilities. Those requirements are described in more detail below.
7.3.1 Indemnification Assets
ASC 805-20
50-1 Paragraph 805-10-50-1 identifies one of the
objectives of disclosures about a business combination. To meet that
objective, the acquirer shall disclose all of the following information for
each business combination that occurs during the reporting period:
-
For indemnification assets, all of the following:
-
The amount recognized as of the acquisition date
-
A description of the arrangement and the basis for determining the amount of the payment
-
An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact. . . .
-
7.3.2 Receivables
ASC 805-20
50-1 Paragraph 805-10-50-1 identifies one of the
objectives of disclosures about a business combination. To meet that
objective, the acquirer shall disclose all of the following information for
each business combination that occurs during the reporting period: . . .
b. For acquired receivables not subject to the requirements of Subtopic
326-20 relating to purchased financial assets with credit deterioration,
all of the following:
1. The fair value of the receivables (unless those
receivables arise from sales-type leases or direct financing leases by the
lessor for which the acquirer shall disclose the amounts recognized as of
the acquisition date)
2. The gross contractual amounts receivable
3. The best estimate at the acquisition date of
the contractual cash flows not expected to be collected.
The disclosures shall be provided by major class of receivable, such as
loans, net investment in sales-type or direct financing leases in
accordance with Subtopic 842-30 on leases — lessor, and any other class of
receivables. . . .
7.3.3 Assets and Liabilities Arising From Contingencies
ASC 805-20
50-1 Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination. To
meet that objective, the acquirer shall disclose all of the following information for each business combination
that occurs during the reporting period: . . .
d. For contingencies, the following disclosures shall be included in the note that describes the business
combination:
1. For assets and liabilities arising from contingencies recognized at the acquisition date:
i. The amounts recognized at the acquisition date and the measurement basis applied
(that is, at fair value or at an amount recognized in accordance with Topic 450 and Section 450-20-25)
ii. The nature of the contingencies.
An acquirer may aggregate
disclosures for assets or liabilities arising from
contingencies that are similar in nature.
2. For contingencies that are not recognized at the acquisition date, the disclosures required by Topic
450 if the criteria for disclosures in that Topic are met. . . .
In addition to the requirements in ASC 805, SEC registrants should consider the
disclosure requirements in SAB Topic 5.Y,
which addresses disclosures related to loss contingencies.
7.3.4 Intangible Assets
While ASC 805-20-50-1(c) requires disclosure of “[t]he amounts recognized as of the acquisition date for
each major class of assets acquired and liabilities assumed,” ASC 350-30-50-1 provides more specific
disclosure requirements for acquired intangible assets:
ASC 350-30
Disclosures in the Period of Acquisition
50-1 For intangible assets acquired either individually or as part of a group of assets (in either an asset
acquisition, a business combination, or an acquisition by a not-for-profit entity), all of the following information
shall be disclosed in the notes to financial statements in the period of acquisition:
- For intangible assets subject to amortization, all of the following:
- The total amount assigned and the amount assigned to any major intangible asset class
- The amount of any significant residual value, in total and by major intangible asset class
- The weighted-average amortization period, in total and by major intangible asset class.
- For intangible assets not subject to amortization, the total amount assigned and the amount assigned to any major intangible asset class.
- The amount of research and development assets acquired in a transaction other than a business combination or an acquisition by a not-for-profit entity and written off in the period and the line item in the income statement in which the amounts written off are aggregated.
- For intangible assets with renewal or extension terms, the weighted-average period before the next renewal or extension (both explicit and implicit), by major intangible asset class.
This information also shall be disclosed separately for each material business
combination or acquisition by a not-for-profit entity or in the aggregate for
individually immaterial business combinations or acquisitions by a
not-for-profit entity that are material collectively if the aggregate fair
values of intangible assets acquired, other than goodwill, are
significant.
In addition, ASC 350-30-50-2 through 50-5 provide disclosure requirements for intangible assets in
periods after their acquisition.
7.3.4.1 In-Process Research and Development
Other than the requirement in ASC 805-20-50-1(c) for acquirers to disclose “[t]he amounts recognized
as of the acquisition date for each major class of assets acquired and liabilities assumed,” ASC 805 does
not specifically address disclosures related to IPR&D. However, acquirers must comply with the fair value measurement disclosure requirements in ASC 820-10-50.
7.3.5 Goodwill
ASC 805-30
50-1 Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination. To
meet that objective, the acquirer shall disclose all of the following information for each business combination
that occurs during the reporting period:
a. A qualitative description of the factors that make up the goodwill recognized, such as expected synergies
from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for
separate recognition, or other factors. . . .
d. The total amount of goodwill that is expected to be deductible for tax purposes.
e. If the acquirer is required to disclose segment information in accordance with Subtopic 280-10, the
amount of goodwill by reportable segment. If the assignment of goodwill to reporting units required by
paragraphs 350-20-35-41 through 35-44 has not been completed as of the date the financial statements
are issued or are available to be issued (as discussed in Section 855-10-25), the acquirer shall disclose
that fact. . . .
50-4 Paragraph 805-10-50-5 identifies the second objective of disclosures about the effects of business
combinations that occurred in the current or previous reporting periods. To meet the objective in that
paragraph, the acquirer shall disclose the following information for each material business combination or in
the aggregate for individually immaterial business combinations that are material collectively: . . .
b. A reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period as
required by paragraph 350-20-50-1. . . .
Further, ASC 350-20 requires entities to provide a reconciliation of the carrying amounts of goodwill at
the beginning and end of the reporting period:
ASC 350-20
50-1 The changes in the carrying amount of goodwill during the period shall be disclosed, showing separately
(see Example 3 [paragraph 350-20-55-24]):
- The gross amount and accumulated impairment losses at the beginning of the period
- Additional goodwill recognized during the period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with paragraph 360-10-45-9
- Adjustments resulting from the subsequent recognition of deferred tax assets during the period in accordance with paragraphs 805-740-25-2 through 25-4 and 805-740-45-2
- Goodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale
- Impairment losses recognized during the period in accordance with this Subtopic
- Net exchange differences arising during the period in accordance with Topic 830
- Any other changes in the carrying amounts during the period
- The gross amount and accumulated impairment losses at the end of the period.
Entities that report segment information in accordance with Topic 280 shall provide the above information
about goodwill in total and for each reportable segment and shall disclose any significant changes in the
allocation of goodwill by reportable segment. If any portion of goodwill has not yet been allocated to a reporting
unit at the date the financial statements are issued, that unallocated amount and the reasons for not allocating
that amount shall be disclosed.
50-1A Entities that have one or more
reporting units with zero or negative carrying amounts of net assets shall
disclose those reporting units with allocated goodwill and the amount of
goodwill allocated to each and in which reportable segment the reporting unit
is included.
In addition, ASC 350-20-50 provides disclosure requirements for goodwill in periods after the business
combination.
As Chapter 8 will
discuss, a private company and not-for-profit entity can elect an alternative to account
for goodwill. In such a case, the entity is required to amortize goodwill over a 10-year
period unless it can demonstrate that a shorter life is more appropriate. A private
company or not-for-profit entity that elects the accounting alternative must provide
disclosures as follows:
ASC 350-20
50-4 The following information shall be disclosed in the notes to financial statements for any additions to
goodwill in each period for which a statement of financial position is presented:
- The amount assigned to goodwill in total and by major business combination, by major acquisition by a not-for-profit entity, or by reorganization event resulting in fresh-start reporting
- The weighted-average amortization period in total and the amortization period by major business combination, by major acquisition by a not-for-profit entity, or by reorganization event resulting in fresh-start reporting.
50-5 The following information shall be disclosed in the financial statements or the notes to financial
statements for each period for which a statement of financial position is presented:
- The gross carrying amounts of goodwill, accumulated amortization, and accumulated impairment loss
- The aggregate amortization expense for the period
- Goodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale.
50-6 For each goodwill impairment loss recognized, the following information shall be disclosed in the notes to
financial statements that include the period in which the impairment loss is recognized:
- A description of the facts and circumstances leading to the impairment
- The amount of the impairment loss and the method of determining the fair value of the entity or the reporting unit (whether based on prices of comparable businesses or nonprofit activities, a present value or other valuation technique, or a combination of those methods)
- The caption in the income statement or statement of activities in which the impairment loss is included
- The method of allocating the impairment loss to the individual amortizable units of goodwill.
50-7 The quantitative disclosures about significant unobservable inputs used in fair value measurements
categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb) are not required
for fair value measurements related to the financial accounting and reporting for goodwill after its initial
recognition in a business combination or an acquisition by [a] not-for-profit entity.
7.3.6 Disclosure of Practical Expedients the Acquirer Uses for Recognizing and Measuring an Acquiree’s Contract Assets and Liabilities
ASC 805-20
50-5 Paragraph not used.
Pending content (Transition Guidance: ASC 805-20-65-3)
Editor’s Note:
The content of paragraph 805-20-50-5 will be amended upon
transition, together with the addition of the heading noted
below:
Exceptions to the Measurement Principle
50-5 For any of the practical expedients
in paragraph 805-20-30-29 that an acquirer uses, the acquirer shall
disclose all of the following information:
- The expedients that have been used
- To the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients.
ASU 2021-08 notes that
upon its adoption, an acquirer is required to disclose any practical expedients it uses in
recognizing and measuring an acquiree’s contract assets and contract liabilities from
revenue contracts with customers and other contracts to which the provisions of ASC 606
apply, such as “contract liabilities from the sale of nonfinancial assets within the scope
of Subtopic 610-20, that are recognized and measured using the guidance in Topic 606.” An
acquirer is also required to disclose “[t]o the extent reasonably possible, a qualitative
assessment of the estimated effect of applying each of those expedients.” See Section 4.3.13 for more information
about the amendments made by ASU 2021-08.
7.4 Consideration Transferred, Including Contingent Consideration
ASC 805-30
50-1 Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination. To
meet that objective, the acquirer shall disclose all of the following information for each business combination
that occurs during the reporting period: . . .
b. The acquisition-date fair value of the total consideration transferred and the acquisition-date fair value
of each major class of consideration, such as the following:
1. Cash
2. Other tangible or intangible assets, including a business or subsidiary of the acquirer
3. Liabilities incurred, for example, a liability for contingent consideration
4. Equity interests of the acquirer, including the number of instruments or interests issued or issuable
and the method of determining the fair value of those instruments or interests.
c. For contingent consideration arrangements, all of the following:
1. The amount recognized as of the acquisition date
2. A description of the arrangement and the basis for determining the amount of the payment
3. An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact
and the reasons why a range cannot be estimated. If the maximum amount of the payment is
unlimited, the acquirer shall disclose that fact. . . .
50-4 Paragraph 805-10-50-5 identifies the second objective of disclosures about the effects of business
combinations that occurred in the current or previous reporting periods. To meet the objective in that
paragraph, the acquirer shall disclose the following information for each material business combination or in
the aggregate for individually immaterial business combinations that are material collectively:
- For each reporting period after the acquisition date until the entity collects, sells, or otherwise loses the right to a contingent consideration asset, or until the entity settles a contingent consideration liability or the liability is cancelled or expires, all of the following:
- Any changes in the recognized amounts, including any differences arising upon settlement
- Any changes in the range of outcomes (undiscounted) and the reasons for those changes
- The disclosures required by Section 820-10-50. . . .
ASC 805-30-50-1 requires acquirers to disclose “[t]he acquisition-date fair value of the total
consideration transferred and the acquisition-date fair value of each major class of consideration.”
The consideration transferred from the acquirer to the seller is commonly in the form of cash, equity
instruments of the acquirer, or a combination of both. However, the consideration can take other forms,
such as noncash assets or liabilities incurred (e.g., contingent consideration or a seller note).
Connecting the Dots
Cash flows related to the acquisitions of businesses, PP&E, and other productive assets are
presented as investing activities in the statement of cash flows. For a business combination, all
cash paid to purchase a business is shown as a single line item, net of any cash acquired. After
an acquisition, the cash flows of the acquirer and acquiree are combined and presented in a
consolidated statement of cash flows.
An entity may also need to consider other financial reporting implications of a
business combination, depending on the nature and terms of the transaction. For example,
any noncash effects of an acquisition that involves noncash consideration must be
disclosed in a narrative format or summarized in a schedule.
See Section 7.5 of
Deloitte’s Roadmap Statement of Cash
Flows for more information about
issues related to the presentation of cash flows in
a business combination.
7.5 Bargain Purchase Gains
ASC 805-30
50-1 Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination. To
meet that objective, the acquirer shall disclose all of the following information for each business combination
that occurs during the reporting period: . . .
f. In a bargain purchase (see paragraphs 805-30-25-2 through 25-4), both of the following:
1. The amount of any gain recognized in accordance with paragraph 805-30-25-2 and the line item in
the income statement in which the gain is recognized
2. A description of the reasons why the transaction resulted in a gain.
7.6 Partial Acquisitions and Noncontrolling Interests
ASC 805-20
50-1 Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a business combination. To
meet that objective, the acquirer shall disclose all of the following information for each business combination
that occurs during the reporting period: . . .
e. For each business combination in which the acquirer holds less than 100 percent of the equity interests
in the acquiree at the acquisition date, both of the following:
1. The fair value of the noncontrolling interest in the acquiree at the acquisition date
2. The valuation technique(s) and significant inputs used to measure the fair value of the
noncontrolling interest.
In addition to meeting the requirement in ASC 805-20-50-1(e), entities must
disclose under ASC 810-10-50-1A — either in the statement of changes in equity or in the
notes to the consolidated financial statements — a reconciliation between the beginning
and end of the period carrying amounts of total equity, equity attributable to the
parent, and equity attributable to the noncontrolling interest. For further details on
these required disclosure requirements, see Chapter 8 of Deloitte’s Roadmap Noncontrolling
Interests.
7.7 Business Combinations Achieved in Stages
ASC 805-10
50-2 To meet the objective in the preceding paragraph [ASC 805-10-50-1], the acquirer shall disclose the following information for each
business combination that occurs during the reporting period: . . .
g. In a business combination achieved in stages, all of the following:
1. The acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately
before the acquisition date
2. The amount of any gain or loss recognized as a result of remeasuring to fair value the equity interest
in the acquiree held by the acquirer immediately before the business combination (see paragraph
805-10-25-10) and the line item in the income statement in which that gain or loss is recognized
3. The valuation technique(s) used to measure the acquisition-date fair value of the equity interest in
the acquiree held by the acquirer immediately before the business combination
4. Information that enables users of the acquirer’s financial statements to assess the inputs used
to develop the fair value measurement of the equity interest in the acquiree held by the acquirer
immediately before the business combination. . . .
7.8 Transactions That Are Separate From the Business Combination
ASC 805-10
50-2 To meet the objective in the preceding paragraph [ASC 805-10-50-1], the acquirer shall disclose the following information for each
business combination that occurs during the reporting period: . . .
e. For transactions that are recognized separately from the acquisition of assets and assumptions of
liabilities in the business combination (see paragraph 805-10-25-20), all of the following:
1. A description of each transaction
2. How the acquirer accounted for each transaction
3. The amounts recognized for each transaction and the line item in the financial statements in which
each amount is recognized
4. If the transaction is the effective settlement of a preexisting relationship, the method used to
determine the settlement amount. . . .
7.8.1 Acquisition-Related Costs
ASC 805-10
50-2 To meet the objective in the preceding paragraph [ASC 805-10-50-1], the acquirer shall disclose the following information for each
business combination that occurs during the reporting period: . . .
f. The disclosure of separately recognized transactions required in (e) [ASC 805-10-50-2(e)] shall include the
amount of acquisition-related costs, the amount recognized as an expense, and the line item or items in
the income statement in which those expenses are recognized. The amount of any issuance costs not
recognized as an expense and how they were recognized also shall be disclosed. . . .
Acquirers typically incur acquisition-related costs — such as third-party costs
for finders’ fees — as well as advisory, legal, accounting, valuation, and other
professional or consulting fees. ASC 805-10-25-23 states, in part, 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” (see Section 5.4.1). ASC 805-10-50-2(f) requires an entity to disclose:
-
“[T]he amount of acquisition-related costs.”
-
“[T]he amount recognized as an expense.”
-
“[T]he line item or items in the income statement in which [the] expenses are recognized.”
-
“The amount of any issuance costs not recognized as an expense and how they were recognized.”
While entities will often incur acquisition-related costs in the reporting periods before an acquisition,
the disclosures specified in ASC 805-10-50-2 are required only for business combinations that occur
during the current reporting period or after the reporting date but before financial statements are
issued unless the initial accounting for the business combination is incomplete at the time the financial
statements are issued or are available to be issued.
7.9 Supplemental Information for Public Entities
ASC 805-10
50-2 To meet the objective in the preceding paragraph [ASC 805-10-50-1], the acquirer shall disclose the following information for each
business combination that occurs during the reporting period: . . .
h. If the acquirer is a public entity, all of the following:
1. The amounts of revenue and earnings of the acquiree since the acquisition date included in the
consolidated income statement for the reporting period.
2. If comparative financial statements are not presented, the revenue and earnings of the combined
entity for the current reporting period as though the acquisition date for all business combinations
that occurred during the year had been as of the beginning of the annual reporting period
(supplemental pro forma information).
3. If comparative financial statements are presented, the revenue and earnings of the combined entity
as though the business combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period (supplemental pro forma information).
For example, for a calendar year-end entity, disclosures would be provided for a business
combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be
revised if 20X2 is presented for comparative purposes with the 20X3 financial statements (even if
20X2 is the earliest period presented).
4. The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to
the business combination(s) included in the reported pro forma revenue and earnings (supplemental
pro forma information).
If disclosure of any of the information required by (h) is impracticable, the
acquirer shall disclose that fact and explain why the
disclosure is impracticable. In this context, the term
impracticable has the same meaning as in
paragraph 250-10-45-9.
According to ASC 805-10-50-2(h)(1), an acquirer that meets the definition of a public entity is required
to disclose “[t]he amounts of revenue and earnings of the acquiree since the acquisition date included
in the consolidated income statement for the reporting period.” The FASB limited the period for this
disclosure to the year of acquisition (i.e., the end of the annual reporting period that includes the acquisition date) because the Board believed that it might become impracticable for entities to obtain
this information after the acquiree becomes more integrated into the acquirer’s operations.
In addition, ASC 805-10-50-2(h) requires public entities to disclose
“supplemental pro forma information.” The requirements for this disclosure differ
depending on whether comparative financial statements are presented:
-
If an acquirer presents comparative financial statements, it is required to disclose “the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period” (emphasis added).
-
If an acquirer does not present comparative financial statements, it is required to disclose “the revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period” (emphasis added).
In addition, in accordance with ASC 805-10-50-2(h)(4), acquirers must disclose
“[t]he nature and amount of any material, nonrecurring pro forma adjustments
directly attributable to the business combination(s) included in the reported pro
forma revenue and earnings.”
Entities must provide pro forma information for business combinations that occur
(1) during the reporting period or (2) after the reporting date but before the
financial statements are issued unless the initial accounting for the business
combination is incomplete at the time the financial statements are issued or are
available to be issued. In addition, if multiple immaterial business combinations
occur that are material collectively, pro forma information should be disclosed in
the aggregate for those business combinations.
The supplemental pro forma information required by ASC 805-10-50-2(h) (i.e., the
revenue and earnings of the acquiree for the periods before the acquisition) does
not need to be audited. Auditors, however, should perform the procedures required by
PCAOB AU Section 558.
SEC Considerations
The SEC rules on pro forma financial information disclosures differ from the guidance in
U.S. GAAP:
- ASC 805-10-50-2(h) requires pro forma financial information to be disclosed in the notes to the historical financial statements.
- SEC Regulation S-X, Article 11, requires pro forma financial information to be presented in certain SEC filings (e.g., Form 8-K, registration statements, and proxy statements).
The pro forma financial information disclosures required by ASC 805 are not
sufficient to satisfy the more extensive presentation requirements of
Article 11. We believe that since that the FASB does not provide detailed
guidance on preparing the pro forma financial information, registrants
preparing such information under ASC 805 may apply the same concepts they
apply when preparing their pro forma information under Article 11 in the
absence of guidance under ASC 805.
See Chapter 4 of
Deloitte’s Roadmap SEC
Reporting Considerations for Business Acquisitions
for more information.
7.9.1 Definition of a Public Entity
The disclosures in ASC 805-10-50-2(h) apply to an acquirer that meets the following definition of a public
entity in the ASC master glossary:
A business entity or a not-for-profit entity that meets any of the following conditions:
- It has issued debt or equity securities or is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
- It is required to file financial statements with the Securities and Exchange Commission (SEC).
- It provides financial statements for the purpose of issuing any class of securities in a public market.
The ASC master glossary includes multiple definitions of a public entity, so
entities should ensure that they are applying the correct one when determining
whether ASC 805 pro forma disclosures are required. The definition of public
entity in ASC 805-10-20 is the same as that in ASC 280-10-20 for segment
reporting, but it is different from those in ASC 718-10-20 for share-based
payment awards and ASC 740-10-20 for income taxes. In addition, the definition
of a public entity is different from the definition of a PBE, which is used to
determine whether an entity qualifies for the private-company accounting
alternatives as discussed in Chapter 8.
7.9.2 Periods to Be Presented
The objective of the disclosure requirements in ASC 805-10-50-2(h) is to give financial statement users
a sense of what the acquirer’s revenues and earnings would have been if the acquiree had been part of
the acquirer’s operations in the periods before the acquisition. However, ASC 805-10-50-2(h) requires
disclosure of the supplemental pro forma information only for (1) the year of the acquisition and (2)
the previous year if comparative financial statements are presented, even if the acquirer presents
more than two years of income statements. For example, if an acquirer with a calendar year-end had a
material business combination on July 1, 20X8, it would disclose the following in its December 31, 20X8,
comparative financial statements:
- The revenue and earnings of the acquiree from July 1, 20X8, through December 31, 20X8.
- The revenue and earnings of the combined entity from January 1, 20X8, through December 31, 20X8.
- The revenue and earnings of the combined entity from January 1, 20X7, through December 31, 20X7.
In its December 31, 20X9, comparative financial statements, the acquirer would
carry forward the disclosures from the prior year without revising them. It
would not have to include additional pro forma information for 20X9 because the
acquiree’s results would be included in the consolidated financial
statements.
Example 7-1
Company A acquires Company B in a business combination on April 30, 20X8. Company A has a calendar
year-end, and the acquisition of B is material to A’s financial statements. We believe that in its June 30, 20X8,
interim financial statements, A should present supplemental pro forma financial information for the three
months ended June 30, 20X7 and 20X8, and the six months ended June 30, 20X7 and 20X8. Even though the
business combination did not occur in the first quarter of 20X8, we believe that A should present supplemental
pro forma financial information for the three months ended March 31, 20X8, in its March 31, 20X9, financial
statements because the comparative interim period does not include B’s results.
7.9.3 Preparing Pro Forma Financial Information
ASC 805 does not provide specific guidance on the preparation of pro forma information. The objective
of the ASC 805 pro forma disclosure requirements is to give the acquirer’s financial statement users
a sense of what the acquirer’s revenues and earnings would have been if the business combination
had occurred at the beginning of the current year (or previous year if comparative financial statements
are presented). Typically, the acquiree’s revenues and earnings are added to those of the acquirer for
the period of the year in which the acquiree was not owned by the acquirer. If the acquirer presents
comparative financial statements, the acquiree’s revenues and earnings are added to those of the
acquirer for the previous year. Pro forma information should be adjusted for the following:
- Acquisition-related costs — Costs related to the acquisition are included in earnings as of the beginning of the earliest period (i.e., the beginning of either the current year or the previous year if comparative financial statements are presented).
- Fair value adjustments — Income statement effects of fair value adjustments (e.g., depreciation or amortization) are shown as if those adjustments were recognized at the beginning of either the current year or the previous year if comparative financial statements are presented.
- Income taxes — Tax effects of the business combination are shown as if the acquiree had been part of the entity since the beginning of either the current year or the previous year if comparative financial statements are presented.
- Financing — Adjustments related to obtaining financing, such as new debt and additional interest expense, are presented as if the new debt had been obtained as of the beginning of either the current year or the previous year if comparative financial statements are presented.
- Accounting policies — An acquiree’s pro forma revenues and earnings are adjusted to reflect the accounting policies that will be applied by the acquiree after the business combination. See Section 4.16 for more information about conforming accounting policies.
In accordance with ASC 805-10-50-2(h)(4), acquirers must also disclose “[t]he
nature and amount of any material, nonrecurring pro forma adjustments directly
attributable to the business combination(s) included in the reported pro forma
revenue and earnings.” However, acquirers should not include adjustments that are
not objectively determinable, such as adjustments for costs savings or synergies
resulting from the business combination.
7.9.4 Impracticability Exception
ASC 805-10-50-2 states that “[i]f disclosure of any of the information required by (h) [ASC 805-10-50-2(h)] is
impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable.”
ASC 250-10-45-9 clarifies the meaning of impracticability as follows:
It shall be deemed impracticable to apply the effects of a
change in accounting principle retrospectively only if any of the following
conditions exist:
-
After making every reasonable effort to do so, the entity is unable to apply the requirement.
-
Retrospective application requires assumptions about management’s intent in a prior period that cannot be independently substantiated.
-
Retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that both:
-
Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application
-
Would have been available when the financial statements for that prior period were issued.
-
Impracticability is viewed as a high hurdle. Because the ASC 805 pro forma disclosures do not typically
need to include significant estimates or assumptions about management’s intent, it is unusual for
entities to determine that it is impracticable to provide them.
7.10 Fair Value Measurements
The fair value measurement disclosures in ASC 820-10-50 are applicable to the assets and liabilities
acquired in a business combination that are measured at fair value. ASC 820 also requires entities to
disclose certain information if the assets or liabilities are remeasured to fair value on a recurring basis.
7.11 Disclosures Required When the Initial Accounting for the Business Combination Is Incomplete (Measurement-Period Adjustments)
ASC 805-20
50-4A If the initial accounting for a business combination is incomplete (see paragraphs 805-10-25-13
through 25-14) for particular assets, liabilities, noncontrolling interests, or items of consideration and the
amounts recognized in the financial statements for the business combination thus have been determined only
provisionally, the acquirer shall disclose the following information for each material business combination or
in the aggregate for individually immaterial business combinations that are material collectively to meet the
objective in paragraph 805-10-50-5:
- The reasons why the initial accounting is incomplete
- The assets, liabilities, equity interests, or items of consideration for which the initial accounting is incomplete
- The nature and amount of any measurement period adjustments recognized during the reporting period in accordance with paragraph 805-10-25-17, including separately the amount of adjustment to current-period income statement line items relating to the income effects that would have been recognized in previous periods if the adjustment to provisional amounts were recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement.
During the measurement period, the acquirer has time to obtain the information needed to identify and
measure the consideration transferred, the assets acquired, the liabilities assumed, and any previously
held or noncontrolling interests. The objective of this period is to give the acquirer a reasonable
amount of time in which to obtain the information necessary to enable it to complete the accounting
for a business combination while maintaining normal reporting schedules. However, the measurement
period cannot exceed one year from the acquisition date. Entities should disclose the assets, liabilities,
and items of consideration for which the initial accounting is incomplete. See Section 6.1 for more
information about the measurement period.
7.12 Disclosures Related to Business Combinations After the Balance Sheet Date
ASC 805-10
50-4 If the acquisition date of a business combination is after the reporting date but before the financial
statements are issued or are available to be issued (as discussed in Section 855-10-25), the acquirer shall
disclose the information required by paragraph 805-10-50-2 unless the initial accounting for the business
combination is incomplete at the time the financial statements are issued or are available to be issued. In that
situation, the acquirer shall describe which disclosures could not be made and the reason why they could not
be made.
ASC 805-20
50-3 If the acquisition date of a business combination is after the reporting date but before the financial
statements are issued or are available to be issued (as discussed in Section 855-10-25), the acquirer shall
disclose the information required by paragraph 805-20-50-1 unless the initial accounting for the business
combination is incomplete at the time the financial statements are issued or are available to be issued. In that
situation, the acquirer shall describe which disclosures could not be made and the reason why they could not
be made.
ASC 805-30
50-3 If the acquisition date of a business combination is after the reporting date but before the financial
statements are issued or are available to be issued (as discussed in Section 855-10-25), the acquirer shall
disclose the information required by paragraph 805-30-50-1 unless the initial accounting for the business
combination is incomplete at the time the financial statements are issued or are available to be issued. In that
situation, the acquirer shall describe which disclosures could not be made and the reason why they could not
be made.
As indicated in ASC 805-10-50-4, entities are required to disclose the information included in
ASC 805-10-50-2, ASC 805-20-50-1, and ASC 805-30-50-1 “[i]f the acquisition date of a business
combination is after the reporting date but before the financial statements are issued or are available
to be issued.” If the initial accounting for the business combination is incomplete when the financial
statements are issued or are available to be issued, the acquirer should “describe which disclosures
could not be made and the reason why they could not be made,” in accordance with ASC 805-20-50-3.
In addition, as stated in ASC 805-20-50-4A, if an acquirer has recognized only provisional amounts for
“particular assets, liabilities, noncontrolling interests, or items of consideration,” it should disclose the
following, either “for each material business combination or in the aggregate for individually immaterial
business combinations that are material collectively”:
- “The reasons why the initial accounting is incomplete.”
- “The assets, liabilities, equity interests, or items of consideration for which the initial accounting is incomplete.”
- “The nature and amount of any measurement period adjustments recognized during the reporting period in accordance with paragraph 805-10-25-17.”
7.13 Disclosures Related to Business Combinations That Occurred in Previous Reporting Periods
ASC 805-10-50-1 states, in part, that the “acquirer shall disclose information that enables users of its
financial statements to evaluate the nature and financial effect of a business combination that occurs
[during] the current [financial] reporting period.” Therefore, whenever financial statements include the
period in which a business combination occurred, the required disclosures for the acquisition should be
provided. For example, if an entity completed a business combination in 20X0 and presents three years
of income statements in its financial statements, it should include the disclosures related to the 20X0
business combination in its 20X1 and 20X2 financial statements.
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.