FASB Amends Guidance on Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity
Overview
On May 12, 2025, the FASB issued ASU 2025-03,1 which revises the guidance in ASC 8052 on identifying the accounting acquirer in a business combination in which
the legal acquiree is a variable interest entity (VIE). The ASU is intended to
improve comparability between business combinations that involve VIEs and those
that do not.3
Background
The guidance in ASC 805-10-25-5 before the adoption of ASU 2025-03 states that in
a business combination in which a VIE is acquired, the primary beneficiary of
the legal acquiree is always the accounting acquirer. Conversely, for business
combinations in which the acquired entity is determined not to be a VIE and it
is not clear which of the combining entities is the acquirer after application
of the voting interest entity (VOE) model, a reporting entity is required to
consider the factors in ASC 805-10-55-11 through 55-15 when determining which
legal entity is the accounting acquirer. As a result, if an acquisition
transaction is effected primarily by exchanging equity interests, a reporting
entity may reach different conclusions related to determining the accounting
acquirer in a business combination involving a legal acquiree that is a VIE than
it would if the legal acquiree were a VOE. That is, having considered the
factors in ASC 805-10-55-12 through 55-15, the reporting entity might not
identify the primary beneficiary of the legal acquiree that is a VIE as the
accounting acquirer of the combining entities.
The identification of the accounting acquirer establishes which entity in the
business combination will have its assets and liabilities remeasured in
accordance with ASC 805-20 (generally at fair value) and creates a new basis of
accounting. Accordingly, the comparability of similar transactions under
existing GAAP can be greatly affected by the structure of the legal acquiree and
whether such entity qualifies as a VIE or a VOE.
Main Provisions of ASU 2025-03
Under ASU 2025-03, a reporting entity involved in a business combination effected
primarily by the exchange of equity interests must consider the factors in ASC
805-10-55-12 through 55-15 to determine which entity is the accounting acquirer
regardless of whether the legal acquiree is a VIE. More specifically,
when considering those factors, the reporting entity can determine that a
transaction in which the legal acquiree is a VIE represents a reverse
acquisition (in which the legal acquirer is identified as the acquiree for
accounting purposes). As a result, comparability is increased with business
combinations in which the legal acquiree is a VOE. For a further discussion of
the factors in ASC 805-10-55-12 through 55-15, see Section 3.1 of Deloitte’s Roadmap Business Combinations.
Effective Date and Transition
Effective Date
ASU 2025-03 is effective for fiscal years beginning after December 15, 2026,
including interim periods within those fiscal years. Early adoption is
permitted.
Transition
The amendments in ASU 2025-03 must be applied prospectively to any business
combination that occurs after the initial adoption date.
Contacts
|
|
Matt Himmelman
Audit & Assurance
Partner
Deloitte &
Touche LLP
+1 714 436
7277
|
|
Kole Gilchrist
Audit & Assurance
Manager
Deloitte &
Touche LLP
+1 716
843-7289
|
Footnotes
1
FASB Accounting Standards Update (ASU) No. 2025-03,
Determining the Accounting Acquirer in the Acquisition of a
Variable Interest Entity.
2
FASB Accounting Standards Codification (ASC) Topic 805,
Business Combinations.
3
Paragraph BC24 of ASU 2025-03 states, “On the basis of
the EITF’s discussions and comment letter feedback received on the
proposed Update, the Board concluded that the amendments in this Update
will enhance the comparability of financial statements across entities
engaging in acquisition transactions effected primarily by exchanging
equity interests when the legal acquiree meets the definition of a
business. Specifically, under the amendments, acquisition transactions
in which the legal acquiree is a VIE will, in more instances, result in
the same accounting outcomes as economically similar transactions in
which the legal acquiree is a voting interest entity. This aligns with
the discussion of comparability in FASB Concepts Statement No. 8,
Conceptual Framework for Financial Reporting, Chapter 3,
Qualitative Characteristics of Useful Financial Information,
which states that ‘for information to be comparable, like things must
look alike and different things must look different’ (paragraph QC23).
In addition, the Board notes that by improving comparability, investors
will receive more decision-useful information.”