As our economy improves, more companies are considering mergers and acquisitions. If you are one of them, it is necessary to understand and properly apply the existing acquisition reporting rules.
n Know the guidelines. The rules that cover accounting for business combinations are codified in Financial Accounting Standards Board Accounting Standards Codification 805.
n Understand the terminology. All business combinations must be reported using the acquisition method. The method requires the reporting entity to identify the acquirer for every business combination.
One of the most important concepts under ASC 805 is that the acquisition method only applies to the acquisition of a business. A business combination only occurs when (a) an entity obtains control and (b) acquires a business. Under ASC 805, a business is defined as an integrated set of activities and assets that is capable of being conducted and managed to provide a return directly to investors and other owners. A business consists of (a) inputs, (b) processes and (c) the ability to create outputs. If the assets acquired and the liabilities assumed do not meet the definition of a business, then the transaction is simply an asset purchase and the fair value and other requirements under ASC 805 do not apply.
It’s important to recognize consideration, generally thought of as what you pay to acquire a business, can come in many ways. Cash, other assets, a business or subsidiary of the acquirer, contingent consideration, common or preferred equity instruments, options, warrants and member interests of mutual entities are all examples of consideration.
n Applying the acquisition method. Proper application of the acquisition method involves:
n Identifying the acquirer
n Determining the acquisition date
n Recognizing and measuring at fair value the identifiable assets acquired, liabilities assumed and any noncontrolling interests
n Measuring the consideration transferred (except in situations where control is obtained without consideration)
Other important considerations when applying ASC 805 to business combinations include the fact that certain transactions are outside the scope of ASC 805. Such transactions include:
n Formation of a joint venture
n Acquisition of an asset or group of assets that does not meet the definition of a business
n A combination between two entities under common control
n A combination between nonprofit entities, acquisitions of a for-profit business by a nonprofit entity
n Public shell mergers
These are all exempt from the requirements of ASC 805 and should not be accounted for as a business combination.
n What to do with goodwill and other intangible assets. Goodwill must be accounted for separately and should not include other identifiable intangible assets (such as patents or trademarks). However, private companies may now elect an accounting alternative that allows certain customer-related intangible assets and noncompetition agreements to be included with goodwill. •
Robert Miller, CPA, CFE, is a shareholder in the Accounting & Auditing Group at CBIZ Tofias. He can be reached at Rmiller@cbiztofias.com.
