Definition
A business combination occurs when an acquirer obtains control of one or more businesses. A business is an integrated set of activities and assets that includes at least an input and a substantive process that together significantly contribute to the ability to create outputs. A screen treats a set as an asset acquisition when substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or group of similar identifiable assets. ASC 805 requires the acquisition method: identify the acquirer, determine the acquisition date, recognize identifiable assets acquired and liabilities assumed at fair value, recognize any noncontrolling interest, and recognize goodwill or a bargain purchase gain. Acquisition-related costs are expensed as incurred.
Why it matters in an audit or review
Auditors test the fair value of consideration, contingent consideration, and the allocation, often with a valuation specialist. The measurement period allows adjustments for up to one year. Disclosures describe the acquisition and the purchase price allocation.
Example
(Illustrative) A company pays $5.0 million for a business with identifiable net assets at fair value of $3.8 million. Goodwill is $1.2 million. $150,000 of legal fees are expensed.
Common mistakes
- Capitalizing deal costs into goodwill.
- Treating an asset purchase as a business combination.
Sources
- FASB ASC 805-10, Business Combinations, Overall (including the definition of a business and the measurement period)
- FASB ASC 805-20, Identifiable assets, liabilities and noncontrolling interest
- FASB ASC 805-30, Goodwill or a gain from a bargain purchase
- FASB ASU 2017-01, Clarifying the Definition of a Business
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error