Definition
After a business combination, the acquirer measures identifiable assets acquired and liabilities assumed at acquisition-date fair value, with limited exceptions (for example, deferred taxes and certain employee benefits follow other topics). Goodwill equals consideration transferred, plus any noncontrolling interest and previously held equity interest at fair value, minus the net identifiable assets. Typical intangibles include customer relationships, trade names, and technology, valued with income, market, or cost approaches. Private companies electing the ASU 2014-18 alternative do not separately recognize certain customer-related intangibles and noncompetes.
Why it matters in an audit or review
Allocation estimates drive future amortization and impairment risk. Auditors test inputs, discount rates, and useful lives; evaluate the specialist's report; and check that provisional amounts are updated in the measurement period.
Example
(Illustrative, with no private company alternative election.) Price $8.0 million. Fair values: receivables $1.0 million, equipment $2.0 million, customer relationships $2.5 million, liabilities assumed $1.5 million. Net identifiable assets are $4.0 million, so goodwill is $4.0 million.
Common mistakes
- Allocating to book values instead of fair values.
- Missing deferred taxes on basis differences.
Sources
- FASB ASC 805-20-25 and 805-20-30 (recognition and measurement of identifiable assets acquired and liabilities assumed, and exceptions)
- FASB ASC 805-30-30-1 (measurement of goodwill)
- FASB ASC 805-10-25-13 through 25-19 (measurement period)
- FASB ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination
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