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This chapter discusses the key characteristics of a business and identifies which transactions require the application of business combination accounting. Business combination accounting is referred to as the “acquisition method” in ASC 805, Business Combinations. See discussion of the acquisition method in BCG 2. Determining whether the acquisition method applies to a transaction begins with understanding whether the transaction involves the acquisition of one or more businesses and whether it is a business combination within the scope of ASC 805.
All transactions in which an entity obtains control of one or more businesses qualify as business combinations, as described in the FASB’s Master Glossary. ASC 805-10-25-1 further establishes the principle for identifying a business combination.

Excerpt from ASC Master Glossary

business combination: A transaction or other event in which an acquirer obtains control of one or more businesses.

Excerpt from ASC 805-10-25-1

An entity shall determine whether a transaction or other event is a business combination by applying the definition in this Subtopic, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition.

1.1.1 Definition of control

A business combination is defined as a transaction or other event in which an acquirer obtains control of one or more businesses. Under ASC 805, control is defined as a having a controlling financial interest, as discussed in ASC 810. According to ASC 810, control is based on one of two common transaction characteristics that determine whether to apply the variable interest entity (VIE) approach or the voting interest (VOE) approach. ASC 810 requires a detailed analysis of which reporting entity, if any, should consolidate the VIE under the VIE approach. If the reporting entity is not a VIE, the VOE approach should be applied. See CG 1 for information on the two consolidation models (described in further detail in CG 2 and CG 3 for the VIE and VOE models, respectively) as well as CG 1.2.3 for exceptions to consolidation (e.g., investment companies).

1.1.2 Transactions excluded from the scope of ASC 805

The following types of transactions are specifically excluded from the scope of ASC 805:
  • Formation of joint ventures: In practice, the term “joint venture” is usually referred to rather loosely. Structures or transactions that are not joint ventures for accounting purposes are commonly called joint ventures. The scope exception for the creation or formation of a joint venture applies only if the transaction meets the accounting definition of corporate joint venture under ASC 323, Investments – Equity Method and Joint Ventures. By definition, no one party obtains control in the creation of a joint venture. The most distinctive characteristic of a joint venture is participants’ joint control over the decision-making process, although other characteristics must also be met (e.g., the purpose of the entity must be consistent with that of a joint venture). See EM 6 for additional information. If the transaction does not meet the definition of a corporate joint venture, the transaction does not meet the scope exception and thus should be evaluated under ASC 805.
  • Acquisition of an asset or a group of assets that does not constitute a business: Consistent with the principles governing the accounting for business combinations, the acquisition of an asset or a group of assets that is not a business should not be accounted for as a business combination. See PPE 2 for additional information.
  • Combinations involving entities or businesses under common control: As discussed in ASC 805-50-15-6, common control transactions are transfers and exchanges between entities that are under the control of the same parent, or are transactions in which all of the combining entities are controlled by the same party or parties before and after the transaction and that control is not transitory. See BCG 7 for the accounting for such a transaction. Sometimes NewCos are formed as part of a common control transaction, which is discussed in ASC 805-50-15-6 and BCG 7.
  • Combinations between not-for-profit organizations and acquisitions made by not-for-profit organizations: Combinations between and acquisitions by not-for-profit organizations are excluded from the scope of ASC 805. Due to the nature and purpose of these organizations, these combinations might not involve the exchange of equal economic values. Such combinations are accounted for in accordance with ASC 958, Not-for-Profit Entities. See PwC’s Not-for-profit entities (NP) guide for details on accounting for not-for-profit entities.
  • Financial assets and financial liabilities of a consolidated VIE that is a collateralized financing entity: Financial assets and financial liabilities of a consolidated VIE that is a collateralized financing entity are excluded from the scope of ASC 805. See FV 6.2.7 for additional information.

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