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1.1 Overview: accounting for business combinations
Publication date: 28 Feb 2022
us Business combinations guide 1.1
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 described in ASC 810-10-15-8. There are two primary consolidation models in ASC 810, Consolidation: the variable interest entity (VIE) and voting interest entity (VOE) models. A reporting entity that has a variable interest in a legal entity not subject to a scope exception would need to first determine whether the VIE model applies. Only if the entity is determined not to be a VIE would the VOE model be applied. Acquisition accounting under ASC 805 is applied irrespective of whether control is gained under the VIE or VOE model. See PwC’s Consolidation guide for further information about the determination of the appropriate model to apply and assessing whether control has been obtained.
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. However, the scope exception in ASC 805 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 should be evaluated under ASC 805.
- Acquisition of an asset or a group of assets that does not constitute a business: 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 on asset acquisitions and BCG 1.2 for additional information on assessing whether an acquired group of assets constitutes a business.
- 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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