A business combination is defined as an entity obtaining control of one or more businesses. The most common business combination is a purchase transaction in which the acquirer purchases the net assets or equity interests of a business for some combination of cash or shares. An entity may also obtain control of a business (1) through the execution of a contract, (2) due to an action by the acquiree, (3) without the exchange of consideration, or (4) through transactions that combine multiple companies to form a single company. The acquisition method, which is discussed in
BCG 2, should be applied to all business combinations within the scope of
ASC 805.
ASC 805-10-55-2 provides examples of how an acquirer may obtain control of an acquiree in a business combination.
ASC 805-10-55-2
Paragraph 805-10-25-1 requires an entity to determine whether a transaction or event is a business combination. In a business combination, an acquirer might obtain control of an acquiree in a variety of ways, including any of the following:
- By transferring cash, cash equivalents, or other assets (including net assets that constitute a business)
- By incurring liabilities
- By issuing equity interests
- By providing more than one type of consideration
- Without transferring consideration including by contract alone (see paragraph 805-10-25-11).
ASC 805-10-55-3
A business combination may be structured in a variety of ways for legal, taxation, or other reasons, which include but are not limited to, the following:
- One or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer.
- One combining entity transfers its net assets or its owners transfer their equity interests to another combining entity or its owners.
- All of the combining entities transfer their net assets or the owners of those entities transfer their equity interests to a newly formed entity (sometimes referred to as a roll-up or put-together transaction).
- A group of former owners of one of the combining entities obtains control of the combined entity.
The initial consolidation of a VIE that is a business is also a business combination and should be accounted for under the acquisition method by the acquirer (i.e., the primary beneficiary). See
BCG 2.11 for additional information.
Example BCG 1-7, Example BCG 1-8, and Example BCG 1-9 illustrate transactions (other than purchase transactions) that are considered business combinations.
EXAMPLE BCG 1-7
Share repurchase by investee
A company (investor) owns an equity investment in an investee that meets the definition of a business. The investee repurchases its own shares from other parties, which increases the investor’s proportional interest, and causes the investor to obtain control of the investee.
Is this transaction a business combination?
Analysis
Yes. This transaction qualifies as a business combination, and the acquisition method (i.e., business combination accounting) would be applied by the investor as a result of the investee’s share repurchase transaction.
EXAMPLE BCG 1-8
Change in the rights of noncontrolling interest holders
Company A owns a majority share of its investee’s voting equity interests. The investee meets the definition of a business. Company A is precluded from exercising control of the investee due to contractual rights held by the noncontrolling interest holders in the investee (e.g., veto rights, board membership rights, other substantive participation rights). The contractual rights expire, and Company A obtains control over the investee.
Is this transaction a business combination?
Analysis
Yes. The elimination or expiration of these rights causes Company A to obtain control of the investee. This event qualifies as a business combination, and the acquisition method would be applied by Company A.
EXAMPLE BCG 1-9
Contracts or other arrangements
Company A and Company T enter into a contractual arrangement to combine their businesses and both meet the definition of a business. Company A will control the operations of both Company A and Company T.
Is this transaction a business combination?
Analysis
Yes. Company A obtains control of Company T. This transaction qualifies as a business combination, and the acquisition method would be applied to the arrangement.