ASC 805 requires that an acquirer in a business combination report provisional amounts when measurements are incomplete as of the end of the reporting period covering the business combination.
In accordance with ASC 805-10-25-15, the acquirer has a period of time, referred to as the measurement period, to finalize the accounting for a business combination. The measurement period provides companies with a reasonable period of time to determine the value of:
The identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree
The consideration transferred for the acquiree or other amount used in measuring goodwill (e.g., a business combination achieved without consideration transferred)
The equity interest in the acquiree previously held by the acquirer
The goodwill recognized or a bargain purchase gain
Any adjustments made by the acquirer during the measurement period should only relate to those assets, liabilities, equity interests, or items of consideration for which the initial accounting was incomplete in the reporting period in which the business combination occurred. In accordance with ASC 805-10-25-14, the measurement period ends as soon as the acquirer receives all necessary information about the facts and circumstances that existed as of the acquisition date for the provisional amounts (or otherwise learns that more information is not obtainable). However, the measurement period cannot exceed one year from the acquisition date.
ASC 805-10-25-17 requires that measurement period adjustments be recognized in the reporting period in which the adjustment amount is determined.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, in accordance with paragraph 805-10-25-17, the acquirer shall adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
During the measurement period, the acquirer shall recognize adjustments to the provisional amounts with a corresponding adjustment to goodwill in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date.
New information that gives rise to a measurement period adjustment should relate to events or circumstances existing at the acquisition date. Factors to consider in determining whether new information obtained gives rise to a measurement period adjustment include the timing of the receipt of new information and whether the acquirer can identify a reason for the measurement period adjustment. Information obtained shortly after the acquisition date is more likely to reflect facts and circumstances existing at the acquisition date, as opposed to information received several months later.
If a measurement period adjustment is identified, the acquirer is required to recognize the adjustment as part of its acquisition accounting. An acquirer increases or decreases the provisional amounts of identifiable assets or liabilities for measurement period adjustments by means of increases or decreases in goodwill. New information obtained during the measurement period may sometimes result in an adjustment to the provisional amounts of more than one asset or liability. In these situations, the adjustment to goodwill may be offset, in whole or part, by another adjustment resulting from a corresponding change to the provisional amount of another asset or liability.
For example, an acquirer might assume a liability to pay damages related to an accident in one of the acquiree’s facilities, part or all of which is covered by the acquiree’s insurance policy. If the acquirer obtains new information during the measurement period about the acquisition-date fair value of that liability, the adjustment to goodwill resulting from a change in the provisional amount recognized for the liability would be offset (in whole or in part) by a corresponding adjustment to goodwill resulting from a change in the provisional amount recognized for the claim receivable from the insurer in accordance with ASC 805-10-25-16.
On the other hand, information pertaining to events that occur after the acquisition date are not measurement period adjustments. All changes that do not qualify as measurement period adjustments are included in current period earnings. For example, changes in the fair value of contingent consideration resulting from events after the acquisition date, such as changes in the probability of meeting an earnings target or reaching a specified share price, are not measurement period adjustments and should be subsequently accounted for based on the guidance in ASC 805-30-35-1.
After the measurement period ends, an acquirer should revise its accounting for the business combination only to correct an error in accordance with ASC 250, Accounting Changes and Error Corrections.
ASC 805-10-55-27 through ASC 805-10-55-29 provide an example that illustrates the application of the measurement period guidance where an appraisal is completed after the initial acquisition. Example BCG 2-36 provides an example of the assessment of whether new information gives rise to a measurement period adjustment.
EXAMPLE BCG 2-36 Identifying measurement period adjustments
On January 1, 20X1, Company C acquires Company D. As part of the initial acquisition accounting, Company C recognizes $50 million of goodwill and a $5 million intangible asset for the customer relationship related to Company D’s largest customer. An appraisal of the customer relationship could not be completed at the time of the acquisition. Thus, Company C recorded the intangible asset at a provisional amount based on historical experience from previous acquisitions and estimates the useful life to be four years. On June 30, 20X1, Company D obtains an independent appraisal of the acquisition-date fair value of the customer relationship intangible asset. Based on the appraisal, the value of the customer relationship of Company D’s largest customer is determined to be $7 million, with a useful life of four years.
How should Company C record the change in fair value of the Company D customer relationship asset?
The appraisal obtained by Company C in the postcombination period is new information about facts and circumstances existing at the acquisition date. Company C should recognize any difference between the appraisal and the initial acquisition accounting as a measurement period adjustment. In the June 30, 20X1 financial statements, Company D would make the following measurement period adjustment to the year-to-date financial information, excluding income tax effects (in millions):
Dr. Customer relationship
To increase the value of the customer relationship
Dr. Amortization expense
Cr. Customer relationship
To adjust amortization expense to reflect the incremental value assigned to the customer relationship
The entire impact of the measurement period adjustment should be recognized in the reporting period in which the adjustment amount was determined (in this case, the quarter ended June 30, 20X1). Accordingly, the financial statements for the quarter ended March 31, 20X1 would not be restated.
Company A would need to evaluate the reason for the change in the fair value of the customer relationship. If the reason for the difference between the provisionally recognized and the finally determined fair value of the customer relationship had been the result of (1) changes in facts and circumstances or economic conditions that occurred after the acquisition date, or (2) an error in the calculation of the provisionally recognized amount, the difference would not have been a measurement period adjustment.
1 Amortization expense based on the appraised value, less amortization expense recorded based on initial value: $0.875 (6 months / 48 total months × $7) less $0.625 (6 months / 48 total months × $5).
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