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The disclosure provisions of ASC 805-10-50 are intended to enable users of financial statements to evaluate the nature and financial effects of:
  • A business combination that occurs either during the current reporting period or after the reporting date, but before the financial statements are issued or are available to be issued
  • Adjustments recognized in the current reporting period that relate to business combinations that occurred in current or previous reporting periods

The guidance indicates that the disclosure provisions should be considered minimum requirements. Reporting entities should provide additional disclosures, if necessary, to meet these objectives. See FSP 28.6.3.1 for disclosure requirements for business combinations that occur as subsequent events.
As discussed in ASC 805-10-50-1, all disclosures should be made in the period in which the business combination occurs. Reporting entities should typically include the disclosures in subsequent financial statements if an acquisition occurred in a previous reporting period and that period is presented in the financial statements. For example, assume a reporting entity includes balance sheets for two years and income statements for three years in its 20X3 financial statements. If it completed a material acquisition in 20X1, the reporting entity should disclose the 20X1 income statement disclosures in their 20X3 financial statements. However, certain of the original disclosures may no longer be relevant since the 20X3 financial statements do not include a 20X1 balance sheet, and may be omitted.

17.4.1 General acquisition disclosures

As discussed in ASC 805-10-50-2, reporting entities should disclose the name and a description of the acquiree (e.g., type of business). The disclosure should also describe the primary reason the reporting entity completed the acquisition (e.g., to expand global reach, increase capacity, enter a new line of business). The disclosure should include the acquisition date (i.e., the date control is obtained), a description of how the acquirer obtained control of the acquiree (e.g., execution of a share purchase agreement), and the percentage of ownership acquired (i.e., voting equity interests). This disclosure should be included for each material business combination that occurs during the reporting period.

17.4.1.1 Aggregation of immaterial business combinations

A reporting entity may complete several immaterial business combinations in the same accounting period. The disclosures required by ASC 805-10-50-2(e) through ASC 805-10-50-2(h), ASC 805-20-50-1(a) through ASC 805-20-50-1(e) and ASC 805-30-50-1(a) through ASC 805-30-50-1(f) are required in the aggregate for immaterial business combinations that are collectively material.

17.4.2 Disclosure of consideration transferred in a business combination

A reporting entity must disclose the acquisition date fair value of the total consideration transferred (i.e., the purchase price) in a business combination. The consideration transferred may include items in addition to, or in lieu of, cash. In addition to disclosing the total consideration, a reporting entity must disclose the acquisition date fair value of each major class of consideration. Consideration may include cash, other assets (tangible or intangible), or a business or subsidiary of the reporting entity. A business transferred as consideration may trigger separate presentation and disclosure requirements, such as the disclosures for a discontinued operation. Refer to FSP 27.5 for disclosure requirements related to discontinued operations.
If the acquirer transfers cash in a business combination and the acquiree has cash on its balance sheet at the acquisition date, we believe the consideration transferred should be disclosed as the gross amount transferred (rather than the amount net of cash acquired, which is disclosed in the statement of cash flows as described in FSP 6.9.21). For example, if Company A pays $100 million of cash to the sellers of Company T, and Company T has $5 million of cash on its balance sheet at the acquisition date, the total consideration transferred by Company A to disclose in the footnotes is $100 million (not $95 million).
Consideration transferred may also be comprised of liabilities incurred for contingent consideration or other liabilities incurred by the buyer to the former owners of the acquiree (e.g., a note payable to the seller). An acquirer may also settle (i.e., pay off) some or all of the outstanding debt of the acquiree on, or in close proximity to, the acquisition date. See BCG 2.5.11 for discussion of the impact of debt assumed or paid off at the time of closing and whether it should be recognized as a component of consideration transferred, and FSP 6.9.21 for discussion of the impact on the statement of cash flows.
Consideration may also include common or preferred stock, options, or warrants of the acquirer or member interests of mutual entities, as well as the portion of stock-based compensation awards issued as replacement awards to grantees of the acquiree that is recorded as part of consideration transferred in the acquisition (see further discussion in BCG 3.4). If equity instruments are provided as consideration, disclosure should include the number of securities issued or issuable, and the method of measuring fair value. If common stock of an SEC registrant is provided as consideration, the disclosure typically includes the number of shares issued and the price of the stock on the acquisition date.

17.4.3 Disclosure of contingent consideration and indemnification assets

The same information is required to be disclosed for both contingent consideration arrangements (as discussed in ASC 805-30-50-1(c)) and arrangements in which the seller indemnifies the buyer (e.g., indemnification assets) (as discussed in ASC 805-20-50-1(a)):

Excerpt from ASC 805-30-50-1(c) and ASC 805-20-50-1(a)

  1. The amount recognized as of the acquisition date
  2. A description of the arrangement and the basis for determining the amount of payment
  3. An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact.

Indemnification assets and the related liabilities are generally presented gross (i.e., not netted against one another) because the right of offset typically does not exist. Refer to FSP 17.3 for income statement presentation considerations related to indemnifications for an income tax liability.

17.4.4 Disclosure of major classes of assets acquired and liabilities assumed

ASC 805-20-50-1(c) requires reporting entities to disclose the amounts recognized for assets acquired and liabilities assumed as of the date of acquisition. This disclosure includes recognized contingent assets and liabilities. The disclosure is required to be prepared by each major class of assets and liabilities, and is typically presented in a tabular format that reconciles the consideration transferred to the assets/liabilities acquired.

17.4.5 Disclosure of acquired receivables after ASC 326/ASC 842

Subsequent to the adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2016-02, Leases (Topic 842), the following information must be disclosed for acquired receivables that are not subject to the requirements of ASC 326-20 related to purchased financial assets with credit deterioration:

Excerpt from ASC 805-20-50-1(b)

  1. The fair value of the receivables (unless those receivables arise from sales-type leases or direct financing leases by the lessor for which the acquirer shall disclose the amounts recognized as of the acquisition date)
  2. The gross contractual amounts receivable
  3. The best estimate at the acquisition date of the contractual cash flows not expected to be collected.
The disclosures shall be provided by major class of receivable, such as loans, net investment in sales-type or direct financing leases in accordance with Subtopic 842-30 on leases—lessor, and any other class of receivables.

The revised guidance under ASC 326 is effective for public business entities that are SEC filers, excluding entities eligible to be smaller reporting companies (SRCs) as defined by the SEC. For SRCs and all other entities, the revised guidance will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. For additional information on the definition of SRCs and the effective dates of ASU 2016-13, refer to LI 13.1.
The accounting and disclosure requirements of ASC 326 are covered in PwC’s Loans and Investments guide (see LI 12).
The revised guidance under ASC 842 is effective for public business entities, employee benefit plans that file with or furnish financial statements to the SEC, and not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded on an exchange or over-the-counter market. For all other entities, the new guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.
The accounting and disclosure requirements of ASC 842 are covered in PwC’s Leases guide. See LG 9.

17.4.5A Disclosures of acquired receivables (before new guidance)

If a reporting entity has adopted ASU 2016-02, Leases (Topic 842) but has not yet adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the terminology in ASC 805-20-50-1(b)(1) is updated to conform with the new accounting guidance in ASC 842. The following information must be disclosed for acquired receivables that are not subject to the requirements of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality:

Excerpt from ASC 805-20-50-1(b)

  1. The fair value of the receivables (unless those receivables arise from sales-type leases or direct financing leases by the lessor for which the acquirer shall disclose the amounts recognized as of the acquisition date)
  2. The gross contractual amounts receivable
  3. The best estimate at the acquisition date of the contractual cash flows not expected to be collected.
The disclosures shall be provided by major class of receivable, such as loans, net investment in sales-type or direct financing leases in accordance with Subtopic 842-30 on leases—lessor, and any other class of receivables.

The revised guidance under ASC 842 is effective for public business entities, employee benefit plans that file with or furnish financial statements to the SEC, and not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded on an exchange or over-the-counter market. For all other entities, the new guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.
The accounting and disclosure requirements of ASC 842 are addressed in PwC’s Leases guide. See LG 9.
For discussion of disclosure requirements for acquired receivables that are subject to ASC 310-30, see FSP 8.3.1.2.
Disclosures of acquired receivables for reporting entities prior to adoption of ASC 326/ASC 842
If a reporting entity has not adopted ASU 2016-02 nor ASU 2016-13, the following information must be disclosed for acquired receivables that are not subject to the requirements of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality:

Excerpt from ASC 805-20-50-1(b)

  1. The fair value of the receivables
  2. The gross contractual amounts receivable
  3. The best estimate at the acquisition date of the contractual cash flows not expected to be collected.
The disclosures shall be provided by major class of receivable, such as loans, direct financing leases in accordance with Subtopic 840-30, and any other class of receivables.

For discussion of disclosure requirements for acquired receivables that are subject to ASC 310-30, see FSP 8.3.1.2.

17.4.5.1 Disclosures for financial assets acquired (after ASC 326)

Upon adoption of ASU 2016-13, financial assets held at amortized cost within the scope of the ASU should be assessed in order to determine whether the receivables have experienced more than insignificant credit deterioration since origination at the date of purchase. If the assets are classified as purchased credit deteriorated (PCD assets), the initial recognition of an allowance for credit losses is required to be recognized through an increase to the amortized cost basis of the finance receivable at acquisition (i.e., a balance sheet gross up). In contrast, the initial recognition of an estimated allowance for credit losses on an asset that is not accounted for under the PCD model is reported in current earnings. Subsequently, the accounting for PCD assets under ASC 326-20 follows the CECL model, as appropriate, with all adjustments to the allowance recognized through current earnings. Refer to LI 9 for further information on the PCD accounting model, and refer to LI 12 on the presentation and disclosure requirements for PCD and non-PCD assets.

17.4.5.1A Disclosures for financial assets acquired (before ASC 326)

Reporting entities that acquire finance receivables as part of a business combination will need to assess the impact of acquired finance receivables on their existing allowance for credit loss policies. They will need to classify the acquired finance receivables into the appropriate portfolio segments and classes to be reflected in accordance with the interim and annual disclosure provisions of ASC 310, Receivables. Refer to FSP 8.3 for disclosure requirements related to finance receivables.

17.4.6 Disclosures about assets and liabilities arising from contingencies

The following information related to contingencies should be included within the financial statement footnote that describes the business combination:

Excerpt from ASC 805-20-50-1(d)

  1. For assets and liabilities arising from contingencies recognized at the acquisition date:

    i. The amounts recognized at the acquisition date and the measurement basis applied (that is, at fair value or at an amount recognized in accordance with Topic 450 and Section 450-20-25).

    ii. The nature of the contingencies.

    An acquirer may aggregate disclosures for assets or liabilities arising from contingencies that are similar in nature.
  2. For contingencies that are not recognized at the acquisition date, the disclosures required by Topic 450 if the criteria for disclosures in that Topic are met.
An acquirer may aggregate disclosures for assets and liabilities arising from contingencies that are similar in nature.

As described in ASC 805-20-50-1(d)(2), there may be circumstances in which a contingency is not recognized by the acquirer on the acquisition date but certain disclosures are still required. If there is at least a reasonable possibility that a loss may have been incurred and certain other conditions are met (see ASC 450-20-50-3), certain disclosures related to the contingency should be provided pursuant to ASC 450.
As discussed in SEC FRM 3250.1(h), if the initial accounting for a contingency is incomplete, SEC registrants are required to disclose that the purchase price allocation is preliminary/provisional. In addition, SEC registrants should disclose the following:
  • A clear description of the nature of the contingency
  • The reasons why the allocation is preliminary/provisional, including identification of the information that the SEC registrant has arranged to obtain
  • When the allocation is expected to be finalized
  • Other available information that could enable a reader to understand the magnitude of any potential adjustment

Refer to FSP 23 for further presentation and disclosure requirements related to liabilities arising from contingencies.

17.4.7 Disclosures for contract assets and liabilities (after adoption of ASU 2021-08)

If a reporting entity elects any of the practical expedients provided in ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (as described in BCG 2.5.16), in accordance with ASC 805-20-50-5 the entity should disclose the expedients that have been used. Additionally, a qualitative assessment of the estimated effect of applying each of the expedients should be disclosed to the extent reasonably possible.
ASU 2021-08 is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should apply the guidance in ASU 2021-08 on a prospective basis to all business combinations with an acquisition date on or after the effective date. Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued.

17.4.8 Goodwill acquisition disclosures

The following information is required to be disclosed when an acquirer recognizes goodwill in a business combination:

Excerpts from ASC 805-30-50-1

a. A qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition, or other factors.
...
d. The total amount of goodwill that is expected to be deductible for tax purposes.

Consistent with ASC 805-30-50-1(e), when reporting entities are required to disclose segment information, they should disclose the amount of goodwill by reportable segment. In addition, if the assignment of goodwill to reporting units is not complete as of the financial statements issuance date, the reporting entities should disclose this fact.
Refer to FSP 8.9 for day-two presentation and disclosure requirements related to goodwill.

17.4.9 In-process research and development (IPR&D) disclosures

ASC 805 does not require specific disclosures for IPR&D intangible assets acquired in a business combination. However, the SEC staff has encouraged registrants to provide additional disclosures about material IPR&D to enhance an investor’s understanding of the registrant’s use and expected use of resources in research and development activities. Examples of such disclosures include:
  • Nature and status of each major research and development project or group of related projects currently in process
  • Appraisal method (e.g., based on discounted probable future cash flows on a project-by-project basis)
  • Significant assumptions, such as:
    • The period in which material net cash inflows from significant projects are expected to commence
    • Any anticipated material changes from historical pricing, margins, and expense levels
    • The risk-adjusted discount rate applied to the project’s cash flows

17.4.10 Disclosure of changes in acquirer’s valuation allowance

ASC 740-10-50-9(h) requires disclosure of adjustments to the beginning-of-the-year balance of a deferred tax asset valuation allowance because of a change in circumstances that causes a significant change in judgment about the realizability of the related deferred tax asset in future years. ASC 805-740-50-1 indicates that a business combination is an example of a transaction that may require such an adjustment and should be disclosed as such. See TX 10.5.4 for further information on changes to acquirer’s deferred tax balances as a result of an acquisition transaction.

17.4.11 Disclosure of separately recognized transactions

The acquirer and the acquiree may have had a preexisting relationship or other arrangement before negotiations for the business combination began, or they may enter into an arrangement during the negotiations that is separate from the business combination. A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity is likely to be a separate transaction.
Acquisition-related costs (e.g., finder’s fees, advisory, legal, or accounting fees) are considered separate transactions. The following are additional examples of separate transactions:
  • Transactions that effectively settle preexisting relationships between the acquirer and acquiree
  • Transactions that compensate employees or former owners of the acquiree for future services
  • Transactions that reimburse the acquiree or its former owners for the acquirer's acquisition-related costs

As discussed in ASC 805-10-50-2(e), for transactions that are recognized separate from the acquisition of assets and assumption of liabilities in the business combination, a reporting entity should disclose the following:
  • A description of the transaction
  • The accounting for the transaction
  • The amounts recognized for each transaction and the line item in the financial statements in which each amount is recognized
  • If the transaction was the settlement of a preexisting relationship, the method used to determine the settlement amount

Additionally, as discussed in ASC 805-10-50-2(f), a reporting entity is required to disclose the amount of any issuance costs (i.e., costs to issue debt or equity instruments used to effect the business combination) that were not expensed and how they were recognized.

17.4.12 Disclosure of bargain purchases

As discussed in ASC 805-30-25-2 through ASC 805-30-25-4, a bargain purchase arises when the fair value of the net assets acquired in a business combination exceeds the consideration transferred, resulting in a gain being recorded by the acquirer. In business combinations where the acquirer makes a bargain purchase, the following items must be disclosed:

Excerpt from ASC 805-30-50-1(f)

  1. The amount of any gain recognized in accordance with paragraph ASC 805-30-25-2 and the line item in the income statement in which the gain is recognized
  2. A description of the reasons why the transaction resulted in a gain.

ASC 805-30-55-14 through ASC 805-30-55-16, Example 1: Bargain Purchases, provides an illustration of these disclosure requirements.
We believe that because a bargain purchase gain is not expected to be recognized frequently, it may be appropriate to present a bargain purchase gain as an unusual or infrequently occurring item in accordance with ASC 220-20-45-1.

17.4.13 Disclosures for partial and step acquisitions

As discussed in ASC 805-20-50-1(e), a reporting entity should disclose the following for each business combination in which the acquirer holds less than 100% of the equity interests in the acquiree at the acquisition date:
  • The fair value of the noncontrolling interest in the acquiree at the acquisition date
  • The valuation technique(s) and significant inputs used to measure the fair value of the noncontrolling interest

In addition to the above disclosures for noncontrolling interests, ASC 805-10 also requires the following disclosures for previously held equity interests in the acquiree at the acquisition date:

ASC 805-10-50-2(g)

In a business combination achieved in stages, all of the following:

  1. The acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the acquisition date
  2. The amount of any gain or loss recognized as a result of remeasuring to fair value the equity interest in the acquiree held by the acquirer immediately before the business combination (see paragraph 805-10-25-10) and the line item in the income statement in which that gain or loss is recognized
  3. The valuation technique(s) used to measure the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the business combination
  4. Information that enables users of the acquirer’s financial statements to assess the inputs used to develop the fair value measurement of the equity interest in the acquiree held by the acquirer immediately before the business combination.

17.4.14 Presentation of reverse acquisitions

A reverse acquisition occurs if the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes and the entity whose equity interests are acquired (legal acquiree) is the acquirer for accounting purposes. ASC 805-40-45-2 indicates that the presentation of the financial statements in a reverse acquisition represents the continuation of the legal acquiree, except for the legal capital structure in a reverse acquisition. See BCG 2.10.3 for further information on the presentation requirements for a business combination accounted for as a reverse acquisition. Also, see FSP 7.6.4.1 for information on the calculation of earnings per share in a reverse acquisition.

17.4.15 Presentation of common control transactions

Common control transactions are not within the scope of the business combinations guidance in ASC 805-10-15; rather, these transactions are covered in ASC 805-50. ASC 805-50-05-5 states that some transfers of net assets or exchanges of shares between entities under common control result in a change in reporting entity. If a transaction combines two or more commonly controlled entities that historically have not been presented together, the resulting financial statements are effectively considered to be those of a different reporting entity. See BCG 7.1.3.2 for information on financial statement presentation requirements when presenting a change in reporting entity in a common control transaction. Also, see BCG 7.1.4 for financial statement presentation considerations for the transferring entity in a common control transaction.

17.4.16 Acquiree’s financial information and pro forma financial information

In business combinations where the acquirer is a public entity, as defined in ASC 805-10-20, the acquirer must disclose certain financial information related to the acquiree and provide pro forma financial data, as described in the excerpt below:

Excerpt from ASC 805-10-50-2(h)

  1. The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.
  2. If comparative financial statements are not presented, the revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period (supplemental pro forma information).
  3. If comparative financial statements are presented, the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information). For example, for a calendar year-end entity, disclosures would be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised if 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented).
  4. The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings (supplemental pro forma information).

If any of the above disclosures are impracticable, the acquirer should disclose that fact and explain why the disclosure is impracticable. In this context, impracticable has the same meaning as described in ASC 250-10-45-9 (see FSP 30.4.3.1).
Question FSP 17-1 addresses, and Example FSP 17-1 illustrates, the number of years a reporting entity is required to present supplemental pro forma revenue and earnings of the combined entity.
Question FSP 17-1
If a reporting entity presents three years of income statements, is it required to present three years of supplemental pro forma revenue and earnings of the combined entity?
PwC response
No. A reporting entity is only required to present two years (the year of the transaction and the prior annual reporting period) of supplemental pro forma revenue and earnings of the combined entity even if its financial statements include three years of income statements. For interim reporting, the supplemental pro forma information should be presented for both the quarter and year-to-date periods.
EXAMPLE FSP 17-1
ASC 805 supplemental pro forma financial information requirements
FSP Corp, a calendar year-end reporting entity, acquired Sub Corp on May 15, 20X2. The acquisition is material to the financial statements of FSP Corp.
In the financial statements included in its SEC filings in subsequent years, how would FSP Corp present its pro forma revenue and earnings?
Analysis
SEC filing
Supplemental pro forma required
Supplemental pro forma not required
Explanation
Q2 20X2
X
Present pro forma revenue and earnings as if the acquisition occurred on January 1, 20X1 for the three and six months ended June 30, 20X1 and 20X2.
Q3 20X2
X
Present pro forma revenue and earnings as if the acquisition occurred on January 1, 20X1 for the three months ended September 30, 20X1 and the nine months ended September 30, 20X1 and 20X2.
Annual 20X2
X
Present pro forma revenue and earnings as if the acquisition occurred on January 1, 20X1 for the annual periods ended December 31, 20X1 and December 31, 20X2.
Q1 20X3
X
No requirement to present pro forma information because the period of acquisition would not be presented in the comparative first quarter 20X2 financial statements.
Q2 20X3

Q3 20X3
X

X
Retain the 20X2 pro forma disclosures because the 20X2 period of acquisition is presented as comparative information.
Annual 20X3
X
Retain the 20X1 and 20X2 pro forma disclosures because the 20X1 and 20X2 periods are presented as comparative information.
Annual 20X4
X
Retain the 20X2 pro forma disclosures because the 20X2 period is presented as comparative information.
FSP Corp would not be required to present pro forma information in the financial statements included in the first quarter 20X3 because the period of acquisition would not be presented in the comparative first quarter 20X2 financial statements. However, FSP Corp would be permitted to include first quarter 20X2 pro forma information and should evaluate whether inclusion of the information would be beneficial to the readers' understanding of the effects of the acquisition on the consolidated financial statements.
If FSP Corp were to file a new or amended registration statement before the Form 10-K for 20X3 is filed, FSP Corp may be required to include updated Regulation S-X Article 11 pro forma financial information. See FSP 17.4.16.2.

17.4.16.1 Preparation of ASC 805 pro forma information

ASC 805 does not provide specific guidance regarding how reporting entities should calculate pro forma revenue and earnings. Generally, a reporting entity adds the results from the financial statements of the acquiree to its historical financial results after making adjustments for some or all of the following:
  • Alignment of accounting policies
For example, a reporting entity would adjust the pro forma financial information for the effect of applying a different inventory accounting policy at the acquiree level.
  • The effect of fair value adjustments
For example, a reporting entity would include amortization of intangible assets and depreciation of the tangible assets recognized as part of the business combination as if the assets were recognized at acquisition date fair value as of the beginning of the comparative period.
  • Transaction costs
A reporting entity would include costs resulting from the business combination in earnings as though the acquisition occurred as of the beginning of the comparative period.
  • Taxation
A reporting entity would need to consider the tax effects of the acquisition and related adjustments as if the acquiree had been part of the reporting entity since the beginning of the comparative period.
  • Financial structure
A reporting entity would need to consider adjustments reflecting the new capital structure, including additional financing or repayments of debt as part of the acquisition.
Adjustments that are not factually supportable are not appropriate. For example, it generally would not be appropriate to incorporate cost savings and other synergistic benefits resulting from the business combination in pro forma amounts.
Reporting entities are also required to provide disclosure of any material, nonrecurring pro forma adjustments directly attributable to the business combination that is included in the supplemental pro forma information. ASC 805-10-55-50 provides examples of nonrecurring pro forma adjustments, including acquisition-related costs and a nonrecurring expense related to the fair value adjustment to inventory on the acquisition date.
Pro forma financial information giving effect to business combinations is often presented in SEC registration statements, proxy statements, and Form 8-Ks as required by Regulation S-X Article 11. Reporting entities should note that pro forma information presented in accordance with ASC 805 will likely differ from that required by Regulation S-X Article 11 (see Figure FSP 17-1).

17.4.16.2 Regulation S-X Article 11 pro formas

Regulation S-X Article 11 provides the SEC’s requirements for the presentation of pro forma condensed financial information regarding significant business combinations that have occurred during the most recent fiscal year or subsequent interim periods. For more information on the preparation of Regulation S-X Article 11 pro forma condensed financial information, refer to SEC FRM Topic 3.
The filing of Regulation S-X Article 11 pro forma financial information does not satisfy the requirement to include ASC 805-10-50-2(h) pro forma disclosures in the footnotes, and vice versa. Pro forma disclosures required by ASC 805-10-50-2(h) might be required even when Regulation S-X Article 11 pro forma financial information is not required due to differences in the relevant materiality thresholds. Regulation S-X Article 11 pro forma information is based on the quantitative significance of the acquisition to the acquirer under Regulation S-X Rule 1-02(w), whereas ASC 805 disclosure requirements are based on materiality to the financial statements taken as a whole.
There are also a number of differences between the form and content of pro forma financial information between ASC 805-10-50-2(h) and Regulation S-X Article 11. Figure FSP 17-1 highlights ASC 805 and Regulation S-X Article 11 requirements related to the preparation of pro forma financial information.
Figure FSP 17-1
ASC 805 and Regulation S-X Article 11 pro forma requirements for acquired businesses
Topic
Periods to present
ASC 805 requires that US public business entities disclose supplemental pro forma information for the results of operations for the current period and the comparable prior period.
Pro forma financial information related to results of operations of periods prior to the combination is limited to the results of operations for the immediately preceding period.
Regulation S-X Article 11 requires a pro forma condensed balance sheet based on the latest balance sheet included in the filing (unless the acquisition is already reflected in the historical balance sheet). The pro forma condensed income statement is based on the latest fiscal year (unless required to be accounted for retrospectively (e.g., common control transactions, discontinued operations)) and subsequent interim period included in the filing.
Comparative prior year interim period information is permissible, but not required.
Length of time disclosures must be “retained”
Pro forma disclosures should be repeated whenever the year or interim period of the acquisition is presented. See Question FSP 17-1 and Example FSP 17-1.
In a subsequent registration statement, if historical financial statements of the acquired entity are required to be included or incorporated, a pro forma condensed balance sheet is not required if an acquisition is already reflected on the historical balance sheet; however, disclosures related to the acquisition are required.
Generally, a pro forma condensed income statement must be presented until the transaction to which the pro forma disclosure relates has been reflected in the audited financial statements for a 9 - 12-month period (depending on significance). In other words, a pro forma condensed income statement should be filed for the most recent fiscal year and for the period from the most recent fiscal year end to the most recent interim date for which a balance sheet is required (a pro forma condensed income statement for the corresponding interim period of the preceding fiscal year may also be filed). However, a pro forma condensed income statement may not be filed when the historical income statement reflects the transaction for the entire period.
Format
ASC 805-10-50-2h requires disclosure of revenue and earnings amounts on a pro forma basis. Additional line items (e.g., operating income, income from continuing operations) are permissible.
Regulation S-X Article 11 requires a pro forma condensed balance sheet, pro forma condensed income statements, which must include income (loss) from continuing operations and income (loss) from continuing operations attributable to the controlling interest, and explanatory footnotes. The pro forma financial information must also include an introductory paragraph that provides a description of each transaction for which pro forma effect is being given, entities involved, periods for which the pro forma information is presented, and an explanation of what the pro forma presentation shows.
Materiality
ASC 805 disclosure requirements are based on materiality to the financial statements taken as a whole.
Regulation S-X Article 11 pro forma information is based on the quantitative significance of the acquisition to the acquirer under Regulation S-X Rule 1-02(w), substituting 20% for 10% each place it appears therein.
Date of combination
If comparative financial statements are not presented, ASC 805 requires that the pro forma information be prepared for the current reporting period as though the acquisition had occurred as of the beginning of the current annual reporting period.
If comparative financial statements are presented, the pro forma information should be prepared as though the acquisition occurred at the beginning of the comparable prior annual reporting period. The “as if” date of the acquisitions would not be revised in the pro forma information in future periods when additional financial statement periods are presented.
Regulation S-X Rule 11-02(a)(6)(i)(B) states that the pro forma adjustments related to the condensed income statement should be computed assuming the transaction was consummated at the beginning of the fiscal year presented. The SEC staff has interpreted this to mean that the pro forma adjustments are to be computed for both the annual and interim income statements, assuming that the acquisition occurred at the beginning of the annual period.
Nonrecurring items
ASC 805 requires adjustments that are nonrecurring in nature to be included in the pro forma amounts.
Regulation S-X Rule 11-02(a)(6) and Regulation S-X Rule 11-02(a)(7) include the following three categories of adjustments:
(1) Transaction accounting adjustments to reflect only the application of required accounting to the transaction, such as acquisition accounting;
(2) Autonomous entity adjustments to reflect the operations and financial position of the registrant as an autonomous entity if the registrant was previously part of another entity, such as a spin-off transaction in which the costs allocated to the entity do not reflect all of the expected costs of operating as a standalone public company; and
(3) Management’s adjustments depicting synergies and dis-synergies of an acquisition or disposition for which pro forma effect is being given.
Transaction accounting and autonomous entity adjustments are required when the conditions for their presentation are met. Autonomous entity adjustments must be presented in a separate column from transaction accounting adjustments.
Management’s adjustments may (but are not required to) be presented only in the notes to the pro forma financial statements at the discretion of management if, in management’s opinion, they enhance an understanding of the pro forma effects of the transaction and certain conditions are met.
All pro forma adjustments should refer to notes that clearly explain the assumptions involved.
Per share data
ASC 805 does not require pro forma per share data.
Regulation S-X Rule 11-02(a)(9i) and Regulation S-X Rule 11-02(a)(9ii) require the following to be presented on the face of the pro forma income statement:
  • The acquirer’s historical and pro forma basic and diluted per share data based on continuing operations attributable to the controlling interests and the number of shares used to calculate such per share amounts, and may only give effect to Transaction accounting adjustments and Autonomous entity adjustments.
The number of shares used in the computation of the pro forma per share amounts based on the weighted average number of shares outstanding during the period adjusted to give effect to the number of shares issued or to be issued to consummate the transaction, or if applicable, whose proceeds will be used to consummate the transaction, as if the shares were outstanding as of the beginning of the period presented. The pro forma effect of potential common stock being issued in the transaction (e.g., a convertible security), or the proceeds that would be used to consummate the transaction, on pro forma earnings per share is calculated in accordance with US GAAP as if the potential common stock was outstanding as of the beginning of the period presented.
Footnotes
ASC 805 requires disclosure of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the acquisition included in the reported pro forma revenue and earnings.
Regulation S-X Article 11 requires explanatory footnotes to be sufficiently detailed to enable a clear understanding of the assumptions and calculations involved in developing each of the pro forma adjustments. Regulation S-X Rule 11-02(a)(11)(i) requires that the explanatory notes disclose the revenues, expenses, gains and losses, and related tax effects that will not recur in the income of the registrant beyond twelve months after the transaction. Incremental disclosures are specifically required in the explanatory footnotes for Transaction accounting adjustments (Regulation S-X Rule 11-02(a)(11)(ii)) and Autonomous entity adjustments (Regulation S-X Rule 11-02(a)(11) (iii)).
Other completed or probable transactions
ASC 805 allows adjustments for completed business acquisitions but does not permit adjustments for probable business acquisitions or other significant transactions (e.g., a completed or probable significant business disposition).
Regulation S-X Article 11 allows adjustments for probable business acquisitions and other significant transactions (e.g., a completed or probable significant business disposition).

17.4.17 Initial accounting for a business combination is incomplete

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the acquisition occurs, the acquirer is required to report provisional amounts for the items for which the accounting is incomplete. As described in BCG 2.9, the acquirer has a period of time, referred to as the measurement period, to finalize the accounting for a business combination. In accordance with ASC 805-20-50-4A, in such circumstances, the acquirer should disclose the reasons the initial accounting is incomplete and the specific assets, liabilities, equity interests, or items of consideration for which the initial accounting is incomplete. The acquirer is also required to disclose the nature and amount of any measurement period adjustments recognized during the reporting period, including the amount of adjustment to current-period income statement line items that would have been recognized in prior periods if the adjustment to provisional amounts had been recognized as of the acquisition date. Alternatively, the acquirer can present those amounts separately on the face of the income statement.
If the acquisition date of a business combination is after the reporting date, but before the financial statements are issued or are available to be issued, the acquirer is required to disclose the same information as is required for acquisitions completed during the reporting period. However, as discussed in ASC 805-10-50-4, ASC 805-20-50-3, and ASC 805-30-50-3, if the initial accounting for the business combination is incomplete, reporting entities should describe which disclosures could not be made, which are preliminary, and the reasons the acquisition accounting could not be completed.

17.4.18 Financial statement effect of adjustments related to prior acquisitions

There may be adjustments recorded in one period that relate to prior acquisitions, which are not necessarily reflective of the ongoing operations of the acquired business. As outlined in ASC 805-10-50-5, an objective of the related disclosures is to provide information that enables users of financial statements to evaluate the financial effects of adjustments recognized in the current reporting period relating to business combinations that occurred in the current or previous reporting periods.
Accordingly, reporting entities are required to disclose the following for each material business combination, or in the aggregate for individually immaterial business combinations that are collectively material:

17.4.18.1 Measurement period adjustment disclosures

An acquirer has up to one year from the acquisition date (referred to as the measurement period) to finalize the accounting for a business combination. The acquirer should book provisional amounts if the initial accounting for a business combination is incomplete. During the measurement period, the acquirer should record the cumulative impact of measurement period adjustments made to provisional amounts in the period that the adjustment is determined. As discussed in ASC 805-20-50-4A(c), the acquirer should present separately on the face of the income statement or disclose in the notes the portion of the adjustment to each income statement line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
When the accounting for a business combination includes provisional amounts, the following information must be disclosed.

ASC 805-20-50-4A

If the initial accounting for a business combination is incomplete (see paragraphs 805-10-25-13 through 25-14) for particular assets, liabilities, noncontrolling interests, or items of consideration and the amounts recognized in the financial statements for the business combination thus have been determined only provisionally, the acquirer shall disclose the following information for each material business combination or in the aggregate for individually immaterial business combinations that are material collectively to meet the objective in paragraph 805-10-50-5:

  1. The reasons why the initial accounting is incomplete
  2. The assets, liabilities, equity interests, or items of consideration for which the initial accounting is incomplete
  3. The nature and amount of any measurement period adjustments recognized during the reporting period in accordance with paragraph 805-10-25-17, including separately the amount of adjustment to current period income statement line items relating to the income effects that would have been recognized in previous periods if the adjustment to provisional amounts were recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement.

Reporting entities should recognize a measurement period adjustment to provisional amounts in the reporting period in which the adjustments are determined in accordance with ASC 805-10-25-17. For the supplemental pro forma information required by ASC 805-10-50-2(h) (see FSP 17.4.16), we believe the effects of a measurement period adjustment should be presented on a retrospective basis as of the beginning of the period presented (or as of the beginning of the comparable prior period when comparative financial statements are presented).
Considerations related to interim reporting
The prospective nature of measurement period adjustments and the need to disclose the retrospective impact to historical financial information has additional implications if the reporting entity prepares interim financial statements.
Example FSP 17-2 demonstrates the additional interim reporting implications of measurement period adjustments.
EXAMPLE FSP 17-2
Measurement period adjustments in interim reporting
FSP Corp is an SEC registrant that reports under US GAAP and has a calendar year-end. FSP Corp acquires SUB Corp on October 1, 20X1. On May 31, 20X2, new information related to facts that existed at the acquisition date arises that leads to a measurement period adjustment. FSP Corp has already filed its Form 10-K for the year ended December 31, 20X1 and a Form 10-Q for the quarterly period ended March 31, 20X2.
How should FSP Corp report the measurement period adjustment?
Analysis
FSP Corp should take the following actions in its June 30, 20X2 Form 10-Q:
  • Recognize the cumulative impact of the measurement period adjustment (i.e., the current and prior period impact) on the statements of income, comprehensive income, cash flows, and changes in stockholders’ equity (if applicable) for the three-month and six-month periods ended June 30, 20X2
  • Disclose the nature and amount of the measurement period adjustment, including separate disclosure of the amount of adjustment to the statement of income line items in the three-month and six-month periods ended June 30, 20X2 that would have been recognized in previous periods if the adjustment to provisional amounts were recognized as of October 1, 20X1
  • No adjustment to the December 31, 20X1 balance sheet or the statements of income, comprehensive income, cash flows, and changes in stockholder’s equity (if applicable) for the year ended December 31, 20X1 or for three-month period ended March 31, 20X2 should be recorded

In its December 31, 20X2 Form 10-K, FSP Corp should reflect the cumulative impact of the measurement period adjustment, including the prior period impact, on the 20X2 statements of income, comprehensive income, cash flows, and changes in stockholders’ equity (if applicable). FSP Corp should disclose the nature and amount of the measurement period adjustment, including separate disclosure of the amount of adjustment to income statement line items in 20X2 that would have been recognized in previous periods if the adjustment to provisional amounts were recognized as of October 1, 20X1. No adjustment should be reflected in the financial statements as of and for the year ended December 31, 20X1 or the selected quarterly data in the footnotes to the financial statements (if presented) for the quarterly periods ended December 31, 20X1 and March 31, 20X2.

17.4.18.2 Disclosure of contingent consideration adjustments

The following disclosures must be provided when adjustments related to contingent consideration arrangements are recorded in reporting periods subsequent to the acquisition date:

Excerpt from ASC 805-30-50-4

  1. For each reporting period after the acquisition date, until the entity collects, sells, or otherwise loses the right to a contingent consideration asset, or until the entity settles a contingent consideration liability, or the liability is cancelled or expires, all of the following:
    1. Any changes in the recognized amounts, including any differences arising upon settlement
    2. Any changes in the range of outcomes (undiscounted) and the reasons for those changes
    3. The disclosures required by Section 820-10-50.

The fair value disclosures required by ASC 820 are broadly applicable to most assets and liabilities measured at fair value, including those acquired in a business combination. ASC 820 requires different disclosures if the related assets or liabilities are remeasured at fair value on a recurring basis. Refer to FSP 20 for further information on fair value disclosure requirements.
1 Information disclosed in the financial statements and notes is generally not marked “unaudited.” However, one of the exceptions is business combination supplemental pro forma information required to be disclosed by ASC 805-10-50-2. Refer to paragraph 11 of PCAOB AS 3105, Departures from unqualified opinions and other reporting circumstances, for further details.
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