Figure FSP 17-2 illustrates disclosures of a business combination in the annual statements of a calendar year-end reporting entity. It also includes a sample goodwill rollforward (see FSP 8). Figure FSP 17-2 is one practical example, but reporting entities can use various formats to meet the disclosure requirements. ASC 805-10-55-37 through ASC 805-10-55-50 provide an additional example of the disclosure requirements.

Figure FSP 17-2
Sample business combination disclosures [with added references to ASC 805]

On August 1, 20X2, FSP Corp completed the acquisition of 50% of the common shares of Sub Corp, increasing its interest from 20% to 70%, and providing FSP Corp control over Sub Corp. Sub Corp became a consolidated subsidiary of FSP Corp on this date. Sub Corp is a shoe retailer operating in the United States and most Western European countries. FSP Corp previously accounted for its 20% interest in Sub Corp as an equity method investment. As a result of the acquisition, FSP Corp is expected to expand the sale of its shoes in the United States and Western European markets [ASC 805-10-50-2(a)–(d)].

The acquired business contributed revenues of $44,700 and earnings of $2,700 to FSP Corp for the period from August 1, 20X2 to December 31, 20X2 [ASC 805-10-50-2(h)(1)]. The following unaudited pro forma summary presents consolidated information of FSP Corp as if the business combination had occurred on January 1, 20X1 [ASC 805-10-50-2(h)(3)].

FSP Corp did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings [ASC 805-10-50-2(h)(4)].

These pro forma amounts have been calculated after applying FSP Corp’s accounting policies and adjusting the results of Sub Corp to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and intangible assets had been applied from January 1, 20X1, with the consequential tax effects.

In 20X2, FSP Corp incurred $200 of acquisition-related costs. These expenses are included in general and administrative expense on FSP Corp’s consolidated income statement for the year ended December 31, 20X2 [ASC 805-10-50-2(e) and ASC 805-10-50-2(f)] and are reflected in pro forma earnings for the year ended December 31, 20X1 in the table above.

The following table summarizes the consideration transferred to acquire Sub Corp and the amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the noncontrolling interest in Sub Corp at the acquisition date [ASC 805-30-50-1(b) and ASC 805-20-50-1(c)]:

FSP Corp issued 220 common shares that had a total fair value of $5,500 based on the closing market price of $25 per share on August 1, 20X2, the acquisition date [ASC 805-30-50-1(b)(4)].

As a result of FSP Corp obtaining control over Sub Corp, FSP Corp’s previously held 20% interest in Sub Corp was remeasured to fair value, resulting in a gain of $900. This gain has been recognized in the line item “other (losses)/gains–net” on the consolidated income statement [ASC 805-10-50-2(g)(2)].

The fair value of the noncontrolling interest of $8,000 and the fair value of the previously held equity interest of $5,600 in Sub Corp were estimated by applying a market approach and an income approach, respectively. These fair value measurements of the noncontrolling interest and the previously held equity interest are based on significant inputs not observable in the market, and thus represent Level 3 measurements. The fair value estimates for the noncontrolling interest and the previously held equity interest are based on (1) an assumed discount rate range of 20–25%, (2) an assumed terminal value based on a range of terminal EBITDA multiples between 3 and 5 times (or, if appropriate, based on long-term sustainable growth rates ranging from 3% to 6%), (3) assumed financial multiples of reporting entities deemed to be similar to Sub Corp, and (4) assumed adjustments because of the lack of control or lack of marketability, as relevant, that market participants would consider when estimating the fair value of the noncontrolling interest and the previously held equity interest in Sub Corp [ASC 805-20-50-1(e), ASC 805-10-50-2(g)].

The acquisition of Sub Corp includes a contingent consideration arrangement that requires additional consideration to be paid by FSP Corp to the sellers of Sub Corp based on the future net income of Sub Corp over a three-year period. Amounts are payable three years after the acquisition date. The range of the undiscounted amounts FSP Corp could pay under the contingent consideration agreement is between zero and $3,000. The fair value of the contingent consideration recognized on the acquisition date of $2,000 was estimated by applying the income approach [ASC 805-30-50-1(c)]. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions include (1) a discount rate range of 10% to 15%, and (2) probability adjusted level of net income between $8,000 and $8,500.

As of December 31, 20X2, there were no changes in the recognized amounts or range of outcomes for the contingent consideration recognized as a result of the acquisition of Sub Corp [ASC 805-30-50-4(a)].

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after FSP Corp’s acquisition of Sub Corp [ASC 805-30-50-1(a)].

The goodwill is not deductible for tax purposes [ASC 805-30-50-1(d)]. All of the $2,750 of goodwill was assigned to FSP Corp’s Retail Shoes segment [ASC 805-30-50-1(e)].

The fair value of the assets acquired includes trade receivables of $6,500 that are not purchased financial assets with credit deterioration. The gross amount due under contracts is $6,800, of which $300 is expected to be uncollectible [ASC 805-20-50-1(b)]. FSP Corp recognized an allowance with a corresponding credit loss expense of $65 during 20X2. FSP Corp did not acquire any other class of receivable as a result of the acquisition of Sub Corp. [See LI 12 for CECL disclosure requirements.]

The fair values of the acquired license and trademark intangible assets of $3,000 and $1,850, respectively, are provisional pending receipt of the final valuations for those assets [ASC 805-20-50-4A].

Prior to the acquisition, FSP Corp had a preexisting relationship with Sub Corp. FSP Corp had a receivable of $200 for certain trademark fees. These fees were disputed by Sub Corp. FSP Corp believed the amount receivable was $150, reflecting a partial reserve of $50. As part of the acquisition terms, the receivable was settled for $140. FSP Corp recorded a loss upon settlement of $10 as a result of the acquisition, which was recorded separate from the business combination. The settlement loss was recorded in general and administrative expense on FSP Corp’s consolidated income statement [ASC 805-10-50-2(e) and ASC 805-10-50-2(f)].

A liability arising from a contingency of $1,000 has been recognized at fair value for expected warranty claims on products sold by Sub Corp during the last two years. FSP Corp expects that the majority of this expenditure will be incurred in 20X3 and that all costs will be incurred by 20X4.

See Note Z, Subsequent Events, for disclosures regarding the acquisition of LTR Company, which took place after the balance sheet date, but before the issuance of these financial statements [ASC 805-10-50-4].

The changes in the carrying amounts of goodwill for the retail shoes and retail coats segments are as follows [ASC 350-20-50-1 and ASC 805-30-50-4(b)]: