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8.2 Acquisition of a foreign operation
Publication date: 31 May 2022
us Foreign currency guide
When a reporting entity acquires a foreign operation, it should consider how to apply the guidance in ASC 830. To do that, the reporting entity should first determine whether the foreign operation (1) will be operating as a distinct and separable foreign operation or (2) will be operationally combined with one of the reporting entity’s existing foreign or domestic entities. See FX 2 for information on determining whether an operation is distinct and separable.
If the reporting entity determines that the newly acquired foreign operation will be operated as a distinct and separable operation, it should determine the functional currency of the acquired operation. If the functional currency is different than the reporting currency, the acquired operation is a foreign entity. If the functional currency is the same as the reporting currency, the acquired operation is a domestic entity. If the foreign operation is not distinct and separable, and is therefore combined with one of the reporting entity’s existing foreign or domestic entities, the reporting entity should determine whether the newly acquired foreign operation causes a change in the functional currency of the existing foreign or domestic entity. See FX 3 for information on determining functional currency.
8.2.1 Allocation of goodwill to reporting units
The unit of account for goodwill is the reporting unit. A reporting unit is the same as, or one level below, an operating segment as defined in ASC 280. One level below an operating segment is referred to as a component. After components are identified, a reporting entity should aggregate components into one or more reporting units based upon similar economic characteristics. See BCG 9.2.4 for a discussion of the various criteria that should be considered when evaluating what constitutes similar economic characteristics. Reporting unit balances are impacted by dispositions and deconsolidation events, and the results of annual or event-driven impairment assessments.
Goodwill resulting from a business combination should be assigned to one or more reporting units. See BCG 9.4 for further guidance. Goodwill created by acquiring a foreign operation should be measured in terms of the foreign entity’s functional currency based on the exchange rate at the date of acquisition. At subsequent reporting dates, goodwill should be translated like all other assets and liabilities of the foreign entity (see FX 5). This treatment applies regardless of whether the goodwill is pushed down to the books and records of the foreign entity.
There is currently no guidance which explains how the foreign entity unit of account concept from ASC 830 interacts with the unit of account concept for goodwill (the reporting unit) from ASC 350, Intangibles — Goodwill and Other, for purposes of aggregating components to form a multi-currency reporting unit. When a reporting unit includes components with different functional currencies, the goodwill impairment test by necessity must be performed in the reporting currency, which means that the goodwill balance being tested is impacted by CTA. Alternatively, the goodwill related to a reporting unit that comprises components that share the same functional currency is not impacted by CTA and is tested in the functional currency.
Given the lack of guidance in ASC 350 and the judgment required to determine when components should be aggregated, multi-currency reporting units exist in practice. However, some reporting entities have limited reporting units to a single currency after considering the principles set forth in ASC 830. For example, ASC 830-10-45-2 states that the assets of a foreign entity shall be measured using the functional currency of the foreign entity. Further, the notion of combining components that are also foreign entities based on the similarity of products, processes, customers, distribution methods, and regulatory environment, and their level of operational dependency, as discussed in ASC 350 and ASC 280, appears inconsistent with the “distinct and separable” (see FX 2) and “self-contained” notions from ASC 830. Lastly, we note that allocating goodwill within a multi-currency reporting unit subsequent to a disposition, impairment, or reorganization can create significant operational challenges.
8.2.2 Obtaining control through a step acquisition
In a step acquisition, an acquirer may obtain control of a business in which it previously held an equity interest. See BCG 5 for information on the accounting for step acquisitions. ASC 805-10-25-10 provides guidance on the accounting for CTA when a reporting entity obtains control of a foreign entity through a step acquisition.
Excerpt from ASC 805-10-25-10
If the business combination achieved in stages relates to a previously held equity method investment that is a foreign entity, the amount of accumulated other comprehensive income that is reclassified and included in the calculation of gain or loss shall include any foreign currency translation adjustment related to that previously held investment.
The accounting for obtaining control of a previously held equity method investment (a step acquisition) is based on the view that the transaction is two distinct events, the disposition of the previously held equity method investment (as discussed in ASC 830-30-40-1A), and the acquisition of the controlling financial interest. When a reporting entity disposes of a foreign entity, it is required to reclassify any related CTA account to net income (see FX 8.3 for further information).
Based on this guidance, if the previously held equity method investment was a foreign entity in its entirety (i.e., an investment “in” a foreign entity), the deemed disposal would cause the related CTA balance to be reclassified to net income. In contrast, if the previously held equity method investment was only a component of a foreign entity (i.e., an investment “within” a foreign entity), the deemed disposal would not cause the related CTA balance to be reclassified unless it represented a substantially complete liquidation of the foreign entity.
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