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The cost of an asset acquisition may exceed or be less than the fair value of the assets acquired and liabilities assumed. Significant differences between the cost of an asset acquisition and the fair value of the assets acquired and liabilities assumed may indicate that not all assets acquired and liabilities assumed have been recognized or that there are transactions that should be recognized separate from the asset acquisition.
After the cost of a group of assets in an asset acquisition is determined, it is allocated to the assets acquired based on their relative fair values as described in ASC 805-50-30-3.

2.4.1 Cost of asset acquisition exceeds fair value

When the acquirer believes that the cost of an asset acquisition exceeds the fair value of the assets acquired and liabilities assumed, the acquirer should (1) confirm that all acquired assets (including intangible assets) have been identified and recognized, (2) confirm that the fair values of the assets acquired and liabilities assumed have been appropriately measured, and (3) reassess whether there are any transactions (e.g., settlement of preexisting relationships) that should be recognized separate from the asset acquisition. See PPE 2.3.6 for additional information on recognizing separate transactions.
Once these steps are performed, the cost of the asset acquisition may still exceed the fair value of the individual assets acquired and liabilities assumed. This may be due to synergies existing among the acquired assets. Unlike in a business combination, goodwill is not recognized in an asset acquisition. Instead, any excess cost over fair value should generally be allocated to the acquired assets on a relative fair value basis. This may result in certain assets being recognized in excess of their fair values, as measured in accordance with ASC 820.
However, not all of the assets acquired should be allocated a portion of the fair value of consideration transferred, as this could result in an immediate impairment. Specifically, financial assets (excluding equity-method investments) and other assets subject to recurring fair value impairment testing (e.g., indefinite-lived intangible assets, assets held-for-sale) should not be allocated a portion of the excess consideration above their fair values. Additionally, any deferred tax assets arising from the asset acquisition should not be allocated a portion of the excess consideration above fair value.
Example PPE 2-4 illustrates the allocation of consideration in an asset acquisition when the cost of the acquisition exceeds the fair value of the acquired assets.
EXAMPLE PPE 2-4
Measurement and allocation of cost in an asset acquisition – cost exceeds fair value
Company X acquires machinery, a building, land, and an indefinite-lived tradename in exchange for cash consideration of $30 million. Company X also incurs direct transaction costs of $500,000. The fair value of each of the acquired assets is as follows:
  • Machinery - $3 million
  • Building - $20 million
  • Land - $5 million
  • Indefinite-lived tradename - $1 million
Company X concludes that the acquired assets do not constitute a business and instead represent an asset acquisition. How should the asset acquisition be recognized and measured?
Analysis
Company X would allocate total consideration transferred, inclusive of $30 million in cash paid to the seller and $500,000 of direct transaction costs, to the acquired assets based on their relative fair value. However, the indefinite-lived tradename would not be allocated cost above its acquisition date fair value of $1 million, since it will be subject to recurring fair value impairment testing. Accordingly, the cost of the acquisition would be allocated as follows:
Acquired asset
Fair value
Percent of fair value * (A)
Acquisition cost, excl. tradename(B)
Allocated cost (A * B)
Machinery
$3,000,000
11%
$29,500,000
$3,160,714
Building
20,000,000
71%
$29,500,000
21,071,429
Land
5,000,000
18%
$29,500,000
5,267,857
Indefinite-lived tradename
1,000,000
N/A
N/A
1,000,000
$29,000,000
$30,500,000
* Because the indefinite-lived tradename is not recognized at an amount in excess of its fair value, percentages are calculated based on eligible assets (i.e., machinery, building, and land).

2.4.2 Cost of asset acquisition is less than fair value

In certain scenarios, the cost of an asset acquisition may be less than the fair value of the individual assets acquired and liabilities assumed. When this occurs, the acquirer should (1) confirm that all liabilities assumed have been identified and recognized, (2) confirm that the fair values of the assets acquired and liabilities assumed have been appropriately measured, and (3) reassess whether there are any transactions (e.g., settlement of preexisting relationships) that should be recognized separate from the asset acquisition. See PPE 2.3.6 for additional information on recognizing separate transactions.
Once these steps are performed, the cost of the asset acquisition may still be less than the fair value of the individual assets acquired and liabilities assumed. However, because the measurement principle for asset acquisitions is based on a cost accumulation model, a bargain purchase gain should generally not be recognized in an asset acquisition. Instead, we believe the benefit should reduce the basis of the nonmonetary long-lived assets acquired. The benefit would be allocated using the relative fair value. However, similar to the scenario in which the cost of an asset acquisition exceeds fair value, any assets for which the subsequent application of GAAP would result in an immediate gain (e.g., financial assets, assets held for sale) should not be allocated a portion of the cost below fair value. In this scenario it would be appropriate to allocate a portion of the cost below fair value to indefinite-lived intangible assets as it would not result in an immediate impairment.
Example PPE 2-5 illustrates the allocation of consideration in an asset acquisition when the cost of the acquisition is less than the fair value of the acquired assets.
EXAMPLE PPE 2-5
Measurement and allocation of cost in an asset acquisition – cost is less than fair value
Company X acquires machinery, a building, land, and a financial asset and assumes accounts payable in exchange for cash consideration of $20 million. Company X incurs direct transaction costs of $2 million. The fair value of each of the acquired assets and the assumed liabilities are:
  • Machinery - $3 million
  • Building - $20 million
  • Land - $5 million
  • Financial asset - $1 million
  • Accounts payable - $2 million
Company X concludes that the acquired assets do not constitute a business and instead represent an asset acquisition. The financial asset will be accounted for under ASC 321 subsequent to the asset acquisition. How should the asset acquisition be recognized and measured?
Analysis
Company X would allocate total consideration transferred, inclusive of $20 million in cash paid to the seller, $2 million of assumed liabilities, and $2 million of direct transaction costs, to the acquired assets based on their relative fair value. Although the cost of the acquisition is less than the fair value of the individual assets acquired, a bargain purchase gain should not be recognized in an asset acquisition. Instead, Company X would recognize the benefit as a reduction to the relative fair values of the nonmonetary long-lived assets acquired. The financial asset would not be allocated a portion of the benefit since the financial asset is subject to recurring fair value measurement under ASC 321. The assumed accounts payable would not be allocated a portion of the benefit as liabilities acquired should be recorded at fair value. Accordingly, the cost of the acquisition would be allocated as follows:
Acquired asset
Fair value
Percent of fair value*
(A)
Acquisition cost**
(B)
Allocated cost
(A * B)
Machinery
$3,000,000
11%
$23,000,000
$2,530,000
Building
20,000,000
71%
$23,000,000
16,330,000
Land
5,000,000
18%
$23,000,000
4,140,000
Financial asset
1,000,000
N/A
N/A
1,000,000
Accounts payable
(2,000,000)
N/A
N/A
(2,000,000)
$27,000,000
$22,000,000
*Because the financial asset and accounts payable should not be recognized below fair value, percentages are calculated based on eligible assets (i.e., machinery, building, and land).
**Excludes the amounts related to financial asset acquired and assumed liabilities, the remaining acquisition cost is allocated to the eligible assets.

2.4.3 Contingent consideration arrangements with IPR&D (asset acquisitions)

As described in PPE 2.3.3, contingent consideration generally represents an obligation of the acquirer to transfer additional consideration to the seller if future events occur or conditions are met. It is often used to enable the buyer and seller to agree on the terms of an exchange when there are differing views on the value of the assets. Some acquisitions involve the purchase of in process research and development (IPR&D). Sometimes, the seller in an IPR&D exchange transaction continues to provide R&D services for a specified period following the transaction. In this scenario, the acquirer in the asset acquisition should determine which elements relate to the exchange transaction and which should be accounted for as a service transaction separate from the asset acquisition. See PPE 2.3.6 for additional information on transactions that are accounted for separately from an asset acquisition.
IPR&D acquisitions typically include an upfront payment and future contingent milestone payments based on the future success of the output of the IPR&D. As required by ASC 730, the portion of the purchase price allocated to IPR&D should be expensed immediately if it has no alternative future use. The acquirer would recognize the contingent milestone payments when probable and reasonably estimable, assuming the contingent consideration is not a derivative. Depending on the status of the IPR&D at the time of the contingent milestone payment, the acquirer may determine it appropriate to capitalize the payment as an intangible asset if the IPR&D meets the definition of an asset.
Example PPE 2-6 illustrates the accounting for contingent consideration related to IPR&D in an asset acquisition.
EXAMPLE PPE 2-6
Contingent consideration related to IPR&D in an asset acquisition
Company A, a pharmaceutical company, acquires IPR&D assets (that do not meet the definition of a business) related to an early stage drug candidate for $10 million. The IPR&D assets are acquired for a specific treatment and do not have an alternative future use. Company A agrees to pay a $2 million milestone payment to the seller if the drug candidate completes phase 2 trials within one year from the date of acquisition. Company A also agrees to pay a $5 million milestone payment to the seller if the drug receives FDA approval within three years from the date of acquisition. Nine months after the transfer of the assets to Company A, the drug candidate is successful in its phase 2 trials. Two years after the transfer of assets to Company A, the FDA approves the drug for commercial sales. For illustrative purposes, assume the contingent payments do not meet the definition of a derivative.
How should Company A account for the asset acquisition of IPR&D assets?
Analysis
Company A should expense the $10 million upfront payment made to acquire the IPR&D assets. The transaction is an asset acquisition and the IPR&D assets have no alternative future use; thus, the amount paid for the IPR&D assets should be expensed in accordance with ASC 730. The entry to record the transaction would be (in millions):
Dr. Expense
$10
Cr. Cash
$10
When it is probable that the early stage drug candidate will successfully complete its phase 2 trials, Company A would recognize a liability and corresponding expense of $2 million. At the time of the contingent payment, the drug candidate still has no alternative future use, and thus it does not yet meet the definition of an asset. The entry to record the transaction would be (in millions):
Dr. Expense
$2
Cr. Contingent consideration liability
$2
When the drug candidate receives FDA approval, Company A would recognize a liability of $5 million for the milestone payment owed to the seller. However, at this point the drug is commercially viable and Company A would likely determine the drug meets the definition of an asset. Accordingly, Company A would capitalize the costs associated with this milestone payment. The entry to record the transaction would be (in millions):
Dr. Intangible asset – IPR&D
$5
Cr. Contingent consideration liability
$5
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