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Figure PPE 2-1 compares asset acquisitions and business combinations. This figure is not intended to address all accounting similarities or differences. Since ASC 805-50 provides limited guidance on the accounting for acquisitions of assets that do not meet the definition of a business, we believe asset acquisitions should follow other sources of guidance, including other US GAAP. Other US GAAP includes guidance in ASC 805 for business combinations (to the extent it does not contradict the cost accumulation model) and other areas (e.g., ASC 350 for intangible assets). In the absence of guidance included in the FASB’s Accounting Standards Codification, we believe it may also be appropriate to consider the concepts in superseded guidance, including FAS 141 and APB 16.
Figure PPE 2-1
Comparison of asset acquisitions and business combinations
Topic
Business combinations
Asset acquisitions
Assembled workforce
An assembled workforce does not qualify as an identifiable intangible asset to be recognized separately from goodwill (see ASC 805-20-55-6).
An assembled workforce intangible asset may be recognized and measured at fair value at the acquisition date if it is part of the asset or group of assets acquired that do not constitute a business (see CON 5). We believe the intellectual capital (e.g., specialized skills, knowledge, experience) of the employees that make up the assembled workforce would be included in the fair value of the assembled workforce intangible asset.
However, if a workforce is present, the group of acquired assets may qualify as a business, in which case, the provisions of ASC 805 should be applied. See BCG 1 for additional information.
Bargain purchases
If the fair value of the assets acquired and liabilities assumed exceeds the fair value of the consideration transferred (taking into effect the fair value of any noncontrolling interest to be recorded and the fair value of the acquirer’s previously held equity interests in the acquiree), a gain is recognized by the acquirer (see ASC 805-30-25-2).
Assets acquired are measured at the fair value of consideration transferred, unless the fair value of the assets acquired and liabilities assumed is more reliably measurable. Because the measurement principle for asset acquisitions is based on a cost accumulation model, a gain is generally not recognized for a bargain purchase. As such, we believe the bargain purchase element should be reflected as a reduction of the relative fair value of the nonmonetary long-lived assets acquired. See PPE 2.4.2  for additional information.
Common control transactions
Transfers of a business between entities under common control that result in a change in reporting entity are accounted for at carrying value retrospectively for all periods presented as if the combination had been in effect since the inception of common control. See BCG 7.2 for additional information.
Transfers of assets between entities under common control are accounted for at carrying value prospectively, unless the transaction involves the transfer of inventory or financial assets. See BCG 7.2 for additional information.
Contingencies
Acquired contingencies should be recognized and measured at fair value if determinable at the acquisition date or during the measurement period using facts and circumstances that existed at the acquisition date. Otherwise, companies should generally account for the acquired contingencies in accordance with ASC 450.
Subsequent changes in the value of acquired contingencies are recognized through earnings until settled.
Loss contingencies recognized in an asset acquisition are accounted for in accordance with ASC 450-20. Gain contingencies should not be recognized in an asset acquisition; instead, gain contingencies should only be recognized once the contingency is resolved.
Asset acquisitions are not subject to the requirement to initially assess whether the acquisition date fair value of acquired contingencies is determinable.
Subsequent changes in the amount recorded under ASC 450 are recognized through earnings.
Contingent consideration
Contingent consideration is recorded at fair value on the date of acquisition. Subsequent changes in the fair value of the contingent consideration not classified as equity are recognized through earnings until settled (see ASC 805-30-25-5).
Contingent consideration that is not accounted for under other US GAAP (e.g., a derivative under ASC 815) is generally recorded when probable and reasonably estimable. Any initial amount of contingent consideration recorded on the acquisition date is included in the initial cost of the assets acquired, and subsequent changes in the recorded amount of contingent consideration are generally recognized as an adjustment to the cost basis (see ASC 323-10-35-14A, ASC 360-10-30-1, and ASC 450-20-25-2). See PPE 2.3.3 for additional information.
Once the contingent consideration is capitalized as part of the cost basis, we are aware of diversity in practice regarding the treatment of the income statement effect of this additional cost basis. We generally believe the depreciation should be recognized as a cumulative “catch up” adjustment (as if the additional amount that is no longer contingent had been accrued from the outset of the arrangement).
Defensive intangible assets
A defensive intangible asset is recognized as a separate unit of accounting and is not included as part of a reporting entity’s existing intangible assets. An acquirer should use market-participant assumptions in determining the fair value of the defensive intangible asset. The intended use of an asset by the acquirer does not affect its fair value (see ASC 350-30-25-5).
A defensive intangible asset is recognized in an asset acquisition based on its relative fair value. The allocated cost of an asset that a reporting entity does not intend to use (or does not intend to use in a way that is the asset’s highest and best use) should be measured based on market-participant assumptions (see ASC 805-50-30-3).
Deferred taxes
Deferred taxes are recorded on most temporary book/tax differences for assets acquired and liabilities assumed, and tax attributes acquired in a business combination in accordance with ASC 740.
Deferred taxes are generally recorded on temporary book/tax differences in an asset acquisition using the simultaneous equations method in accordance with ASC 740-10-25-49 through ASC 740-10-25-55. A reduction in the valuation allowance of the acquirer that is directly related to the asset acquisition will impact income tax expense. Further, any “negative goodwill” arising from the application of ASC 740-10-25-51(c) should first reduce the values assigned to the noncurrent assets, and any remaining deferred credit should be amortized to income tax expense in proportion to the realization of the tax benefits that gave rise to the negative goodwill (see ASC 740-10-35-5). See TX 10.12.1 for additional information.
The tax law may provide for the acquirer’s tax on certain nonmonetary exchanges to be deferred and for the acquirer’s tax basis in the asset that was given up to carry over to the asset received. In those instances, a deferred tax liability may be recorded. See TX 10.12.2 for additional information.
Deferred taxes on in-process research and development (IPR&D)
In a non-taxable business combination, deferred taxes are measured and recorded on the acquired IPR&D at the acquisition date.
IPR&D acquired in an asset acquisition is expensed if it has no alternative future use. Such write-off occurs on the acquisition date prior to the measurement of deferred taxes. Accordingly, deferred taxes are not provided on the initial differences between the amounts assigned for financial reporting and tax purposes, and IPR&D is charged to expense on a gross basis.
Employee benefits (e.g., share-based compensation and pension plans)
Employee benefits may be included in a business combination. Compensation arrangements should be analyzed to determine whether they represent consideration transferred, compensation cost, or a combination thereof.
If an acquired set includes employees with share-based compensation awards that are replaced with awards of the acquirer and the set is determined to be a business, the replacement awards issued may represent consideration for precombination vesting, postcombination vesting, or both. Therefore, a portion of the expense may need to be attributed to the precombination period. See BCG 3.4 for additional information.
Employee benefits may be included in asset acquisitions, particularly when an acquired set is considered an asset as a result of the screen test (see BCG 1.2.1 for additional information on the screen test). In this case, any specific relief provisions in ASC 805 do not apply as an asset acquisition is not within its scope.
If an asset acquisition includes employees with share-based compensation awards that are replaced with awards of the acquirer, the full amount of the replacement awards would be considered new awards and be accounted for prospectively, and recognized in the postcombination period. This may result in an increase in the postcombination expense in an asset acquisition as compared to a business combination.
Financial statement disclosure
There are extensive disclosures required by ASC 805-10-50 to enable users of the financial statements to evaluate the nature and financial effects of business combinations. See FSP 17 for additional information.
There are no specific disclosures required by ASC 805-50 for acquisitions of assets that do not meet the definition of a business. Reporting entities should follow the disclosure requirements in accordance with other US GAAP based on the nature of the assets acquired or liabilities assumed.
Goodwill
Goodwill is recognized as a separate asset as the aggregate of (1) the consideration transferred (in accordance with ASC 805, generally at acquisition-date fair value), (2) the fair value of any NCI, and (3) the fair value of the acquirer’s previously-held equity interest, less the fair value of the net identifiable assets (see ASC 805-30-30-1).
Goodwill is not recognized in an asset acquisition. Any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on their relative fair values (see ASC 805-50-30-3). See PPE 2.4.1 for additional information.
Indemnifications
Indemnification assets are recognized and measured based on the related indemnified item (see ASC 805-20-30-18).
Indemnifications provided outside of a business combination are generally recognized and measured by analogy to the business combination standard.
Initial measurement
Assets acquired and liabilities assumed are measured at their acquisition date fair values, with limited exceptions (see BCG 2.5)
Assets acquired are measured under a cost accumulation model, with cost allocated to acquired assets on a relative fair value basis.
Intangible assets, excluding goodwill
Intangible assets are recognized at fair value if they meet the identifiable criteria (see ASC 805-20-25-4).
Intangible assets acquired in an asset acquisition are recognized in accordance with ASC 350. Accordingly, an intangible asset in an asset acquisition should be recognized if it meets the asset recognition criteria in CON 5, even if it does not meet the identifiable criteria in ASC 805.
IPR&D
Research and development acquired in a business combination is measured at fair value using market-participant assumptions and is recognized as an indefinite-lived intangible asset. IPR&D intangible assets should be considered indefinite-lived until the abandonment or completion of the associated research and development efforts (see ASC 350-30-35-17A). See BCG 8.2.4 for additional information.
IPR&D is expensed for asset acquisitions at the acquisition date if it has no alternative future use. However, the costs of intangible assets that are purchased from others and have alternative future uses (in other research and development projects or otherwise) are accounted for as an intangible asset. Amortization of those intangible assets used in research and development activities is a research and development cost (see ASC 730-10-25-2(c)). Circumstances when there is an alternative future use are expected to be limited (see PPE 4.2.1.3 for additional information).
Lease classification of an acquired lease (ASC 840)
The previous lease classification for the lease of the acquired entity is retained. Lease classification should not be changed unless the provisions of the lease are modified (see ASC 805-20-25-8(a) and ASC 840-10-25-27).
We generally believe classification of a lease contract should be reassessed by the acquirer upon acquisition, similar to the assessment when a reporting entity subleases an asset (see ASC 840-10-25-32).
Lease classification of an acquired lease (ASC 842)
The previous lease classification for the lease of the acquired entity is retained unless the lease is modified (see ASC 842-10-55-11).
We generally believe classification of a lease contract should be reassessed by the acquirer upon acquisition.
Lease measurement: acquiree is a lessee in an operating lease or a finance lease (ASC 842)
Leases are an exception to the recognition and measurement principles under ASC 805.
The lease liability should be measured as if it were a new lease under ASC 842.
The right-of-use asset is equal to the lease liability and is adjusted to reflect favorable or unfavorable terms of the lease compared to market terms (see ASC 805-20-30-24).
Refer to BCG 4.3.3.7 for further details.
The lease liability and the right-of-use asset should be measured as if it were a new lease under ASC 842.
Intangible assets or liabilities should be recorded at fair value for favorable or unfavorable terms of the lease compared to market terms and generally classified separate from the right-of-use asset. For further considerations when measuring the favorable or unfavorable terms of the lease, see BCG 4.3.3.7.
The cost of the acquisition to the buyer should be allocated to the identifiable assets, including the right-of-use asset and any intangibles (i.e., the right-of-use asset may not be equal to the lease liability, even when the lease is at market).
Lease measurement: acquiree is a lessor in an operating lease (ASC 842)
An asset subject to a lease is recognized and measured at fair value unencumbered by the related lease.
An intangible asset or liability may also be recognized if the lease contract terms are favorable or unfavorable as compared to market terms (see ASC 805-20-25-12).
An intangible asset may be recognized at the acquisition date under ASC 805-20-30-5 for the value associated with the existing lease (i.e., in-place lease intangible).
Refer to BCG 4.3.3.7 for further details.
An asset subject to a lease is recognized and measured at fair value unencumbered by the related lease.
An intangible asset or liability may also be recognized if the lease contract terms are favorable or unfavorable as compared to market terms.
An intangible asset may be recognized at the acquisition date for the value associated with the existing lease (i.e., in-place lease intangible).
For further considerations when measuring lease related intangibles, see BCG 4.3.3.7.
The cost of the acquisition to the buyer should be allocated to the identifiable assets, including the asset subject to lease and any intangibles.
Leases: acquiree is a lessor in a sales-type, direct financing, or leveraged lease (ASC 842)
Leases are an exception to the recognition and measurement principles under ASC 805.
Net investment in the lease will be equal to the sum of the lease receivable and the unguaranteed residual, measured following ASC 805-20-30-25. Refer to BCG 4.3.3.7 for further details.
Net investment in lease is recorded at fair value, including the lease receivable and any unguaranteed residual value.
For further considerations when measuring lease related intangibles, see BCG 4.3.3.7.
The cost of the acquisition to the buyer should be allocated to the identifiable assets, including any intangibles.
Measurement date
The assets acquired and liabilities assumed are measured at fair value on the date control is obtained (see ASC 805-10-25-6).
The assets acquired and liabilities assumed are recognized at cost (which is the consideration the acquirer transfers to the seller, including transaction costs) on the acquisition date, unless other GAAP requires otherwise.
Measurement period adjustments
The acquirer has a period of time, referred to as the measurement period, to finalize the identification and measurement of assets acquired, liabilities assumed, and consideration transferred. Measurement period adjustments are recognized in the reporting period in which the adjustment amount is determined (see ASC 805-10-25-13).
The concept of measurement period adjustments does not exist for asset acquisitions. Assets acquired are recorded at cost on the acquisition date.
Noncontrolling interest (NCI)
NCI is recognized and measured at fair value on the acquisition date (see ASC 805-20-30-1).
There is no guidance outside of a business combination for NCI. We believe the acquirer can make an accounting policy election on the acquisition date to either (1) follow the guidance for business combinations and measure NCI at fair value, or (2) follow the asset acquisition cost accumulation and allocation model and record the NCI at its carrying amount. See PPE 2.3.4 for additional information.
Preexisting relationships
A preexisting relationship can be contractual or noncontractual.
The settlement of a contractual relationship is measured as the lesser of the amount the contract terms are favorable/ unfavorable and the amount of any stated settlement provisions in the contract.
The settlement of a noncontractual relationship is measured at fair value on the acquisition date. Any gain or loss on settlement is recognized in the income statement (see ASC 805-10-55-21).
There is no guidance outside of a business combination on the settlement of a preexisting relationship. Settlement gains and losses are generally recognized in the income statement consistent with the guidance for business combinations. See LG 5.5.2 for additional considerations when a lessee terminates a lease in conjunction with the purchase of the underlying leased asset.
Previously held equity interest
On the date the controlling interest is acquired, the previously held equity interest in the acquiree is remeasured to fair value. Any difference in the previously held equity interest is recognized as a gain or loss in the income statement (see ASC 805-10-25-10).
There is no guidance outside of a business combination requiring the remeasurement of a previously held equity interest. We are aware of diversity in practice regarding the treatment of previously held equity interest in an asset acquisition. We believe the acquirer can make an accounting policy election on the acquisition date to (1) follow the guidance for business combinations and remeasure the previously held equity interest to fair value and recognize a gain or loss, if any, in the income statement, or (2) follow the asset acquisition cost accumulation and allocation model, record the previously held equity interest at its carrying amount, and record the fair value of the consideration paid to acquire the remaining equity interest.
In the absence of guidance for previously held equity interests in an asset acquisition, other measurement considerations may be acceptable (e.g., iterative equation). See PPE 2.3.5 for additional information.
Pushdown accounting
An election can be made to “push down” an acquirer’s stepped-up basis in the separate financial statements of the acquiree, creating a new basis of accounting and new reporting entity (ASC 805-50-25-4).
Pushdown accounting cannot be elected in an asset acquisition.
Reacquired rights
A reacquired right is generally an identifiable intangible asset that the acquirer recognizes separate from goodwill.
Reacquired rights are measured based on the estimated cash flows over the remaining contractual life and not based on market participant assumptions (an exception to the fair value principle).
Any settlement gain or loss should be measured consistent with the guidance for preexisting relationships (see ASC 805-20-25-15).
There is no guidance outside of a business combination on reacquired rights.
An asset may be recognized at fair value if there is probable future economic benefit (CON 6). However, the acquirer in an asset acquisition must first evaluate whether the transaction is the cancellation of a contract (and therefore does not constitute an asset acquisition), which should be accounted for in accordance with ASC 606.
Transaction costs
In a business combination, transaction costs are expensed as incurred and not included as part of the consideration transferred (see ASC 805-10-25-23).
Direct transaction costs are generally a component of the consideration transferred to acquire the group of assets in an asset acquisition, and are capitalized as a component of the cost of the assets acquired in accordance with the applicable standards (e.g., CON 5 for property, plant, and equipment) (see ASC 805-50-30-1).
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