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2.3 Initial measurement (asset acquisitions)
Publication date: 22 Feb 2024
us PP&E and other assets guide
Once an acquirer determines that a transaction is an asset acquisition, the acquirer should measure the assets acquired and liabilities assumed based on their cost to the acquiring entity, which includes consideration the acquirer transfers to the seller and direct transaction costs. The cost of the acquisition is then allocated to the assets acquired based on their relative fair values (see PPE 2.4 for information on allocation). An asset’s acquisition cost or the consideration transferred by the acquiring entity is assumed to be equal to the fair value of the net assets acquired, unless contrary evidence exists.
Most asset acquisitions involve exchanges of cash or other monetary assets for the assets acquired and thus determining the cost of the acquisition is straightforward. The amount of monetary assets or liabilities exchanged in an asset acquisition generally provides an objective basis for measuring the fair value of the assets acquired. Accordingly, if the consideration transferred is in the form of cash or other monetary assets, recognition and measurement of the acquired assets is based on the amount of cash or other monetary assets paid to the seller, in addition to direct transaction costs incurred. If the consideration transferred is in the form of liabilities incurred or equity interests issued to the seller, these amounts should generally be recognized on the acquisition date.
If the consideration transferred is in the form of nonfinancial or in substance nonfinancial assets within the scope of ASC 610-20, the assets transferred should be derecognized in accordance with that guidance and the assets acquired should be treated as noncash consideration. For recognition and measurement of asset acquisitions in which consideration transferred consists of nonfinancial assets or in substance nonfinancial assets, see PPE 2.3.1 and PPE 2.3.1.1.
2.3.1 Noncash consideration (asset acquisitions)
ASC 805-50-30-1 through ASC 805-50-30-2 provide the principles for recognition and measurement of noncash consideration transferred in an asset acquisition.
Excerpt from ASC 805-50-30-1
For transactions involving nonmonetary consideration within the scope of Topic 845, an acquirer must first determine if any of the conditions in paragraph 845-10-30-3 apply. If the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.
Asset acquisitions in which the consideration given is cash are measured by the amount of cash paid, which generally includes the transaction costs of the asset acquisition. However, if the consideration given is not in the form of cash (that is, in the form of noncash assets, liabilities incurred, or equity interests issued) and no other generally accepted accounting principles (GAAP) apply (for example, Topic 845 on nonmonetary transactions or Subtopic 610-20), measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable. For transactions involving nonmonetary consideration within the scope of Topic 845, an acquirer must first determine if any of the conditions in paragraph 845-10-30-3 apply. If the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.
For asset acquisitions in which some or all of the consideration transferred consists of noncash assets, liabilities incurred to the seller, or equity interests issued to the seller, reporting entities should first determine whether the transaction is within the scope of other US GAAP. ASC 805-50-30-2 specifically provides ASC 845 and ASC 610-20 as examples of other US GAAP that may apply to these transactions (see PPE 2.3.1.1). Additionally, when a reporting entity acquires assets by issuing equity interests to the seller, the reporting entity can elect to apply the measurement guidance in ASC 805-50 or the guidance in ASC 718. See SC 7.1 for information on the application of ASC 718.
2.3.1.1 Nonmonetary consideration transferred (asset acquisitions)
When an asset acquisition involves nonmonetary consideration, ASC 805-50-30-1 indicates that the acquirer must first determine if any of the conditions in ASC 845-10-30-3 through ASC 845-10-30-4 apply to the transaction.
A nonmonetary exchange shall be measured based on the recorded amount (after reduction, if appropriate, for an indicated impairment of value as discussed in paragraph 360-10-40-4) of the nonmonetary asset(s) relinquished, and not on the fair values of the exchanged assets, if any of the following conditions apply:
a. The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits.
b. The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
c. The transaction lacks commercial substance (see the following paragraph).
A nonmonetary exchange has commercial substance if the entity's future cash flows are expected to significantly change as a result of the exchange. The entity's future cash flows are expected to significantly change if either of the following criteria is met:
a. The configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred. The configuration of future cash flows is composed of the risk, timing, and amount of the cash flows. A change in any one of those elements would be a change in configuration.
b. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. An entity-specific value (referred to as an entity-specific measurement in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements) is different from a fair value measurement. As described in paragraph 24(b) of Concepts Statement No. 7, an entity-specific value attempts to capture the value of an asset or liability in the context of a particular entity. For example, an entity computing an entity-specific value of an asset would use its expectations about its use of that asset rather than the use assumed by marketplace participants. If it is determined that the transaction has commercial substance, the exchange would be measured at fair value, rather than at the entity-specific value.
A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange.
Transactions included in the scope of ASC 845 are limited and primarily include (1) exchanges of products or property held for sale in the ordinary course of business (i.e., inventory) for other inventory in the same line of business, and (2) exchanges of long-lived assets that are not substantive (i.e., the transaction lacks commercial substance). If any of the conditions described in ASC 845-10-30-3 are met, the acquirer would measure the cost of the acquired assets based on the carrying amount of the nonmonetary assets transferred, rather than fair value. Accordingly, no gain or loss (aside from impairment, as applicable) would be recognized on the transaction.
If the transaction does not meet any of the conditions in ASC 845-10-30-3, and the consideration transferred is in the form of nonfinancial assets or in substance nonfinancial assets (see PPE 6.2.2.5), the acquirer should recognize the transaction in accordance with ASC 610-20. Under this guidance, the fair value of the assets received by the acquirer is treated as noncash consideration in exchange for the nonfinancial assets relinquished, and a gain or loss, if any, is recognized by the acquirer. See PPE 6.2 for information on recognizing and measuring transactions in accordance with ASC 610-20.
If the transaction is not within the scope of ASC 845, ASC 610-20, or other relevant US GAAP, the measurement principles of ASC 805-50-30-2 should be applied. Under this guidance, the cost of the acquired assets would be measured based on either (1) the fair value of the consideration transferred, or (2) the fair value of the assets acquired, whichever is more clearly evident and thus more reliably measurable.
2.3.2 Transaction costs (asset acquisitions)
Direct transaction costs incurred by the acquirer in an asset acquisition are generally a component of the consideration transferred and are therefore capitalized as part of the cost of the assets acquired in accordance with ASC 805-50-30-1. Direct transaction costs include those third-party costs that can be directly attributable to the asset acquisition and would not have been incurred absent the acquisition transaction. Examples of direct transaction costs may include third-party finders’ fees, advisory, legal, accounting, valuation, and other professional service fees. Internal acquisition-related costs should be expensed as incurred.
Debt and equity issuance costs incurred relating to an asset acquisition within the scope of other GAAP should not be capitalized as a component of the cost of the assets acquired. Instead, financing costs relating to the issuance of debt should be recognized as a reduction of the debt balance in accordance with ASC 835-30-45-1A, and financing costs relating to the issuance of equity securities should reduce the proceeds received from the issuance.
2.3.3 Contingent consideration arrangements (asset acquisitions)
Asset acquisitions may include contingent consideration, which represents an obligation of the acquirer to transfer additional assets or equity interests to the seller if future events occur or conditions are met. Obligations of the acquirer to transfer additional assets or equity interests based only upon the passage of time do not represent contingent consideration and instead may represent seller financing.
There is no specific guidance within ASC 805-50 for the recognition and measurement of contingent consideration obligations in an asset acquisition. We believe that contingent consideration in an asset acquisition that is not accounted for under other US GAAP (e.g., as a derivative under ASC 815) should be recognized when probable and reasonably estimable, by analogy to ASC 450-20.
Contingent consideration recognized should be included in the initial cost of the assets acquired. Subsequent changes in the recorded amount of contingent consideration should generally be recognized as an adjustment to the cost basis of the acquired assets, by analogy to ASC 323-10-35-14A and ASC 360-10-30-1. These subsequent changes should be allocated to the acquired assets based on their relative fair value at the date of acquisition.
A change in contingent consideration impacts the cost basis of acquired assets, which may also impact the income statement through subsequent accounting for the acquired asset. We are aware of diversity in practice regarding the subsequent treatment of the income statement effect of changes to the cost basis of the acquired assets. We generally believe the depreciation or amortization of these assets should be recognized as a cumulative “catch up” adjustment, as if the additional amount of consideration that is no longer contingent had been accrued from the outset of the arrangement.
2.3.4 Noncontrolling interest (asset acquisitions)
A noncontrolling interest (NCI) is the equity interest in a subsidiary that is not attributable, directly or indirectly, to the parent. NCIs may arise in an asset acquisition when the acquirer obtains a controlling financial interest, but less than 100%, of an entity that does not meet the definition of a business.
There is no specific guidance within ASC 805-50 for the recognition and measurement of NCI in an asset acquisition. We believe the acquirer can make an accounting policy election on the acquisition date to either:
- follow the guidance for business combinations and measure NCI at fair value on the date of acquisition in accordance with ASC 805-30-30-1; or
- follow the asset acquisition cost accumulation and allocation model and record the NCI at its carrying amount.
Example PPE 2-1 illustrates the recognition and measurement of an asset acquisition with a noncontrolling interest.
EXAMPLE PPE 2-1
Asset acquisition with a noncontrolling interest
Asset acquisition with a noncontrolling interest
Company A acquires a 90% controlling interest in a legal entity whose only asset is a patent. Company A pays $9 million in cash and $100,000 in direct transaction costs. Company B, the seller, retains a 10% noncontrolling interest in the legal entity. Company A determines that the transaction should be accounted for as an asset acquisition, as the legal entity acquired does not constitute a business. Company A has previously made an accounting policy election to analogize to the business combinations guidance and measure noncontrolling interests at fair value on the date of acquisition. Company A has determined that the fair value of the noncontrolling interest is $1 million.
How should Company A account for the asset acquisition, including the noncontrolling interest?
Analysis
Company A should recognize and measure the acquired patent at a total cost of $10.1 million, consisting of (1) $9 million of cash consideration transferred, (2) $100,000 of direct transaction costs, and (3) $1 million fair value of noncontrolling interest. Company A would also recognize the noncontrolling interest at its acquisition date fair value of $1 million.
2.3.5 Previously held equity interests (asset acquisitions)
An acquirer may obtain control of an asset or group of assets through acquisition of a controlling interest in a legal entity in which it previously held a noncontrolling equity interest immediately prior to the acquisition. There is no specific guidance within ASC 805-50 on the accounting for previously held equity interests (PHEI) in this fact pattern. As a result, there is diversity in practice regarding the treatment of PHEI when the acquisition is determined to be an asset acquisition rather than a business combination.
We believe the acquirer in an asset acquisition should choose one of the following accounting policy elections on the acquisition date:
- Follow the guidance for business combinations (ASC 805-30-30-1) and remeasure the PHEI to fair value immediately prior to the asset acquisition, with a corresponding gain or loss recognized in the income statement. The fair value of the PHEI, along with the fair value of any consideration paid and direct transaction costs incurred, would be included in determining the cost to be allocated to the assets acquired.
- Follow the asset acquisition cost accumulation model and include the acquirer’s carrying amount of the PHEI, along with the fair value of any consideration paid and direct transaction costs incurred, in determining the cost to be allocated to the assets acquired.
In the absence of guidance for previously held equity interests in an asset acquisition, other measurement considerations may be acceptable (e.g., iterative equation). Example PPE 2-2 illustrates the recognition and measurement of an asset acquisition when the acquirer previously held a noncontrolling equity interest.
EXAMPLE PPE 2-2
Asset acquisition with previously held equity interest
Asset acquisition with previously held equity interest
Company A holds a 25% noncontrolling interest in a legal entity whose only asset is a patent. The carrying value of Company A’s investment is $100,000 and its fair value is $500,000. Company A acquires the remaining 75% interest in the legal entity for $1.5 million in cash; there were no direct transaction costs incurred. Company A determines that the transaction should be accounted for as an asset acquisition, as the legal entity acquired does not constitute a business. Company A has previously made an accounting policy election to analogize to the business combinations guidance in remeasuring previously held equity interests in an asset acquisition.
How should Company A account for the asset acquisition, including the previously held equity interest (PHEI)?
Analysis
Immediately prior to the acquisition, Company A would remeasure the PHEI to fair value, recognizing a gain on remeasurement of $400,000 ($500,000 acquisition date fair value less carrying value of $100,000). Company A would then recognize and measure the acquired patent at a total cost of $2 million, consisting of (1) $1.5 million of cash consideration transferred and (2) the $500,000 fair value of PHEI on the acquisition date.
2.3.6 Separate transactions (asset acquisitions)
The acquirer and the seller in an asset acquisition may enter into separate arrangements at or near the time of the asset acquisition. Such arrangements should be accounted for separate from the asset acquisition. That is, the consideration attributed to the acquired assets and assumed liabilities should only include the amounts related to those acquired assets and assumed liabilities in the exchange transaction. Any consideration relating to separate transactions would be attributed to those transactions and accounted for separately. Consideration transferred should be allocated between the asset acquisition transaction and any separate transactions on a relative fair value basis.
Judgment is required to determine the elements of an arrangement that should be accounted for as part of the exchange transaction and elements that should be accounted for separately. In making this determination, we believe the acquirer in an asset acquisition should consider (1) the reasons for the transaction, (2) who initiated the transaction, and (3) the timing of the transaction, by analogy to the guidance for business combinations in ASC 805-10-55-18.
Example PPE 2-3 illustrates the allocation of consideration transferred on a relative fair value basis between an asset acquisition and a transition service arrangement entered into on the acquisition date.
EXAMPLE PPE 2-3
Asset acquisition and transition service agreement
Asset acquisition and transition service agreement
Company A acquires a group of assets that does not constitute a business for $100 million from Company B. The fair value of the group of assets is $95 million. Concurrent with the asset acquisition, Company A and Company B enter into a transition service agreement (TSA), under which Company B agrees to provide certain services to Company A for a period of one year after the asset acquisition at no cost to Company A. Company A estimates the fair value of the services to be provided under the TSA to be $5 million.
How should Company A account for the services to be received under the TSA?
Analysis
On the date of the acquisition, Company A should allocate the transaction price of $100 million between the acquired group of assets and the TSA with Company B on a relative fair value basis. Although the TSA stipulates that the services will be performed by Company B at no cost to Company A, the substance of the transaction is that a portion of the consideration for the purchase of the assets relates to the transition services that will be provided in the future.
Accordingly, $95 million of the consideration transferred would be allocated to the group of assets acquired and $5 million would be allocated to the TSA, based on their relative fair values. The $5 million allocated to the TSA would be recognized as an asset for the prepayment of the services and would be expensed as the services are provided over a one-year period.
2.3.6.1 Preexisting relationships (asset acquisitions)
The acquirer and seller in an asset acquisition may have a preexisting relationship before negotiations for the exchange transaction begin that is effectively settled as a result of the asset acquisition. There is no guidance outside of a business combination for the settlement of preexisting relationships. However, we believe settlement gains and losses relating to preexisting relationships should generally be recognized in the income statement consistent with the guidance for business combinations in ASC 805-10-55-21.
For example, assume Company A is a defendant in litigation relating to a patent infringement claim brought by Company B. If Company A subsequently buys the intellectual property that is subject to the patent infringement from Company B, Company A would need to assess whether some of the consideration transferred should be accounted for separate from the asset acquisition transaction for the settlement of a preexisting relationship (i.e., ascribe some of the value to the effective settlement of the lawsuit). If a portion of the consideration transferred is for the settlement of a preexisting relationship, the consideration transferred would be allocated to the asset acquisition and settlement of the litigation on a relative fair value basis, since the preexisting relationship is noncontractual. See BCG 2.7.2 for additional information on the guidance for recognizing gains or losses on the settlement of noncontractual and contractual preexisting relationships.
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