Many regulated utility acquisitions include rate discounts that are negotiated by the acquirer with the regulator as part of obtaining the regulator’s support for the transaction (referred to as “merger credits” for purposes of this discussion). As discussed in UP 17.4, merger credits typically do not meet the definition of a regulatory liability or a liability under CON 8. However, a question arises as to whether such amounts should be recognized as a liability when applying the acquisition method.

No. ASC 805 discusses recognition of assets acquired and liabilities assumed in a business combination.

In accordance with ASC 805-20-25-3, assets and liabilities recognized as part of acquisition accounting should be part of the exchange between the acquirer and the acquiree. Merger credits typically would not be part of the exchange in an acquisition involving a regulated utility (i.e., contingent consideration of the acquirer). Merger credits are more akin to acquisition-related costs, which are expensed as incurred, as they are not negotiated between the buyer and seller but are instead conditions accepted by the seller to obtain regulatory approval. Under this view, merger credits do not represent a liability to the seller at the acquisition date rather they represent a future reduction of revenues as the credits are issued.

Therefore, as the merger credits are not part of the exchange, no merger credit liability should be recorded as part of the business combination.