ASC Topic 805
Business Combinations
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ASC 805 requires every transaction meeting the definition of a business combination to be accounted for by the acquisition method: identify the acquirer, determine the acquisition date (805-10), recognize and measure the identifiable assets acquired, liabilities assumed and any noncontrolling interest at acquisition-date fair value subject to a closed list of exceptions (805-20), and recognize goodwill — the excess of consideration transferred plus NCI plus any previously held equity interest over identifiable net assets — or, after reassessment, a bargain purchase gain (805-30). Specialized subtopics adapt or displace that model: reverse acquisitions where the legal acquirer is the accounting acquiree (805-40), joint venture formations that apply a new basis without identifying an acquirer (805-60), and 805-50's residual bucket of asset acquisitions (cost allocated on relative fair values, no goodwill), common-control transfers at carryover basis, and optional pushdown accounting. Industry and entity-type overlays cover mining (805-930), insurance and demutualizations (805-944), not-for-profit mergers under the carryover method and NFP acquisitions with inherent contributions (958-805), and health care performance-indicator presentation (805-954). The central idea is that control obtained over a *business* triggers fresh-start fair value measurement and goodwill, while everything short of that is measured at cost or carryover basis.
Subtopics
- 10Overall178 ¶
ASC 805-10 is the Overall subtopic of Business Combinations: it sets the scope of the Topic and governs two of the four steps of the acquisition method — identifying the acquirer and determining the acquisition date — plus the definition of a business, the measurement period, and deciding what is (and is not) part of the business combination exchange. Every transaction meeting the definition of a business combination must be accounted for by the acquisition method (805-10-25-1); if the acquired set is not a business, it is an asset acquisition. It also sets the disclosure objectives and requirements enabling users to evaluate the nature and financial effects of a combination.
- 20Identifiable Assets and Liabilities, and Any Noncontrolling Interest181 ¶
ASC 805-20 governs one piece of the acquisition method: recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest (NCI) in the acquiree. The core rules are that at the acquisition date the acquirer recognizes these items separately from goodwill (if they meet the asset/liability definitions and are part of the exchange, not a separate transaction) and measures them at acquisition-date fair value, subject to a closed list of recognition and measurement exceptions (income taxes, employee benefits, indemnification assets, reacquired rights, share-based payments, held-for-sale assets, certain contingencies, leases, PCD assets, contract assets/liabilities). Private companies and NFPs may elect an accounting alternative that subsumes most customer-related intangibles and all noncompetition agreements into goodwill.
- 30Goodwill or Gain from Bargain Purchase, Including Consideration Transferred69 ¶
ASC 805-30 covers the piece of the acquisition method that produces goodwill or a bargain purchase gain. Goodwill equals the excess of (a) consideration transferred at acquisition-date fair value plus the fair value of any noncontrolling interest plus the acquisition-date fair value of any previously held equity interest, over (b) the net of the acquisition-date amounts of identifiable assets acquired and liabilities assumed (805-30-30-1); if (b) exceeds (a), the acquirer must first reassess its identification and measurement of all items and then recognize the remaining excess as a gain in earnings. It also governs measurement of consideration transferred, including contingent consideration and share-based payment replacement awards.
- 40Reverse Acquisitions39 ¶
ASC 805-40 explains how to apply the acquisition method when the legal acquirer (the entity that issues equity, often a public shell) is the accounting acquiree and the legal subsidiary is the accounting acquirer — a reverse acquisition. The accounting acquiree must be a business, and all recognition and measurement principles of 805-10, 805-20 and 805-30 (including goodwill) apply, but consideration transferred is imputed as the number of shares the legal subsidiary would have had to issue to give the legal parent's owners their resulting ownership percentage (805-40-30-2). The consolidated statements are issued in the legal parent's name yet are a continuation of the legal subsidiary's financial statements, with the subsidiary's legal capital retroactively restated to the parent's equity structure (805-40-45-1 through 45-2).
- 50Related Issues71 ¶
ASC 805-50 collects the transactions that fall outside the acquisition method of Topic 805: asset acquisitions that are not businesses, transfers between entities under common control, formation of master limited partnerships, and pushdown accounting. Asset acquisitions are recorded at cost (including transaction costs) and allocated to the individual assets on a relative fair value basis with no goodwill; common-control transfers are recorded by the receiving entity at the transferor's (or parent's) carrying amounts with retrospective presentation for periods under common control. Pushdown accounting is an optional, irrevocable election by an acquiree to reflect the acquirer's new basis in its separate financial statements.
- 60Joint Venture Formations50 ¶
ASC 805-60 governs how a newly formed joint venture (or corporate joint venture) accounts for its own formation in its separate financial statements. The joint venture must establish a new basis of accounting at the formation date, recognizing and measuring identifiable assets, liabilities, and any noncontrolling interest under Subtopic 805-20, but without identifying an acquirer. Goodwill, if any, is the excess of the formation-date fair value of the joint venture as a whole over the net of the identifiable assets and liabilities recognized; any excess of net assets over that fair value is credited to additional paid-in capital rather than recognized as a bargain purchase gain.
- 930Extractive Activities—Mining4 ¶
This Subtopic gives industry-specific guidance on how a mining entity measures mineral rights and other mining assets in a business combination purchase price allocation. It requires that value beyond proven and probable reserves (VBPP) be included in the value allocated to mining assets to the extent a market participant would include it, and that anticipated future mineral price fluctuations be reflected consistently with marketplace participant expectations.
- 942Financial Services—Depository and Lending4 ¶
- 944Financial Services—Insurance82 ¶
ASC 805-944 tells insurance entities how to account for insurance and reinsurance contracts acquired in a business combination and how to account for demutualizations (or formation of a mutual insurance holding entity). Acquired insurance/reinsurance contracts are treated as new contracts, recognized at fair value but split into (a) amounts measured under the acquirer's own insurance accounting policies and (b) an intangible asset (or liability) for the residual, while the acquiree's classification as insurance versus deposit contract is carried forward. A demutualization is not itself a change in ownership requiring a new accounting basis; instead the entity computes a one-time actuarial calculation of maximum future closed-block earnings and records a policyholder dividend obligation whenever cumulative actual closed-block earnings exceed cumulative expected earnings.
- 954Health Care Entities15 ¶
ASC 805-954 supplements Subtopic 958-805 for not-for-profit, business-oriented health care entities that combine with other NFPs, businesses, or nonprofit activities in a transaction meeting the definition of a merger of not-for-profit entities or an acquisition by a not-for-profit entity. Its incremental rules address classification of acquired debt securities, and—most importantly—whether particular acquisition-related amounts (contingent consideration remeasurements, the separate charge, inherent contributions, step-acquisition gains or losses) are reported within or outside the performance indicator. It also prescribes pro forma performance indicator disclosures for public health care entities.
- 958Not-for-Profit Entities172 ¶
ASC 958-805 (indexed here as 805-958) governs combinations in which a not-for-profit entity is the reporting entity and combines with other NFPs, businesses, or nonprofit activities. If the participating governing boards cede control to a new NFP, the transaction is a merger accounted for under the carryover method (combine GAAP carrying amounts, no fresh start, no new assets); if one entity obtains control of the other, it is an acquisition accounted for under the acquisition method with NFP-specific rules for identifying the acquirer, goodwill, and inherent contributions.