ASC

ASC 805-40

Reverse Acquisitions

805 Business Combinations

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In brief

AdvancedBusiness combinationsConsolidationFinancial statement presentationEarnings per share

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).

Key points (6)
  • A transaction is accounted for as a reverse acquisition only if the accounting acquiree meets the definition of a business, and all recognition principles of 805-10, 805-20 and 805-30 — including recognizing goodwill — apply (805-40-25-1).
  • The acquisition-date fair value of consideration transferred is based on the number of equity interests the legal subsidiary would hypothetically have had to issue to give the legal parent's owners the same percentage interest in the combined entity, measured using the most reliable measure of fair value (805-40-30-2; 805-40-55-10).
  • The legal subsidiary's (accounting acquirer's) assets, liabilities, retained earnings and other equity are carried at precombination carrying amounts, while the legal parent's (accounting acquiree's) assets and liabilities are recognized and measured under the acquisition method (805-40-45-2(a)-(c)).
  • Owners of the legal acquiree who do not exchange their shares become a noncontrolling interest, measured at their proportionate share of the legal subsidiary's precombination carrying amounts rather than fair value (805-40-25-2; 805-40-30-3; 805-40-45-2(e)).
  • Issued equity in the consolidated balance sheet equals the accounting acquirer's precombination issued equity plus the fair value of consideration effectively transferred, but the number and type of shares reflect the legal parent's equity structure, with comparatives retroactively adjusted (805-40-45-1; 45-2(d); 45-3; illustrated at 805-40-55-14).
  • For EPS, weighted-average shares before the acquisition date are the accounting acquirer's historical weighted-average shares multiplied by the exchange ratio, and actual legal acquirer shares thereafter; prior comparative-period EPS uses the accounting acquirer's income over its restated share count (805-40-45-4; 45-5).

For students. Reverse acquisitions are the standard accounting model for private companies going public via a shell or SPAC merger, so exam questions focus on identifying the accounting acquirer and computing imputed consideration and goodwill. The most common misunderstanding is thinking the noncontrolling interest is measured at fair value — here it is the NCI's share of the legal subsidiary's precombination carrying amounts (805-40-30-3).

reverse acquisitionaccounting acquirer versus legal acquirerconsideration effectively transferredexchange rationoncontrolling interest at precombination carrying amountretroactive restatement of legal capitalgoodwill measurementearnings per share restatement

Machine-generated study aid for ASC 805-40. Check the source paragraphs below.

805-40-00Status

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805-40-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
AcquireeAmendedAccounting Standards Update No. 2010-0701/28/2010
AcquirerAmendedAccounting Standards Update No. 2025-0305/12/2025
BusinessAmendedAccounting Standards Update No. 2017-0101/05/2017
Business CombinationAmendedAccounting Standards Update No. 2010-0701/28/2010
GoodwillAmendedAccounting Standards Update No. 2023-0508/23/2023
GoodwillAmendedAccounting Standards Update No. 2010-0701/28/2010
Variable Interest EntitySupersededAccounting Standards Update No. 2025-0305/12/2025
805-40-55-19AmendedAccounting Standards Update No. 2010-0802/02/2010

805-40-05Overview and Background

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805-40-05-1
This Subtopic provides incremental guidance on the application of the acquisition method (as described in paragraph 805-10-05-4) to a business combination that is a reverse acquisition.
805-40-05-2
As one example of a reverse acquisition, a private operating entity may want to become a public entity but not want to register its equity shares. To become a public entity, the private entity will arrange for a public entity to acquire its equity interests in exchange for the equity interests of the public entity. In this situation, the public entity is the legal acquirer because it issued its equity interests, and the private entity is the legal acquiree because its equity interests were acquired. However, application of the guidance in paragraphs
805-10-55-11 through 55-15
results in identifying:
  1. a
    The public entity as the acquiree for accounting purposes (the accounting acquiree)
  2. b
    The private entity as the acquirer for accounting purposes (the accounting acquirer).

805-40-15Scope and Scope Exceptions

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Overall Guidance

805-40-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 805-10-15, with specific transaction qualifications noted below.

Transactions

805-40-15-2
The guidance in this Subtopic applies to business combinations that are reverse acquisitions.

805-40-25Recognition

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805-40-25-1
For a business combination transaction to be accounted for as a reverse acquisition, the accounting acquiree must meet the definition of a business. All of the recognition principles in Subtopics 805-10, 805-20, and 805-30, including the requirement to recognize goodwill, apply to a reverse acquisition.

Noncontrolling Interest

805-40-25-2
In a reverse acquisition, some of the owners of the legal acquiree (the accounting acquirer) might not exchange their equity interests for equity interests of the legal parent (the accounting acquiree). Those owners are treated as a noncontrolling interest in the consolidated financial statements after the reverse acquisition. That is because the owners of the legal acquiree that do not exchange their equity interests for equity interests of the legal acquirer have an interest in only the results and net assets of the legal acquiree―not in the results and net assets of the combined entity. Conversely, even though the legal acquirer is the acquiree for accounting purposes, the owners of the legal acquirer have an interest in the results and net assets of the combined entity.

805-40-30Initial Measurement

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805-40-30-1
All of the measurement principles applicable to business combinations in Subtopics 805-10, 805-20, and 805-30 apply to a reverse acquisition.

Measuring the Consideration Transferred

805-40-30-2
In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquiree. Instead, the accounting acquiree usually issues its equity shares to the owners of the accounting acquirer. Accordingly, the acquisition-date fair value of the consideration transferred by the accounting acquirer for its interest in the accounting acquiree is based on the number of equity interests the legal subsidiary would have had to issue to give the owners of the legal parent the same percentage equity interest in the combined entity that results from the reverse acquisition. Example 1, Case A (see paragraph 805-40-55-8) illustrates that calculation. The fair value of the number of equity interests calculated in that way can be used as the fair value of consideration transferred in exchange for the acquiree.

Noncontrolling Interest

805-40-30-3
The assets and liabilities of the legal acquiree are measured and recognized in the consolidated financial statements at their precombination carrying amounts (see paragraph 805-40-45-2(a)). Therefore, in a reverse acquisition the noncontrolling interest reflects the noncontrolling shareholders' proportionate interest in the precombination carrying amounts of the legal acquiree's net assets even though the noncontrolling interests in other acquisitions are measured at their fair values at the acquisition date.

Consolidated Financial Statements Following a Reverse Acquisition

805-40-30-4
Paragraph 805-40-45-1 provides guidance on required adjustments to the accounting acquirer's legal capital to reflect the legal capital of the legal parent (accounting acquiree) in the consolidated financial statements following a reverse acquisition.

805-40-45Other Presentation Matters

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Preparation and Presentation of Consolidated Financial Statements

805-40-45-1
Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting acquiree) but described in the notes as a continuation of the financial statements of the legal subsidiary (accounting acquirer), with one adjustment, which is to retroactively adjust the accounting acquirer's legal capital to reflect the legal capital of the accounting acquiree. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree). Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree).
805-40-45-2
Because the consolidated financial statements represent the continuation of the financial statements of the legal subsidiary except for its capital structure, the consolidated financial statements reflect all of the following:
  1. a
    The assets and liabilities of the legal subsidiary (the accounting acquirer) recognized and measured at their precombination carrying amounts.
  2. b
    The assets and liabilities of the legal parent (the accounting acquiree) recognized and measured in accordance with the guidance in this Topic applicable to business combinations.
  3. c
    The retained earnings and other equity balances of the legal subsidiary (accounting acquirer) before the business combination.
  4. d
    The amount recognized as issued equity interests in the consolidated financial statements determined by adding the issued equity interest of the legal subsidiary (the accounting acquirer) outstanding immediately before the business combination to the fair value of the legal parent (accounting acquiree) determined in accordance with the guidance in this Topic applicable to business combinations. However, the equity structure (that is, the number and type of equity interests issued) reflects the equity structure of the legal parent (the accounting acquiree), including the equity interests the legal parent issued to effect the combination. Accordingly, the equity structure of the legal subsidiary (the accounting acquirer) is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse acquisition.
  5. e
    The noncontrolling interest's proportionate share of the legal subsidiary's (accounting acquirer's) precombination carrying amounts of retained earnings and other equity interests as discussed in paragraphs 805-40-25-2 and 805-40-30-3 and illustrated in Example 1, Case B (see paragraph 805-40-55-18).

EPS

805-40-45-3
As noted in (d) in the preceding paragraph, the equity structure in the consolidated financial statements following a reverse acquisition reflects the equity structure of the legal acquirer (the accounting acquiree), including the equity interests issued by the legal acquirer to effect the business combination.
805-40-45-4
In calculating the weighted-average number of common shares outstanding (the denominator of the earnings-per-share [EPS] calculation) during the period in which the reverse acquisition occurs:
  1. a
    The number of common shares outstanding from the beginning of that period to the acquisition date shall be computed on the basis of the weighted-average number of common shares of the legal acquiree (accounting acquirer) outstanding during the period multiplied by the exchange ratio established in the merger agreement.
  2. b
    The number of common shares outstanding from the acquisition date to the end of that period shall be the actual number of common shares of the legal acquirer (the accounting acquiree) outstanding during that period.
805-40-45-5
The basic EPS for each comparative period before the acquisition date presented in the consolidated financial statements following a reverse acquisition shall be calculated by dividing (a) by (b):
  1. a
    The income of the legal acquiree attributable to common shareholders in each of those periods
  2. b
    The legal acquiree's historical weighted-average number of common shares outstanding multiplied by the exchange ratio established in the acquisition agreement.

805-40-55Implementation Guidance and Illustrations

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805-40-55-1
This Section is an integral part of the requirements of this Subtopic. This Section provides illustrations that address the application of accounting requirements for business combinations to reverse acquisitions.

Illustrations

805-40-55-2
The following Cases illustrate the guidance in this Subtopic on accounting for a reverse acquisition:
  1. a
    A reverse acquisition if all the shares of the legal subsidiary are exchanged (Case A)
  2. b
    A reverse acquisition if not all of the shares of the legal subsidiary are exchanged and a noncontrolling interest results (Case B).
805-40-55-3
In these Cases, Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity instruments and therefore the legal parent, on September 30, 20X6. These Cases ignore the accounting for any income tax effects. Cases A and B share all of the following information and assumptions.
805-40-55-4
The statements of financial position of Entity A and Entity B immediately before the business combination are as follows.
  • "Entity A (Legal Parent, Accounting Acquiree) $" "Entity B (Legal Subsidiary, Accounting Acquirer) $" Current assets 500 700 Noncurrent assets " 1,300 " " 3,000 " Total assets " 1,800 " " 3,700 " Current liabilities 300 600 Noncurrent liabilities 400 " 1,100 " Total liabilities 700 " 1,700 " Shareholders' equity Retained earnings 800 " 1,400 " Issued equity 100 common shares 300 - 60 common shares - 600 Total shareholders' equity " 1,100 " " 2,000 " "Total liabilities and shareholders' equity" " 1,800 " " 3,700 "
805-40-55-5
On September 30, 20X6, Entity A issues 2.5 shares in exchange for each common share of Entity B. All of Entity B's shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 common shares in exchange for all 60 common shares of Entity B.
805-40-55-6
The fair value of each common share of Entity B at September 30, 20X6, is $40. The quoted market price of Entity A's common shares at that date is $16.
805-40-55-7
The fair values of Entity A's identifiable assets and liabilities at September 30, 20X6, are the same as their carrying amounts, except that the fair value of Entity A's noncurrent assets at September 30, 20X6, is $1,500.
805-40-55-8
This Case illustrates the accounting for a reverse acquisition if all of the shares of the legal subsidiary, the accounting acquirer, are exchanged in a business combination. The accounting illustrated in this Case includes the calculation of the fair value of the consideration transferred, the measurement of goodwill and the calculation of earnings per share (EPS).
805-40-55-9
The calculation of the fair value of the consideration transferred follows.
805-40-55-10
As a result of the issuance of 150 common shares by Entity A (legal parent, accounting acquiree), Entity B's shareholders own 60 percent of the issued shares of the combined entity, that is, 150 of 250 issued shares. The remaining 40 percent are owned by Entity A's shareholders. If the business combination had taken the form of Entity B issuing additional common shares to Entity A's shareholders in exchange for their common shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B's shareholders would then own 60 of the 100 issued shares of Entity B—60 percent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group's interest in Entity A is $1,600 (40 shares with a per-share fair value of $40). The fair value of the consideration effectively transferred should be based on the most reliable measure. In this Case, the quoted market price of Entity A's shares provides a more reliable basis for measuring the consideration effectively transferred than the estimated fair value of the shares in Entity B, and the consideration is measured using the market price of Entity A's shares―100 shares with a per-share fair value of $16.
805-40-55-11
Goodwill is measured as follows.
805-40-55-12
Goodwill is measured as the excess of the fair value of the consideration effectively transferred (the group's interest in Entity A) over the net amount of Entity A's recognized identifiable assets and liabilities, as follows.
  • $ $ Consideration effectively transferred " 1,600 " Net recognized values of Entity A's identifiable assets and liabilities Current assets 500 Noncurrent assets " 1,500 " Current liabilities (300) Noncurrent liabilities (400) " (1,300)" Goodwill 300
805-40-55-13
The consolidated statement of financial position immediately after the business combination is as follows.
  • $ Current assets ($700 + $500) " 1,200 " "Noncurrent assets ($3,000 + $1,500)" " 4,500 " Goodwill 300 Total assets " 6,000 " Current liabilities ($600 + $300) 900 "Noncurrent liabilities ($1,100 + $400)" " 1,500 " Total liabilities " 2,400 " Shareholders' equity Retained earnings " 1,400 " Issued equity "250 common shares ($600 + $1,600)" " 2,200 " Total shareholders' equity " 3,600 " Total liabilities and shareholders' equity " 6,000 "
805-40-55-14
In accordance with paragraph 805-40-45-2(c) through (d), the amount recognized as issued equity interests in the consolidated financial statements ($2,200) is determined by adding the issued equity of the legal subsidiary immediately before the business combination ($600) and the fair value of the consideration effectively transferred, measured in accordance with paragraph 805-40-30-2 ($1,600). However, the equity structure appearing in the consolidated financial statements (that is, the number and type of equity interests issued) must reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to effect the combination.
805-40-55-15
The calculation of EPS follows.
805-40-55-16
Entity B's earnings for the annual period ended December 31, 20X5, were $600, and the consolidated earnings for the annual period ended December 31, 20X6, are $800. There was no change in the number of common shares issued by Entity B during the annual period ended December 31, 20X5, and during the period from January 1, 20X6, to the date of the reverse acquisition on September 30, 20X6. EPS for the annual period ended December 31, 20X6, is calculated as follows.
  • "Number of shares deemed to be outstanding for the period from January 1, 20X6, to the acquisition date (that is, the number of common shares issued by Entity A [legal parent, accounting acquiree] in the reverse acquisition)" 150 "Number of shares outstanding from the acquisition date to December 31, 20X6" 250 "Weighted-average number of common shares outstanding ([150 × 9 ÷ 12] + [250 × 3 ÷ 12])" 175 EPS (800 ÷ 175) $4.57
805-40-55-17
Restated EPS for the annual period ending December 31, 20X5, is $4.00 (calculated as the earnings of Entity B of 600 divided by the 150 common shares Entity A issued in the reverse acquisition).
805-40-55-18
This Case illustrates the accounting for a reverse acquisition if not all of the shares of the legal subsidiary, the accounting acquirer, are exchanged in a business combination and a noncontrolling interest results.
805-40-55-19
Assume the same facts as in Case A except that only 56 of Entity B's 60 common shares are exchanged. Because Entity A issues 2.5 shares in exchange for each common share of Entity B, Entity A issues only 140 (rather than 150) shares. As a result, Entity B's shareholders own 58.3 percent of the issued shares of the combined entity (140 of 240 issued shares). The fair value of the consideration transferred for Entity A, the accounting acquiree, is calculated by assuming that the combination had been effected by Entity B's issuing additional common shares to the shareholders of Entity A in exchange for their common shares in Entity A. That is because Entity B is the accounting acquirer, and paragraphs
805-30-30-7 through 30-8
require the acquirer to measure the consideration exchanged for the accounting acquiree.
805-40-55-20
In calculating the number of shares that Entity B would have had to issue, the noncontrolling interest is ignored. The majority shareholders own 56 shares of Entity B. For that to represent a 58.3 percent equity interest, Entity B would have had to issue an additional 40 shares. The majority shareholders would then own 56 of the 96 issued shares of Entity B and, therefore, 58.3 percent of the combined entity. As a result, the fair value of the consideration transferred for Entity A, the accounting acquiree, is $1,600 (that is, 40 shares each with a fair value of $40). That is the same amount as when all 60 of Entity B's shareholders tender all 60 of its common shares for exchange. The recognized amount of the group's interest in Entity A, the accounting acquiree, does not change if some of Entity B's shareholders do not participate in the exchange.
805-40-55-21
The noncontrolling interest is represented by the 4 shares of the total 60 shares of Entity B that are not exchanged for shares of Entity A. Therefore, the noncontrolling interest is 6.7 percent. The noncontrolling interest reflects the noncontrolling shareholders' proportionate interests in the precombination carrying amounts of the net assets of Entity B, the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a noncontrolling interest of 6.7 percent of the precombination carrying amounts of Entity B's net assets (that is, $134 or 6.7 percent of $2,000).
805-40-55-22
The consolidated statement of financial position at September 30, 20X6, reflecting the noncontrolling interest is as follows.
  • $ Current assets ($700 + $500) " 1,200 " "Noncurrent assets ($3,000 + $1,500)" " 4,500 " Goodwill 300 Total assets " 6,000 " Current liabilities ($600 + $300) 900 "Noncurrent liabilities ($1,100 + $400)" " 1,500 " Total liabilities " 2,400 " Shareholders' equity "Retained earnings ($1,400 × 93.3%)" " 1,306 " Issued equity "240 common shares ($560 + $1,600)" " 2,160 " Noncontrolling interest 134 Total shareholders' equity " 3,600 " Total liabilities and shareholders' equity " 6,000 "
805-40-55-23
The noncontrolling interest of $134 has 2 components. The first component is the reclassification of the noncontrolling interest's share of the accounting acquirer's retained earnings immediately before the acquisition ($1,400 × 6.7% or $93.80). The second component represents the reclassification of the noncontrolling interest's share of the accounting acquirer's issued equity ($600 × 6.7% or $40.20).

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