8.1 Business Combinations

Business
combinations
ASC 805
Contents
# Topic
1 Identification of a business
combination / Scope
2 Acquisition method of accounting
2.1 Who is the Acquirer
2.2 Acquisition date
2.3 Recognition and Measurement of
assets acquired, liabilities assumed
and non-controlling interests
2.4 Recognition and measurement of
goodwill and bargain purchase
2.5 Consideration transferred
3 Business combination achieved in stages
4 Business combination vs Asset
acquisition
5 Common control transactions
6 Disclosure requirements
FAAS technical training 2015 – business combinations

Page 2
Highlights of ASC 805
Business Combinations
► Business combinations are accounted for under the Acquisition Method
► Obtaining control is a new basis recognition event
► Pre-existing equity interests are revalued of upon obtaining control
► Post-control acquisitions are equity transactions
► When an entity (acquirer) takes control of another entity (target) the fair value of the exchange is
used to establish the new accounting basis of the acquired entity
► The acquirer recognizes the assets acquired, liabilities assumed and any noncontrolling interests,
with limited exceptions, at full fair value
► The difference between consideration paid and the fair value of net assets acquired is recorded
as goodwill
► Accounting for business combinations differs significantly from accounting for asset acquisitions
► To distinguish between the two, an entity must assess whether the set of assets and activities acquired
meets the definition of a business

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Identifying business combination transactions

Page 4
Definition
► Business Combination - A transaction or other event in which an acquirer obtains control of one or
more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are
business combinations.
► Acquiree - The business or businesses that the acquirer obtains control of in a business combination.
This term also includes a non-profit activity or business that a not-for-profit acquirer obtains control of in
an acquisition by a not-for-profit entity.
► Acquirer – The entity that obtains control of the acquiree. However, in a business combination in which a
variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.
► Acquisition Date – The date on which the acquirer obtains control of the acquiree.

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Definition
► Obtaining control of a business is a new basis event
► What is a business?
► If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not a business
► To be a business, the set must include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create outputs.
► Control - The direct or indirect ability to determine the direction of management and policies through
ownership, contract, or otherwise.

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Narrower definition of Business
Inputs
Outputs
Processes
► Not a business if ► Processes need to be ► Aligned to ASC 606-
“substantially all” fair substantive revenue generating
value of the gross ► Continuation of activities
assets acquired is revenue not a
concentrated in a presumption for
single identifiable substantive processes
asset or a group of
similar identifiable
assets
► “Substantially all” not
defined No evaluation for
whether market Cost savings
► Anagolize 90% scoped out
participant can
benchmark which has from definition
its origins in ASC replace missing
elements of output
840?
Real estate and Life Sciences companies will be significantly impacted

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Ammended definition of Business: At a glance
Transaction
Yes
Fair value of gross assets Yes
Apply concentration test? concentrated in single/similar
assets?
Asset Acquisition
Asset Acquisition
No No
Input and substantive process acquired?
Process is critical to the ability to

Process is critical to the ability to
continue producing outputs and
convert input into output AND an
Acquired set activities/ inputs include organized workforce to
organized workforce to perform
assets contains outputs? perform process OR process
No critical process and other inputs are No Yes No
unique/scarce or hard to replace
acquired to convert into outputs?
without significant cost or efforts?
Yes Yes
Business Combination

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Processes
Does the set have revenue generating outputs?
No Yes
► Does set include organized ► Does set include organized and skilled workforce
workforce with necessary (as described in adjacent box)
skills, knowledge or OR
experience to perform an ► Does set include processes when applied to acquired
acquired process that when inputs can generate outputs and
applied to acquired inputs is ► cannot be replaced without significant cost,
critical to the ability to produce effort or delay
outputs OR
► is considered unique or scarce
Yes Yes
No Set includes a substantive process No
No substantive processes
Asset acquisition

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Definition of a business: Presence of Goodwill
ASC 805 includes a rebuttable presumption that if goodwill exists in the acquisition (i.e., if the aggregate value of
an acquired set of activities and assets is greater than the value of the net identifiable assets acquired), the
acquisition is a business.
► For example, if the total fair value of an acquired set of activities and assets is $15 million and the fair value of
the identifiable net assets in that set is only $10 million, the existence of value in excess of the fair value of
identifiable assets creates a presumption that the acquired set is a business.
► However, care should be exercised to ensure that all of the identifiable net assets have been identified and
measured appropriately. While the absence of goodwill may be an indicator that the acquired activities and
assets do not represent a business, it is not presumptive.
GOODWILL
Presumption is that if goodwill exists, the acquisition is a business.
BUT
A business need not necessarily have goodwill

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Example 2- Application of the definition of a business
► Pharma Co. purchases a legal entity that holds

a Phase 3 compound developed to treat Response
diabetes, an at-market clinical research IPR&D is a single identifiable and
organization (CRO) contract and an at-market asset and there is no value to
clinical manufacturing organization (CMO) assign to the at-market CRO &
contract. No other assets or activities were CMO contracts. Hence set is not
transferred. No employees were transferred. Is a business
the set a business?

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Scenario 1
► Acquirer designs, develops, manufactures and
sells semiconductor chips. Acquirer purchases Response
the inputs, processes and outputs of Target’s As the acquired set is capable
semiconductor production operations. No of providing some form of
significant elements have been excluded from return to its owners, it is
Acquirer’s purchase, which includes the considered a business under
ASC 805.
following –
► Inputs — long-lived assets, intangible assets
(including customer relationships), intellectual
property and all employees
► Processes — strategic, manufacturing,
marketing and other operational processes.
These are substantial process
► Outputs — developed products

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Scenario 2
► Assume the same facts as Example 2, except
that the acquired set includes only one of the Response
three manufacturing facilities used in Target’s Not a business:
operations and does not include any As the acquired set includes only certain
processes or outputs. of the inputs (assets) required to operate
► Inputs — long-lived assets, intangible assets
a business, it is not considered a business
under ASC 805. While the revenue
(including customer relationships) and
generating process after acquisition may
intellectual property be similar to the pre-acquisition processes,
► Processes — none the acquirer has simply acquired a
► Outputs — none manufacturing facility with no processes
or outputs.

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Example 4- Application of the definition of a business-Life sciences
Scenario 1
► Biotech A acquires outstanding shares in
Biotech B, a start-up with a license for a Response
product candidate. Not a business,
► Due to loss of funding, Biotech B has no since there is no process.
employees, no other assets.
► Inputs – license
► Neither clinical trials nor development are
► Substantial Processes – none
currently performed. However Biotech A will ► Outputs – none
commence Phase 1 clinical tests .
► Should the acquisitions be accounted as a

business combination or an asset
acquisition?

Page 14
Example 5- Application of the definition of a business-Life sciences
Scenario 2
► Biotech A acquires outstanding shares in
Biotech B, a start-up with a license for a Response
product candidate. It is a Business.
► Phase 1 clinical tests are currently performed
by the 3 Biotech B’s employees (one of whom ► Inputs – license & employees
founded Biotech B and discover the product ► Substantial Processes – operational &
management processes
candidate)
associated with the
performance
► Should the acquisitions be accounted as a and supervision of the technical tests.
business combination or an asset ► Outputs – none
acquisition?

Page 15
Example 6- Application in real estate industry
Scenario 1
► Company A acquires land and a vacant
building from Company B. Response
► No processes, other assets or employees (for Not a Business.
example, leases and other contracts,
maintenance or security personnel or a Land and building can be considered
leasing office) are acquired in the transaction. as single identifiable assets because
building are attached to the land and
► Should the acquisitions be accounted as a cannot be removed without incurring
business combination or an asset significant cost.
acquisition?

Page 16
Example 7- Application in real estate industry
Scenario 2
► Company A acquires an operating hotel, the
hotel’s employees, the franchise agreement, Response
inventory, reservations system and all ‘back It is a Business
office’ operations.
► Inputs – non-current assets,
► Should the acquisitions be accounted as a franchise agreement and Employees
► Substantial Processes – operational and
business combination or an asset
resource management processes associated with
acquisition? operating the hotel
► Outputs – revenues from
operating the hotel

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Acquisition Method

Page 18
Application of the acquisition method
– 4 step process
3
Identifiable
assets
4
Goodwill or
2 Liabilities Bargain
1 What is the
Acquisition
assumed
NCI
purchase
Who is the
Acquirer? date? Consideration
transferred

Page 19
Identify the Acquirer

Page 20
Step 1: Identify the acquirer
► Entity that obtains control of the business

► Usually the entity that transfers cash or other assets or incurs the
liabilities
► When there is an exchange of equity interests, usually the entity that
issues its equity interests is the acquirer
► When the acquirer is not obvious, may need to consider the following
factors:
► Size
► Relative voting rights
► Size of single minority voting interest
► Composition of the governing body
► Composition of management
► Terms of the exchange (e.g., whether an entity pays a premium)

Page 21
Specific case of formation of new entity
► Where a new entity (NewCo) is formed to effect business combination between two or more entities,
say B and C, IFRS 3 identifies two distinct scenarios
NewCo
Entity B Entity C
► NewCo issues its equity instruments in exchange for equity instruments in B and C - Either B or
C should be identified as the acquirer
► NewCo transfers cash (or other assets) in exchange for equity instruments in B and C (e.g. from
the proceeds of a debt/ equity issue to new investors) NewCo may be identified as the acquirer.

Page 22
Acquisition Date

Page 23
Step 2: Determine the acquisition date
ASC 805-10-25-6 and 7

► Date control is obtained
► Date that asset ownership is transferred, liabilities are assumed/incurred, or equity interests
are issued
► Generally, the closing date or consummation date
► If regulatory or shareholder approval is required (or shareholder approval is sought), likely

control does not transfer until approval is obtained
► No “convenience” exception
► Acquirer is permitted to designate a date other than the date control of the target is obtained
► Difference should be no more than a few days
► Results of operations can not be material to the acquirer

Page 24
Example 1: Determine the acquisition date
► Company A has signed a purchase agreement (PA)with Company B on July 1, 20X0.
► PA was filed with the high court for approval on Jan 1, 20X1
► PA provides that subject to the High Court approval of the agreement, any profits or losses arising
out of operations of B from July 1, 20X0 will belong to A.
► PA provides that the management of B will run B from the July 1 20X0 as trustee’s of A.
► PA also provides that the purchase consideration payable by A to B will be based on B net assets
value as at July 1 20X0 and as determined by the independent valuer.
► The High Court approves the transaction on 25 March 20X1 and is filed with the ROC
immediately. A is preparing CFS for the year ended 31 March 20X1.
Should CFS include Company B from 1 July 20X0,1 January 20X1 or from 25 March 20X1?

Page 25
Recognize and measure identifiable net assets
acquired and any NCI

Page 26
Step 3: Recognize and measure identifiable net assets acquired and
any non-controlling interests
ASC 805-20-25-1
Recognition Principles –
► Meet the definition of an asset or liability at the acquisition date, and
► Be part of the business combination rather than the result of a separate transaction.
Assets — Probable future economic benefits obtained or controlled by a particular entity as a result of
past transactions or events.
Liabilities — Probable future sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the future as a result of past
transactions or events.

Page 27
“Full goodwill” method
► FV measurements are from a market participant (not buyer specific) perspective pursuant to ASC 820:
► Generally will result in more items being recognized and higher assigned values
► Only limited exceptions to FV measurement
► Assets that will not be utilized are recognized in business combination accounting
► Defensive intangible assets
► Measurement period
► Permits adjustments related to facts and circumstances that existed as of the acquisition date
► Applies to all aspects of business combination accounting
► Revised measurements must be applied retroactively
► Equity interests issued by the acquirer

► Value per share is measured on the acquisition date

Page 28
Potential assets to be valued
Intangible Assets Tangible Assets
► Marketing-related ► Personal property

► Trademarks, trade names, service marks ► Machinery and equipment
► Non-compete agreements ► Buildings
► Furniture and fixtures
► Customer-related ► Inventory
► Customer lists
► Customer contracts ► Real property
► Non-contractual relationships ► Land
► Leasehold improvements
► Contract-based ► Construction in process
► Management contracts
► Servicing rights ► Financial Assets/Liabilities
► Employment contracts ► Receivables
► Non-compete arrangements ► Stocks, bonds, loans, other
investments
► Technology-based
► Patented and unpatented technology
► Databases
► Computer software
► Artistic related & Pictures, Photos, etc.

Page 29
Case study: Intangible Assets
Please comment on recognition of intangible asset other than Goodwill in each of the following situations:
1) Company P acquires Company S, a medical testing company, in a business combination on 31
December 20X1. S provides testing services to patients, such as blood screening, based on referrals
from their general practitioners (medical practitioners who provide primary care to patients). S maintains
a database with each patient's information, such as name, address, telephone number, doctor's name,
insurer's name and policy number. However, this patient information is protected by privacy laws and S
cannot sell, license, transfer or otherwise exchange it.
2) Company P acquires Company S, a ski-holiday company, in a business combination on 30 June 20XX,

which is during S's off-season. S has a practice of establishing customer relationships through contracts
but it does not have any contracts in place with customers at the acquisition date.

Page 30
Solution
1 2
The customer list does not meet the S does not have any contracts in place with
separability criterion because privacy laws and customers at the acquisition date, P does not
regulations over patient information prevent recognise any customer contracts as part of its
selling, transferring, licensing or exchanging acquisition accounting. However, S's customer
patient information separately from the relationships are considered to meet the
acquiree. Whether or not P could recognise a contractual-legal criterion because S has a
separate intangible asset for the relationship practice of establishing customer relationships
with the patients and the general practitioner through contracts. These customer
would depend on the specific facts and relationships are recognised separately from
circumstances of each case. goodwill at their acquisition-date fair values.

Page 31
Exceptions to the recognition and measurement principles
Exception to measurement Exception to both recognition

principle and measurement principle
Deferred taxes and tax

Reacquired rights
uncertainties – ASC 740
Share-based payment
Indemnification assets
awards –ASC 718
Assets held for sale or Employee benefits – ASC

distribution - ASC 360 710,712, 715
Goodwill/bargain purchase Leases –ASC 842

Page 32
Indemnification asset
► The seller in a business combination may contractually indemnify the acquirer

for the outcome of a contingency or uncertainty related to all or part of a specific
asset or liability. As a result, the acquirer obtains an indemnification asset.
► Examples of indemnification assets:
► The seller agrees to pay the settlement costs of an outstanding court case
against the acquiree.
► The acquiree is the subject of an uncertain tax position and the seller agrees
to refund the acquiree if any costs are incurred as a result of tax proceeding.

Page 33
Indemnification asset (cont.)
ASC 805-20-25-27 and 28

► Recognized and measured by acquirer at the same time and on the same basis as the indemnified item
► Some indemnification assets may not be recognized at acquisition date
► Subsequent accounting - indemnification assets are measured on the same basis as the indemnified
item (i.e., “mirror” accounting), considering any limits on the indemnification and reserves for
collectability issues
Indemnified item Indemnification asset

Fair value Fair value
Exception to recognition and measurement rule Exception to recognition and measurement rule subject to the
need for a valuation allowance for uncollectible amounts
► Derecognition
► Collected
► Sold
► Lost otherwise

Page 34
Example
► In January 2010 Entity P acquires a 100% interest in Entity S, a manufacturer of cosmetics, from Entity
V. At the time of acquisition there are two open litigations against S:
► Litigation 1: S customers have alleged that S products contain harmful levels of parabens that cause
breast cancer. The claimants are suing S for damages amounting to CU 50 million.
► Litigation 2: S is in a dispute with tax authorities over its tax return for 2008.
► V will indemnify P for the losses up to CU 25 million in the case of Litigation 1. P has also received an
indemnification from V to cover the outcome of Litigation 2.
► How should P account for the contingent liability/liability and the indemnification assets assuming that:
► The fair value of the contingent liability resulting from Litigation 1 is CU 15 million.
► An outflow in relation to Litigation 2 is probable. The estimated amount expected to be paid is CU 13

million (amount claimed by tax authorities). The fair value of the liability is CU 11 million.

Page 35
Response
► Litigation 1
► In the purchase price allocation, identifiable liability of CU 15 million is recognised.
► The liability is measured at fair value, and the indemnification asset should be measured at fair value.
► Asset is recognised amounting to CU 15 million assuming that none of the possible outcomes taken
into calculation of the fair value of liability exceeds the indemnification cap and there is no risk of
uncollectibility.
► Litigation 2
► In the purchase price, allocation liability related to Litigation 2 — tax litigation — is recognised at CU
13 million, i.e., at the amount expected to be paid, not at fair value
► The indemnification asset has to be recognised and measured using assumptions consistent with
those used to measure the indemnified item.
► An asset amounting to CU 13 million is recognised assuming there is no risk of uncollectibility.

Page 36
Non-controlling interests
► Equity interests in a subsidiary not owned, directly or indirectly, by a parent
► Recognize at fair value on acquisition date. Two approaches:
► Measure the NCI directly based on trading price for the outstanding non-controlling interest
► Measure the NCI indirectly based on the entity’s enterprise value (adjusted for the effect of any
control premium paid by the acquirer, if applicable)

Page 37
Recognize and measure goodwill or bargain
purchase gain

Page 38
Step 4: Recognize and measure goodwill or bargain purchase gain
Consideration
Non Net assets

Controlling acquired
Goodwill Interests (NCI)
Previously held
equity interest
Acquisition related costs charged to P&L Except, Debt securities issue cost–incorporated
in effective interest rate and Equity issues cost recognized in equity.

Page 39
Goodwill is calculated as a residual of: Example calculation

► Fair value of consideration transferred $100
► Fair value of any Non-controlling interest
in the acquiree $20
► Fair value of the acquirer’s previously
held equity interest in acquiree $30
► LESS: Net purchase price allocation for assets acquired
and liabilities assumed ($140)
$10

Page 40
► Bargain purchase
► Fair value of net assets acquired is more than the sum of the fair values of the other three
components (i.e., the calculation above results in a negative amount)
► Should be rare
► Examples of factors that may individually or in aggregate justify a bargain gain include
the following:
► The transaction was a “forced” or “distressed” sale.
► The seller was required to sell the business in a less than an optimal period of time.
► The transaction was not subject to a competitive bidding process.
► The purchase price was “fixed” prior to the closing date of the transaction and the fair value
of the net identifiable assets acquired increased during the intervening period thereby
creating the bargain purchase.

Page 41
Consideration transferred

Page 42
Measure the consideration transferred
► Consideration transferred is the sum of acquisition date FV of:

► Net assets transferred
► Gain or loss on acquisition date re-measurement
► Equity interests issued by the acquirer
► Contingent consideration arrangements
► Add the acquisition date FV of any preexisting, non-controlling equity investment to
consideration transferred
► Gain or loss on re-measurement
► Consideration transferred excludes:
► Costs/effects of settling preexisting relationships
► Compensation for future services
► Acquirer’s transaction costs
► Buyer restructuring costs

Page 43
Measurement of consideration transferred
► Examples of potential forms of consideration include the following:

► Cash
► Other assets
► A business or a subsidiary of the acquirer
► Contingent consideration
► Common or preferred equity instruments
► Options
► Warrants
► Member interests of mutual entities
► However, any portion of the acquirer’s share-based payment awards

exchanged for awards held by the acquiree’s employees that is included
in consideration transferred in the business combination shall be
measured in accordance with ASC 718 rather than at fair value.

Page 44
Contingent consideration
► An obligation of the acquirer to transfer additional assets or equity interests to

the former owners of an acquiree as part of the exchange for control of the
acquiree if specified future events occur or conditions are met.
► May also give the acquirer the right to the return of previously transferred
consideration if specified conditions are met.
► Recognized by the acquirer on the acquisition date as part of the consideration
transferred
► Initially recorded at acquisition-date fair value
► Subsequent accounting depends on classification (i.e., liability or equity)

Page 45
Debt-equity classification
1. Will the arrangement be settled Yes

in cash?
No
2. Is the arrangement within the Yes
scope of ASC 480?
No
3. Is the instrument indexed to No
the entity’s own stock?
(ASC 815-40-15)
Yes
4. Does the instrument meet the
equity classification No
requirements under ASC 815
40-25?
Yes
The arrangement is The arrangement is

classified as equity classified as a liability
Page 46
FAAS
FAAS technical technical
training 2015 – business
training 2015 – combinations
business combinations
Subsequent accounting
Liability Equity
► Recognized at fair value ► No adjustments made until

through earnings contingency resolved
► Subsequent accounting does ► Reassess equity classification
not affect goodwill each report period

Page 47
Distinguishing compensation from contingent consideration
All contingent consideration arrangements should be evaluated to determine if the

arrangements are compensatory in nature
Does the arrangement provide compensation for post-acquisition services?

Consider the following:
► Continuing employment ► Number of shares owned
► Duration of continuing employment ► Linkage to the valuation
► Level of compensation ► Formula for determining consideration
► Incremental payments to employees ► Other agreements and issues
Not compensatory Compensatory
For compensatory arrangements, no recognition in opening balance sheet. Compensation

expense recognized based on other GAAP

Page 48
Example: Contingent consideration: purchase price or
compensation?
► Client purchased outstanding shares of competitor for $25 million
► Client obtains control over competitor
► Client agrees to pay $10 million if company performs well over the next five years
► Hired owners, who built the company have to stay on as employees to receive the
additional $10 million
► Analysis:
► Consideration transferred for acquisition accounting is $25 million
► The additional $10 million will be recognized as compensation expenses over the
five years vesting period

Page 49
Example: Contingent consideration - Deferred payment of
consideration in cash
► Company A acquires all of the outstanding shares of Company B for cash consideration of $3 million.
► The acquisition agreement includes a provision whereby Company A must pay additional cash
consideration of $1 million to the selling shareholders of Company B on the third anniversary of the
consummation of the business combination.
Analysis
► Because the obligation to transfer additional cash consideration of $1 million is not contingent on a
future event occurring or condition being met, the obligation is not accounted for as contingent
consideration.
► The obligation is recorded as a liability and initially measured at fair value at the acquisition date and
included in the consideration transferred.

Page 50
Example : Contingent consideration settled in cash
► Company A acquires all of outstanding shares of Company B for $3 million in cash.

► The agreement includes a provision whereby Company A must pay additional consideration of
$1 million in cash if EBITDA exceeds $10 million in the twelve-month period subsequent to the
acquisition date.
Analysis
► Because Company A is required to settle the contingent consideration arrangement in cash,

Company A classifies the contingent consideration arrangement as a liability and measures it
at fair value.

Page 51
Measuring the consideration transferred — transaction costs
ASC 805-10-25-23
► Fees/costs of raising acquisition debt capitalized separately and amortized
► Fees/costs of issuing new equity netted against proceeds received
► But fees are not allocated to consideration transferred
► Transaction related costs (internal, advisory, legal, due diligence, accounting) charged to
expense as incurred

Page 52
Restructuring costs
ASC 805-20-25-26
► Not recorded as part of the business combination accounting unless ASC 420 definition of a liability is
met “at acquisition date” by acquiree:
► Transaction or event occurred that leaves an entity little or no discretion to avoid the future transfer or
use of assets to settle the liability
► Liability must exist at the target and not depend on the business combination
Considerations
► Generally will result in less goodwill and increased post acquisition expense as inclusion in business
combination accounting will be less likely
► Costs of work force reductions (severance), branch closings, contract terminations, etc. will flow through
acquirer’s income statement post-closing

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Deferred Revenue
► The acquirer should recognize deferred revenue of the acquired company only if it relates to a legal
performance obligation assumed by the acquiring entity.
► Assumed performance obligation should be measured at fair value.
► Determine the value the acquirer will deliver to satisfy the remaining obligation under the contract.
Subtract the cost of the effort already completed by the acquiree prior to the acquisition date) and the
profit margin on that effort, or
► Determine cost of effort needed by acquirer to satisfy obligation. Add a reasonable profit margin to
that effort.

Page 54
Business combination
achieved in stages
Page 55
FAAS
FAAS technical technical
training 2015 – business
training 2015 – combinations
A business combination achieved in stages
ASC 805-10-25-9 and 10

► Revaluation of previously owned equity interests upon obtaining control
► All assets/liabilities/non-controlling interest are fully adjusted to fair value with limited exceptions
Considerations
► Gains and losses on preexisting equity investment recognized in income
► After control obtained, subsequent changes in ownership of a subsidiary accounted for as capital
transactions, unless control is lost

Page 56
Step acquisition - example
► Assume Investor accounts for its 30% ownership of investee as an equity method investment
► Investor acquires additional 60% of the investee for $100 million to obtain control over the investee
► Acquisition date values:
► Equity method investment carrying value – $35 million
► Equity method investment fair value – $45 million
► Noncontrolling interests fair value - $15 million
► Acquired net assets value - $140 million
Net assets $140

Goodwill 20
Cash $100
Equity method investment 35
Noncontrolling interests 15
Gain 10

Page 57
► Assume Investor accounts for its 10% ownership of investee as an available for sale financial asset
► Investor acquires additional 90% of the investee for $100 million to obtain control over the investee
► Acquisition date values:
► AFS investment fair value – $10 million
► Unrealized gains recognized in AOCI – $3 million
► Acquired net assets value - $90 million
Net assets $90

Goodwill 20
Cash $100
AFS financial asset 10
OCI 3
Gain 3

Page 58
► Assume Parent owns 80% of Subsidiary which has a net carrying value of $4,000 and that the
carrying amount of the NCI shareholders’ 20% interest is $800
► Parent acquires additional 10% from the NCI for $500
► Pursuant to ASC 810, Parent would account for its increased ownership interest as a capital
transaction as follows:
Stockholders’ equity – non-controlling interest $400

APIC 100
Cash $500
Page 59
FAAS technical training
FAAS 2015
technical – business
training 2015 –combinations
Business Combination Vs
Asset Acquisition

Page 60
Why is business combination vs. asset acquisition determination
important?
Item Business combination Asset acquisition
Consolidation Acquired entity is consolidated by acquirer No consolidation required
Generally capitalized as part of the cost of

Transaction costs Expensed as incurred
assets acquired
Generally recognized when the contingency

Recognized at its acquisition date fair value is resolved (i.e., when the contingent
as part of the consideration transferred consideration is paid or
becomes payable)
Measurement of acquired assets Fair value, with limited exceptions Relative fair value, with limited exceptions
No goodwill; excess cost allocated among

Cost exceeds fair value of assets Recognize goodwill
acquired assets
Capitalized as an indefinite-lived intangible Expensed at acquisition, unless the IPR&D

IPR&D assets
asset has an alternative future use

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Example: Differences for accounting for a BC vs. Asset Acquisition
► Entity P acquires 100% of entity V’s shares for 1000, incurring transaction costs of 200.
► V has no liabilities. The only assets are 2 buildings (A,B) their book value is 700. The fair value of A and
B is 300 and 600 respectively.
► Tax base of buildings is 700 and income tax rate is 20%.
BC Asset acquisition
Price paid 1,000 1,000
Transaction costs P&L- expensed 200 - capitalized
Total consideration 1,000 1,200
Fair values (BC) / Relatives FV of Assets acquired
Asset A 300 400=(1200*300/900)
Asset B 600 800=(1200*600/900)
total 900 1,200
DTL 40=(900-700)*20% N/A
Goodwill 140=(1000-900+40) N/A

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Accounting for Common
control transactions

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Common control transactions
► Combination of entities or businesses in which ALL of the combining entities/businesses are ultimately
CONTROLLED by the SAME party (ies) both BEFORE and AFTER the transaction and that control is
not transitory
► It will include transactions such as transfer of subsidiaries or businesses, between entities within a
group
► The extent of minority interest in each of the combining entities before and after the BC not relevant
to determine whether a combination involves entities under common control
► It is not necessary that combining entities are included as part of the same CFS
► A group of individuals can be a controlling party
► BC involving entities or businesses under common control shall be accounted for using the pooling of
interests method

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Common control transactions
A Ltd
B Ltd C Ltd
51% 100%
D Ltd E Ltd
65% 80%
E Ltd amalgamated with D Ltd

Page 65
Application of pooling of interest method – key principles
Assets and liabilities of the combining entities are reflected at their carrying amounts
(only adjustments that are made are to harmonise accounting policies);
No 'new' goodwill is recognized as a result of the combination;
Financial information in financial statements in respect of prior periods should be restated as if

business combination had occurred from beginning of preceding period in financial
statements, irrespective of actual date of combination
However, if business combination had occurred after that date, prior period information shall be
restated only from that date

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Application of pooling of interest method – key principles
Consideration for business combination may consist of securities, cash or other

assets. Securities shall be recorded at nominal value. In determining the value of consideration,
assets other than cash shall be considered at their fair values
Identity of reserves shall be preserved and shall appear in financial statements

of transferee in same form in which they appeared in financial statements of transferor
Difference, if any, between amount recorded as share capital issued plus any
additional consideration in form of cash or other assets and amount of share
capital of transferor shall be transferred to capital reserve and should be presented separately
from other capital reserves

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Business Combination - General disclosure
requirements

Page 68
General disclosure requirements
► Business Combinations Occurring During a Current Reporting Period or After the Reporting
Date but Before the Financial Statements Are Issued
805-10-50-1
The acquirer shall disclose information that enables users of its financial statements to evaluate
the nature and financial effect of a business combination that occurs either:
► During the current reporting period
► After the reporting date but before the financial statements are issued or are available to be
issued
805-10-50-2
To meet the objective in the preceding paragraph, the acquirer shall disclose the following
information for each business combination that occurs during the reporting period:
► The name and a description of the acquiree
► The acquisition date

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► The percentage of voting equity interests acquired after the reporting date but before the financial
statements are issued or are available to be issued
► The primary reasons for the business combination and a description of how the acquirer obtained control
of the acquire
► For transactions that are recognized separately from the acquisition of assets and assumptions of
liabilities in the business combination, all of the following:
1. A description of each transaction
2. How the acquirer accounted for each transaction
3. The amounts recognized for each transaction and the line item in the financial statements in which
each amount is recognized
4. If the transaction is the effective settlement of a pre existing relationship, the method used to
determine the settlement amount.
► The disclosure of separately recognized transactions required in (e) shall include the amount of
acquisition-related costs, the amount recognized as an expense, and the line item or items in the income
statement in which those expenses are recognized. The amount of any issuance costs not recognized as
an expense and how they were recognized also shall be disclosed.

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► In a business combination achieved in stages, all of the following:

1. The acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately
before the acquisition date
2. The amount of any gain or loss recognized as a result of remeasuring to fair value the equity interest
in the acquiree held by the acquirer immediately before the business combination (see
paragraph 805-10-25-10) and the line item in the income statement in which that gain or loss is
recognized
3. The valuation technique(s) used to measure the acquisition-date fair value of the equity interest in the
acquiree held by the acquirer immediately before the business combination
4. Information that enables users of the acquirer’s financial statements to assess the inputs used to
develop the fair value measurement of the equity interest in the acquiree held by the acquirer
immediately before the business combination.
► If the acquirer is a public entity, all of the following:
1. The amounts of revenue and earnings of the acquiree since the acquisition date included in the
consolidated income statement for the reporting period.

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1. The amounts of revenue and earnings of the acquiree since the acquisition date included in the
consolidated income statement for the reporting period.
2. If comparative financial statements are not presented, the revenue and earnings of the combined entity for
the current reporting period as though the acquisition date for all business combinations that occurred
during the year had been as of the beginning of the annual reporting period (supplemental pro forma
information).
3. If comparative financial statements are presented, the revenue and earnings of the combined entity as
though the business combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period (supplemental pro forma information).
4. The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the
business combination(s) included in the reported pro forma revenue and earnings (supplemental pro
forma information).
5. If disclosure of any of the information is impracticable, the acquirer shall disclose that fact and explain why
the disclosure is impracticable.

Page 72
Thank You
Page 73

8.1 Business Combinations

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8.1 Business Combinations

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Business

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

► Obtaining control of a business is a new basis event

FAAS technical training 2015 – business combinations

Real estate and Life Sciences companies will be significantly impacted

FAAS technical training 2015 – business combinations

Input and substantive process acquired?

Process is critical to the ability to

FAAS technical training 2015 – business combinations

Does the set have revenue generating outputs?

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

► Pharma Co. purchases a legal entity that holds

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

► Should the acquisitions be accounted as a

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

► Entity that obtains control of the business

► Relative voting rights

► Size of single minority voting interest

► Composition of the governing body

► Terms of the exchange (e.g., whether an entity pays a premium)

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

ASC 805-10-25-6 and 7

► If regulatory or shareholder approval is required (or shareholder approval is sought), likely

► Difference should be no more than a few days

► Results of operations can not be material to the acquirer

FAAS technical training 2015 – business combinations

► Company A has signed a purchase agreement (PA)with Company B on July 1, 20X0.

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

► Only limited exceptions to FV measurement

► Defensive intangible assets

► Applies to all aspects of business combination accounting

► Revised measurements must be applied retroactively

► Equity interests issued by the acquirer

FAAS technical training 2015 – business combinations

Intangible Assets Tangible Assets

► Marketing-related ► Personal property

► Artistic related & Pictures, Photos, etc.

FAAS technical training 2015 – business combinations

2) Company P acquires Company S, a ski-holiday company, in a business combination on 30 June 20XX,

FAAS technical training 2015 – business combinations

FAAS technical training 2015 – business combinations

Exception to measurement Exception to both recognition

Deferred taxes and tax

Assets held for sale or Employee benefits – ASC

Goodwill/bargain purchase Leases –ASC 842

FAAS technical training 2015 – business combinations

► The seller in a business combination may contractually indemnify the acquirer

FAAS technical training 2015 – business combinations