Business Combinations (ASC 805)
A business combination occurs when an acquirer obtains control of one or more businesses, accounted for using the acquisition method under ASC 805.
Explanation
The acquisition method requires the acquirer to recognize identifiable assets acquired and liabilities assumed at their acquisition-date fair values. Goodwill is recognized as the excess of consideration transferred over the net identifiable assets acquired. If the consideration is less than fair value of net assets, a bargain purchase gain is recognized immediately in earnings.
Consideration can include cash, stock, contingent consideration, and other forms of payment. Acquisition-related costs (legal fees, due diligence) are expensed as incurred, not capitalized. The acquirer must identify and separately recognize intangible assets apart from goodwill if they arise from contractual-legal rights or are separable from the business.
Key Points
- •Acquisition method: recognize assets/liabilities at fair value on acquisition date
- •Goodwill = consideration transferred minus net identifiable assets at fair value
- •Bargain purchase gain recognized immediately in earnings
- •Acquisition costs are expensed, not capitalized
Exam Tip
Focus on the goodwill calculation and what gets recognized separately from goodwill. Remember that acquisition costs are always expensed.
Frequently Asked Questions
Related Topics
Goodwill Impairment
Goodwill impairment occurs when the carrying amount of a reporting unit exceeds its fair value, requiring a write-down of goodwill to the extent of the excess, not below zero.
Consolidations
Consolidation is the process of combining the financial statements of a parent company and its subsidiaries into a single set of financial statements, eliminating intercompany transactions and balances.
Intangible Assets
Intangible assets are identifiable non-monetary assets without physical substance, such as patents, trademarks, copyrights, and customer lists, recognized at cost and amortized over their useful lives if finite.
Fair Value Measurement (ASC 820)
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
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