The classification of a transaction as either a business combination or an asset acquisition for financial reporting purposes has recently received greater attention. The differences between the two types of transactions can make a substantial difference in a company’s financial reporting, both in the various initial reporting requirements as well as the ongoing accounting requirements.
This article will not explore accounting-based pronouncements or the reasoning behind the decision-making process between the two types of transactions. Instead, it will discuss some of the valuation differences practitioners encounter when valuing the assets between a business combination and an asset acquisition for purchase price allocation purposes.
A merger, amalgamation, consolidation, or integration is a type of business combination that can significantly impact a company's financial landscape. These transactions often involve complex valuation considerations and can present unique challenges for accounting professionals.
While the list of differences outlined below is not exhaustive, it provides an overview of some of the more commonly encountered valuation differences between the two types of transactions.
Treatment of Transaction Expenses
In a business combination under Accounting Standards Codification Section 805, Business Combinations (“ASC 805”), transaction expenses are generally excluded from the consideration paid. Instead, such costs are usually accounted for as expenses in the period they are incurred (per ASC 805-10-25-23).
However, in an asset acquisition, transaction expenses are generally included in the consideration paid, capitalized, and subsequently depreciated over the life of the acquired assets.
Treatment of Goodwill
In a business combination under ASC 805, the resulting purchase price allocation may result in the recognition of goodwill, which is the excess of the purchase price over the estimated fair value of the identified acquired assets. This is aligned with the acquisition method and the conceptual framework of accounting for business combinations. If goodwill is recognized, it would then be subject to subsequent testing for impairment or amortization, depending upon whether the company elects (or is able to elect) to utilize the private company alternative.
In an asset acquisition, goodwill is not recognized. Instead, any excess consideration paid over the fair value of the assets acquired is allocated to the non-financial and non-working capital identifiable assets (both tangible and intangible assets), based on their relative fair values, to equate to the consideration paid.
Treatment of Bargain Purchase
In a business combination under ASC 805, the resulting purchase price allocation may result in recognizing a bargain purchase gain, which is the excess of the estimated fair value of the identified acquired assets over the purchase price. This can have a significant impact on the company’s financial statements.
In an asset acquisition, a bargain purchase is not recognized. Instead, any bargain purchase element would typically be shown as a reduction in the relative fair value of the non-financial and non-working capital identifiable assets (both tangible and intangible assets), based on their relative fair values, to equate to the consideration paid.
Treatment of Non-Controlling Interests
In a business combination under ASC 805, a non-controlling interest (NCI) in a transaction is recognized and measured at fair value as of the acquisition date. The acquirer can separately measure the NCI at either fair value or at the NCI's proportionate share of the acquiree's identifiable net assets.
However, in an asset acquisition, a non-controlling interest can either be measured at its fair value, or the acquirer may choose to record the non-controlling interest at its carrying value. This flexibility can affect the equity interests and control aspects in joint ventures and other entities, as well as the amount of analysis that goes into the purchase price allocation.
Measurement Period
In a business combination under ASC 805, the acquirer has a period in which it can identify and measure the fair value of the assets acquired and liabilities assumed to make adjustments as necessary. This period, commonly known as the measurement period, cannot exceed one year from the acquisition date.
However, an asset acquisition does not have a measurement period like a business combination does. Instead, in an asset acquisition, assets and liabilities generally must be measured by the next reporting cycle after the acquisition.
Key Similarities Among Business Combinations and Asset Acquisitions
Whether a transaction is accounted for as an asset acquisition or a business combination, identifiable tangible and intangible assets should be separately fair valued. As noted above, the difference is whether any initial adjustments need to be made to the resulting fair values to ensure that the total fair value equates to the purchase consideration paid. The same level of rigor should be applied in valuing these identified assets, no matter how the transaction will be accounted for.
Another similarity between business combinations and asset acquisitions is the treatment of contingent consideration. The accounting literature does not provide specific guidance for the recognition and measurement of contingent consideration in an asset acquisition. However, in practice, it is generally expected that contingent consideration should be accounted for at its estimated fair value as part of the total consideration paid for both business combinations and asset acquisitions.
Acquiring companies should be aware of these similarities and the differences between the two types of transactions. While the list above is not exhaustive, it does provide an overview of the most commonly encountered differences, including the impacts on contingent consideration, control, and the overall conceptual framework of IFRS 3 and other accounting standards.
