Business combinations accounting

The accounting for business combinations (ASC 805), discontinued operations, divestitures, and related topics such as impairments, intangibles, and segment reporting continue to pose many challenges and remains on the SEC's radar screen.

Read the latest developments on these accounting for business combinations topics:

  • On June 5, the FASB issued a proposed Accounting Standards Update (ASU), Simplifying the Equity Method of Accounting. The proposal eliminates the requirement to separately account for the basis difference of equity-method investments. Instead, an entity would recognize its equity-method investment at its cost and would no longer determine the acquisition-date fair value of the investee's identifiable assets and liabilities assumed. Comments were due on August 4, 2015. 
  • On September 25, 2015, the FASB issued Accounting Standards Update 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. 

  • The new standard should be applied prospectively to measurement period adjustments that occur after the effective date. For public business entities, the new standard is effective for interim and annual periods beginning after December 15, 2015. For non-public business entities, the new standard is effective for annual periods beginning after December 15, 2016 and interim periods beginning after December 15, 2017. Early adoption is permitted for all entities.
  • The FASB has undertaken a project that is intended to clarify the definition of a business with an objective of addressing whether certain transactions should be accounted for as asset acquisitions or acquisitions of businesses. Differentiating between an asset and business can be challenging, particularly in certain industries. This project is also intended to provide guidance for partial sales or transfers involving in-substance nonfinancial assets.

  • The staff has begun drafting guidance in a proposed Accounting Standards Update on the basis of the tentative decisions reached by the Board.
  • Following the issuance of Accounting Standards Update No. 2014-02, Accounting for Goodwill, which significantly changes the way that private companies can account for goodwill, the FASB has undertaken a project to consider changes to the accounting for goodwill for all companies (including public, private and nonprofit entities). At the November 2014 meeting the board requested the staff to research potential alternatives related to amortizing goodwill, and simplifying the impairment test. At the November meeting the board also decided to add a separate project to its agenda for public business entities and not-for-profits on a potential simplification to the accounting for identifiable intangible assets in a business combination. The Board is considering several potential alternatives related to both of these projects and is closely monitoring the IASB’s agenda.The board plans to continue deliberations in Q4 2015.
  • The FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (the “revised standard”) in April 2014. The revised standard changes previous guidance and, in many cases, is expected to result in fewer disposals being presented as discontinued operations. These changes will impact entities across all industries, particularly those that actively divest components.

  • The new standard amends the criteria for determining whether a disposal qualifies for reporting as a discontinued operation. Under the revised standard, a “disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results” as determined when the component or group of components: (i) meets the criteria to be classified as held for sale; (ii) is disposed of by sale; or (iii) is disposed of other than by sale.

  • The revised standard includes examples of strategic shifts that have (or will have) a major effect on an entity’s operations and financial results and states that a strategic shift could include the “disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.” The concept of a strategic shift is intended to be entity specific.

  • Discontinued operations will no longer be precluded by the existence of (i) significant continuing involvement with a component after its disposal, or (ii) operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations.

  • New and expanded disclosure requirements for discontinued operations will include more details about earnings, balance sheet accounts, and cash flows.

  • For disposals of individually significant components that do not qualify as discontinued operations, entities will have to disclose pre-tax profit or loss of the disposed component and the amount attributable to the parent if a noncontrolling party has an interest in the disposed component.

  • Assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period will have to be reclassified for the comparative prior periods presented in the statement of financial position. Previously, prior period reclassification was optional.

  • The guidance is to be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. Public business entities and certain not-for-profit entities are required to apply the guidance in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. All other entities will be required to apply the guidance within annual periods beginning on or after December 15, 2014, and interim periods thereafter. Early adoption is permitted for all entities but only for disposals and new classifications as held for sale occurring in periods for which financial statements have not yet been issued. 
  • In October 2014, the FASB issued new guidance on pushdown accounting and the SEC rescinded its pushdown accounting guidance in Staff Accounting Bulletin Topic No. 5.J, New Basis of Accounting Required in Certain Circumstances (SAB Topic 5.J). The new guidance makes pushdown accounting elective for all entities, public and nonpublic, with the election available at each change-in-control event. Previously, there was limited guidance in U.S. GAAP on when pushdown accounting should be applied other than SAB Topic 5.J, which applied only to the filings of SEC registrants and required (or precluded) pushdown accounting in certain circumstances.

  • The new pushdown accounting guidance provides an entity with the option to apply pushdown accounting each time there is a transaction or event in which another entity or individual (acquirer) obtains control of the entity (“change-in-control event”). An acquirer may obtain control of the entity either directly through purchase of the acquired entity’s equity interests (or equity interests of the acquired entity’s parent), or without transferring consideration, such as when certain rights in a contract lapse. The existing guidance in U.S. GAAP should be applied to determine if and when an acquirer has obtained control of the entity.

  • The election to apply pushdown accounting should be made in the period in which the change-in-control event occurs. Once pushdown accounting is applied, it is irrevocable. However, if an entity did not apply pushdown accounting at the time of its most recent change-in-control event, in a subsequent period it can elect to do so retrospectively as a change in accounting policy.

  • The pushdown accounting standard is effective immediately for all transactions in periods for which financial statements have not been issued. Entities that did not elect pushdown accounting for a change in control event that occurred prior to the effective date may do so as a change in accounting policy.

Refer to PwC’s In depth on the new pushdown accounting standard for more information.

  • The FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, on August 27, 2014, which requires management to assess an entity’s ability to continue as a going concern at each annual and interim reporting period, and requires additional disclosures in certain circumstances. While footnote disclosures related to liquidity and going concern uncertainties have been common before this new standard was issued, there was no specific guidance in U.S. GAAP defining management’s responsibility to assess or disclose going concern uncertainties.

  • The new standard specifies that the threshold for when such disclosures are required is when “substantial doubt” exists about an entity’s ability to continue as a going concern. The standard indicates that substantial doubt about an entity’s ability to continue as a going concern exists when it is probable that an entity will not meet its obligations within one year from the date the financial statements are issued (the assessment period). In this context, “probable” has the same meaning as its current use in U.S. GAAP for loss contingencies. Management’s assessment should be based on relevant conditions known and reasonably knowable at the issuance date of the financial statements, rather than at the balance sheet date, to determine if it is probable that the entity will be unable to meet its obligations within one year from the date the financial statements are issued.

  • Management’s assessment would consider the mitigating effect of management’s plans to the extent that it is probable that those plans will be effectively implemented and alleviate the adverse conditions giving rise to the going concern uncertainty within the assessment period.

  • The disclosures required will vary depending on whether or not management has plans that mitigate the conditions that gave rise to substantial doubt. An express statement indicating that there is substantial doubt about the company’s ability to continue as a going concern is required if substantial doubt is not alleviated by management’s plans.

  • The new standard will be effective for all entities in the first annual period ending after December 15, 2016, and subsequent interim periods. Earlier application is permitted.

Among the continuing areas of challenge for preparers and users is the application of guidance for:

  • Accounting and valuation of contingent consideration;
  • Accounting for changes in ownership interests and noncontrolling interests;
  • Segment reporting, and
  • Impairments of goodwill and long-lived tangible and intangible assets.

In addition to being complex, applying the relevant accounting guidance often involves significant judgments and estimates to be determined by both financial and non-financial management. PwC has a publication series entitled “Mergers & acquisitions - a snapshot” that takes these topics and addresses them in a plain-English manner. PwC has issued multiple publications from this series which are available on the M&A snapshot page in the “Publications” section of this website. Last year PwC issued a series that focused on navigating unique issues of a cross-border acquisition. PwC recently commenced a series focused on navigating the stages of bankruptcy.

Four publications have been issued in the series so far that cover an overview of the turnaround processvarious aspects of the bankruptcy process and the financial reporting requirementsconsiderations when emerging from bankruptcy, and most recently tax considerations.

Business combinations and noncontrolling interests - 2014 global accounting and financial reporting guide


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