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:

  • In November 2015, the FASB decided to eliminate the requirement to retroactively adopt the equity method of accounting for an investment that was previously accounted for on a basis other than the equity method (for example, available-for-sale security).

  • The standard would require entities that have an available-for-sale equity security that becomes eligible for the equity method of accounting to recognize the accumulated other comprehensive income income or loss (related to the unrealized holding gains or lossess) through earnings at the date in which the investment qualifies for use of the equity method.

  • The standard would be applied prospectively to increases in ownership level or degree of influence occurring after the effective date of the change and no incremental disclosures would be required in the period this change is adopted. Entities would apply this new standard in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Entities would have the option of early application.

  • In addition, the FASB added a separate project to its agenda for improving the equity method of accounting more broadly, and directed the staff to research additional alternatives.
  • 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 clarifying the definition of a business project includes three phases. The first phase is focused on revising the definition of a business with the objective of narrowing its application.The second phase is focused on finalizing the scope of the recognition and measurement guidance for partial sales under ASC 610-20, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets. Finally, the third phase is focused on aligning current accounting differences in the acquisitions and disposals of businesses and assets.

Phase I

  • The FASB proposed the following key changes in an exposure draft:

    • When substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset (or a group of similar identifiable assets), the assets acquired would not represent a business.

    • To be considered a business, an acquisition would have to include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs. The proposal provides a framework to evaluate when an input and substantive process is present, and removes the current requirement to assess if a market participant could replace any missing elements.

    • Narrower definition of outputs so that the term is consistent with how outputs are described in Topic 606, Revenue from Contracts with Customers. Under the proposed definition, an output is the result of inputs and processes that provide goods or services to customers, other revenue, or investment income, such as dividends and interest.

Phase II

  • The FASB has made a number of tentative decisions, including:

    • Any transaction where a seller either retains an equity interest in an entity or receives an equity interest in an entity would be in the scope of ASC 610-20. Transactions involving business are outside of the scope of ASC 610-20 even if they are also considered in-substance nonfinancial assets.

    • Any retained or received equity interests would be measured at fair value in partial sale transactions that result in a loss of control.

    • Partial sale transactions that do not result in a loss of control would generally follow the existing guidance for such transactions in ASC 810, Consolidation.

Phase III

  • The Board has not begun deliberations on the project’s third phase.
  • 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). The Board decided to simplify the impairment test by removing the requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value (i.e., eliminating step 2 of the impairment model in current GAAP).

  • 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.

In certain circumstances, contingent consideration in a business combination (e.g., an earn out) can be considered compensation expense in the post combination period.  PwC’s Meg Rohas explains the basic concepts around contingent payments, the criteria to consider when things aren’t clear cut, and one area that can catch people off guard in the below video.

Business combinations and noncontrolling interests - 2014 global second edition (February 2016)


This PwC guide explains the principles of accounting and financial reporting for business combinations and noncontrolling interests (ASC 805) under both U.S. GAAP and IFRS. This guide includes our perspectives on the application of those principles, and our insights on the challenges of accounting for intangible assets and goodwill in the post-combination period. Read more

FASB changes definition of a business


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