In January 2017, the FASB issued guidance that changes the definition of a business. The guidance was issued in response to stakeholder feedback that the current definition results in transactions being recorded as business combinations that seem more like asset acquisitions. The revised definition could result in more upstream acquisitions being accounted for as asset acquisitions.
In January 2017, the FASB issued guidance that changes the definition of a business. The guidance was issued in response to stakeholder feedback that the current definition results in transactions being recorded as business combinations that seem more like asset acquisitions. The revised definition could result in more upstream acquisitions being accounted for as asset acquisitions. However, certain acquisitions that are accounted for as asset acquisitions today may be considered business combinations under the new guidance.
The new guidance may also increase the complexity of the analysis that oil and gas companies perform to determine whether a transaction is an asset acquisition or a business combination.
The distinction between an asset acquisition and a business combination is important because the accounting is substantially different. In a business combination, assets and liabilities acquired are recorded at fair value, goodwill is recognized for any excess consideration, and transaction costs are expensed. In an asset acquisition, goodwill is not recognized, contingencies assumed are recorded only if probable, and transaction costs are generally capitalized. Furthermore, the measurement period (i.e., the period of time in which an acquirer may finalize its accounting for a business combination) is not available for asset acquisitions. Asset acquisitions are recorded at cost, however, companies need to determine the fair values of individual assets when a group of assets is acquired. This is because the cost must be allocated to the individual assets based on their relative fair values.
While the new guidance was written in the context of acquisitions, it will also impact the accounting in other areas that utilize the “business” unit of account, such as the accounting for dispositions, segment and reporting unit changes, and common control transactions.
For calendar year end public business entities, the guidance is effective in 2018. All other entities have an additional year to adopt. Early adoption is permitted, including adoption in an interim period. Prospective application is required.
The guidance is the first phase of a broader project. The second phase was finalized in early 2017 and clarifies the guidance for the derecognition of nonfinancial assets (for example, equipment), including partial sales and transfers. To the extent sets are not businesses under the new definition, they will be derecognized through the nonfinancial asset derecognition guidance. However, this guidance did not amend the accounting for the types of conveyances addressed in ASC 932.
In the third phase, the FASB may revisit certain accounting differences between asset and business acquisitions.
Partner, National Professional Services Group, PwC US
National Professional Assurance Energy Partner, PwC US
Senior Manager, National Professional Services Group, PwC US