Financial reporting developments A comprehensive guide

Business combinations Revised December 2012

Financial reporting developments Business combinations

To our clients and other friends

Business combinations are on the rise, due to the globalization of business and technological advances

that make it easier to integrate operations around the world.

Companies that engage in business combinations face various financial reporting issues, including

determining whether a transaction represents a business combination or an asset acquisition, accounting

for consideration transferred in the transaction and measuring and recognizing the fair value of assets

acquired and liabilities assumed.

We have updated this Financial reporting developments publication to help you understand the financial

reporting issues associated with business combinations. This publication includes excerpts from and

references to the FASBs Accounting Standards Codification, interpretive guidance and examples. We

have also updated this publication to provide insights from the SEC, updates on recent standard-setting

activities and further clarifications and enhancements to our interpretative guidance. Refer to Appendix F

for further detail on the updates provided.

We hope this publication will help you understand and apply the accounting for business combinations.

We are also available to answer your questions and discuss any concerns you may have.

December 2012

Financial reporting developments Business combinations i

Contents

1 Overview of accounting for business combinations ....................................................... 1

1.1 Overview ............................................................................................................................... 1

1.2 Background ........................................................................................................................... 1

1.3 The overall principle in ASC 805: obtaining control results in a new basis .................................. 1

1.4 Scope: identifying business combination transactions .............................................................. 2

1.4.1 Definition of a business .................................................................................................. 2

1.5 Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree ......................................................... 2

1.6 Consideration transferred ...................................................................................................... 3

1.7 Recognizing and measuring goodwill or a gain from a bargain purchase .................................... 3

1.7.1 Bargain purchases ........................................................................................................ 3

1.7.2 A business combination achieved in stages ..................................................................... 4

1.7.3 Measurement period ..................................................................................................... 4

1.7.4 Assessing what is part of the exchange for the acquiree .................................................. 4

1.8 Disclosure requirements ......................................................................................................... 4

2 Identifying business combination transactions ............................................................. 5

2.1 What is a business combination? ............................................................................................. 5

2.1.1 Control obtained without transferring consideration ....................................................... 7

2.1.1.1 Lapse of participating rights held by minority shareholders ............................ 7

2.1.1.2 Investee share repurchase transactions ........................................................ 7

2.1.1.3 Control obtained by contract alone ............................................................... 8

2.1.1.3.1 Control by contract ............................................................................. 8

2.1.1.3.2 Dual-listed corporation and stapling arrangements ................................ 8

2.1.2 Variable interest entities ................................................................................................ 9

2.1.3 Definition of a business .................................................................................................. 9

2.1.3.1 Capable of from the viewpoint of a market participant............................... 10

2.1.3.2 Development stage enterprises .................................................................. 11

2.1.3.2.1 Examples Development stage enterprises ......................................... 13

2.1.3.3 Presence of goodwill ................................................................................. 13

2.1.3.4 Application of the definition of a business ................................................... 14

2.1.3.4.1 Examples Application of the definition of a business .......................... 14

2.1.3.4.2 Industry examples Application of the definition of a business ............. 15

2.1.3.5 Effect of the definition of a business on other GAAP .................................... 17

2.2 Limitations in the scope of ASC 805 ..................................................................................... 18

2.2.1 Joint ventures ............................................................................................................ 18

2.2.2 The acquisition of an asset or group of assets that does not constitute a business .......... 19

2.2.3 A combination between entities or businesses under common control ........................... 19

2.2.4 Change of accounting basis in master limited partnerships ............................................ 19

2.2.5 Not-for-profit organizations ......................................................................................... 20

2.2.6 Mutual entities ............................................................................................................ 21

2.2.7 Other scope considerations ......................................................................................... 21

Contents

Financial reporting developments Business combinations ii

3 The acquisition method ............................................................................................ 22

3.1 Overview ............................................................................................................................. 22

3.2 Identifying the acquirer ........................................................................................................ 23

3.2.1 Identifying the acquirer if the acquiree is a VIE .............................................................. 23

3.2.2 Identifying the acquirer if the acquiree is a voting interest entity .................................... 24

3.2.2.1 Identifying the acquirer when the acquirer is not obvious .......................... 25

3.2.2.1.1 Relative voting rights ........................................................................ 25

3.2.2.1.2 Size of single minority voting interest ................................................. 26

3.2.2.1.3 Composition of the governing body .................................................... 26

3.2.2.1.4 Composition of management ............................................................. 26

3.2.2.1.5 Terms of the exchange of equity interests ........................................... 27

3.2.2.1.6 Size ................................................................................................. 27

3.2.2.2 Reverse acquisitions ................................................................................. 29

3.2.2.2.1 Measuring the consideration transferred in a reverse acquisition .......... 30

3.2.2.2.2 Share-based payments in a reverse acquisition .................................... 31

3.2.2.2.3 Noncontrolling interests in a reverse acquisition .................................. 32

3.2.2.2.4 Financial statement presentation ....................................................... 33

3.2.2.2.5 Transactions involving public shell companies ..................................... 38

3.2.2.3 Combinations of more than two entities ...................................................... 39

3.2.2.4 Combinations involving a Newco ............................................................. 40

3.2.2.4.1 Examples Combinations involving a Newco .................................... 41

3.3 Determining the acquisition date .......................................................................................... 41

3.4 Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree ....................................................... 42

3.4.1 Recognition concepts .................................................................................................. 43

3.4.1.1 Meaning of An asset or liability at the acquisition date .............................. 43

3.4.1.2 Meaning of Part of the business combination ............................................ 44

3.4.1.2.1 Allocating the consideration transferred to a transaction to be accounted for se