BAR, Business Analysis and Reporting
Sources for Business Combinations: The Acquisition Method
Last reviewed
The standards and authorities behind PocketCPA's BAR lessons on Business Combinations: The Acquisition Method. The topic rests on ASC 805.
About this topic
A business combination is one entity buying control of another. ASC 805 accounts for it by the acquisition method, which puts what was bought onto the acquirer's books at fair value on the day control passed and records the leftover as goodwill.
The worked examples are built that way, and every one ends with a tie-out. The defining feature of an acquisition error is that it balances perfectly.
Key points
- The acquisition method requires measuring identifiable assets and liabilities at fair value at the acquisition date.
- Goodwill is the residual; a bargain purchase gain is recognized immediately after reassessing all amounts.
- Transaction costs are expensed, not capitalized, under the acquisition method.
- A step acquisition remeasures any previously held equity interest at acquisition-date fair value, recognizing gain or loss.
What the lessons cover
- The four-step acquisition method
- Measuring what was acquired
- Goodwill, bargain purchase, and contingent consideration
- Measurement period and acquisition costs
- Assembling the acquisition entry under exam conditions
- Quantifying someone else's acquisition accounting
- Reading a measurement-period adjustment as an analyst
- What the combination does to the acquirer's reported figures
Authoritative references
- ASC 805-10-25-1, the single acquisition method for a combination in which an entity obtains control of a business, with pooling of interests prohibited.
- ASC 805-10-25-4, the acquirer: the entity that obtains control.
- ASC 805-10-25-10, a previously held interest remeasured to acquisition-date fair value.
- ASC 805-10-25-13 through 25-17, the measurement period, with a provisional amount refined later offset against goodwill, and the catch-up recognized in earnings as amended by ASU 2015-16.
- ASC 805-10-25-23, advisory, legal, and finder's fees expensed as incurred.
- ASC 805-10-55-5A, the screen for whether what was acquired is a business at all.
- ASC 805-10-55-11 through 55-15, the factors identifying the acquirer, and the reverse-acquisition deemed-consideration computation.
- ASC 805-20-30-1, the identifiable assets and liabilities measured at acquisition-date fair value.
- ASC 805-20-50-4A, the separate disclosure by line item of the earnings effect of a measurement-period adjustment.
- ASC 805-30-25-2, the bargain purchase gain in earnings after reassessment.
- ASC 805-30-25-5, contingent consideration included in consideration transferred at acquisition-date fair value.
- ASC 805-30-30-1 and 30-7, goodwill as the residual, and consideration transferred at acquisition-date fair value, with equity at the closing-date price.
- ASC 805-30-35-1, a liability-classified earn-out remeasured through earnings each reporting period, with an equity-classified amount not remeasured.
- ASU 2021-08, the contract-balance measurement exception.
Related requirements outside the Topic:
- Impairment of the customer-relationship intangible, ASC 360-10.
- Classification of the contingent consideration, ASC 480 and ASC 815-40.
- Postretirement benefits and income taxes, ASC 715 and ASC 740, as measurement exceptions.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.