Article
Business combinations: consider financial reporting issues before closing
Oct. 17, 2017
The accounting rules for mergers and acquisitions can be complicated depending on how a deal is structured. Here are four questions to ask to help you record your transaction correctly under U.S. Generally Accepted Accounting Principles (GAAP).
1. What’s for sale?
There’s an important distinction between acquiring a business vs. an asset or a group of assets. The Financial Accounting Standards Board (FASB) recently updated the guidance to help make this determination.
A business combination is a transaction in which an acquirer gains control over a business. Accounting Standards Update (ASU) No. 2017-01, Business Combinations: Clarifying the Definition of a Business, revises the definition of “business.” As a result, fewer transactions are expected to be subject to the complex business combinations rules.
Effective date
The new definition goes into effect in 2018 for public companies and 2019 for private ones, although some buyers are likely to apply it early.
The new definition lays out minimum requirements for a set of assets to be considered a business. A business includes:
- An input (such as people, intellectual property or raw materials), and
- A substantive process.
For a set of assets to be considered a business, these mandatory components must have the ability to contribute to the creation of outputs. Outputs are goods or services, investment income, or other revenues resulting from the application of the required processes to the required inputs.
Shortcut to determining what’s for sale
In addition, the updated standard provides a shortcut to help buyers quickly decide what’s for sale: A set of assets is not a business if substantially all the fair value of the acquired gross assets is concentrated in a single asset or a group of similar identifiable assets. A set of assets is considered a business as long as market participants are capable of buying the set and continuing to produce outputs, such as incorporating the set into their own inputs and processes.