A Guide to Accounting for Business Combinations – Second Edition
Download the Executive Summary
Download the Guide
A Guide to Accounting for Business Combinations is designed to help assist growing, owner-managed and public companies in their application of Topic 805, "Business Combinations," of the FASB Accounting Standards Codification®. Topic 805 has been in effect since 2009, and the Guide addresses many insights gained as a result of the application of this guidance since its effective date. Some of the key insights include the following:
- Fair value – The required use of a "fair-value" model to account for business combinations has increased the involvement of valuation specialists – both by management and auditors.
- Timing of determining the nature of the acquisition – It is extremely important for the buyer to determine as early in the acquisition process as possible whether it has acquired a business within the scope of the business combination accounting guidance because whether a business has been acquired or not has significant accounting and valuation implications.
- Definition of a business – The definition of a business is one of the more challenging aspects of the business combination accounting guidance to implement in practice because that definition encompasses much more than just a group of assets or net assets that could function together as a standalone business. A significant amount of judgment may need to be exercised in determining whether a business has been acquired.
- Contingent consideration – The accounting for contingent consideration (including measuring it at fair value initially, classifying it appropriately as either an asset/liability or equity, and subsequently adjusting it to fair value if classified as an asset/liability) is also one of the more challenging aspects of the business combination accounting guidance.
These insights and many others underscore the importance of familiarizing yourself with the business combination accounting guidance before a business combination occurs.
Essential tools to help prepare for a business combination
Reading the Guide's Executive Summary will help you plan and prepare for the many challenges you will encounter in accounting for a business combination. Additionally, the Application Checklist includes a series of questions that will help a buyer apply the provisions of Topic 805. The Guide itself describes the accounting requirements for a business combination in plain English complemented with additional explanations, examples, summary tables and flowcharts, as appropriate.
Critical updates to the Second Edition
Numerous updates were made to the second edition of the Guide, which reflects information available as of December 15, 2011. Some of these include discussion and (or) illustration of the following topics:
- Preacquisition contingencies – The model used to account for preacquisition contingencies.
- Interaction of business combination accounting and equity method accounting – The effects the current model used to account for business combinations had on the equity method of accounting.
- Straight-line rent liabilities –The exclusion of a straight-line rent liability from the accounting for a business combination and the recognition of rent expense before and after the business combination.
- Income taxes – The income tax effects of a business combination, including deferred taxes related to contingent consideration and acquisition costs.
- Push-down accounting – The questions and issues that arise in push-down accounting, such as when is applying push-down accounting appropriate and how it is applied.
To request a printed copy of the Guide, please contact your McGladrey client service team member.