Week 003

IDENTIFYING A BUSINESS COMBINATION

PART 2
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

Learning objectives

At the end of this module, the students will learn the following:

• Definition of a business combination

• Transactions within the scope of ASC 805-10, ASC 805-20, and ASC 505-30
• Transactions outside the scope of ASC 805-10, ASC 805-20, and ASC 805-30
• Definition of a business (after adoption of ASU 2017-01)
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

Introduction

• ASC 805 requires an entity to account for a business combination by using the
acquisition method. For an entity to apply the acquisition method, the transaction
must meet the definition of a business combination and the net assets acquired
must meet the definition of a business in ASC 805. This chapter discusses those
definitions and addresses the scope of the business combinations guidance in
ASC 805-10, ASC 805-20, and ASC 805-30.
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

Definition of a Business (After Adoption of ASU 2017-01)

• Framework for Assessing Whether an Input and a Substantive Process Are
Present
• If the screen is not met, entities must determine whether the acquired set
includes, at a minimum, an input and a substantive process that together
significantly contribute to the ability to create outputs. ASC 805-10-55
provides a framework for making that judgment.
• Identify the Elements of a Business
• Both a business and an asset or a group of assets possess one or more inputs.
As indicated in ASC 805-10-55-4, what distinguishes a business from an asset
or a group of assets is that “[a] business consists of inputs and processes
applied to those inputs that have the ability to contribute to the creation of
outputs.”
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

• Sets Without Outputs

• ASC 805-10-55-5D states that if a set does not have outputs, a substantive
process can only be provided by employees that form an organized workforce
with “the necessary skills, knowledge, or experience to perform an acquired
process (or group of processes) that when applied to another acquired input
or inputs is critical to the ability to develop or convert that acquired input or
inputs into outputs.” ASC 805-10-55 does not provide guidance on
determining whether employees are providing a “critical” process, except to
say that “a process (or group of processes) is not critical if, for example, it is
considered ancillary or minor in the context of all the processes required to
create outputs.” Accordingly, entities will need to use judgment in
determining whether a process is critical.
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

• Sets with Outputs

• Like a set without outputs, a set with outputs is a business if it includes, at a
minimum, both an input and a substantive process that together significantly
contribute to the ability to create outputs. A set has outputs if there is a
continuation of revenue before and after the transaction. While the
continuation of revenues alone does not mean that a set is a business, the
Board concluded in paragraph BC51 of ASU 2017-01 that a set with outputs is
more likely to include an input and substantive process than a set without
outputs. Therefore, the criteria for determining whether a substantive
process is present are less stringent than those for a set that is not producing
outputs.
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• Groups of Processes
• Individual processes that are used to create outputs may sometimes be
considered insignificant on their own but could be substantive as a group
because all the processes together could be difficult to replace without
significant cost or effort or a delay in operations. In determining whether a
substantive process is present, entities should consider whether a group of
processes are together significant.
• Presence of Goodwill
• To help entities evaluate whether a set includes a substantive process, the
FASB notes in ASC 805-10-55-9 that “the presence of more than an
insignificant amount of goodwill may be an indicator that the acquired
process is substantive.”
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

• Paragraph B313 of the Basis for Conclusions of Statement 141(R) describes

components that are conceptually part of goodwill — the fair values of “the
going-concern element of the acquiree’s existing business” and “the expected
synergies and other benefits from combining the acquirer’s and acquiree’s net
assets and businesses.” The guidance also lists elements that are captured in the
measurement of goodwill in a business combination but are not conceptually
part of goodwill — namely, “overvaluation of the consideration paid by the
acquirer stemming from [valuation] errors” and “overpayment or underpayment
by the acquirer.” We believe that while the nonrecognition of certain assets and
liabilities and the measurement of certain assets or liabilities at amounts other
than fair value are not conceptually part of goodwill, those components are
captured in the measurement of goodwill. In evaluating goodwill as an indicator
of a substantive process, entities should consider the reasons why they have
calculated an excess and whether the excess is related to the elements that are
conceptually part of goodwill.
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• Often, part of an excess is the result of an assembled workforce intangible asset

that is subsumed into goodwill in a business combination. In such cases, entities
should consider whether the employees represent an organized workforce. That
is, in accordance with ASC 805-10-55-5D, entities should assess whether the
employees “have the necessary skills, knowledge, or experience to perform an
acquired process (or group of processes) that when applied to another acquired
input or inputs is critical to the ability to develop or convert that acquired input
or inputs into outputs.” The presence of an assembled workforce that has
significant fair value may be an indicator that the employees are performing a
substantive process. Similarly, an excess may indicate that there is value in an
acquired process that would not be captured in an identifiable asset.
Week 003: IDENTIFYING A BUSINESS COMBINATION PART 2

References and Supplementary Materials

Book and Journals

Deloitte’s A Roadmap to Accounting for Business Combinations
Authors: Michael Morrissey and Stefanie Tamulis
Contributors: Ashley Carpenter, Sandie Kim, Christine Mazor, Stephen
McKinney, Morgan Miles, Lisa Mitrovich, Ignacio Perez, Michael Scheper,
Jonathan Tambourine, Curt Weller, Amy Winkler, and Andy Winters, Lynne
Campbell, Diane Castro, Geri Driscoll, and Jeanine Pagliaro