Week 006

RECOGNIZING AND MEASURING

THE IDENTIFIABLE ASSETS
ACQUIRED AND LIABILITIES ASSUMED PART 1
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

Learning objectives

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

• Recognition and measurement principles

• Classifying or designating the assets acquired and liabilities assumed
• Exceptions to recognition, measurement, and designation or classification of
assets or liabilities
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

Introduction

• This Module addresses the recognition and measurement of the identifiable

assets acquired and liabilities assumed in a business combination, which is
part of step 3 of the acquisition method. The recognition and measurement
of noncontrolling interests, also part of step 3, is addressed in connection
with the accounting for partial acquisitions.
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

Recognition and Measurement Principles

• The accounting for a business combination is based on two key principles, which
ASC 805 calls the recognition principle and the measurement principle. The
objective of the principles is to provide guidance that an acquirer can apply when
ASC 805 does not contain specific recognition or measurement guidance for a
particular asset or liability.
• Use of a Third-Party Specialist to Measure Fair Value
• Some entities elect to engage a third-party specialist to assist management in
the valuation of some or all of the assets acquired and liabilities assumed in a
business combination, especially if the fair value measurements are unusually
complex or management wishes to otherwise supplement its internal
valuation expertise.
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

Classifying or Designating the Assets Acquired and Liabilities Assumed

• Because a business combination results in the initial recognition of the assets
acquired and liabilities assumed in the acquirer’s financial statements, the acquiree’s
assets and liabilities are recognized even if they did not qualify for recognition before
the business combination, and they are generally remeasured at fair value.
• ASC 805-20-25-7 provides three examples:
a. Classification of particular investments in securities as trading, available for sale, or
held to maturity in accordance with Section 320-10-25
b. Designation of a derivative instrument as a hedging instrument in accordance with
paragraph 815-10-05-4
c. Assessment of whether an embedded derivative should be separated from the host
contract in accordance with Section 815-15-25 (which is a matter of classification
as this Subtopic uses that term).
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

Exceptions to Recognition, Measurement, and Designation or

Classification of Assets or Liabilities
Exceptions to General Principles of Recognition, Measurement, and Classification or Designation
Recognition and  Indemnifications assets
measurement exceptions  Assets held for sale
 Assets and liabilities arising from contingencies
 Reacquired rights
 Income taxes
 Employee benefits
 Purchased financial assets with credit deterioration
 Leases — after adoption of ASC 842
 Leases — before adoption of ASC 842 Share-based payment awards

Classification or designation  Leases — after adoption of ASC 842

exceptions  Leases — before adoption of ASC 842
 Insurance or reinsurance contracts
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

• Indemnification Assets
• The seller in a business combination may contractually indemnify the acquirer for
uncertainties related to specific assets or liabilities, such as those associated with
lawsuits and uncertain tax positions.
• Initial Accounting for Indemnification Assets
• The recognition and measurement of an indemnification asset depends on
whether the acquirer recognizes the indemnified item as part of the accounting for
the business combination and how the acquirer measures the indemnified item.
• Subsequent Accounting for Indemnification Assets
• When measuring an indemnification asset that was initially recognized as part of
the accounting for a business combination, an entity should use assumptions that
are consistent with those used to measure the indemnified item after the
acquisition date, subject to any contractual limitations and considerations about
the indemnifying party’s credit risk.
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

• Assets Held for Sale

• 30-22 The acquirer shall measure an acquired long-lived asset (or disposal group)
that is classified as held for sale at the acquisition date in accordance with Subtopic
360-10, at fair value less cost to sell in accordance with paragraphs 360-10-35-38
and 360-10-35-43.
• Assets and Liabilities Arising from Contingencies
• “an existing condition, situation, or set of circumstances involving uncertainty as to
possible gain (gain contingency) or loss (loss contingency) to an entity that will
ultimately be resolved when one or more future events occur or fail to occur.”
• Initial Recognition and Measurement of Assets and Liabilities Arising from
Contingencies
• ASC 805 requires entities to perform two steps in determining whether an asset or
liability arising from a contingency qualifies for recognition in a business
combination.
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

• Subsequent Accounting for Contingencies Recognized as Part of the Business

Combination
• ASC 805 does not provide specific subsequent measurement guidance for
contingencies recognized in a business combination, except to say that “[a]n
acquirer shall develop a systematic and rational basis for subsequently measuring
and accounting for assets and liabilities arising from contingencies depending on
their nature.”
• Reacquired Rights
• ASC 805-20-25-14 states that “[a]s part of a business combination, an acquirer
may reacquire a right that it had previously granted to the acquiree to use one or
more of the acquirer’s recognized or unrecognized assets.
• Initial Measurement of Reacquired Rights
• Subsequent Accounting for Reacquired Rights
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

• Income Taxes
• Income taxes are an exception to the recognition and measurement principles in
ASC 805. For information about accounting for income taxes in a business
combination, see Deloitte’s A Roadmap to Accounting for Income Taxes.
• Employee Benefits
• Employee benefit arrangements that are within the scope of ASC 710, ASC 712, and
ASC 715 are exceptions to ASC 805’s recognition and measurement principles. ASC
805-20-25-22 requires an acquirer to “recognize [and measure] a liability (or
asset, if any) related to the acquiree’s employee benefit arrangements in
accordance with other GAAP.”
• Pension and Other Postretirement Benefit Plans
• Postemployment Benefits
• Multiemployer Plans
Week 006: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 1

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