Week 008

RECOGNIZING AND MEASURING

THE IDENTIFIABLE ASSETS
ACQUIRED AND LIABILITIES ASSUMED PART 3
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Learning objectives

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

• Intangible assets
• Assets and liabilities associated with revenue contracts
• Debt
• Guarantees
• Liabilities for exit or restructuring activities
• Instruments indexed to or settled in shares and classified as liabilities
• Conforming accounting policies
• Subsequent measurement of assets acquired and liabilities assumed
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Intangible Assets
• The ASC master glossary defines intangible assets as “assets (not including financial
assets) that lack physical substance. (The term intangible assets is used to refer to
intangible assets other than goodwill).”
• An intangible asset is identifiable and therefore recognized separately from goodwill if it
meets either of the following criteria:
• The intangible asset arises from contractual or other legal rights (i.e., the
“contractual-legal criterion”), regardless of whether those rights are transferable or
separable from the acquiree or from other rights and obligations.
• The intangible asset is separable (i.e., the “separability criterion”). According to ASC
805-20-55-3, an asset that meets this criterion “is capable of being separated or
divided from the acquiree and sold, transferred, licensed, rented, or exchanged,
either individually or together with a related contract, identifiable asset, or liability.”
An intangible asset is separable regardless of whether the acquirer intends to
transfer it.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Assets and Liabilities Associated with Revenue Contracts

• Contract Assets and Contract Liabilities
• Before a business combination, an acquiree may have entered into revenue
contracts for which it has recognized contract assets, contract liabilities, or both
under ASC 606 in its preacquisition financial statements.
• Long-Term Revenue Contracts
• Long-term revenue contracts are common in the service, construction, and
aerospace and defense industries, and they arise in other industries as well.
• Business Combinations Before the Adoption of ASC 606
• An acquired revenue contract has the same fair value regardless of whether it is
subsequently accounted for under ASC 605 or ASC 606 (i.e., the cash flows related
to a contract are the same regardless of the subsequent accounting). Accordingly,
we believe that entities should not remeasure those assets and liabilities upon
adoption of ASC 606.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Debt

• An acquirer in a business combination is required to recognize any debt of the

acquiree that it assumes at fair value on the acquisition date.
• Reporting Consideration Related to Debt and Other Liabilities of the Acquiree
Settled at or in Close Proximity to the Acquisition Date
• An acquirer may sometimes use cash to settle debt or other liabilities of the
acquiree on, or in close proximity to, the acquisition date. In such cases, it is
necessary to determine whether the cash distributed should be reported as
consideration transferred to effect the acquisition or as cash paid to settle the
debt or other liabilities assumed in the acquisition.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

• Prepayment Penalty
• Sometimes the acquiree’s debt must be extinguished concurrently with a business
combination.
• Changes in an Acquirer’s Debt as a Result of a Business Combination
• The acquirer in a business combination may have outstanding debt with provisions
that result in an increase in the interest rate in the event of an acquisition.
• Accounting for Debt Between the Acquirer and the Acquiree in a Business Combination
• A business combination may result in the effective extinguishment of debt between
the acquirer and acquiree.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Guarantees

• Liabilities for guarantees made by the acquiree that are assumed by the acquirer must
be measured at fair value as of the acquisition date. After assets and liabilities are
initially recognized in a business combination, other GAAP generally provide
accounting for them.
• ASC 460 does not apply to guarantees between parents and their subsidiaries. If an
acquirer and acquiree previously entered into a guarantee arrangement, the guarantee
is not recognized as part of the business combination; however, the acquirer must
determine whether the transaction represents the settlement of a preexisting
relationship. The acquirer would also be subject to the disclosure requirements in ASC
460.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Liabilities for Exit or Restructuring Activities

• The costs that the acquirer expects to incur in the future related to its plans to (1) exit an
activity, (2) involuntarily terminate employees, or (3) relocate the acquiree’s employees
(commonly called restructuring costs) generally would not qualify as liabilities assumed
in the business combination. To qualify as such, the restructuring costs would need to
meet the recognition criteria in ASC 420-10 as of the acquisition date. ASC 420-10-25-2
states:
• A liability for a cost associated with an exit or disposal activity is incurred when the
definition of a liability included in FASB Concepts Statement No. 6, Elements of
Financial Statements, is met. Only present obligations to others are liabilities under
the definition. An obligation becomes a present obligation when a transaction or
event occurs that leaves an entity little or no discretion to avoid the future transfer or
use of assets to settle the liability. An exit or disposal plan, by itself, does not create a
present obligation to others for costs expected to be incurred under the plan; thus, an
entity’s commitment to an exit or disposal plan, by itself, is not the requisite past
transaction or event for recognition of a liability.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Instruments Indexed to or Settled in Shares and Classified as Liabilities

• An acquiree may have issued securities that are equity in legal form but
classified and accounted for as a liability under ASC 480 or ASC 715. Regardless
of their legal form or accounting classification, if the instruments remain
outstanding after the business combination, an acquirer must recognize them on
the acquisition date as part of the business combination and measure them at
their fair value. Equity instruments classified as liabilities are not considered
noncontrolling interests.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Conforming Accounting Policies

• Financial statements are more transparent and relevant if the policies used to
account for similar assets, liabilities, operations, and transactions are the same.
Therefore, the acquirer and acquiree should conform their accounting policies in the
consolidated financial statements if there is no justification for differences between
them.
• In addition, in its separate financial statements, a subsidiary may adopt a new
standard in a period other than the period in which the parent adopts it or may use a
different transition method for its adoption. In such cases, even though the
subsidiary may use different accounting policies in its stand-alone financial
statements, the subsidiary’s policies must be conformed to those of the parent in the
parent’s consolidated financial statements.
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

Subsequent Measurement of Assets Acquired and Liabilities Assumed

• Accordingly, ASC 805 does not provide subsequent accounting guidance for assets
acquired and liabilities assumed in a business combination, except for the following:
• Indemnification assets, including those arising from government-assisted
acquisitions of financial institutions
• Assets and liabilities arising from contingencies
• Reacquired rights
• Leasehold improvements
• Insurance and reinsurance contracts
• Intangible assets, including research and development assets
• Contingent consideration arrangements of an acquiree assumed by the acquirer
Week 008: RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES
ASSUMED PART 3

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