Week 013

OTHER ACQUISITION METHOD GUIDANCE

PART 2
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

Learning objectives

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

• Partial acquisitions
• Business combinations achieved in stages
• Business combinations achieved without the transfer of consideration
• Recapitalization transactions
• Reverse acquisitions
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

Partial Acquisitions
• A “partial acquisition” is a business combination in which an entity acquires a
controlling interest, but less than 100 percent of the voting interests, in an entity.
The ASC master glossary defines a noncontrolling interest (also known as a
minority interest) as “the portion of equity (net assets) in a subsidiary not
attributable, directly or indirectly, to a parent.” Therefore, the portion of equity in
the acquiree held by other parties is presented as a noncontrolling interest in the
acquirer’s consolidated financial statements.
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

• The acquirer shall recognize goodwill as of the acquisition date, measured as the
excess of (a) over (b):
• The aggregate of the following:
• The consideration transferred measured in accordance with this Section, which
generally requires acquisition-date fair value (see paragraph 805-30-30-7)
• The fair value of any noncontrolling interest in the acquiree
• In a business combination achieved in stages, the acquisition-date fair value of
the acquirer’s previously held equity interest in the acquiree.
• The net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with this Topic. [Emphasis added]
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

Business Combinations Achieved in Stages

• An acquirer sometimes obtains control of an acquiree in which it held an equity
interest immediately before the acquisition date. For example, on December 31,
20X1, Entity A holds a 35 percent noncontrolling equity interest in Entity B. On
that date, Entity A purchases an additional 40 percent interest in Entity B, which
gives it control of Entity B. This Topic refers to such a transaction as a business
combination achieved in stages, sometimes also referred to as a step acquisition.
• 10 In a business combination achieved in stages, the acquirer shall remeasure its
previously held equity interest in the acquiree at its acquisition-date fair value and
recognize the resulting gain or loss, if any, in earnings.
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

• As described in ASC 805-10-25-9, in a business combination achieved in stages, an

acquirer “obtains control of an acquiree in which it held an equity interest
immediately before the acquisition date.” Such transactions are also commonly
called “step acquisitions.” Because, as stated previously, an acquirer is accountable
and responsible for all of the acquiree’s assets and liabilities regardless of the
ownership percentage acquired on the acquisition date, the acquirer in a step
acquisition recognizes in its consolidated financial statements the assets acquired,
liabilities assumed, and noncontrolling interest at 100 percent of their values,
measured in accordance with ASC 805 (generally at fair value).
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

Business Combinations Achieved Without the Transfer of Consideration

• An acquirer may obtain control of an acquiree without transferring any

consideration on the acquisition date. Even though no consideration is transferred,
the acquirer must still account for the transaction by using the acquisition method.
ASC 805-30-55-2 states that “[t]he acquirer must substitute the acquisition-date
fair value of its interest in the acquiree for the acquisition-date fair value of the
consideration transferred to measure goodwill or a gain on a bargain purchase.”
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

Recapitalization Transactions
• A recapitalization is a type of reorganization designed to change an entity’s capital
structure (e.g., the mix of debt and equity). Usually, these transactions involve new
debt financing, issuing new shares, or repurchasing outstanding shares. In a
leveraged recapitalization, new debt is issued, and the proceeds are used to
redeem shares from existing shareholders as part of a series of steps that may also
result in the establishment of a new majority shareholder. If the transaction
results in a change in control of the entity undergoing the recapitalization, the new
controlling entity would account for the entity that underwent the recapitalization
(if it meets the definition of a business) as an acquiree in a business combination.
In such a situation, an entity should evaluate all facts and circumstances in
determining whether it has obtained control of a business as a result of an
investee undergoing a recapitalization transaction.
Week 013: OTHER ACQUISITION METHOD GUIDANCE PART 2

Reverse Acquisitions
• As discussed in module 4, a reverse acquisition occurs when the entity that issues
its shares or gives other consideration to effect the transaction is determined for
accounting purposes to be the acquiree (also called the accounting acquiree or
legal acquirer), while the entity whose shares are acquired is for accounting
purposes the acquirer (also called the accounting acquirer or legal acquiree). The
accounting acquiree/legal acquirer generally continues in existence as the legal
entity whose shares represent the outstanding common shares of the combined
company. While the accounting acquiree/legal acquirer continues to issue its own
financial statements, those statements are often in the name of the accounting
acquirer/legal acquiree because the legal acquirer often adopts the name of the
legal acquiree. The financial reporting reflects the accounting acquirer’s/legal
acquiree’s financial information, except for its equity, which is retroactively
adjusted to reflect the equity of the accounting acquiree/legal acquirer.
Week 013: OTHER ACQUISITION METHOD GUIDANCE 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