A Roadmap to Accounting for Business Combinations

A Roadmap to Accounting for Business Combinations

November 2020

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Publications in Deloitte's Roadmap Series

Business Combinations Business Combinations -- SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation -- Identifying a Controlling Financial Interest Contingencies, Loss Recoveries, and Guarantees Contracts on an Entity's Own Equity Convertible Debt Current Expected Credit Losses Debt Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees -- SEC Reporting Considerations Fair Value Measurements and Disclosures (Including the Fair Value Option) Foreign Currency Transactions and Translations Guarantees and Collateralizations -- SEC Reporting Considerations Impairments and Disposals of Long-Lived Assets and Discontinued Operations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures and Metrics Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows

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Contents

Prefacexv

Contactsxvi

Chapter 1 -- Overview of Accounting for Business Combinations

1

1.1Summary of Accounting for Business Combinations

2

1.1.1Identifying a Business Combination

2

1.1.2Determining Whether the Acquiree Meets the Definition of a Business

2

1.1.3Steps to Applying the Acquisition Method

3

1.1.4Identifying the Acquirer

3

1.1.5Determining the Acquisition Date

3

1.1.6Recognizing and Measuring the Identifiable Assets, Liabilities, and Noncontrolling Interests

in the Acquiree

3

1.1.7Recognizing and Measuring the Consideration Transferred and Goodwill or Bargain

Purchase Gains

4

1.1.8Measurement Period

4

1.1.9Determining What Is Part of the Business Combination

5

1.1.10Presentation and Disclosure

5

1.1.11Private-Company and Not-for-Profit Entity Accounting Alternatives

5

1.2Pushdown Accounting

6

1.3Common-Control Transactions

6

1.4Asset Acquisitions

7

1.5SEC Reporting Considerations for Business Acquisitions

7

1.6Comparison of U.S. GAAP and IFRS Standards

8

Chapter 2 -- Identifying a Business Combination

9

2.1Definition of a Business Combination

9

2.2Transactions Within the Scope of ASC 805-10, ASC 805-20, and ASC 805-30

11

2.2.1Roll-Up or Put-Together Transactions

12

2.2.2Combinations Between Two or More Mutual Entities

12

2.2.3True Mergers or Mergers of Equals

13

2.2.4Multiple Arrangements With a Seller That Result in a Business Combination

13

2.3Transactions Outside the Scope of ASC 805-10, ASC 805-20, and ASC 805-30

14

2.3.1Joint Venture Formations

14

2.3.2Common-Control Transactions

15

2.3.3Common-Ownership Transactions

15

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Contents

2.3.4Asset Acquisitions

15

2.3.5Combinations of Not-for-Profit Entities

16

2.3.6Collateralized Financing Entities

16

2.4Definition of a Business (After Adoption of ASU 2017-01)

17

2.4.1Identifying the Activities and Assets of the Acquired Set

19

2.4.1.1Employees of the Seller

19

2.4.1.2Contractual Arrangements Between the Acquirer and a Party Other Than the Seller

19

2.4.1.3Revenue Arrangements With the Seller

19

2.4.1.4Transactions That Are Separate From the Business Combination

19

2.4.2Single or Similar Assets

20

2.4.2.1Step 1 -- Combine the Identifiable Assets Into a Single Identifiable Asset

20

2.4.2.2Step 2 -- Combine the Assets Into Similar Assets

23

2.4.2.3Step 3 -- Measure the Fair Value of the Gross Assets Acquired

25

2.4.2.4Step 4 -- Determine Whether Substantially All of the Fair Value of the Gross

Assets Acquired Is Concentrated in a Single Identifiable Asset or Group of

Similar Identifiable Assets

26

2.4.2.5Illustration of the Screen

27

2.4.2.6Assessing the Screen Qualitatively

29

2.4.3Framework for Assessing Whether an Input and a Substantive Process Are Present

30

2.4.3.1Identify the Elements of a Business

30

2.4.3.2Sets Without Outputs

33

2.4.3.3Sets With Outputs

36

2.4.3.4Groups of Processes

39

2.4.3.5Presence of Goodwill

39

2.4.4Examples Illustrating the Application of the Guidance

39

Chapter 3 -- Identifying the Acquirer and Determining the Acquisition Date

47

3.1Identifying the Acquirer

47

3.1.1Identifying the Acquirer if the Acquiree Is a VIE

48

3.1.2Identifying the Acquirer if the Acquiree Is a Voting Interest Entity

48

3.1.2.1Business Combinations Effected Primarily by Transferring Cash or Other Assets or

by Incurring Liabilities

49

3.1.2.2Business Combinations Effected Primarily by Exchanging Equity Interests

49

3.1.2.3Consideration of the Relative Size of the Combining Entities

52

3.1.2.4Other Considerations

52

3.1.3Evaluating Pertinent Facts and Circumstances in Identifying the Acquirer

53

3.1.4Business Combinations Involving More Than Two Entities

53

3.1.5Use of a New Entity Formed to Effect a Business Combination

53

3.2Determining the Acquisition Date

56

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Deloitte | A Roadmap to Accounting for Business Combinations (2020)

Chapter 4 -- Recognizing and Measuring the Identifiable Assets Acquired

and Liabilities Assumed

58

4.1Recognition and Measurement Principles

58

4.1.1Use of a Third-Party Specialist to Measure Fair Value

59

4.2Classifying or Designating the Assets Acquired and Liabilities Assumed

61

4.3Exceptions to Recognition, Measurement, and Designation or Classification of

Assets or Liabilities

62

4.3.1Exceptions to Recognition and Measurement

62

4.3.2Exceptions to Designation or Classification of Assets or Liabilities

64

4.3.3List of Exceptions to the Recognition, Measurement, Designation, or Classification of

Assets or Liabilities

65

4.3.4Indemnification Assets

65

4.3.4.1Initial Accounting for Indemnification Assets

65

4.3.4.2Subsequent Accounting for Indemnification Assets

68

4.3.4.3Subsequent Accounting for an Indemnification Asset Recognized as of the Acquisition

Date After a Government-Assisted Acquisition of a Financial Institution

69

4.3.5Assets Held for Sale

70

4.3.6Assets and Liabilities Arising From Contingencies

71

4.3.6.1Initial Recognition and Measurement of Assets and Liabilities Arising From Contingencies72

4.3.6.2Subsequent Accounting for Contingencies Recognized as Part of the Business Combination73

4.3.7Reacquired Rights

75

4.3.7.1Initial Measurement of Reacquired Rights

75

4.3.7.2Subsequent Accounting for Reacquired Rights

76

4.3.8Income Taxes

77

4.3.9Employee Benefits

77

4.3.9.1Pension and Other Postretirement Benefit Plans

79

4.3.9.2Postemployment Benefits

80

4.3.9.3Multiemployer Plans

81

4.3.10Purchased Financial Assets With Credit Deterioration

81

4.3.11Leases

82

4.3.11.1Leases -- After Adoption of ASC 842

82

4.3.11.2Leases -- Before Adoption of ASC 842

97

4.3.12Insurance or Reinsurance Contracts

104

4.3.12.1Classification of Contracts

105

4.3.12.2Recognition and Measurement of Insurance Contracts

105

4.3.12.3Deferred Acquisition Costs and Unearned Premiums

106

4.3.12.4Subsequent Accounting for Insurance or Reinsurance Contracts

106

4.4Working Capital

107

4.5Assets With Uncertain Cash Flows (Valuation Allowances)

108

4.6Financial Instruments

108

4.6.1Acquiree's Equity Investments

108

4.6.2Derivatives

109

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Contents

4.7Inventory

109

4.7.1Finished Goods

109

4.7.2Work in Process

110

4.7.3Raw Materials

110

4.7.4Supply Inventory

110

4.7.5LIFO Inventories

110

4.8Property, Plant, and Equipment

111

4.8.1PP&E Subject to Asset Retirement Obligations

111

4.8.2Mineral Rights and Mining Assets

112

4.9Assets That the Acquirer Does Not Intend to Use, or Intends to Use in a Manner Other

Than Their Highest and Best Use

113

4.10Intangible Assets

113

4.10.1Initial Recognition of Intangible Assets

114

4.10.1.1The Contractual-Legal Criterion

114

4.10.1.2The Separability Criterion

116

4.10.1.3Intangible Assets That Are Not Identifiable as of the Acquisition Date

117

4.10.2Initial Measurement of Intangible Assets

119

4.10.2.1Use of the Residual Method to Value Intangible Assets

119

4.10.3Combining Intangible Assets Into a Single Unit of Account

120

4.10.4Examples of Identifiable Intangible Assets

120

4.10.4.1Marketing-Related Intangible Assets

121

4.10.4.2Customer-Related Intangible Assets

122

4.10.4.3Artistic-Related Intangible Assets

129

4.10.4.4Contract-Based Intangible Assets

129

4.10.4.5Technology-Based Intangible Assets

132

4.10.4.6Examples of Intangible Assets by Industry

134

4.10.4.7R&D Assets

135

4.10.4.8Defensive Intangible Assets

137

4.10.5 Subsequent Accounting for Intangible Assets

140

4.11Assets and Liabilities Associated With Revenue Contracts

140

4.11.1Contract Assets and Contract Liabilities

140

4.11.1.1Contract Assets

140

4.11.1.2Contract Liabilities

141

4.11.1.3Costs of Obtaining a Contract

142

4.11.2Long-Term Revenue Contracts

142

4.11.3Business Combinations Before the Adoption of ASC 606

143

4.12Debt

143

4.12.1Reporting Consideration Related to Debt and Other Liabilities of the Acquiree Settled

at or in Close Proximity to the Acquisition Date

143

4.12.2Prepayment Penalty

145

4.12.3Changes in an Acquirer's Debt as a Result of a Business Combination

146

4.12.4Accounting for Debt Between the Acquirer and the Acquiree in a Business Combination 146

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Deloitte | A Roadmap to Accounting for Business Combinations (2020)

4.13Guarantees

146

4.14Liabilities for Exit or Restructuring Activities

147

4.15Instruments Indexed to or Settled in Shares and Classified as Liabilities

147

4.16Conforming Accounting Policies

147

4.17Subsequent Measurement of Assets Acquired and Liabilities Assumed

149

Chapter 5 -- Measurement of Goodwill or Gain From a Bargain Purchase, and

Consideration Transferred in a Business Combination

150

5.1Measuring Goodwill

150

5.2Measuring a Bargain Purchase Gain

152

5.2.1Recognition of a Provisional Bargain Purchase Gain During the Measurement Period

154

5.2.2Accounting for Income Taxes in a Business Combination That Resulted in a Bargain Purchase 155

5.3Measuring the Consideration Transferred

155

5.3.1Consideration Held in Escrow Pending Resolution of Representation and Warranty Provisions 156

5.3.2Working Capital Adjustments

157

5.3.3Ticking Fees

157

5.3.4Hedging the Commitment to Enter Into a Business Combination

158

5.4Acquisition-Related Costs

158

5.4.1Acquirer's Acquisition-Related Costs

159

5.4.1.1Reimbursing the Acquiree for Paying the Acquirer's Acquisition-Related Costs

161

5.4.2Acquiree's Acquisition-Related Costs

161

5.4.3Success Fees

161

5.5Acquirer's Equity Securities Issued as Consideration

162

5.5.1Issuance of Subsidiary Shares as Consideration

162

5.6Replacement of Share-Based Payment Awards

162

5.7Contingent Consideration

162

5.7.1Initial Measurement of Contingent Consideration

163

5.7.2Initial Classification of Contingent Consideration

164

5.7.2.1Unit of Account for Contingent Consideration Arrangements

165

5.7.2.2Distinguishing Liabilities From Equity Under ASC 480-10

166

5.7.2.3Definition of a Derivative in ASC 815-10-15

168

5.7.2.4Indexed to the Acquirer's Own Shares Under ASC 815-40-15

169

5.7.2.5Determining Whether Contingent Consideration Is Classified as Equity

Under ASC 815-40-25

172

5.7.3Subsequent Accounting for Contingent Consideration

174

5.7.4Effect of Contingently Issuable Equity on EPS Calculations

175

5.7.5Acquiree Contingent Consideration Arrangements Assumed by the Acquirer

176

5.7.5.1Acquiree Was the Acquirer in a Previous Business Combination

176

5.7.5.2Acquiree Was the Seller in a Previous Business Combination

177

5.8Noncash Assets Transferred as Consideration

177

5.8.1Noncash Assets That Are Used as Consideration and That Remain Within the Combined Entity 178

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