Did you know that a majority of mergers and acquisitions occur in the technology industry?
Some of the largest business combinations formed within the tech and communication sector in the last decade alone. This includes massive names like Verizon Communications, Time Warner, and Comcast.
These mergers and acquisitions are often strategic tools used to grow. However, it’s important to pay close attention to how this impacts your business accounting. ASC 805 business combinations outline the regulatory framework that all businesses should adhere to.
Want to learn more about ASC 805? Read this helpful guide for more information on how ASC 805 impacts business combinations.
What Are Business Combinations?
A business combination is when one company or business acquires another company. This can be through a stock purchase, a formal acquisition, or a strategic merger. When a business combination occurs, one company takes full control over the other company’s operations, assets, and liabilities.
Business combinations can take on various forms. The most common is known as a merger where two businesses become one. However, outright acquisitions are also popular. This is when one business is completely dissolved, with all assets being transferred to the purchasing company.
What Is ASC 805?
ASC 805 is part of the Accounting Standards Codification. Topic 805 refers to a set of accounting rules that are generally accepted for business combinations under US Generally Accepted Accounting Principles (GAAP).
ASC 805 provides clear guidance on how to recognize and evaluate the fair value of assets that are being acquired. This is important since business combinations will now need to include new assets in their asset register. When adding these new assets, it’s important to be accurate with the valuations that you record.
Under ASC 805, companies need to record assets according to their fair value at the date of acquisition. If the date of acquisition is on the 1st of May, all valuations should be done according to that date.
This includes all kinds of assets, both tangible and intangible. ASC 805 also sets out clear guidance for recording goodwill so that everything is standardized and compliant. If assets are purchased over market price, the difference should be regarded as goodwill.
When one company buys another, it’s often major news. This is because financial disclosures are generally expected. ASC 805 outlines what’s required to be disclosed.
In most cases, these disclosures include certain financial information, financial statements, purchase price allocation, and assumptions made when calculating fair value. This is to make sure that everything is in line with the latest business regulations.
What Are the Entities That Must Comply With ASC 805?
ASC 805 clearly lays out the procedure for business combinations. However, it’s important to know which companies need to comply with this regulation. Here’s a quick guide on the companies that need to comply.
- Public companies
- Private companies
- Non-profit companies
- Governmental entities
As you can see, this is an incredibly wide scope and includes a majority of all businesses in the United States.
How Do You Allocate the Purchase Price of a Business Combination to the Acquired Assets and Liabilities?
Allocating a purchase price is not as complicated as you may think. In most cases, the fair value of all assets is calculated. This figure is then used to determine the value of all acquired assets and liabilities.
How Do You Determine the Fair Value of Assets and Liabilities Acquired in a Business Combination?
Companies can determine the fair value of business assets by conducting an inventory and appraisal. This includes counting everything and determining the value of everything that’s been counted.
In this way, an accurate market price for a company can be determined.
What’s a Fixed Asset Inventory?
A fixed asset inventory is simply a detailed record of all assets that the business owns. This includes all kinds of assets, both tangible and intangible.
What’s a Fixed Asset Appraisal?
A fixed asset appraisal is a process of determining an asset’s market value. There are a few techniques that you can use to do this. The most popular option is to compare the asset with comparable sales.
Asset inventories and appraisals can get complicated at times. However, there are a few reliable outside firms that can help streamline the process.
What’s the Difference Between Goodwill and Other Intangible Assets?
Goodwill is a unique asset that the business holds. This intangible asset is different from other intangible assets for a number of reasons. Intangible assets can refer to a wide range of assets that a business can hold.
This includes everything from patents to trademarks, copyrights, software, and customer relationships. Yes, even the relationships and brand that your business has can be noted as intangible assets. This is why so many businesses acquire other companies for the brand name alone.
Goodwill differs from these assets as it represents the difference between the price paid for an asset and the market value of that asset. In this way, goodwill represents the brand, relationships, and reputation of a business that was used to justify the higher purchase price.
In this way, goodwill represents that added value the assets hold because they’re from a particular company.
What Are the Disclosures Required Under ASC 805?
There are a few disclosures that are required under ASC 805. These disclosures are incredibly important to make sure that your business is always compliant. Here’s a quick look at them.
- Description of the transaction
- Basis of accounting for the business combination
- Fair value of assets being purchased
- Goodwill recognized by the business combination
- Non-controlling interests
- Acquisition costs of the transaction
- Pro forma financial information
- Contingent considerations
How Do You Account for the Income Tax Effects of a Business Combination?
When one company buys another, there can be income tax effects to keep an eye on. It’s important to understand the tax consequences and the impacts they can have on your financial statements.
There are a few steps that you can take to account for the income tax effects of a business combination. Here’s a quick look at these steps.
- Identify tax basis differences
- Determine the deferred tax liability or asset
- Allocate the deferred tax liability or asset
- Recognize tax contingencies
- Measure the current tax expense or benefit
- Measure the deferred tax expense or benefit
- Make all necessary disclosures
What Is the Accounting Treatment of Asset Retirement Obligations (AROs) Under ASC 805?
Under ASC 805, an acquiring company is required to recognize and measure all retiring assets. These are known as AROs. This is a legal obligation to account for the retirement of long-term assets.
It’s important for all businesses to identify the AROs. Once you have determined the AROs, you can go ahead and determine the costs associated with retiring the asset. This also includes calculating the fair value of the asset at the date of purchasing the company.
Once this is complete, you can proceed to document the liability in your balance sheet. This is important to keep note of since it’s a regulatory obligation. In this way, it’s vital that you keep track of asset retirements going forward.
What’s an Asset Retirement Obligation?
An asset retirement obligation is a legal obligation for a company to retire a long-term asset. This is mainly due to the fact that the asset is no longer useful to the business. This is common for assets that come with a limited lifespan, such as oil wells and power plants.
This would require the business to remove the asset and restore the site underneath it. Since there are costs involved with retiring the asset, it’s important to make sure everything is compliant.
The ARO should represent the cost of retiring the asset. This is an estimated cost that should include the dismantling and removal of the asset. This cost also includes the cost of returning the site back to normal.
This enables the site to be used for other purposes later.
Accounting for AROs
When a company retires an asset, it’s required to list the ARO as a liability on the balance sheet. All expenses are to be recorded over the asset’s useful life. If your business still owes money on the asset, you will need to make sure that you have all financial documents in order.
This should include documentation showing that you have enough funds when all obligations are due.
ASC 805 Business Combinations With CPCON
Business combinations can get tricky when you need to appraise and evaluate a wide range of assets. This puts more regulatory pressure on your business accounting practices. However, ASC 805 business combinations outline a clear path for tracking your business finances.
Our team of experts has extensive experience in working with business combinations and can guide you through the accounting process. This can help you maximize value for your organization while remaining compliant with the latest regulations.
Our approach includes optimizing your current system or evolving your organization to adopt modern alternatives.
Contact us today to learn more.