Did I Really Acquire a Business?

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Presentation transcript:

Did I Really Acquire a Business? ACQUISITION ACCOUNTING 101

Email: ktomosky@cbiz.com Direct: 610-862-2364 DID I REALLY ACQUIRE A BUSINESS?

Business Combination vs Asset Acquisition DID I REALLY ACQUIRE A BUSINESS?

Key Differences Items Business Combination Asset Acquisition Transaction costs Expense as incurred Capitalize as component of cost of assets acquired Measurement Period Up to 1 year No measurement period Measurement of Assets and Liabilities Recognize Fair Value Allocate consideration transferred (purchase price plus transactional costs) pro-rata based on fair value of assets Goodwill Only arises in business combination Not recognized Consideration transferred in less than Fair Value of Net Assets Recognized as gain in earnings on the acquisition date No gain is recognized in earnings. Excess is allocated to identifiable acquired assets other than non-qualifying assets. DID I REALLY ACQUIRE A BUSINESS?

Accounting Guidance ASC 805, Business Combinations ASU 2017-01 Business Combinations (Topic 805) Clarifying the Definition of a Business Effective for private companies fiscal years beginning after December 15, 2018 (2019) DID I REALLY ACQUIRE A BUSINESS?

ASU 2017-01 New framework Establishes sequential approach Screen Narrowed definition of output Inputs and processes applied to those inputs that do provide goods and services to customers or investment income DID I REALLY ACQUIRE A BUSINESS?

DID I REALLY ACQUIRE A BUSINESS?

Screen Test Initial Step Determine fair value of gross asset acquired Gross assets are NOT reduced by debt and other assumed liabilities Identify single assets or group of similar assets Substantially all fair value of gross asset acquired is concentrated in a single asset or group of similar identifiable assets, set (assets and activities acquired) is NOT a business DID I REALLY ACQUIRE A BUSINESS?

Screen Example: Acquisition of Real Estate Company A is a real estate company that owns and manages a group of rental properties Company purchases a set of 10 residential homes (land, building, leaseholds) and in-place leases associated with properties Residential homes are located in same city but are dissimilar in terms of size and layout No employees or other assets are acquired Has Company A purchased a business or group of assets? DID I REALLY ACQUIRE A BUSINESS?

Screen Example: Acquisition of Real Estate Screen Met, Transaction considered Asset Acquisition Land, Building, Leasehold improvements and in place leases are considered similar group for purposes of screen test Nature of assets and risks associated with properties are similar 100% of fair value of gross assets acquired is concentrated in a group of similar identifiable assets DID I REALLY ACQUIRE A BUSINESS?

DID I REALLY ACQUIRE A BUSINESS?

Framework: Does the transaction met the definition of a business? Excerpt from ASC 805-10-55-3A A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. In order to be a business, a set needs to have an input and a substantive process that together significantly contribute to the ability to create outputs DID I REALLY ACQUIRE A BUSINESS?

Framework Example: Acquisition of Office Buildings Company A manages portfolio of office buildings, 50 buildings across 10 states and each is different in design Company A Executives are responsible for key strategic decisions Company B acquires Company A Company A Executives become Senior Executives of Company B, no other employees join Company B Has Company A purchased a business or group of assets? DID I REALLY ACQUIRE A BUSINESS?

Framework Example: Acquisition of Office Buildings Step 1: Apply Screen Office Buildings are considered dissimilar as risks are different (geography, design) and may produce different cash flows Screen NOT met Step 2: Assess Framework Inputs Acquired: Land, Buildings, Leasehold Improvements Processes Acquired: Expertise of Company A Executives Outputs: Rental Revenues Acquired processes applied to Inputs produces an output Company B has acquired a business DID I REALLY ACQUIRE A BUSINESS?