1. Did I Really Acquire a Business?
ACQUISITION ACCOUNTING 101

2. Direct:
DID I REALLY ACQUIRE A BUSINESS?

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

4. 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?

5. Accounting Guidance ASC 805, Business Combinations
ASU 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?

6. 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?

7. DID I REALLY ACQUIRE A BUSINESS?

8. 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?

9. 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?

10. 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?

11. DID I REALLY ACQUIRE A BUSINESS?

12. Framework: Does the transaction met the definition of a business?
Excerpt from ASC A 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?

13. 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?

14. 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?