The Financial Accounting Standards Board (“FASB”) released the Accounting Standards Codification Topic 805 (“ASC-805”) in July 2009. ASC-805, as amended, is the authoritative source for GAAP concerning business combinations.
A business combination is the transfer of ownership rights of a business to another entity in exchange for consideration. Consideration is the sum of the assets transferred by the acquirer plus the liabilities of the acquiree assumed by the acquirer plus equity issued by the acquirer. Regardless of when the consideration and the interest in the business are transferred, the acquisition date is the date that the acquirer obtains control of the business.
Proper calculation of the consideration and identification of the assets purchased and liabilities assumed are the first steps in determining fair value of intangibles. Part of the consideration may be contingent on future events. Contingent consideration is reported on the acquirer’s balance sheet at fair value. If the contingent consideration may be owed to the acquiree, it is included in determining goodwill. If consideration may be returned to the acquirer, it will be recorded as an asset.
All identifiable assets and liabilities acquired are recorded at fair value. ASC 820, Fair Value Measurement, defines fair value as “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
Identifiable assets include identifiable intangibles. The intangibles in question vary depending on the transaction. The intangible asset must have either contractual or legal rights or is separable (can be transferred as a separate asset or in conjunction with related assets and liabilities). Examples include, but are not limited to, trademarks, patents, customer lists and licenses.
Goodwill equals consideration minus the fair value of tangible assets minus the fair value of identifiable intangible assets. When the value of the transferred consideration is less than this net value, the acquiring company realizes a bargain purchase. It reports the gain in the year of acquisition.
Identifiable intangible assets are typically amortized over their respective useful life. Goodwill is not amortized but is tested annually for impairment.