Accounting for business combinations is a complex area of U.S. generally accepted accounting principles (U.S. GAAP). Acquirers' accountants and auditors often have questions about business combination accounting. Questions have also been raised because of recent standards issued the Financial Accounting Standards Board (FASB) addressing the accounting for goodwill, the definition of a business, pushdown accounting, and a private company accounting alternative that impacts which intangible assets are recognized as part of a business combination. Below are some of the questions that most frequently arise when a business combination occurs.

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A publication of the Professional Standards Group
September 2017
Common Questions When a Business is Acquired
Accounting for business combinations is a complex
area of U.S. generally accepted accounting principles
(U.S. GAAP). Acquirers’ accountants and auditors
often have questions about business combination
accounting. Questions have also been raised because
of recent standards issued the Financial Accounting
Standards Board (FASB) addressing the accounting
for goodwill, the definition of a business, pushdown
accounting, and a private company accounting
alternative that impacts which intangible assets are
recognized as part of a business combination. Below
are some of the questions that most frequently arise
when a business combination occurs.
Did I Really Acquire a Business?
In order for there to be a business combination,
there must first be an acquisition of a set of assets
that meets the definition of a business. Earlier this
year the FASB released Accounting Standards
Update 2017-01, Business Combinations (Topic 805)
Clarifying the Definition of a Business (ASU 2017-
01), which clarifies what constitutes a business. ASU
2017-01 establishes a screen, clarifies the definition
of an output and requires the acquisition to have
inputs and processes that are significant in order to
be considered a business. Prior to the adoption ASU
2017-01, entities will continue to follow U.S. GAAP
and interpret he definition of a business broadly. For
instance, the acquisition of a single hotel or rental
property would generally qualify as a business, even
if the acquirer and investors think of the acquisition as
the purchase of an asset.
Prior to and after the adoption of the new standard,
whether a business is acquired does not depend on the
terminology used to legally document the acquisition
(i.e., it is not relevant if the contract is titled “Asset
Purchase”) or whether a legal entity was acquired.
Once adopted, ASU 2017-01 will require additional
effort in evaluating whether a business was acquired.
If it is determined that a business is not acquired,
the assets acquired are accounted for as an asset
acquisition. A critical difference between an asset
acquisition and a business combination is that in an
asset acquisition, the assets acquired are measured
at cost basis instead of fair value. Cost basis includes
the transaction costs. Another characteristic of an
asset acquisition is that goodwill or bargain gains are
not recognized. Rather, the cost is allocated amongst
the assets acquired based on relative fair value.
How Much Was Paid for the Acquisition?
Consideration transferred is the amount paid to the
selling (former) owners of the business acquired. The
term transaction price, which is more commonly used
in valuation techniques, is often used interchangeably
with the term “consideration transferred.” From an
accounting perspective, consideration transferred
includes only amounts paid or owed to the seller,
such as assets transferred, liabilities incurred
(including contingent consideration) to the former
owners, and equity interests issued by the acquirer.
The consideration transferred does not include
liabilities that are assumed from the target nor the
noncontrolling interests in the target retained by
former owners. The consideration transferred is used
in determining goodwill or gain on the acquisition and
can include cash, other assets, a business, contingent
consideration, common preferred equity interests,
options, warrants, and members’ interest in mutual
entities. All of the above examples are measured at

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fair value. The consideration transferred is also the
amount of that is used to prepare disclosures in the
financial statements.
In some cases a valuation expert may determine
the amount paid for the acquisition will include long-
term debt assumed or other liabilities that are not
part of consideration transferred from an accounting
perspective. Care is often necessary when utilizing
a valuation report to prepare the measurement of
goodwill and disclosures to ensure the amount of
consideration transferred is correctly disclosed under
U.S. GAAP.
Is There More Than One Transaction?
Sometimes part of a transaction is excluded from
the business combination and accounted for
separately. Examples can include employment
agreements, settlement of pre-existing relationships,
and reimbursement to the acquiree for the acquirer’s
acquisition costs. These types of transactions are
evaluated to determine if they are part of the business
combination or a separate transaction. The evaluation
involves considering whether these transactions are
primarily entered into for the benefit of the acquiree
(part of the business combination) or by the acquirer,
or primarily for the benefit of the acquirer or combined
entity (separate transaction).
What assets and liabilities need to be
recognized?
Assets and liabilities are measured and recognized
as part of a business combination when they are
identifiable. Identifiable assets have probable future
economic benefits obtained or controlled as part of
the transaction. Liabilities are identifiable if there are
probable future sacrifices of economic benefits arising
from present obligations to transfer assets or provide
services to other entities in the future as part of the
transaction. A typical challenge is the determination
of which intangible assets should be recognized in
the financial statements as amounts separate from
goodwill.
Intangible assets should be separated from goodwill
when they arise from contractual or legal rights, or
they can be separated from the business (sold or
transferred independently in exchange for value).
Some common examples of contractual intangible
assets include franchise rights, customer and supplier
contracts, patents, leases and customer relationships,
while those that are separable may include customer
lists and unpatented technology.
Customer relationships are considered to meet the
contractualorlegalrightscharacteristicifthetargethas
a practice of entering into contracts with its customers.
When this practice exists, whether it is through service
contracts, sales/purchase orders, supply agreements
or similar arrangements, the customer relationship is
recognized and measured as a separate intangible
asset. Existing in-place contracts, including backlog,
may also exist and be measured as a separate asset.
If there is not a past practice of establishing customer
arrangements through contracts, then the customer
relationship would be subsumed into goodwill.
A customer list is a different type of intangible assets
from a customer relationship. A customer list may
meet the criterion of being separable from the acquired
business in order to be recognized separately from
goodwill. This occurs when information, such as
names, addresses, phone numbers of customers
exist, the information is not restricted from being sold
to third parties, and third parties would exchange
value to purchase the list on its own. The value of
a customer list can vary greatly depending on the
industry, and in some cases may not be material to
the financial statements.
A common question of private companies is whether
to elect the private company accounting alternative
for the recognition of intangible assets. Under the
alternative they do not recognize customer-related

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intangible assets and noncompetition agreements that
are not capable of being sold or licensed separately
from other business assets. The value of any non-
recognized assets will be subsumed into goodwill.
Customer relationships and in-place contracts often
qualify for the accounting alternative and would not
need to be valued; however separable customer lists
and contracts that are unfavorable (liabilities) do not
qualify for the accounting alternative. For further
discussion on the accounting alternative, see our
Substance of the Standard.
How Are the Assets and Liabilities
Measured?
Almost all identifiable assets and liabilities acquired
as part of the business combination are measured at
fair value at the date of the acquisition. Fair value is
the price that would be received to sell the asset or
transfer the liability in an orderly transaction between
market participants. The determination of fair value
is done in compliance with accounting standard
contained in ASC Topic 820, Fair Value. Although
the use of a valuation expert is not required by U.S.
GAAP, most companies choose to use a valuation
expert to assist in measuring long-term or hard-
to-value assets and liabilities (such as intangibles)
because they require sophisticated valuation models
and the careful selection of inputs into those models.
Three approaches exist to value assets and liabilities:
market, income, and cost. Considering each approach
and valuation technique in order to select the best
one for each type of asset can be a complex, time
consuming, and a difficult task.
In contrast, most companies find that they are able
to measure working capital assets and liabilities
internally due to their short duration and simpler
valuation techniques. Keep in mind that whatever
valuation technique is used, the determination of fair
value results in a new basis for the asset and there
should be no allowance or contra accounts, such as
an allowance for bad debts for accounts receivable
or accumulated depreciation for property, plant, and
equipment, reported in the financial statements as of
the date of acquisition.
Some assets and liabilities are not measured at fair
value. Depending on the nature of the asset, they
may be measured as computed in other accounting
guidance, use specified valuation techniques, or use
techniques that are similar to fair value but exclude
components of the contracts. Assets and liabilities not
measured at fair value include:
• Income taxes
• Employee benefit obligations
• Share-based payments
• Pre-acquisition contingencies
• Indemnification
• Reacquired rights
• Assets held for sale
• Goodwill
What Is Pushdown Accounting?
It may be desirable to use pushdown accounting.
With pushdown accounting, the acquiree applies the
step-up in basis that would have resulted from the
acquisition method being applied to the standalone
statements of the acquiree. The advantages of
pushdown accounting include a more accurate
reflection of assets and liabilities in the stand alone
financial statements of the acquired business and
easier accounting for consolidating entries. The
election applies to each change-in-control event,
such as cash transfers, contracts and changes in the
primary beneficiary of variable interest entities.
The election also requires that goodwill be pushed
down and bargain purchase gains not be recognized
by the acquiree. The acquiree may also recognize

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please
contact your MHM auditor to further discuss the impact on your audit or audit report.
acquisition-related liabilities of the acquirer if the
liabilities are also the acquiree’s obligation.
Once the pushdown accounting policy is elected, it
cannot be reversed. If it is not elected when a change
in control event has occurred, it can be applied in a
later period as a change in accounting principles.
Should Goodwill be Amortized?
U.S. GAAP includes two different models for
accounting for goodwill. The standard model is to test
goodwill for impairment at least annually. The second
model, an accounting alternative available only to
private companies, requires goodwill to be amortized
over a period not exceeding 10 years and only requires
impairment tests when a triggering event occurs. If a
private company elects the accounting alternative for
the recognition of intangible assets, it is required to
amortize goodwill.
Considerations for companies that have the
opportunity to choose their accounting model for
goodwill include the expected annual cost of testing
for impairment and the preferences of their financial
statement users.
Importantly, the standard impairment model is due for
a significant change. An accounting standard update
issued this year simplified the required annual goodwill
impairment test. Once adopted the revision eliminates
the computation of implied fair value (formerly “Step
2” of the impairment process). The revised model will
continue to include an optional qualitative assessment
(formerly “step 0”) and a quantitative test (formerly
“Step 1”). The elimination of Step 2 will result in a
decrease in costs related to the testing of impairment
for those entities that previously failed the Step 1 test.
The new simplified test for goodwill is effective for
SEC filers for fiscal years beginning after Dec. 15,
2019. Other public business entities adopt the new
impairment test after Dec. 15, 2020, and private
entities must adopt it by Dec. 15, 2021. Early adoption
is permitted after Jan. 1, 2017. Preferability analysis is
required to switch from the Private Company Council
accounting alternative to amortize goodwill.
For More Information
If you have specific comments, questions or
concerns about business combinations, please
contact Mark Winiarski or Brad Hale of MHM’s
Professional Standards Group. Mark can be reached
at 816.945.5614 or mwiniarski@cbiz.com. Brad can
be reached at 727.572.1400 or bhale@cbiz.com.