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Business combinations and noncontrolling interestsApplication of the U.S. GAAP and IFRS Standards2014

Global edition

This publication has been prepared for general informational purposes, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this publication was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible for any loss sustained by any person or entity that relies on the information contained in this publication. The content of this publication is based on information available as of April 30, 2014. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance.

Portions of various FASB documents included in this work are copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and are reproduced with permission. The IASB material included in this work is Copyright © of the IFRS Foundation ®. All rights reserved. Reproduced by PricewaterhouseCoopers LLP with the permission of the IFRS Foundation ®. No permission granted to third parties to reproduce or distribute. The IASB, IFRS Foundation, their authors and their publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise.

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PwC guide library Other titles in the PwC accounting and financial reporting guide series:

□ Bankruptcies and liquidations (2014)

□ Derivative instruments and hedging activities (2013)

□ Fair value measurements, global edition (2013)

□ Financial statement presentation (planned issuance 2014)

□ Financing transactions: debt, equity and the instruments in between (planned update 2014)

□ Income taxes (2013)

□ Revenue from contracts with customers, global edition (2014)

□ Stock-based compensation (2013)

□ Transfers and servicing of financial assets (2013)

□ Variable interest entities (2013)

□ Utilities and power companies (2013)

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Acknowledgments The Business Combinations and Noncontrolling Interests, global edition guide represents the efforts and ideas of many individuals within PwC. The following PwC people contributed to the contents or served as technical reviewers of the 2014 edition: Project leaders Larry Dodyk Mary Dolson Ralph Weinberger Erin Bennett Christopher Pisciotta Other contributors John Althoff James Anderson Elly Barrineau Richard Billovits Matthew Brenner Roberta Chmielnik Maria Constantinou Sara DeSmith Christopher Filiaggi Yun Han Bradley Jansen Doyt Jones Gina Klein Lucy Lillycrop Eric Lussier Christopher May Lauren Murphy Nicole Nahlous Matthew Naro Matt Pinson Ruth Preedy Ravi Rao Rana Razza Mary Saslow Steven Schaeffer Cody Smith John Stieg Wei Xu Special thanks Special thanks to all the other resources within PwC who contributed to the overall quality of this guide, including the final editing and production of the document.

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Preface PwC is pleased to offer this global accounting and financial reporting guide for Business combinations and noncontrolling interests. This guide explains the fundamental principles of accounting for business combinations and noncontrolling interests under both U.S. generally accepted accounting principles and International Financial Reporting Standards. This guide also includes our perspectives on the application of those principles, as well as our insights on the challenges of accounting for intangible assets and goodwill in the postcombination period. Each chapter discusses the relevant accounting literature and includes specific questions and examples to illustrate application.

Locating guidance on particular topics

Guidance on particular topics can be located as follows:

□ Table of contents—The table of contents provides a detailed listing of the various sections in each chapter. The titles of each section are intentionally descriptive to enable users to easily find a particular topic.

□ Table of questions—The table of questions includes a listing of questions and PwC responses in numerical order, by chapter.

□ Table of examples—The table of examples includes a listing of examples in numerical order, by chapter.

The guide also includes a detailed index of key topics.

References to U.S. GAAP and International Financial Reporting Standards

Definitions, full paragraphs, and excerpts from the Financial Accounting Standards Board’s Accounting Standards Codification and standards issued by the International Accounting Standards Board are clearly designated, either within quotes in the regular text or enclosed within a shaded box. The remaining text is PwC’s original content.

References to specific paragraphs within the codification in U.S. GAAP and a standard in IFRS appear in brackets. References in brackets detail the codification section or particular standard and paragraph within that standard that is being referenced. For example, a reference to paragraph 2 of IFRS 3 is displayed as [IFRS 3.2].

Wording differences between U.S. GAAP and IFRS standards

When information in the text of each chapter appears in [ ], the bracketed text identifies wording in IFRS that is different from the wording in the U.S. GAAP codification.

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General references to specific standards

Throughout this guide, the phrase “the Standards” is used to refer to ASC 805 and IFRS 3. The phrase “the NCI Standards” is used to refer to ASC 810-10 and IFRS 10. The phrase “the Fair Value Standards” is used to refer to ASC 820 and IFRS 13.

References to other chapters and sections in this guide

Where relevant, the discussion includes general and specific references to other chapters of the guide that provide additional information. References to another chapter or particular section within a chapter are indicated by the abbreviation “BCG” followed by the specific section number (e.g., BCG 2.2.2 refers to section 2.2.2 in chapter 2 of this guide).

References to other PwC guidance

This guide focuses on the specific accounting and financial reporting for business combinations and noncontrolling interests. It supplements information provided by the authoritative accounting literature and other PwC guidance. This guide provides general and specific references to chapters in other PwC guides to assist users in finding other relevant information. References to other guides are indicated by the applicable guide abbreviation followed by the specific section number. The other PwC guides referred to in this guide, including their abbreviations are:

□ Derivative instruments and hedging activities (DH)

□ Fair value measurements, global edition (FV)

□ Financial statement presentation (FSP)

□ Financing transactions: debt, equity and the instruments in between (FG)

□ Income taxes (TX)

□ Variable interest entities (VE)

In addition, PwC’s Accounting and reporting manual (the ARM) provides information about various accounting matters in U.S. GAAP. All references to the other guides and ARM are to the latest editions noted in the PwC Guide Library.

Copies of the other PwC guides may be obtained through CFOdirect, PwC’s comprehensive online resource for financial executives (www.cfodirect.com), a subscription to Comperio, PwC’s online accounting and financial reporting reference tools, or by contacting a PwC representative.

Guidance date

As the accounting guidance changes or is clarified, so will the content in this guide. This guide considers existing guidance as of April 30, 2014. Future editions will be released to keep pace with significant developments. In addition, this guide

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supersedes all previously issued PwC guidance, including the 2013 edition of PwC’s A Global Guide to Accounting for Business Combinations and Noncontrolling Interests.

Certain events such as the issuance of a new pronouncement by the FASB, a consensus (and ensuing endorsement by the FASB) of the Emerging Issues Task Force, a new standard by the IASB, a new interpretation by the IFRS IC, or new SEC rules or guidance, may necessitate an update or supplement to the guide. Updates, or supplements that may be in the form of other PwC communications, can be found on CFOdirect (www.cfodirect.com) or PwC’s online accounting and financial reporting reference tools.

Other information

The appendices to this guide include guidance on professional literature, a listing of technical references and abbreviations, definitions of key terms, and a summary of significant changes from the previous edition.

* * * * *

This guide has been prepared to support you as you consider the accounting for transactions and address the accounting, financial reporting, and related regulatory matters relevant to business combinations and noncontrolling interests. It should be used in combination with a thorough analysis of the relevant facts and circumstances, review of the authoritative accounting literature, and appropriate professional and technical advice. We hope you find the information and insights in this guide useful. We will continue to share with you additional perspectives and interpretations as they develop.

Paul Kepple U.S. Chief Accountant

2014

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Table of contentsChapter 1: Scope

1.1 Chapter overview .................................................................... 1-2

1.2 Defi nition of a business ........................................................... 1-3

1.2.1 Development stage enterprises ............................................... 1-5

1.2.2 The presence of goodwill ......................................................... 1-6

1.2.3 Distinguishing a business from an asset or group of assets ................................................................................... 1-6

1.2.4 Identifying market participants when determining whether an acquired group is a business ................................. 1-7

1.2.5 Distinguishing a business from an asset or group of assets ..... 1-8

1.3 Identifying a business combination ........................................1-13

1.3.1 Stapling transactions and dual-listed companies ....................1-14

1.3.2 Merger of equals, mutual enterprises, and “roll-up” or “put-together” transactions ....................................................1-15

1.3.3 Exchanges of assets between companies ................................1-15

1.3.4 Multiple transactions that result in the acquisition of a business ...........................................................................1-16

1.3.5 Transactions excluded from the scope of ASC 805 and IFRS 3 ....................................................................................1-17

1.4 Identifying a joint venture [joint arrangement] .....................1-17

1.5 Common control business combinations ............................... 1-18

1.6 U.S. GAAP and IFRS differences: defi nition of control ...........1-19

1.6.1 U.S. GAAP ..............................................................................1-19

1.6.2 IFRS ...................................................................................... 1-20

1.6.3 New investment entity standard—IFRS ..................................1-21

1.6.4 New investment companies standard—U.S. GAAP ................. 1-22

Chapter 2: Acquisition method

2.1 Chapter overview ....................................................................2-2

2.2 The acquisition method ...........................................................2-4

2.3 Identifying the acquirer...........................................................2-4

2.3.1 New entity formed to effect a business combination ................2-7

2.3.2 Other considerations in identifying the acquirer .....................2-8

2.4 Determining the acquisition date .......................................... 2-10

2.4.1 Determining the acquisition date for a business combination achieved without the transfer of consideration ........................................................................ 2-10

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2.5 Recognising and measuring the identifi able assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree...........................................................2-11

2.5.1 Assets that the acquirer does not intend to use ...................... 2-12

2.5.1.1 Defensive intangible assets ........................................................................2-13

2.5.2 Asset valuation allowances .................................................... 2-13

2.5.3 Inventory .............................................................................. 2-13

2.5.4 Contracts ............................................................................... 2-14

2.5.4.1 Loss contracts ............................................................................................2-14

2.5.5 Intangible assets ................................................................... 2-14

2.5.6 Reacquired rights .................................................................. 2-15

2.5.6.1 Determining the value and useful life of reacquired rights ......................2-16

2.5.7 Property, plant, and equipment............................................. 2-17

2.5.7.1 Government grants ....................................................................................2-17

2.5.7.2 Consideration of decommissioning and site restoration costs .................2-18

2.5.8 Income taxes ......................................................................... 2-18

2.5.9 Recognition of assets held-for-sale ........................................ 2-19

2.5.10 Employee benefi t plans ......................................................... 2-19

2.5.11 Payables and debt .................................................................. 2-21

2.5.12 Guarantees ............................................................................2-22

2.5.13 Contingencies ........................................................................2-22

2.5.13.1 Initial recognition and measurement—U.S. GAAP .................................. 2-24

2.5.13.2 Subsequent measurement—U.S. GAAP ................................................... 2-25

2.5.13.3 Contingent liabilities—IFRS ..................................................................... 2-27

2.5.14 Indemnifi cation assets .......................................................... 2-27

2.5.15 Recognition of liabilities related to restructurings or exit activities .....................................................................2-29

2.5.16 Deferred or unearned revenue ..............................................2-30

2.5.17 Deferred charges arising from leases .................................... 2-31

2.5.18 Classifying or designating identifi able assets and liabilities ........................................................................2-32

2.5.18.1 Financial instruments—classifi cation or designation of fi nancial instruments and hedging relationships ................................................... 2-33

2.5.19 Long term construction contracts .........................................2-34

2.5.19.1 Percentage of completion method ............................................................ 2-34

2.5.19.2 Completed contract method—U.S. GAAP only ........................................ 2-34

2.6 Recognising and measuring goodwill or a gain from a bargain purchase ................................................................2-34

2.6.1 Goodwill ................................................................................2-35

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2.6.2 Bargain purchase ..................................................................2-35

2.6.3 Measuring and recognising consideration transferred ..........2-36

2.6.3.1 Share-based payment awards ....................................................................2-37

2.6.3.2 Consideration transferred includes other assets and liabilities of the acquirer ............................................................................2-37

2.6.4 Contingent consideration ...................................................... 2-37

2.6.4.1 Contingent consideration—U.S. GAAP .................................................... 2-38

2.6.4.2 Contingent consideration—IFRS .............................................................. 2-44

2.6.4.3 Classifi cation of contingent consideration arrangements—U.S. GAAP and IFRS examples ................................................................ 2-46

2.6.4.4 Contingent consideration arrangements requiring continued employment ...............................................................................................2-55

2.6.4.5 Existing contingent consideration arrangements of an acquiree—U.S. GAAP .................................................................................2-55

2.6.4.6 Existing contingent consideration arrangements of an acquiree—IFRS ..........................................................................................2-55

2.6.4.7 Effect of contingent equity issued in a business combination on earnings per share ............................................................................... 2-56

2.6.4.8 Contingent consideration—seller accounting ...........................................2-57

2.6.5 Noncontrolling interest .........................................................2-62

2.6.5.1 Redeemable noncontrolling interest—U.S. GAAP ................................... 2-63

2.6.6 Calls and puts related to the noncontrolling interest .............2-66

2.6.6.1 Calls and puts related to the noncontrolling interest—U.S. GAAP ......... 2-66

2.6.6.2 Calls and puts related to the noncontrolling interest—IFRS ................... 2-74

2.6.7 Treatment of a previously held equity interest in an acquiree ............................................................................2-76

2.6.8 Business combinations achieved without consideration transferred ............................................................................2-78

2.7 Assessing what is part of a business combination transaction ............................................................................2-78

2.7.1 Employee compensation arrangements ................................ 2-80

2.7.2 Reimbursement arrangements between the acquiree and the acquirer for transaction costs incurred .................... 2-81

2.7.3 Settlement of preexisting relationships between the acquirer and acquiree ........................................................... 2-81

2.7.3.1 Calculating the gain or loss on settlement of preexisting relationships ............................................................................................. 2-82

2.7.4 Settlement of debt .................................................................2-85

2.7.5 Acquisition-related costs .......................................................2-85

2.7.6 Financial instruments entered into by the acquirer in contemplation of a business combination .............................2-86

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2.8 Example of applying the acquisition method .........................2-87

2.9 Measurement period adjustments .........................................2-89

2.10 Reverse acquisitions..............................................................2-92

2.10.1 Reverse acquisition (merger) involving a nonoperating public shell and a private operating entity .............................2-93

2.10.2 Consideration transferred in a reverse acquisition ...............2-94

2.10.3 Presentation of consolidated fi nancial statements ................2-95

2.10.4 Noncontrolling interest in a reverse acquisition ....................2-99

2.10.5 Computation of earnings per share in a reverse acquisition ..........................................................................2-100

2.11 Applying the acquisition method for variable interest entities and special purpose ................................................ 2-102

2.12 Conforming accounting policies of the acquiree to those of the acquirer ..................................................................... 2-103

2.13 Continuing transition requirements .................................... 2-104

2.13.1 Income tax transition provisions ......................................... 2-104

2.13.1.1 Acquired tax benefi ts disclosure ..............................................................2-105

2.13.2 Exit activities—U.S. GAAP ................................................... 2-106

2.13.3 Tax benefi ts of equity-classifi ed awards that ordinarily results in a tax deduction—U.S. GAAP ................................. 2-106

2.13.4 Resolution of contingent consideration ............................... 2-107

2.13.5 Contingent consideration of an acquiree ............................. 2-107

Chapter 3: Employee compensation arrangements


3.2 Assessing what is part of the consideration transferred for the acquiree .......................................................................3-4

3.3 Contingent payments—determining whether the arrangement is compensation .................................................3-5

3.3.1 Golden parachute and stay bonus arrangements .....................3-8

3.4 Exchange of employee share-based payment awards ............. 3-10

3.4.1 Determining the fair value attributable to precombination and postcombination services ............................................... 3-13

3.4.1.1 Awards with graded-vesting features ........................................................3-16

3.4.2 Service required after the acquisition date is equal to or greater than the original service requirement ................... 3-19

3.4.3 Service required after the acquisition date is less than the original service requirement ...................................3-20

3.4.3.1 Acquiree awards with an automatic change in control provision ............3-21

3.4.3.2 Acquiree awards with a discretionary change in control provision ........ 3-22

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3.4.4 Excess fair value of the acquirer’s replacement award ..........3-22

3.4.5 Acquiree awards that continue after the business combination ..........................................................................3-23

3.4.6 Awards with performance or market conditions ...................3-23

3.4.7 Illustrative summary of attributing fair value to precombination and postcombination services .....................3-25

3.5 Cash settlement of employee share-based payment awards ..................................................................................3-28

3.5.1 Initiated by the acquirer ........................................................3-28

3.5.2 Initiated by the acquiree ........................................................3-29

3.6 Other arrangements ..............................................................3-30

3.6.1 “Last-man-standing” arrangements ......................................3-30

3.6.2 “Dual trigger” arrangements .................................................3-32

3.7 Postcombination accounting for share-based payment awards ....................................................................3-33

3.8 U.S. GAAP and IFRS differences—income tax effects of share-based payment awards ............................................3-35

3.8.1 Accounting for the income tax effects of replacement awards—U.S. GAAP ...............................................................3-35

3.8.1.1 Awards that ordinarily result in a tax deduction ..................................... 3-36

3.8.1.2 Awards that do not ordinarily result in a tax deduction .......................... 3-40

3.8.2 Accounting for the income tax effects of replacement awards—IFRS ........................................................................ 3-41

3.9 U.S. GAAP and IFRS difference—recognition of social charges ........................................................................3-43

Chapter 4: Intangible assets acquired in a business combination


4.2 Intangible assets and the identifi able criteria ..........................4-3

4.2.1 Contractual-legal criterion ......................................................4-4

4.2.2 Separability criterion ..............................................................4-5

4.2.3 Examples of applying the identifi able criteria .........................4-6

4.3 Types of identifi able intangible assets .....................................4-7

4.3.1 Marketing-related intangible assets ......................................4-10

4.3.1.1 Trademarks, trade names, and other types of marks ...............................4-10

4.3.1.2 Trade dress, newspaper mastheads, and internet domain names ...........4-10

4.3.1.3 Noncompetition agreements .....................................................................4-10

4.3.2 Customer-related intangible assets ........................................4-11

4.3.2.1 Customer contracts and related customer relationships ..........................4-12

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4.3.2.2 Noncontractual customer relationships ....................................................4-14

4.3.2.3 Customer lists ............................................................................................4-14

4.3.2.4 Customer base............................................................................................4-15

4.3.2.5 Order or production backlog .....................................................................4-15

4.3.3 Artistic-related intangible assets ........................................... 4-16

4.3.4 Contract-based intangible assets ........................................... 4-16

4.3.4.1 Contracts to service fi nancial assets ..........................................................4-17

4.3.4.2 Employment contracts ..............................................................................4-17

4.3.4.3 Use rights ...................................................................................................4-18

4.3.4.4 Insurance and reinsurance contract intangible assets .............................4-19

4.3.4.5 Favourable and unfavourable contracts ....................................................4-19

4.3.4.6 At-the-money contracts .............................................................................4-21

4.3.4.7 Lease agreements.......................................................................................4-21

4.3.5 Technology-based intangible assets .......................................4-28

4.3.5.1 Intangible assets used in research and development activities ............... 4-28

4.3.5.2 Patented technology, unpatented technology, and trade secrets ............ 4-29

4.3.5.3 Computer software, mask works, databases, and title plants ................. 4-29

4.4 Complementary intangible assets and grouping of other intangible assets ................................................................... 4-30

4.4.1 Assessment of other factors in determining grouping of complementary assets—U.S. GAAP .................................... 4-31

4.5 Intangible assets that the acquirer does not intend to use or intends to use differently than other market-participants ........................................................................... 4-31

4.6 Summary of intangible assets and typical useful life characteristics found in major industries ..............................4-33

Chapter 5: Income tax implications in business combinations


5.1.1 U.S. GAAP and IFRS differences ..............................................5-4

5.2 Determine the tax structure of the transaction and tax status of the entities involved in the business combination ............................................................................5-4

5.2.1 Determining whether the business combination is taxable or nontaxable ..............................................................5-4

5.2.2 Identifying the tax status of the entities involved .....................5-5

5.3 Determine fi nancial statement and tax bases of the net assets acquired ..................................................................5-5

5.3.1 Determining tax bases in a taxable transaction .......................5-6

5.3.2 Determining tax bases in a nontaxable transaction .................5-6

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5.4 Identify and measure temporary differences ...........................5-6

5.4.1 Basic methodology for recognition of deferred taxes on acquired temporary differences and tax benefi ts ................5-6

5.4.2 Expected manner of recovery or settlement ............................ 5-7

5.4.3 Deferred taxes related to outside basis differences .................5-8

5.4.4 Recording the tax effect of contingencies and contingent consideration in business combinations ................................5-11

5.4.4.1 Contingencies and contingent consideration—taxable transactions ................................................................................................5-14

5.4.4.2 Contingencies and contingent consideration—nontaxable transactions ................................................................................................5-18

5.4.5 Deferred taxes related to research and development activities ............................................................................... 5-21

5.4.6 Deferred taxes related to acquisition-related costs ................5-22

5.4.7 Identifying the applicable tax rate to calculate deferred tax assets and liabilities .........................................................5-23

5.5 Identify acquired tax benefi ts ................................................5-24

5.5.1 Realisation test for acquired tax benefi ts ...............................5-24

5.5.2 Evaluating future combined results subsequent to the business combination ............................................................5-26

5.5.3 Considering the acquirer’s taxable differences as a source of realisation .............................................................. 5-27

5.5.4 Limitation of tax benefi ts by law ............................................ 5-27

5.5.5 Changes to the acquired deferred tax assets after the business combination ......................................................5-28

5.5.6 Effects of post-acquisition elections ......................................5-30

5.5.7 Changes in the acquirer’s deferred tax balances related to acquisition accounting ...................................................... 5-31

5.5.8 Business combinations achieved in stages .............................5-33

5.6 Consider the treatment of tax uncertainties .......................... 5-37

5.6.1 Recording tax uncertainties .................................................. 5-37

5.6.1.1 Income tax indemnifi cations .................................................................... 5-38

5.6.2 Subsequent resolution of tax uncertainties in a business combination ..........................................................................5-40

5.7 Deferred taxes related to goodwill .........................................5-40

5.7.1 Excess of tax-deductible goodwill over book goodwill ........... 5-41

5.7.2 Recognition of a deferred tax asset for excess tax-deductible goodwill .........................................................5-42

5.7.3 Situations in which the iterative formula may not apply ........5-44

5.7.4 Excess of book goodwill over tax-deductible goodwill ...........5-45

5.7.5 Business combinations in multiple jurisdictions ...................5-45

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5.7.6 Recognition of deferred tax liabilities related to tax-deductible goodwill subsequent to the acquisition date .........5-46

5.7.7 Deferred tax liabilities related to tax-deductible goodwill and indefi nite-lived intangible assets—source of taxable income ..................................................................5-46

5.7.8 Disposal of goodwill .............................................................. 5-47

5.7.9 Bargain purchase ..................................................................5-49

5.8 Recording the tax effects of transactions with noncontrolling shareholders ................................................. 5-51

5.8.1 Direct tax impact of a transaction with noncontrolling shareholders ......................................................................... 5-52

5.8.2 Indirect tax impacts of a transaction with noncontrolling shareholders ......................................................................... 5-53

5.9 Other considerations ............................................................. 5-55

5.9.1 Asset acquisitions and nonmonetary exchanges ....................5-56

5.9.2 Exchanges of assets between companies—U.S. GAAP ............ 5-57

Chapter 6: Partial acquisitions, step acquisitions, and accounting for changes in the noncontrolling interest


6.2 Defi nition and classifi cation of the noncontrolling interest ....................................................................................6-3

6.2.1 Measurement of the noncontrolling interest—fair value method ....................................................................................6-4

6.2.2 Measurement of the noncontrolling interest—proportionate share method—IFRS .........................................6-5

6.3 Accounting for changes in ownership interest .........................6-6

6.4 Accounting for partial and step acquisitions .......................... 6-8

6.4.1 Fair value method .................................................................. 6-8

6.4.2 Remeasurement of previously held equity interest and recognition of gains and losses ................................................6-9

6.4.3 Examples of the fair value method ........................................6-10

6.4.4 Fair value considerations ...................................................... 6-14

6.4.5 Consideration of goodwill when noncontrolling interest exists—U.S. GAAP ..................................................... 6-14

6.4.6 Consideration of goodwill when noncontrolling interest exists—IFRS ............................................................. 6-15

6.4.7 Bargain purchase in a partial or step acquisition—U.S. GAAP companies and IFRS companies choosing the fair value method .................................................................. 6-15

6.4.8 Partial acquisition and step acquisition—proportionate share method—IFRS .............................................................. 6-17

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6.4.9 Bargain purchase in a partial or step acquisition—proportionate share method—IFRS ..................................... 6-20

6.5 Accounting for changes in ownership interest that do not result in loss of control ...............................................6-22

6.5.1 Parent company accounting for an equity-classifi ed freestanding written call option on subsidiary’s shares ......... 6-31

6.5.2 Parent company accounting for employee stock option issued by a subsidiary ............................................................6-34

6.5.3 Accounting for a transaction in which a noncontrolling interest in a wholly owned subsidiary is exchanged for a controlling interest in another entity ....................................6-34

6.5.4 Accumulated other comprehensive income considerations .......................................................................6-36

6.5.4.1 Accumulated other comprehensive income considerations when the parent disposes of a group of assets in a consolidated foreign entity ....................................................................... 6-37

6.5.5 Acquisition of a noncontrolling interest through a business combination ............................................................6-39

6.5.6 Acquisition of additional ownership interests in a variable interest entity—U.S. GAAP ................................... 6-40

6.6 Changes in interest resulting in a loss of control ................... 6-41

6.6.1 Loss of control—U.S. GAAP ...................................................6-42

6.6.2 Loss of control—IFRS ............................................................6-42

6.6.3 Accounting for changes in interest if control is lost ...............6-42

6.6.4 Retained noncontrolling investment .................................... 6-48

6.6.5 Nonreciprocal transfer to owners .........................................6-49

6.6.6 Multiple transactions or agreements that result in loss of control ...............................................................................6-49

6.6.6.1 Multiple transactions or agreements that result in gaining control ........ 6-50

6.7 Attribution of net income and comprehensive income to controlling and noncontrolling interests ...........................6-50

6.7.1 Attribution of losses to noncontrolling interests in excess of carrying amount of noncontrolling interests ..................... 6-51

6.7.2 Attribution of other items to noncontrolling interests in excess of carrying amount of noncontrolling interests ..........6-52

6.8 Recognition of gain or loss by investor in a joint venture—IFRS .......................................................................6-52

6.9 Accounting for transaction costs associated with sale or purchase of noncontrolling interest ......................................6-52

6.10 Earnings per share considerations ........................................6-53

6.11 Required disclosures and supplemental schedule .................6-54

6.12 Classifi cation of fi nancial instruments as noncontrolling interest ..................................................................................6-54

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Chapter 7: Valuation


7.2 Determining fair value ............................................................7-2

7.2.1 Use of market-participant assumptions ...................................7-3

7.2.1.1 Identifying market-participants ..................................................................7-4

7.2.1.2 Market-participant synergies ......................................................................7-5

7.2.1.3 Market-participant versus entity-specifi c assumptions .............................7-6

7.2.2 Determining the appropriate market ...................................... 7-7

7.2.3 Highest and best use ................................................................ 7-7

7.2.4 Application of valuation techniques ........................................7-9

7.2.4.1 Income approach .........................................................................................7-9

7.2.4.2 Market approach ........................................................................................7-10

7.2.4.3 Cost approach ............................................................................................7-10

7.3 Applicable accounting standards requiring fair value measures related to business combinations ...........................7-11

7.4 Valuation considerations in business combinations ...............7-11

7.5 Valuation of the business enterprise ..................................... 7-12

7.5.1 Use of the income approach in the business enterprise value (BEV) analysis .............................................................. 7-13

7.5.1.1 Evaluating prospective fi nancial information through the business enterprise value and related internal rate of return analyses ................... 7-13

7.5.1.2 Conditional versus expected cash fl ows .................................................... 7-15

7.5.1.3 Discount rates ............................................................................................7-16

7.5.1.4 Terminal value ...........................................................................................7-16

7.5.2 Use of the market approach in the business enterprise value analysis ........................................................................7-20

7.5.2.1 Guideline public company method ........................................................... 7-21

7.5.2.2 Guideline transaction method ................................................................... 7-21

7.5.2.3 Obtaining and reviewing guideline information ...................................... 7-22

7.5.3 Leading practices when calculating the business enterprise value .................................................................... 7-22

7.6 Valuation of intangible assets ................................................7-24

7.6.1 Income approach for intangible assets ..................................7-24

7.6.1.1 Multiperiod excess earnings method ........................................................7-25

7.6.1.2 Relief-from-royalty method...................................................................... 7-34

7.6.1.3 Greenfi eld method .................................................................................... 7-36

7.6.1.4 With and without method .........................................................................7-37

7.6.2 Market approach for intangible assets ..................................7-38

7.6.3 Cost approach for intangible assets .......................................7-38

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7.6.4 Assets not intended to be used or used in a way other than their highest and best use .............................................. 7-39

7.6.5 Reacquired rights ..................................................................7-42

7.6.6 Leading practices when measuring the fair value of intangible assets ....................................................................7-42

7.7 Valuation approaches for other assets and liabilities ............7-44

7.7.1 Measuring the fair value of working capital ...........................7-44

7.7.1.1 Inventories ................................................................................................ 7-44

7.7.1.2 Accounts receivable ...................................................................................7-45

7.7.1.3 Accounts payable .......................................................................................7-45

7.7.2 Measuring the fair value of tangible assets ............................7-46

7.7.3 Measuring the fair value of fi nancial assets and fi nancial liabilities ............................................................................... 7-47

7.7.3.1 Restricted securities ..................................................................................7-47

7.7.3.2 Blockage factors ........................................................................................ 7-48

7.7.3.3 Debt ........................................................................................................... 7-49

7.7.4 General principles for measuring the fair value of liabilities ...............................................................................7-49

7.7.4.1 A liability is not necessarily a negative asset ............................................ 7-49

7.7.4.2 Not all liabilities are the same .................................................................. 7-50

7.7.4.3 Not all cash fl ows and rates of return are the same ................................. 7-50

7.7.5 Contingent assets and liabilities ............................................ 7-52


7.7.7 Deferred revenue ..................................................................7-60

7.7.7.1 Unit of account considerations for deferred revenue .............................. 7-60

7.7.7.2 Fair value considerations when deferred revenue exists ..........................7-61

7.8 Measuring the fair value of the noncontrolling interest and previously held equity interest........................................7-62

7.8.1 Determining the impact of control on the noncontrolling interest .................................................................................. 7-62

7.8.2 Measuring the fair value of the noncontrolling interest ......... 7-63

7.8.2.1 Measuring the fair value of the noncontrolling interest—market approach ................................................................................................... 7-63

7.8.2.2 Measuring the fair value of the noncontrolling interest—income approach ....................................................................................................7-65

7.8.2.3 Measuring the fair value of the previously held equity interest ...............7-65

7.9 Valuation implications for impairment testing ...................... 7-65

7.9.1 Impairment tests—key considerations ..................................7-66

7.9.2 Fair value considerations for reporting unit or cash generating unit ......................................................................7-66

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7.9.2.1 Adjustments to observed market capitalisation .......................................7-67

7.9.2.2 Multiple reporting units or cash generating units ....................................7-67

7.9.2.3 Fair value measurements in inactive markets ......................................... 7-68

7.9.2.4 Nonoperating assets and liabilities .......................................................... 7-68

Chapter 8: Common control transactions


8.2 Common control transactions under U.S. GAAP .....................8-3

8.2.1 Assessing whether common control exists ..............................8-5

8.2.1.1 Common control and control groups ......................................................... 8-6

8.2.1.2 Entities consolidated under the variable interest approach (the variable interest entities subsections of ASC 810-10) ....................... 8-7

8.2.1.3 Entities with a high degree of common ownership .................................... 8-8

8.2.2 Nature of the transfer ............................................................8-10

8.2.2.1 Specialised accounting considerations ...................................................... 8-11

8.2.3 Accounting and reporting by the receiving entity .................. 8-13

8.2.3.1 Basis of transfer .........................................................................................8-13

8.2.3.2 Guidance for presenting a change in reporting entity ..............................8-15

8.2.3.3 Determining the reporting entity (predecessor) in certain common control transactions ....................................................................8-17

8.2.3.4 Noncontrolling interest in a common control transaction .......................8-17

8.2.3.5 Goodwill impairment and reporting unit assessment ..............................8-21

8.2.3.6 Deferred taxes ........................................................................................... 8-22

8.2.3.7 Last-In, First-Out (LIFO) inventories ...................................................... 8-23

8.2.4 Accounting and reporting by the contributing entity .............8-23

8.2.4.1 Accounting for the transfer ...................................................................... 8-23

8.2.4.2 Allocation of contributed entity goodwill ................................................. 8-25

8.2.4.3 Nonreciprocal transfers to owners ........................................................... 8-26

8.3 Common control transactions under IFRS ............................8-27

8.3.1 Assessing whether common control exists ........................... 8-28

8.3.1.1 Common control and control groups .......................................................8-30

8.3.1.2 Entities with a high degree of common ownership ...................................8-31

8.3.2 Transitory common control ..................................................8-32

8.3.3 Nature of the acquisition—group of assets or net assets versus business .....................................................................8-34

8.3.4 Business combinations versus reorganisations .....................8-34

8.3.5 Predecessor values method ...................................................8-35

8.3.5.1 Basis of transfer ........................................................................................ 8-35

8.3.5.2 Financial statement presentation ............................................................. 8-36

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8.3.6 Noncontrolling interest in a common control business combination ..........................................................................8-37

8.3.7 Accounting and reporting by the selling (contributing) entity .................................................................................... 8-40

Chapter 9: Asset acquisitions


9.2 Asset acquired in an exchange transaction ..............................9-2

9.2.1 Initial recognition ...................................................................9-2

9.2.2 Initial measurement ................................................................9-2

9.2.2.1 Nonmonetary transactions accounting—U.S. GAAP ................................. 9-3

9.2.2.2 Nonmonetary transactions accounting—IFRS .......................................... 9-4

9.2.3 Allocating cost (the fair value of consideration given) ............9-4

9.2.4 Accounting for an asset acquisition versus a business combination ............................................................................9-5

9.2.5 Accounting after acquisition .................................................9-10

9.2.6 Acquisition of intangible assets disclosures............................9-11

Chapter 10: Accounting for tangible and intangible assets postacquisition—U.S. GAAP

10.1 Chapter overview .................................................................. 10-2

10.2 Determining the useful life of an asset...................................10-4

10.2.1 Indefi nite-lived intangible assets ........................................... 10-5

10.2.2 Reclassifi cation of intangible assets between indefi nite-life and fi nite-life categories .................................................. 10-7

10.2.3 Changes in useful lives or salvage values ............................... 10-7

10.2.4 Renewable intangible assets .................................................. 10-7

10.2.5 Reacquired rights ..................................................................10-8

10.2.6 Intangible assets used in research and developmental activities ................................................................................10-8

10.2.6.1 Enabling technology ..................................................................................10-9

10.3 Attribution ............................................................................10-9

10.3.1 Commencement and cessation of depreciation or amortisation ....................................................................... 10-10

10.3.2 Depreciation of tangible assets ............................................ 10-10

10.3.3 Amortisation of intangible assets .........................................10-11

10.3.4 Customer-based intangible assets ....................................... 10-12

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10.4 Impairment of long-lived and indefi nite-lived intangible assets .................................................................................. 10-13

10.4.1 Impairment of long-lived assets to be held-and-used ............10-15

10.4.1.1 When to test long-lived assets for impairment .......................................10-18

10.4.1.2 Estimates of future cash fl ows used in the recoverability tests .............. 10-19

10.4.1.3 Measuring an impairment loss for assets held-and-used .......................10-25

10.4.1.4 Order of impairment testing for long-lived assets held-and-used ........ 10-29

10.4.1.5 Allocating a held-and-used impairment loss ......................................... 10-29

10.4.2 Impairment of long-lived assets to be disposed of by sale ................................................................................. 10-31

10.4.2.1 Order of impairment testing for long-lived assets held-for-sale ............10-35

10.4.2.2 Commitment to a plan of sale after the balance sheet date ................... 10-36

10.4.2.3 Changes to a plan of sale ........................................................................ 10-36

10.4.2.4 Changes in held-for-sale classifi cation after one year ........................... 10-36

10.4.3 Impairment of long-lived assets to be disposed of other than by sale ................................................................ 10-37

10.4.4 Impairment of intangible assets with indefi nite useful lives .......................................................................... 10-39

10.4.4.1 The indefi nite-lived intangible asset impairment test ........................... 10-40

10.4.4.2 The qualitative indefi nite-lived intangible asset impairment assessment .............................................................................................. 10-40

10.4.4.3 Selecting an indefi nite-lived intangible asset for the qualitative assessment .............................................................................................. 10-42

10.4.4.4 Considering the results of prior fair value measurements in the qualitative assessment ...................................................................... 10-44

10.4.4.5 Periodically refreshing an asset’s fair value ............................................10-45

10.4.4.6 Entity’s assertion in annual assessment .................................................10-45

10.4.4.7 The quantitative impairment test ............................................................10-45

10.4.5 Unit of accounting for indefi nite-lived intangible assets ...... 10-45

10.4.5.1 Unit of accounting for intangible assets used in research and development activities .............................................................................10-47

10.5 Assets that an acquirer does not intend to actively use, including defensive assets ................................................... 10-49

10.6 Financial statement presentation and disclosure guidance ..............................................................................10-50

Chapter 11: Accounting for goodwill postacquisition—U.S. GAAP

11.1 Chapter overview ...................................................................11-2

11.2 Identify reporting units ..........................................................11-4

11.2.1 Operating segments as the starting point for determining reporting units .......................................................................11-5

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11.2.2 Reporting unit may be an operating segment or one level below .............................................................................11-6

11.2.2.1 Discrete fi nancial information and business requirement for components ................................................................................................ 11-6

11.2.3 Components are combined if economically similar ................11-7

11.2.4 Aggregation of components across operating segments is not permitted ..................................................................... 11-8

11.2.5 Periodic reassessment of reporting units .............................. 11-8

11.2.6 Summary of impact of reporting levels on determining reporting units ...................................................................... 11-8

11.3 Assigning assets and liabilities to reporting units ................. 11-12

11.3.1 Assigning assets and liabilities relating to multiple reporting units ..................................................................... 11-13

11.3.2 Assigning corporate assets and liabilities ............................. 11-14

11.3.3 Interaction between assigning assets and liabilities to reporting units and segment reporting ................................. 11-15

11.3.4 “Full” allocation for entities with a single reporting unit ...... 11-15

11.3.5 Guidance for specifi c balance sheet components .................. 11-15

11.4 Assigning all recorded goodwill to one or more reporting units ..................................................................................... 11-19

11.4.1 Determination and recognition of goodwill in partial acquisitions .......................................................................... 11-21

11.4.2 Goodwill attributable to controlling and noncontrolling interests ...............................................................................11-22

11.4.3 Determination of fair value for the noncontrolling interest .................................................................................11-23

11.4.4 Reassignment of goodwill as an acquirer’s reporting structure changes .................................................................11-24

11.4.5 Translation of goodwill denominated in a foreign currency ...............................................................................11-26

11.4.6 Documentation to support goodwill assignment .................. 11-27

11.4.7 Other considerations ............................................................ 11-27

11.4.7.1 Subsequent resolution of certain matters arising from acquisitions recorded prior to the adoption of ASC 805 that may continue to impact goodwill ........................................................................................ 11-27

11.4.7.2 Litigation stemming from a business combination ................................ 11-29

11.5 Impairment model ...............................................................11-29

11.5.1 The goodwill impairment test .............................................. 11-30

11.5.1.1 The qualitative goodwill impairment assessment ...................................11-31

11.5.1.2 Selecting reporting units for the qualitative assessment ........................ 11-33

11.5.1.3 Considering the results of prior fair value measurements in the qualitative assessment ............................................................................. 11-34

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11.5.1.4 Periodically refreshing a reporting unit’s fair value ............................... 11-35

11.5.1.5 An entity’s assertion of its annual qualitative assessment ..................... 11-35

11.5.2 The two-step goodwill impairment test ................................ 11-37

11.5.3 Qualitative assessment for reporting units with zero or negative carrying amounts ...............................................11-38

11.5.4 Application of step two of the impairment test for goodwill ...............................................................................11-39

11.5.4.1 Step two may not always result in an impairment loss ...........................11-41

11.5.4.2 Consistency between the fair values used to test indefi nite-lived intangible assets for impairment and step two of the goodwill impairment test ........................................................................................11-41

11.5.4.3 Consistency of valuation methodologies between ASC 805 and step two of the goodwill impairment test ................................................ 11-42

11.5.4.4 Deferred income tax considerations when determining the fair value of a reporting unit and the implied fair value of goodwill of a reporting unit ........................................................................................ 11-42

11.5.5 Potential impact of unrecognised or appreciated asset values on step one test ......................................................... 11-48

11.5.6 When to test goodwill for impairment ..................................11-49

11.5.6.1 Triggering events for goodwill impairment testing ................................ 11-49

11.5.6.2 Annual goodwill impairment testing dates ............................................. 11-53

11.5.6.3 Impairment of goodwill shortly after acquisition ................................... 11-56

11.5.6.4 Estimate of an impairment loss if assessment is not completed before issuing fi nancial statements ......................................................... 11-56

11.5.7 Interaction with impairment testing for other assets ........... 11-57

11.5.8 Determining the fair value of reporting units to which goodwill has been assigned .................................................. 11-57

11.5.8.1 Considerations unique to determining the fair value of reporting units when using the income approach ................................................... 11-60

11.5.8.2 Considerations unique to determining the fair value of reporting units when using the market approach ................................................... 11-62

11.5.8.3 Use of quoted market price of a reporting unit on a single date ............ 11-64

11.5.8.4 Use of more than one valuation technique to estimate the fair value of a reporting unit .......................................................................... 11-65

11.5.8.5 Changing the valuation method used to estimate the fair value of a reporting unit ........................................................................................ 11-65

11.5.8.6 Reconciling the aggregate fair values of the reporting units to market capitalisation ............................................................................... 11-65

11.5.9 Special applications of the impairment test ......................... 11-68

11.5.9.1 Impairment testing when a noncontrolling interest exists .................... 11-68

11.5.9.2 Fair value of a noncontrolling interest may differ depending on whether a noncontrolling interest exists above the reporting unit or within the reporting unit ............................................................. 11-73

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11.5.9.3 Impairment testing when a noncontrolling interest exists and the reporting unit contains goodwill from multiple acquisitions .............................................................................................. 11-74

11.5.9.4 Impairment testing of goodwill for separate subsidiary fi nancial statements ................................................................................. 11-76

11.5.9.5 Impact of impairment at a subsidiary level on impairment testing at the parent level ........................................................................ 11-76

11.5.9.6 Equity method investment goodwill not subject to the ASC 350-20 impairment test ........................................................................................11-77

11.5.9.7 Allocation of impairment to goodwill components for tax purposes ............................................................................................. 11-78

11.5.9.8 Different aggregation of goodwill for ASC 740-10 and 350-20 .............. 11-82

11.6 Disposal considerations .......................................................11-82

11.6.1 Impairment testing in connection with the disposal of a business ........................................................................ 11-84

11.6.1.1 Expectation of a disposal ......................................................................... 11-84

11.6.1.2 Assets held-for-sale ................................................................................. 11-84

11.6.1.3 Disposal of the business .......................................................................... 11-84

11.6.2 Allocation of goodwill in a spin-off .......................................11-87

11.6.3 Allocation of goodwill for a nonmonetary exchange transaction .......................................................................... 11-88

11.7 Presentation and disclosures .............................................. 11-89

11.8 Private company accounting alternative .............................. 11-89

11.8.1 Amortization of goodwill ......................................................11-92

11.8.1.1 Amortization after initial adoption ......................................................... 11-93

11.8.2 Impairment model ...............................................................11-93

11.8.2.1 Level to test goodwill for impairment ..................................................... 11-93

11.8.2.2 Frequency of impairment testing ............................................................ 11-94

11.8.2.3 The goodwill impairment test ................................................................. 11-94

11.8.2.4 Measurement of an impairment loss ...................................................... 11-95

11.8.2.5 Allocation of an impairment loss ............................................................ 11-96

11.8.3 Disposal considerations .......................................................11-97

11.8.4 Presentation and disclosure ................................................ 11-98

Chapter 12: Postacquisition accounting issues—IFRS


12.2 Overview of impairment testing under IAS 36 ....................... 12-3

12.3 Accounting issues for the acquirer ........................................ 12-4

12.3.1 Indemnifi cation assets .......................................................... 12-4


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12.4 Intangible assets ................................................................... 12-6

12.4.1 Grouping intangible assets .................................................... 12-7

12.4.2 Intangible assets—useful lives ............................................... 12-7

12.4.2.1 Renewal periods.........................................................................................12-8

12.4.2.2 Reacquired rights .......................................................................................12-8

12.4.2.3 Indefi nite useful lives .................................................................................12-8

12.4.2.4 Acquired in-process research and development .......................................12-9

12.4.2.5 Intangible assets that the acquirer does not intend to use .......................12-9

12.4.3 Amortisation ......................................................................... 12-9

12.4.4 Specifi c issues in impairment testing of intangible assets .................................................................................. 12-10

12.5 Goodwill ............................................................................... 12-11

12.5.1 Goodwill and the valuation choice for noncontrolling interests ...............................................................................12-12

12.5.2 Allocating goodwill impairment losses to controlling and noncontrolling interests ................................................12-14

12.5.3 Disposals and group reorganisations with goodwill .............12-18

12.6 Impairment of assets ............................................................12-18

12.6.1 Scope of IAS 36 .....................................................................12-18

12.6.2 Indicators of impairment .....................................................12-19

12.6.3 Determination of cash-generating units .............................. 12-20

12.6.4 Grouping cash-generating units .......................................... 12-23

12.6.5 Allocating assets and liabilities to cash-generating units .................................................................................... 12-23

12.6.6 Determining recoverable amount—fair value less costs of disposal .................................................................. 12-24

12.6.7 Determining recoverable amount—value in use .................. 12-24

12.6.7.1 Cash fl ows for value in use ......................................................................12-24

12.6.7.2 Selection of a discount rate......................................................................12-26

12.6.8 Recognising an impairment loss .......................................... 12-26

12.6.9 Reversing an impairment loss ............................................. 12-27

Chapter 13: Other business combination considerations


13.2 Disclosure, reporting and pushdown accounting considerations for companies fi ling under United States Securities and Exchange Commission rules .......................... 13-2

13.2.1 Defi nition of a business ......................................................... 13-2

13.2.2 Disclosures required in interim fi nancial statements ............ 13-2

13.2.3 Measurement period adjustments ......................................... 13-3

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13.2.3.1 Impact of measurement period adjustments on previously issued annual fi nancial statements included or incorporated by reference in proxy statements, registration statements, and offering memoranda ...........................................................................13-4

13.2.4 Signifi cance test .................................................................... 13-5

13.2.5 SEC regulation S-X, article 11 pro forma disclosures ............. 13-6

13.2.6 SEC considerations regarding the accounting for certain assets acquired and liabilities assumed .................... 13-11

13.2.6.1 SEC considerations regarding the accounting for certain acquired assets with uncertain future cash fl ows ................................... 13-12

13.2.6.2 SEC considerations regarding the accounting for contingencies in acquisition accounting ......................................................................... 13-12

13.2.7 Rescissions of mergers and other acquisitions of assets .......13-13

13.2.8 Disclosures related to goodwill and acquired in-process research and development ..................................13-14

13.2.9 Reverse mergers—Securities Act and Exchange Act reporting .............................................................................. 13-17

13.2.10 Pushdown accounting ..........................................................13-18

13.2.10.1 SEC views on pushdown accounting ....................................................... 13-18

13.2.10.2 Pushdown accounting for non-SEC registrants—U.S. GAAP .................13-25

13.2.10.3 Financial statement presentation ............................................................13-27

13.2.10.4 Pushdown accounting related to parent company debt .........................13-29

13.2.11 Leveraged recapitalisation transactions .............................. 13-30

13.3 Internal control implications .............................................. 13-30

13.3.1 Controls over acquisition accounting and the consolidation process ...........................................................13-31

13.3.2 Review controls over business combinations ...................... 13-32

13.3.2.1 Use of specialists ......................................................................................13-39

13.3.2.2 Use of spreadsheets ................................................................................ 13-40

13.3.3 Other control related considerations................................... 13-40

13.3.3.1 Due diligence .......................................................................................... 13-40

13.3.3.2 Reporting on internal control over fi nancial reporting under section 404 of the Sarbanes-Oxley Act of 2002 ........................... 13-41

13.4 Insurance industry considerations ...................................... 13-42

13.4.1 Accounting for business combinations ................................ 13-43

13.4.2 Distinguishing between a business combination, a reinsurance transaction, and an asset acquisition ............ 13-44

13.4.3 Acquired insurance and reinsurance contracts are recorded at fair value .......................................................... 13-45

13.4.4 Insurance contract intangible assets and liabilities related to insurance contracts acquired in a business combination ........................................................................ 13-45

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13.4.4.1 Insurance contract intangible asset and liabilities related to acquired non-life short-duration and fi nancial guarantee insurance contracts under U.S. GAAP ....................................................13-46

13.4.4.2 Insurance contract intangible asset and liabilities related to acquired long-duration insurance contracts under U.S. GAAP ..............13-48

13.4.4.3 Insurance contract intangible asset and liabilities related to acquired insurance contracts under IFRS ...............................................13-50

13.4.4.4 Postcombination accounting for insurance contract intangible asset and liabilities related to insurance contracts acquired in a business combination ........................................13-50

13.4.5 Other intangible assets recognised in a business combination .........................................................................13-51

13.4.6 Contingent commissions and sellers’ claim liability guarantees........................................................................... 13-52

Appendices

Appendix A Professional literature ...................................................A-1

Appendix B Technical references and abbreviations ........................B-1

Appendix C Key terms ......................................................................C-1

Appendix D Summary of signifi cant changes ................................... D-1

PwC xxvii

Table of questionsChapter 1: Scope

Question 1-1: When a company temporarily obtains control of a business (e.g., a fi nancial institution taking temporary control in a bankruptcy proceeding or an entity acquired for resale), must business combination accounting be followed by the acquiring company? ............... 1-16

Chapter 2: Acquisition method

Question 2-1: Can modifi cations to defi ned benefi t pension plans be included as part of the acquisition accounting in a business combination if the modifi cations are written into the acquisition agreement as an obligation of the acquirer? ..................................................................................2-21

Question 2-2: How should unamortized deferred fi nancing costs of the acquiree be accounted for in a business combination? ...........................................................................2-21

Question 2-3: How should a buyer account for an indemnifi cation from the seller when the indemnifi ed item has not met the criteria to be recognised on the acquisition date? ........... 2-28

Question 2-4: Does an indemnifi cation arrangement need to be specifi ed in the acquisition agreement to achieve indemnifi cation accounting? .................................................. 2-28

Question 2-5: Should acquisition consideration held in escrow for the seller’s satisfaction of general representation and warranties be accounted for as an indemnifi cation asset? ....................................................................................... 2-28

Question 2-6: Should acquisition consideration held in escrow for the seller’s satisfaction of general representation and warranties be accounted for as contingent consideration? ......................................................................... 2-39

Question 2-7: Should consideration that will be transferred or received based on changes in working capital be considered contingent consideration? ................................... 2-39

Question 2-8: Are fees paid to an investment banker to handle the fi nancing of the business combination considered acquisition-related costs? ....................................................... 2-86

Question 2-9: Should transaction costs incurred by the acquirer be refl ected in the separate fi nancial statements of the acquiree in a business combination accounted for under ASC 805? ...................................................................... 2-86

Question 2-10: How should excess tax-deductible goodwill from acquisitions made prior to the effective date of ASC 805 be accounted for under U.S. GAAP? ......................................2-105

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Chapter 3: Employee compensation arrangements

Question 3-1: How should fair value be attributed to postcombination services for share options that are deep out-of-the-money at the acquisition date? .....................3-14

Question 3-2: How should the fair value of the acquirer’s unvested replacement awards included in the consideration transferred for the acquiree refl ect an estimate of forfeitures? ...............................................................................3-15

Question 3-3: How should the compensation cost recognised in the acquirer’s postcombination fi nancial statements be adjusted to refl ect estimated forfeitures of unvested awards? ....................................................................................3-15

Question 3-4: Under U.S. GAAP, how does an acquirer’s attribution policy impact the amount attributable to precombination services for awards with graded-vesting features? .................3-16

Question 3-5: How should the acquirer account for the exchange of an equity settled award with a performance (nonmarket) condition (as defi ned by ASC 718 and IFRS 2), assuming it is not probable both before and after the exchange that the condition will be achieved? ........ 3-24

Question 3-6: How should an acquirer account for the acceleration of unvested share-based payment awards that is triggered when the acquirer does not issue equivalent replacement awards as part of a business combination? ....... 3-34

Question 3-7: How should the acquirer account for a modifi cation to an arrangement with contingent payments in a business combination when the modifi cation occurs during the measurement period? ........................................... 3-34

Chapter 4: Intangible assets acquired in a business combination

Question 4-1: Should the acquirer recognise a customer relationship intangible asset when the acquirer is a customer of the acquiree? ..................................................................................4-14

Question 4-2: How should the acquirer account for the acquisition of an existing capital [fi nance] lease arrangement with the acquiree (e.g., acquirer leased assets under a capital [fi nance] lease from acquiree) in its acquisition accounting? ............................................................................. 4-28

Chapter 6: Partial acquisitions, step acquisitions, and accounting for changes in the noncontrolling interest

Question 6-1: When should a parent company, which is not in bankruptcy, deconsolidate a subsidiary that has fi led for bankruptcy? ................................................................6-41

Table of questions

PwC xxix

Question 6-2: Should a parent company, which is not in bankruptcy and has a negative investment in a subsidiary, recognise a gain upon the subsidiary’s fi ling for bankruptcy? ............................................................................ 6-47

Question 6-3: Is there a difference between (1) the gain recognised when an entity sells 100 percent of a consolidated subsidiary’s shares to an equity method investee and (2) the gain recognised when an entity sells shares of a consolidated subsidiary to an unrelated party but retains an equity interest in the former subsidiary? .............. 6-48

Chapter 7: Valuation

Question 7-1: When should an acquirer incorporate restrictions on sale when determining value? ................................................ 7-48

Question 7-2: How should a company measure the fair value of debt assumed in a business combination? ..................................... 7-49

Chapter 10: Accounting for tangible and intangible assets postacquisition—U.S. GAAP

Question 10-1: Do the useful lives of long-lived tangible or intangible assets need to be reassessed if no impairment indicators exist or if the asset (asset group) passes step one of the impairment test? .............................................10-5

Question 10-2: Must a company record an impairment charge when the fair value of property, plant, and equipment is less than its carrying amount? ............................................... 10-15

Question 10-3: How should shared assets be considered when performing step one of the ASC 360-10 impairment test? ........................................................................................ 10-17

Question 10-4: How should a company think about the interaction of the assessment of recoverability and useful life of a long-lived asset? ..................................................................... 10-17

Question 10-5: Should the undiscounted cash fl ows in step one of the ASC 360-10 impairment test include cash infl ows from any salvage or residual value? .............................................. 10-20

Question 10-6: How is residual value of a long-lived asset group determined in step one of the ASC 360-10 impairment test? ....................................................................................... 10-20

Question 10-7: How does determining the terminal value under the ASC 350 impairment test differ from determining the residual value under the ASC 360-10 impairment test? ....... 10-21

Question 10-8: How are cash fl ows from new customer relationships that are anticipated to arise after the test date considered when performing step one of the ASC 360-10 impairment test? .............................................................. 10-22

Table of questions

xxx PwC

Question 10-9: How is the undiscounted cash fl ow period for step one of the ASC 360-10 impairment test determined when the primary asset is a group of customer relationships recognised as a single customer relationship asset? ............ 10-22

Question 10-10: How would the undiscounted cash fl ows (including residual value) be computed for an asset group in which the primary asset is a group of customer relationships recognised as a single customer relationship asset? ................................................................ 10-22

Question 10-11: How should the recoverable amount of a long-lived asset group be determined when the primary assets are leasehold improvements? ................................................10-23

Question 10-12: How should an increase in expected utilisation of an asset group be considered when testing the group for recoverability under ASC 360-10? .........................................10-23

Question 10-13: How should an entity’s consideration of a potential bankruptcy fi ling impact its projected cash fl ows in an ASC 360-10 impairment test? ......................................10-25

Question 10-14: Does the existence of a going concern opinion limit the cash fl ow projections used in the impairment test to one year? .....................................................................10-25

Question 10-15: When a company has failed step one of the ASC 360-10 impairment test, may an estimate of the impairment loss be recorded in the current reporting period subject to fi nalisation of the step two test in the next reporting period by analogy to ASC 350-20-35-18 through 35-19? ...................................................................... 10-28

Question 10-16: How does the application of ASC 820-10 impact step two of the long-lived asset impairment test? ................ 10-28

Question 10-17: In step two of the ASC 360-10 impairment test, should the fair value of a long-lived asset group consider unrecognised long-lived assets? .......................

Business combinations and noncontrolling interests, 2014 ... · Business combinations and...

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