Accounting for Business Combinations Under ASC 805

‍Introduction

Struggling to make sense of accounting after a merger or acquisition? You’re not the only one in this battle. In the second half of 2024, the announced global M&A deal value reached aroundd $1 trillion, the highest since early 2022, with nearly 9,765 transactions in Q4, a volume not seen since Q1 2023. Business combinations often confuse how to record assets, liabilities, goodwill, and non-controlling interests.

Accounting for Business Combinations under ASC 805 provides a framework for recording mergers and acquisitions using the acquisition method. You’ll need to identify the acquirer, measure consideration transferred, and assign fair values to all acquired assets and liabilities, including intangible ones you may not have tracked.

If you manage finance during or after a deal, this blog uncovers how ASC 805 works and helps you stay in control of what’s booked, when, and how. This process doesn’t stop at closing; it also covers earn-outs, contingent liabilities, and measurement period adjustments.

What is ASC 805?

ASC 805 governs transactions in which one entity obtains control over another business. It requires acquirers to apply the acquisition method in every such transaction. This standard defines a “business combination” as any event where control transfers, whether via equity, asset purchase, contractual arrangements, or other means.

Under ASC 805, U.S. companies must apply specific rules for recognizing and measuring assets, liabilities, and any non-controlling interests in the acquired company. ASC 805 outlines how U.S. businesses should handle the purchase method of accounting, including price allocation and the treatment of goodwill.

• The procedure begins with identifying the acquirer and the exact acquisition date. Next, the acquirer must evaluate whether the acquired assets and activities form a business rather than a mere collection of assets. Practitioners first apply a fair-value screen; if the screen fails, they assess whether the set contains inputs and a process capable of producing outputs.
• Once the item qualifies, the acquirer recognizes identifiable assets, assumed liabilities, any noncontrolling interest, and contingent consideration, all at fair value per ASC 820. The acquirer then records either goodwill (if the consideration paid exceeds net fair value) or a bargain gain (if the reverse occurs).

ASC 805 also mandates that acquirers isolate any linked transactions, such as contingent payments or service agreements, and account for them separately if needed.

Not every acquisition falls under ASC 805. Here’s a look at the types of transactions that are scoped out.

Which Transactions are Excluded from the Scope of ASC 805?

ASC 805 defines a business combination as any transaction in which an acquirer gains control of one or more businesses. However, FASB explicitly excludes certain transactions, treating them under other GAAP, under ASC 805‑10‑15‑4 and related guidance. These exclusions include:

Once a deal falls within ASC 805, a few core components shape how it’s recorded. This section covers the most important ones.

What are the Key Aspects of Business Combinations?

ASC 805 prescribes the acquisition method for business combinations. This process involves several stages: identifying the acquirer, determining the acquisition date, and measuring the consideration transferred, identifiable assets, liabilities, and non-controlling interest at fair value. Additionally, it requires recognizing goodwill or a bargain purchase gain when the transaction doesn't meet the definition of a business. When assets dominate in fair value, it falls under ASC 805‑50 for asset acquisitions.

For U.S. companies involved in business combinations, understanding the core principles of ASC 805 is necessary. This standard governs how U.S. companies account for the purchase of another business, ensuring that all financial aspects are accurately reported.

1. Framework for M&A Transactions

A framework for M&A transactions provides a structured approach to evaluating, executing, and recording mergers or acquisitions. It covers deal strategy, due diligence, purchase price allocation, and post-close accounting compliance.

• Determine if the Acquisition Qualifies as a Business

Apply the screen test: if nearly all fair value resides in a single asset or group of similar assets, classify it as an asset acquisition; otherwise, verify the presence of inputs and a substantive process that generates outputs.

• Identify the Acquiring Entity and Acquisition Date

Identify the legal acquirer, but apply accounting acquirer criteria when facts suggest a reverse acquisition. The acquisition date typically aligns with the moment control passes, even if that differs from legal closing.

• Measure and Allocate Consideration

Measure all forms of consideration, including cash, equity instruments, contingent payments, and assumed liabilities, at fair value on the acquisition date.

• Allocate the Purchase Price

Apply ASC 820 to identify and measure tangible and intangible assets and assumed liabilities, including contingent liabilities. Allocate the residual amount to goodwill or record a bargain purchase gain.

• Account for Separate Transactions 

Evaluate transactions with former owners or affiliates to determine if they form part of the business combination or require separate accounting.

2. Key Considerations for Business Combinations

Classify earnouts as liabilities, assets, or equity and remeasure after the acquisition date, recognizing changes in net income.

• Acquirer/Share‑Based Payments

The acquirer assumes value share-based payments under ASC 718 standards, often using lattice models for in‑life awards.

• Interplay with Other GAAP

Recognize that certain acquired contract assets/liabilities stay on ASC 606 terms, while leases must meet ASC 842 fair‑value recognition during allocation.

3. Criteria for Asset Purchase Accounting

When a transaction fails the business definition screen, apply ASC 805‑50:

• Allocate cost across acquired assets and liabilities based on relative fair value.
• Do not recognize goodwill.
• Record contingent liabilities and earnouts based on fair value if they existed before the transaction.

ASC 805 guides practitioners through decisive steps, from business determination to allocation and separate transaction identification.

The first step in applying ASC 805 correctly is determining whether a transaction qualifies as a business combination.

How to Identify Business Combination Transactions?

U.S. businesses must assess the acquired company’s assets, liabilities, and goodwill, often requiring detailed valuations and accounting expertise. ASC 805 excludes several types of transactions from its coverage, recognizing that not all transfers of control fit the business combination model:

1. Joint Ventures: Entity formations that grant shared control don’t qualify as business combinations.
2. Acquisition of Assets or Activity Groups: If the acquired items don’t meet the definition of a business, ASC 805 does not apply; instead, companies follow other U.S. GAAP guidance, such as ASC 805‑50 for asset acquisitions.
3. Transactions Under Common Control: Transfers of businesses between entities under shared control fall outside ASC 805 and are instead covered by ASC 805‑50.
4. Not‑For‑Profit (NFP) Acquisitions or Mergers: Acquisitions by NFPs before December 15, 2009, and NFP-to-NFP mergers remain out of scope, but if a for‑profit acquires an NFP, ASC 805 applies.
5. Collateralized Financing with VIEs: Consolidation of a variable interest entity used solely as collateral doesn’t qualify as a business combination

Also Read: Transfer Pricing: Transactional Net Margin Method

Entities must first identify whether a transaction grants control over a business as defined in ASC 805. The standard does not apply if the transfer involves an asset collection, joint venture, common-control event, specified not-for-profit activity, or collateralized financing entity. In these cases, different accounting guidelines may be followed. Instead, they follow specialized accounting rules tailored to those transactions. 

Distinguishing between a business and an asset acquisition matters; here’s how to make that call using ASC 805 guidelines.

How to Determine if an Acquisition is a Business Combination or an Asset Acquisition?

Under ASC 805, you determine whether an acquisition qualifies as a business combination or an asset acquisition by using a two-step test:

Companies must apply ASC 805’s two-step test before choosing accounting treatment. If fair value concentrates on a single asset or similar group, treat it as an asset acquisition. If not, and if the set includes an input plus a substantive process that produces outputs, account for a business combination.

Once a transaction qualifies, the accounting begins. Here's how to apply the acquisition method under ASC 805.

How Can You Account for Business Combinations?

Accounting for business combinations becomes important for accurate financial reporting when U.S. businesses engage in mergers or acquisitions. ASC 805 requires the acquirer to apply the acquisition method when it gains control over another business. Practitioners follow these steps:

1. Identify the Acquirer and Acquisition Date: Determine which party controls the other and set the control date, often the legal closing day.
2. Measure Consideration Transferred: Include all forms of payment, cash, equity, debt, contingent consideration, measured at fair value on the acquisition date.‍
3. Recognize Identifiable Assets, Liabilities, Non-Controlling Interest: Assign a fair value to all acquired assets and assumed liabilities and measure any non-controlling interest (NCI).‍
4. Record Goodwill or Bargain Purchase Gain: Compute goodwill as the excess of consideration plus NCI and prior holdings over net assets acquired; if negative, recognize a gain.‍
5. Handle Measurement Period Adjustments: Allow up to one year to refine valuations. Post-acquisition adjustments reflect new information regarding facts and estimates at the acquisition date.‍
6. Account for Step Acquisitions: When control results from multiple phases, remeasure prior holdings to fair value on the acquisition date and recognize any gain or loss.‍
7. Separate Linked but Independent Transactions: Identify agreements tied to the acquisition, like settlement deals or service contracts, and account for them apart from the combination.

For multi-stage acquisitions, the acquirer also remeasures earlier investments. Transactions that accompany the acquisition but serve separate goals receive distinct accounting. This method gives stakeholders a fair view of what was acquired and what it cost.

By deliberately applying each step, from valuation to separation of related contracts, organizations present transparent and compliant financial results under U.S. GAAP.

VJM Global simplifies ASC 805 compliance, supporting cross-border mergers and acquisitions from identifying the acquirer to recording goodwill. With decades of experience, we handle purchase price allocation, fair value assessments, and more, letting you focus on integration and growth.

How to Recognize Liabilities, Assets, Goodwill, and Consideration in Acquisitions?

ASC 805 directs companies to record identifiable assets, liabilities, NCI, and consideration transferred at fair value on the acquisition date. Under ASC 805‑20‑25‑1, acquirers must record the acquisition date:

• Identifiable assets acquired and liabilities assumed, measured at their acquisition‑date fair value.

Also Read: FLA Return- Foreign Liabilities and Assets Annual Return

• The acquiree's non-controlling interests (NCI) are also measured at fair value.

Next, place the consideration transferred, including cash, equity, and contingent payments, at fair value as of the acquisition date.

Then, calculate the difference:

• If the combination consideration plus fair value of NCI (and any previously held interest) exceeds net identifiable assets, aim for goodwill; the remaining excess.
• If that aggregate amount falls short, record a bargain purchase gain, which is recognized immediately.

For step acquisitions (gaining control in stages), calculate the fair value of the acquiree as a whole on the control date, then remeasure existing holdings and reflect gains or losses.

ASC 805 also permits a measurement-period adjustment (up to 1 year) to refine provisional fair values; subsequent changes adjust goodwill or gain. The residual, goodwill, or gain results from the difference between the consideration value and net assets acquired.

Some estimates require time to finalize. The next section explains the window provided by ASC 805 for updating your figures.

What is a Measurement Period?

ASC 805‑10‑25‑15 grants acquirers up to one year from the acquisition date to finalize accounting for a business combination. During this measurement period, companies may record provisional amounts for acquired assets, assumed liabilities, transferred consideration, non-controlling interests, and preexisting equity stakes. This can only be when information is incomplete. These provisional amounts can be adjusted as more information becomes available.

When the acquirer obtains accurate data, it becomes available or proves unattainable. The measurement period ends for that item or overall, whichever comes first. ASC 805-10-55-16 requires that the acquirer adjust provisional figures when new information surfaces as if the original measurements dated to the acquisition date. Goodwill or gain and related depreciation, amortization, or earnings figures may shift accordingly.

This period exists solely under ASC 805. Asset acquisitions don’t allow provisional values; they demand complete fair-value measurements before the first post-acquisition report. Once they access reliable inputs, they adjust those items retrospectively in the first reporting period after the new data emerges. 

What is a Purchase Price Allocation?

A purchase price allocation (PPA) under ASC 805 divides the total price paid in a business combination among acquired assets and assumed liabilities, using acquisition-date fair values under ASC 820.

U.S. businesses must allocate the purchase price to the identifiable assets acquired, liabilities assumed, and any non-controlling interests. Additionally, ASC 805 dictates the handling of goodwill, which may arise from acquiring another company.

• PPA begins by identifying all tangible assets (inventory, property, equipment), intangible assets (customer contracts, trademarks, IPR&D), and assumed liabilities (debt, contingent obligations). The acquirer appraises items requiring specialized valuation, such as working capital adjustments, earn-out liabilities, and in-place leases. An assembled workforce lacks separate recognition and becomes part of goodwill.
• Allocators apply appropriate valuation techniques. Most intangible assets follow an income-based discounted cash-flow model, while tangible assets often require third-party appraisals. The result divides the purchase price across recognized assets and liabilities; any remaining excess creates goodwill. The acquirer reports a bargain purchase gain if the net fair value exceeds the price paid.

PPA also affects future reporting. Finite-lived assets get classified and amortized based on their estimated useful lives; goodwill remains unchecked for impairment under ASC 350.

Not all costs tied to a deal can be capitalized. Here's how ASC 805 treats legal, advisory, and other acquisition expenses.

What are the Acquisition-Related Costs in a Business Combination?

ASC 805 treats acquisition-related costs separately from business combination considerations. These costs include fees such as legal, advisory, accounting, valuation, internal acquisition department expenses, and any finder’s fees. Both direct and indirect costs fall outside the calculation of purchase consideration.

Whether it’s price allocation, goodwill valuation, or preparing financial statements, working with professionals familiar with U.S. regulations and international standards can prevent costly mistakes and ensure compliance.

Under ASC 805, companies must distinguish acquisition-related costs from acquisition considerations. They must expense most costs as they arise and separately account for issuance costs per applicable GAAP. Acquirers should avoid mistakenly capitalizing legal or advisory fees within purchase price allocation.

While the standard offers structure, implementing it can be difficult. Here are some common hurdles companies face.

What are the Complexities and Challenges of ASC 805?

U.S. businesses may encounter challenges when applying ASC 805, especially when determining the fair value of assets and liabilities during a business combination. 

Accurate price allocation is critical to compliance, as any miscalculations can result in improper financial statements. Accounting under ASC 805 presents several judgment-intensive areas that practitioners often underemphasize:

1. Determining a business vs. asset acquisition demands a granular evaluation of inputs, processes, and outputs; each judgment carries significant implications.
2. Valuing intangible assets such as trademarks, customer lists, or in‑process R&D requires a specialized appraisal. Acquirers must identify and fair‑value every asset, even those absent from the acquiree’s books.
3. Estimating contingent consideration means assessing probabilities, timing, and classifying payments (e.g., accounting vs. compensation). Firms must then remeasure these liabilities each reporting period.
4. Measuring noncontrolling interests (NCI) at fair value introduces complexity surrounding minority discounts or control premiums. Specialists often need to reconcile differing valuation approaches.
5. Remeasuring previous equity stakes in step acquisitions may lead to unexpected gains or losses, a nuance that surprises many preparers.
6. Applying the measurement period (up to 12 months) adds tracking burdens: any change to provisional amounts alters goodwill and impacts earnings retrospectively.
7. Managing disclosure and audit scrutiny also presents practical challenges. Auditors often expect specialist valuation input, mainly when internal teams apply subjective judgments.

Firms must consider transaction structures, engage specialists for contingent and intangible valuation, track remeasurement during measurement, and address NCI valuation nuances. 

Every deal comes with its own set of nuances. The following section covers factors often shaping how a business combination is accounted for.

How to Address Key Considerations Affecting Transactions?

Providers of top ASC 805 guidance highlight several transaction-specific factors that shape accounting outcomes and often receive less attention in standard discussions:

1. Identification of Preexisting or Acquisition-Linked Arrangements

An acquirer must review agreements, like leases, ongoing supply deals, or litigation, that existed before or were negotiated during the transaction. ASC 805 sets out criteria to determine if these items count toward purchase consideration or need separate accounting.

2. Step Acquisition Nuances

When gaining control in phases, the acquirer must remeasure previously held equity stakes to fair value upon control acquisition, recognizing any related gains or losses.

3. Contingent Consideration Structure

Those “earn‑out” provisions require judgment to classify and measure. ASC 805 requires initial fair-value estimation and subsequent adjustment through earnings if they are recognized as liabilities.

4. Valuation of Intangibles and Liabilities

Firms often underestimate the effort required to identify and appraise intangible assets like IPR&D, customer relationships, and assumed liabilities like environmental obligations.

5. Non-Controlling Interest Measurement

ASC 805 allows fair-value or proportionate method; the choice affects goodwill. Judgment about discounts or control premiums comes into play.

6. Pushdown Accounting Elections

Deciding whether to apply pushdown accounting can influence the acquiree's standalone presentation and disclosures, though timing and conditions often confuse.

7. Private-Company Council (PCC) Alternatives

ASC 805 allows private companies to elect alternatives: amortize goodwill over 10 years, and simplify intangible-asset recognition under ASU 2014‑18.

Internal teams should involve valuation specialists early for earn‑outs and NCI measurement. Clear documentation and audit readiness build transparency and safeguard against misapplication of ASC 805 in complex transactions.

Beyond the basics, ASC 805 includes provisions that apply in special situations. Here’s how to approach those less common cases.

Guidance on Additional Aspects

U.S. businesses that lack in-house resources for handling ASC 805 often turn to firms with expertise in U.S. accounting standards to ensure proper compliance. With the right accounting support, businesses can confidently manage the complexities of business combinations. Practitioners must address several additional factors that often create unexpected adjustments in a business combination:

1. Income Tax Considerations

Acquirers first identify whether the deal qualifies as taxable or non-taxable. In taxable deals, the acquirer steps up the tax basis in assets; deferred tax liabilities may arise if the book and tax bases differ. In non-taxable deals, historical tax attributes (like NOLs or tax credits) transfer with a carryover basis, and the acquirer must evaluate whether a valuation allowance applies.

2. Transaction Structure and Costs

ASC 805 excludes acquisition-related costs (e.g., legal, valuation, advisory) from the purchase price. However, debt or equity issuance costs follow U.S. GAAP requirements under ASC 320 or ASC 825.

3. Contract Assets and Liabilities

Following the 2021 update (ASU 2021‑08), acquirers recognize and measure contract assets or liabilities under ASC 606 instead of fair value when the acquiree used those for revenue reporting.

4. Contingent Consideration and Earn‑Outs

Acquirers assign acquisition-date fair value to contingent payments. If classified as liabilities, they remeasure those each reporting period, with changes hitting the income statement.

5. Valuation of Intangibles and Goodwill Validation

Firms often use a multi-period excess earnings model (MEEM) to assess goodwill and confirm that the residual covers workforce-related intangibles.

ASC 805 requires detailed application of tax rules, careful treatment of transaction and issuance costs, accurate contract-accounting treatment, disciplined contingent consideration evaluation, and validation of goodwill. Company teams must collaborate with tax advisors, valuation specialists, and auditors early.

Under PCC guidance, private companies have some relief options. The next section explains those options and how they work.

Diving Deeper into PCC Elections

PCC elections enable private entities to simplify ASC 805 accounting by omitting certain intangibles and simplifying goodwill amortization and impairment. Private companies can opt into two PCC accounting alternatives under ASC 805:

1. Intangible Asset Alternative (ASU 2014-18)

Companies using this option omit separately recognizing customer-related intangible assets and noncompetition agreements unless they qualify for separate sales or licensing. Companies must apply this treatment uniformly across all eligible intangible assets if elected.

2. Goodwill Alternative (ASU 2014-02)

This option allows companies to amortize goodwill straight-line and restricts impairment testing to triggering events only, eliminating the second step of annual impairment evaluation. Entities may opt for this goodwill treatment even if they don’t adopt the intangible asset alternative, but embracing the latter requires also taking the goodwill option.

Firms must evaluate whether customer-related intangibles (like customer lists or contract rights) qualify for separate recognition by determining if they meet the ability-to-sell-or-license test. Even when subsumed into goodwill, those intangibles may require high-level valuation inputs, such as contributory asset charges, within valuation models for other assets.

If you’re handling a business acquisition, here’s how VJM Global can support you with the accounting, analysis, and reporting.

How Can VJM Global Help You with Accounting for Business Combinations?

Mergers and acquisitions can overwhelm even experienced finance teams. You might struggle to identify the acquirer, calculate goodwill, assign fair values to assets, or handle contingent liabilities. Mistakes can snowball into audit findings or misstated reports if you're unsure how to apply ASC 805 properly. VJM Global helps you get it right the first time.

If you’re a U.S. business handling a business combination, VJM Global provides expert support in ASC 805 compliance. Here’s how VJM Global supports you through the entire accounting process for business combinations:

• Full-Service Accounting and Bookkeeping for Acquisitions

We handle everything from setting up opening balances to recording purchase price allocations, goodwill, and acquisition-related costs. You don’t have to manage this internally or guess at compliance.

• Audit Support for CPA Firms and Software Businesses

Our team prepares supporting documentation for valuations, helps reconcile financial statements post-acquisition, and assists with ASC 805 disclosure requirements, so you're ready for internal or external audits.

• Cross-Border Compliance for Indian and U.S. Operations

If your deal involves an Indian entity, we guide you through FEMA, RBI, GST, and MCA requirements. We also ensure that all local and international reporting standards are met, especially for group consolidation.

• Post-Deal Tracking of Adjustments and Contingent Consideration

We help you track measurement period adjustments, deferred payments, and earn-outs so your financials reflect the most up-to-date information without last-minute scrambles at month-end.

• Entity Setup and Registration for New Acquisitions in India

Are you planning to acquire or set up a subsidiary in India? We register entities and provide ongoing accounting support so you can focus on growth instead of paperwork.

With VJM Global, you get more than accounting help. You get a team that knows how to manage the technical details and local regulations that come with business combinations. Contact VJM Global today.

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