1.3 Identifying a business combination

A business combination is defined as an entity obtaining control of one or more businesses. The most common business combination is a purchase transaction in which the acquirer purchases the net assets or equity interests of a business for some combination of cash or shares. An entity may also obtain control of a business (1) through the execution of a contract, (2) due to an action by the acquiree, (3) without the exchange of consideration, or (4) through transactions that combine multiple companies to form a single company. The acquisition method, which is discussed in BCG 2, should be applied to all business combinations within the scope of ASC 805. ASC 805-10-55-2 provides examples of how an acquirer may obtain control of an acquiree in a business combination.

1. By transferring cash, cash equivalents, or other assets (including net assets that constitute a business)
2. By incurring liabilities
3. By issuing equity interests
4. By providing more than one type of consideration
5. Without transferring consideration including by contract alone (see paragraph 805-10-25-11).

1. One or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer.
2. One combining entity transfers its net assets or its owners transfer their equity interests to another combining entity or its owners.
3. All of the combining entities transfer their net assets or the owners of those entities transfer their equity interests to a newly formed entity (sometimes referred to as a roll-up or put-together transaction).
4. A group of former owners of one of the combining entities obtains control of the combined entity.

The initial consolidation of a VIE that is a business is also a business combination and should be accounted for under the acquisition method by the acquirer (i.e., the primary beneficiary). See BCG 2.11 for additional information.

Example BCG 1-7, Example BCG 1-8, and Example BCG 1-9 illustrate transactions (other than purchase transactions) that are considered business combinations.

A company (investor) owns an equity investment in an investee that meets the definition of a business. The investee repurchases its own shares from other parties, which increases the investor’s proportional interest, and causes the investor to obtain control of the investee.

Yes. This transaction qualifies as a business combination, and the acquisition method (i.e., business combination accounting) would be applied by the investor as a result of the investee’s share repurchase transaction.

Company A owns a majority share of its investee’s voting equity interests. The investee meets the definition of a business. Company A is precluded from exercising control of the investee due to contractual rights held by the noncontrolling interest holders in the investee (e.g., veto rights, board membership rights, other substantive participation rights). The contractual rights expire, and Company A obtains control over the investee.

Yes. The elimination or expiration of these rights causes Company A to obtain control of the investee. This event qualifies as a business combination, and the acquisition method would be applied by Company A.

Company A and Company T enter into a contractual arrangement to combine their businesses and both meet the definition of a business. Company A will control the operations of both Company A and Company T.

Yes. Company A obtains control of Company T. This transaction qualifies as a business combination, and the acquisition method would be applied to the arrangement.

1.3.1 Stapling transactions and dual-listed companies

Stapling transactions and the formation of dual-listed companies are considered business combinations and should be accounted for using the acquisition method.

Stapling transactions and dual-listed companies are rare and occur only in certain territories. A stapling transaction occurs as a result of a contractual arrangement between two legal entities whereby one legal entity issues equity securities that are combined with (i.e., stapled to) the securities issued by the other legal entity. The stapled securities are quoted at a single price and cannot be traded or transferred independently.

A dual-listed company is typically an arrangement between two listed legal entities in which their activities are managed under contractual arrangements as a single economic entity. The separate legal identity of each of the combining companies is retained. The securities of each entity normally are quoted, traded, and transferred independently in different capital markets. In this case, one entity has not acquired an ownership interest in the other entity, and the individual legal entities have not been combined to form a new legal entity. However, this is considered a business combination from an accounting perspective (see ASC 805-10-25-11).

1.3.2 Merger of equals, mutual enterprises, and roll-ups/put-togethers

A merger of equals, in which two entities of approximately equal size combine and share control over the combined entity, is considered a business combination that falls within the scope of ASC 805. As described in FAS 141(R).B35, the FASB concluded it was not feasible to develop a separate accounting framework for these transactions due to the difficulty in distinguishing between a merger of equals and other business combinations. Accordingly, in a merger of equals, the entity deemed to be the acquirer (see BCG 2.3) should account for the transaction using the acquisition method.

Combinations of mutual enterprises are also within the scope of ASC 805. The FASB acknowledged some differences between mutual enterprises and corporate business enterprises but determined that such differences were not substantial enough to warrant separate accounting. Accordingly, in a combination of mutual enterprises, the entity deemed to be the acquirer (see BCG 2.3) should account for the transaction using the acquisition method.

“Roll-up” or “put-together” transactions typically result when several unrelated companies in the same market or in similar markets combine to form a larger company. The FASB concluded that, although these transactions might not cause a single entity to obtain control of the combined entity, they are similar to other types of business combinations and the acquirer (see BCG 2.3) should account for the transaction using the acquisition method.

1.3.3 Exchanges of assets between companies

Companies that exchange assets other than cash (i.e., nonmonetary assets) should apply the acquisition method if the result is the acquisition of a business. For example, assume Company A transfers a radio broadcast license to Company B in exchange for a radio station. If Company A determines that the radio station it receives is a business, Company A would account for the acquired radio station as a business combination by applying the acquisition method. If Company B determines that the radio broadcast license it receives is an asset, Company B would account for the radio broadcast license as an asset acquisition under the applicable US GAAP. See PPE 2 for additional information on the accounting for asset acquisitions.

1.3.4 Multiple transactions that result in a business combination

Legal, tax, or regulatory considerations frequently affect the structure of a business combination. A series of transactions might be used to combine two businesses in the most economically advantageous way. An arrangement to acquire a business through a series of transactions that are linked is a business combination and should be accounted for using the acquisition method. Determining whether a series of transactions is linked and whether they should be combined and viewed as a single arrangement is a matter of judgment and should be based on specific facts and circumstances. See BCG 5.3.7 and BCG 5.5.4 for additional guidance on factors to consider when determining whether to account for a series of transactions as a single business combination.

Example BCG 1-10 provides a scenario in which a reporting entity considers whether a series of transactions constitutes a single business combination.

Company A (an international media group) has agreed to acquire Company T’s television broadcast and production operations. For tax reasons, Company A will not acquire Company T’s shares, but the program rights will be purchased by a subsidiary of Company A. The production facilities and workforce that are located in the various countries will be acquired by separate operating subsidiaries of Company A in those locations. None of the transactions will be completed unless all of the other transactions are also completed.

Is the series of transactions to acquire the program rights, production facilities and workforces considered a single business combination?

Yes. The separation of the acquisition of Company T’s television broadcast and production operations into several transactions does not affect the substance of the arrangement. The arrangements to acquire the program rights, production facilities, and workforce are entered into in contemplation of one another, are designed to achieve an overall commercial effect (i.e., acquiring Company T’s broadcast and production operations), and are mutually dependent on each other. Therefore, Company A should account for the series of transactions as a single business combination.

1.3.5 Business combinations when control is temporary

ASC 805 does not have a concept of “temporary” control. Generally, any transaction in which an entity obtains control of one or more businesses qualifies as a business combination. However, there is one industry scope exception in ASC 810-10-15-10(a)(2) for a transaction in which control is only temporarily obtained. A parent entity that is a broker-dealer within the scope of ASC 940, Financial Services—Broker and Dealers, is not required to consolidate a majority-owned subsidiary in which the parent entity has a controlling financial interest and control is likely to be temporary. Otherwise, there are no scope exceptions for a transaction in which control is only temporarily obtained.

When a reporting entity obtains control of a business, the transaction is a business combination and the acquirer must follow the acquisition method. This is the case even when control is expected to be transferred in the future or maintained for a short period of time. For example, assume Company A has a signed purchase agreement with Company T (third party) to acquire multiple entities that each individually meet the definition of a business, including Business X. Company A has also negotiated a contract with Company C (separate third party) to sell Business X three months from the date on which Business X is acquired from Company T. Therefore, Company A determines the business being acquired meets the criteria in ASC 205-20-45-1E to be classified as held for sale (and therefore also should be presented as discontinued operations per ASC 205-20-45-1D). Based on ASC 805-20-30-22, Company A would measure the acquired disposal group (Business X) on the acquisition date at fair value less cost to sell (in accordance with ASC 360-10-35-38 and ASC 360-10-35-43).

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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