Business Combinations

Overview: Commencing with combinations effected on or after January 1, 2009, business combinations must be accounted for using the acquisition method in accordance with ASC 805, Accounting for Business Combinations. ASC 805 provides that "a business combination occurs when an entity acquires net assets that constitute a business or acquires equity interests of one or more other entities and obtains control over that entity or entities." In addition, ASC 805 explicitly states that its provisions apply equally to business combinations in which:

• One or more entities are merged or become subsidiaries
• One entity transfers net assets or its owners transfer their equity interests to another entity
• All entities transfer net assets or the owners of those entities transfer their equity interests to a newly formed entity (i.e., roll-up or put-together transactions)

Services: Once the business combination decision is made, including the necessary due diligence, we evaluate the necessary accounting standards by applying a proprietary step-by-step approach. Our conclusions are documented in a formal, written report (usually a SAS 50). Once the accounting is approved by management and accepted by the auditors, we assist in the identification of all assets, tangible and intangible. These tangible and intangible assets require valuation and we provide those valuation services applying the guidance of Statements on Standards for Valuation Services, published by the AICPA.

Case Study: What looks like a purchase business combination may not, in fact, be one.

We were engaged to evaluate a company’s purchase of substantially all tangible and intangible assets from an unrelated third party. In applying our proprietary step-by-step approach, we concluded that the assets acquired did not constitute a business because (i) the combined assets did not possess all of the inputs, processes and outputs necessary for a business and (ii) the assets would have been defined as a business in its development stage. The transaction was accounted for as a purchase of tangible assets and intangible assets, applying ASC 350 Intagibles - Goodwill and Other. Had the company accounted for the acquisition as a purchase business combination as originally planned by management, its financial statements would likely have been materially misstated.