ASC 805

Definition

ASC 805 is the Accounting Standards Codification section that outlines the accounting principles for business combinations, specifically focusing on mergers and acquisitions. This standard requires entities to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values at the acquisition date. It plays a crucial role in financial reporting for companies engaging in mergers and acquisitions, particularly in ensuring that financial statements reflect the true economic reality of these transactions.

5 Must Know Facts For Your Next Test

1. ASC 805 was issued to improve the relevance and comparability of financial information resulting from business combinations by providing clear guidelines.
2. Under ASC 805, entities must recognize goodwill as part of the acquisition accounting if the purchase price exceeds the fair value of net identifiable assets.
3. The standard requires comprehensive disclosures about the nature of the business combination, including terms and conditions and how fair values were determined.
4. ASC 805 applies not only to acquisitions but also to mergers, where two companies combine to form a new entity.
5. One significant aspect of ASC 805 is that it mandates re-evaluation of previously acquired goodwill on an annual basis or more frequently if certain indicators arise.

Review Questions

• How does ASC 805 change the way business combinations are accounted for compared to previous standards?
  • ASC 805 provides a more structured approach to accounting for business combinations than previous standards by emphasizing the acquisition method. This method requires recognizing all identifiable assets and liabilities at their fair values, which enhances transparency in financial reporting. This shift allows stakeholders to better understand the economic impact of mergers and acquisitions on a company's financial position.
• Discuss the implications of goodwill recognition under ASC 805 and how it affects financial statements after an acquisition.
  • Goodwill recognition under ASC 805 can significantly impact financial statements following an acquisition since it represents excess purchase price over identifiable net assets. This intangible asset affects the balance sheet by increasing total assets, but it does not have a defined lifespan. Thus, companies must assess goodwill for impairment annually, which can lead to fluctuations in reported income and can signal potential issues if significant impairments are recognized.
• Evaluate how ASC 805 facilitates better financial decision-making for investors and stakeholders during mergers and acquisitions.
  • ASC 805 enhances financial decision-making by ensuring that investors and stakeholders have access to accurate and comparable information regarding business combinations. The standard's requirements for recognizing and measuring identifiable assets, liabilities, and goodwill provide clearer insights into a company's value post-acquisition. This transparency helps stakeholders assess risks and returns associated with mergers and acquisitions, ultimately supporting more informed investment choices.

Related terms

Purchase Method: An accounting method used in business combinations where the acquiring company records the assets and liabilities of the acquired company at fair value on the acquisition date.

Goodwill: An intangible asset that arises when a company acquires another for more than the fair value of its identifiable net assets, representing factors like brand reputation and customer relationships.

Fair Value: The estimated price at which an asset or liability could be bought or sold in a current transaction between willing parties, reflecting market conditions.