The interpretation and application of Financial Accounting Standards Board (FASB) standards is clearly within the domain of the accounting profession and generally does not directly involve lawyers. Yet, lawyers involved in mergers and acquisitions should be aware that the FASB has issued Update No. 2017-01 (the “Update”) to provide guidance on whether a transaction will be accounted for as an acquisition of assets or as an acquisition of a business.
The purpose of this communication is not to analyze or discuss the tests included in the Update for determining whether a transaction will be accounted for as an acquisition of assets or an acquisition of business. Instead, the writer simply wishes to point out that there are certain differences in accounting treatment under the Update that may need to be considered in connection with an acquisition transaction. Specifically, note the following:
• Transaction expenses will be capitalized in an asset acquisition but must be expensed in a transaction to be accounted for as an acquisition of a business or business combination;
• In process research and development is capitalized in an acquisition of a business and expensed in an asset acquisition;
• Contingent consideration is recognized at its acquisition date fair value in a business combination, but an asset acquisition requires that contingent consideration be recognized when the contingency is resolved.