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Fixed asset toolkit: Asset acquisitions · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:07
  SPEAKER_02: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_02: I'm Heather Horn.
• 0:12
  SPEAKER_02: Thanks for tuning in to another episode in our Toolkit series, where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:27
  SPEAKER_02: This month we're all about fixed assets.
• 0:30
  SPEAKER_02: Now, fixed assets may sound easy to some of our listeners who think this is a simple topical area, but I guarantee you this is one of our areas of most frequently asked questions, and there'll be something in here for everyone.
• 0:46
  SPEAKER_01: I mean, I think it's important to understand the whole transaction.
• 0:50
  SPEAKER_01: You want to make sure you know not only what you're buying, but if there are other elements to the transaction, sort of settling those pre-existing relationships.
• 0:58
  SPEAKER_02: That's my guest, Beth Paul, a partner in our national office.
• 1:02
  SPEAKER_02: Beth's here today to kick things off and cover the challenges that come up in accounting for asset acquisitions, including distinguishing between the acquisition of an asset or a group of assets and a business.
• 1:15
  SPEAKER_02: There's a lot to cover, so let's get started.
• 1:24
  SPEAKER_02: Beth, welcome back to the podcast.
• 1:26
  SPEAKER_02: So nice to have you on again and love this topic we have today.
• 1:30
  SPEAKER_02: And the month of October, we're really focusing in on fixed asset-related matters.
• 1:35
  SPEAKER_02: And of course, one of the areas is one of your specialties, asset acquisitions.
• 1:39
  SPEAKER_02: And I know this can be a topic that can get complicated very quickly.
• 1:43
  SPEAKER_02: So looking forward to our conversation.
• 1:46
  SPEAKER_02: So, Beth, before we get into the actual accounting for asset acquisitions, I think one of the biggest questions people typically have is around scope and when we're into this guidance.
• 1:58
  SPEAKER_02: So can we start with that?
• 1:59
  SPEAKER_01: Yeah, certainly, Heather.
• 2:00
  SPEAKER_01: I mean, before talking about how to account for an asset acquisition, it's important first to determine whether your transaction is an acquisition of assets or a business.
• 2:08
  SPEAKER_01: And determining whether a transaction represents an asset acquisition or a business is a critical step because there are significant differences between the two models, most significantly in recognition and measurement.
• 2:21
  SPEAKER_01: Because the asset acquisition is a cost accumulation model, with the cost of the acquisition then allocated based on relative fair value to the assets acquired.
• 2:31
  SPEAKER_01: In contrast, a business combination is accounted for at fair value with any excess consideration recognized as goodwill.
• 2:39
  SPEAKER_01: In order to be a business, a set does not need to have outputs.
• 2:43
  SPEAKER_01: That's a question we get a lot, but it does need to have an input and a substantive process that together significantly contribute to the ability to create outputs.
• 2:52
  SPEAKER_01: If the assets acquired are not a business, the buyer will account for the transaction as an asset acquisition.
• 2:58
  SPEAKER_02: All right.
• 3:02
  SPEAKER_02: But just for people who may not be as familiar with the guidance, when we talk about outputs, inputs, substantive process, can you give a brief explanation?
• 3:11
  SPEAKER_02: Unless Beth, we're planning to get into that later.
• 3:14
  SPEAKER_01: No, we're not really planning to get into that later because um We're talking about assets, not businesses.
• 3:20
  SPEAKER_02: Right.
• 3:21
  SPEAKER_01: But if if we want to think about it, right, inputs are things like employees or um assets themselves, like manufacturing facilities, and that have the ability then for a process to be applied to it.
• 3:35
  SPEAKER_01: So maybe your process is applied to your machinery to create your output, your good, whatever it is.
• 3:43
  SPEAKER_01: Um, and that's that's what an input and output and process is.
• 3:47
  SPEAKER_02: Okay, that's helpful.
• 3:48
  SPEAKER_02: And then Beth, one other question, and this one I have a feeling the answer is going to be it depends.
• 3:53
  SPEAKER_02: But do you see when you're getting questions about this that there's a preference people have between an asset acquisition and a business, or it just really depends?
• 4:01
  SPEAKER_02: I mean, obviously it's facts and circumstances specific, but I know sometimes people also try to structure things.
• 4:07
  SPEAKER_01: Yeah, I think it's primarily just facts and circumstances that you have to apply to the models to figure out where you come out.
• 4:13
  SPEAKER_01: All right.
• 4:13
  SPEAKER_01: I feel like that's always the answer to my good questions, but okay.
• 4:16
  SPEAKER_02: So then that as we get into this, I know sometimes it can be, as I we sort of started talking about, it can be pretty challenging and sometimes a lot of effort for company to figure out, okay, do you have an actual business or do you have an asset or a group of assets?
• 4:32
  SPEAKER_02: So is there any type of assessment a company could do just to get more quickly to a conclusion that you do have an asset acquisition?
• 4:41
  SPEAKER_01: Yes.
• 4:41
  SPEAKER_01: I mean, GAAP does include an initial screen test, which is designed to identify with less cost and effort a transaction that is clearly more akin to an asset acquisition and remove it from the scope of the VISCOM guidance.
• 4:54
  SPEAKER_01: A company can bypass the screen test and start right with the business combination framework.
• 4:58
  SPEAKER_01: You know, think about if they have those inputs, outputs, and processes.
• 5:02
  SPEAKER_01: If they think for some reason that is more cost effective, but if they determine it's a business under the framework, they have to be comfortable that it wouldn't have been an asset acquisition under the screen test, as the screen test is not optional.
• 5:15
  SPEAKER_01: In applying the screen test, an entity determines whether substantially all the fair value of the gross assets are in a single asset or a group of similar assets.
• 5:26
  SPEAKER_01: And if so, the transaction is an asset acquisition.
• 5:29
  SPEAKER_01: While the standard doesn't define what substantially all is, this term is used in other areas of gap, like the revenue standard and the leasing standard.
• 5:36
  SPEAKER_01: And it's not really defined there either, but there isn't a bright line.
• 5:40
  SPEAKER_01: It's sort of typically interpreted to mean around 90%.
• 5:44
  SPEAKER_01: So if you do the screen and there's uncertainty around that quantitative threshold, you know, because you're kind of close to 90%, then you usually just go into the framework to determine whether the transaction is a business combination or an asset acquisition.
• 5:56
  SPEAKER_01: That's helpful.
• 5:57
  SPEAKER_02: And then one of the things that I I know can trip people up in the screen test is part of it you said that has to be a single asset or a group of similar assets.
• 6:07
  SPEAKER_02: So how do you determine if you have a single asset or a group of similar assets?
• 6:12
  SPEAKER_01: Yeah, it's a great question.
• 6:13
  SPEAKER_01: So for purposes of the screen test, a single asset includes one, any individual asset or group of assets that would be recognized as a single asset under the business combination guide.
• 6:24
  SPEAKER_01: So the business combination guidance allows certain complementary intangible assets with similar useful lives to be grouped as one asset.
• 6:31
  SPEAKER_01: So you usually see this like a trade name with a recipe or a trademark with a formula.
• 6:37
  SPEAKER_01: Those usually are a single asset.
• 6:39
  SPEAKER_01: So that could be a single asset, but it doesn't stop there.
• 6:42
  SPEAKER_01: The standard also says a single asset could be a tangible asset or an intangible asset that is attached to another tangible asset and cannot be physically removed without a lot of cost and effort.
• 6:54
  SPEAKER_01: And so the prime example here is a building on a piece of land, right?
• 6:59
  SPEAKER_01: You can't remove the building easily from the land.
• 7:01
  SPEAKER_01: So that would be a single asset for the screen test.
• 7:04
  SPEAKER_01: And then finally, the last single asset would be an in-place lease intangible and the related asset.
• 7:10
  SPEAKER_01: So if you have a building with an in-place lease, that will be a single asset for the purposes of the screen test.
• 7:17
  SPEAKER_01: And you would then compare the single asset value to the fair value of the gross assets acquired to see if the screen is met.
• 7:25
  SPEAKER_01: But the screen can also be met if we have similar assets.
• 7:28
  SPEAKER_01: So that's different.
• 7:29
  SPEAKER_01: So let's take a minute there.
• 7:31
  SPEAKER_01: So similar assets are assets of a similar nature that have similar risks associated with managing and creating outputs.
• 7:38
  SPEAKER_01: If the risks are not similar, the assets cannot be combined.
• 7:41
  SPEAKER_01: But identifying similar assets based on risks is something that's going to require some judgment.
• 7:47
  SPEAKER_01: Risks that you might consider would be dependent on the nature of the asset.
• 7:51
  SPEAKER_01: So they could include things like are the customers the same.
• 7:54
  SPEAKER_01: It could include things like commercialization risk.
• 7:56
  SPEAKER_01: It could include things like market risk, regulatory risk, or even the location, right?
• 8:01
  SPEAKER_01: So if we think about a group of buildings in one geographic area, that might be considered similar if they're all the same type of buildings.
• 8:09
  SPEAKER_01: If some are houses and some are, you know, apartment buildings, then maybe those aren't similar.
• 8:14
  SPEAKER_01: And then if we think about assets in different geographic locations that are the same, so I could have that, you know, apartment building in a metropolitan area and an apartment building in, you know, a rural area, and we would probably say those have different risk characteristics.
• 8:27
  SPEAKER_01: So you really have to look at all of the risks before determining if you have similar assets.
• 8:32
  SPEAKER_02: All right.
• 8:33
  SPEAKER_02: And then Beth, let me rewind to the screen test and just to ask about a scenario.
• 8:39
  SPEAKER_02: So let's say you said you have to do both.
• 8:41
  SPEAKER_02: So now I've analyzed and I've I've concluded that I have inputs, outputs, and a process.
• 8:49
  SPEAKER_02: But then I do my screen test and I say, oh, but I'm acquiring a single asset or a group of similar assets.
• 8:55
  SPEAKER_02: How do you then deal with sort of that kind of in one case would say, oh, well, I have a business, but in the other case, say, well, but it's it's sort of concentrated in a single asset?
• 9:05
  SPEAKER_01: So the screen test is not optional.
• 9:08
  SPEAKER_01: And so if the screen test tells you you have an asset acquisition, you have an asset acquisition, even if you would have a business combination under the framework.
• 9:18
  SPEAKER_02: All right, that's helpful.
• 9:19
  SPEAKER_02: And thank you for that clarification.
• 9:22
  SPEAKER_02: So then, Beth, if we combine um two or more assets in as a single asset or a group of assets for the screen test, then how do you think about that when you record them in the books and records?
• 9:35
  SPEAKER_01: So the assets used for the screen test are different than the assets recorded for financial reporting purposes.
• 9:40
  SPEAKER_01: For example, the screen test considers assets that are attached and inseparable, like I just mentioned, right, to be one asset for purposes of the screen.
• 9:49
  SPEAKER_01: But in my earlier example, when I had the land and building, when you actually record those on your books, you're going to record the land separately from the building and you're going to follow like the separate accounting.
• 9:59
  SPEAKER_01: So for instance, land's not depreciated, but the building would be.
• 10:02
  SPEAKER_02: All right.
• 10:02
  SPEAKER_02: And then how do you calculate the fair value of the gross assets acquired?
• 10:07
  SPEAKER_01: Yeah, for the purpose of applying the screen test, I think the important thing here is to remember that the fair value of the gross assets acquired is not necessarily the same as the consideration transferred.
• 10:17
  SPEAKER_01: So this is often the case when you have liabilities that are going to be assumed by the buyer, because then the value of the gross assets used in the denominator are not reduced by those liabilities.
• 10:29
  SPEAKER_01: So for example, consider the acquisition of a building with an assumed mortgage or even an asset retirement obligation, right?
• 10:36
  SPEAKER_01: The gross fair value of the building used in the screen test would be the fair value of the building unencumbered by like the mortgage or the ARO.
• 10:44
  SPEAKER_01: Whereas the consideration somebody's gonna pay, right, to acquire the building is going to be less because the buyer is gonna assume the mortgage or that asset retirement obligation, right?
• 10:53
  SPEAKER_01: So they're gonna give you sort of the net cash.
• 10:55
  SPEAKER_01: And so that's where the consideration transferred is going to be different than the fair value of the gross assets acquired.
• 11:01
  SPEAKER_01: The fair value of the gross assets acquired also includes goodwill that would be recorded in a business combination.
• 11:08
  SPEAKER_01: However, the gross assets acquired excludes any cash and cash equivalents in the transaction, any deferred tax assets in the transaction, and goodwill to the extent it results from recording deferred tax liabilities.
• 11:21
  SPEAKER_01: And the FASBI did that and excluded those specific items because it didn't want the tax form of the transaction or whether you included cash or how much cash you included to sort of impact the determination of whether the set is a business or not.
• 11:35
  SPEAKER_01: So somehow kind of impact that screen analysis.
• 11:38
  SPEAKER_01: So it excluded those items.
• 11:39
  SPEAKER_02: All right, that makes sense.
• 11:40
  SPEAKER_02: So then, Beth, before we get into the actual accounting, anything else that you would highlight?
• 11:46
  SPEAKER_01: Yeah, Heather, I'd like to clarify that what we've been discussing is the definition of an asset versus the definition of a business under US GAAP, because the SEC has its own definition of a business and it can yield different results.
• 11:57
  SPEAKER_01: The SEC's definition is included in Article 11.
• 12:00
  SPEAKER_01: And Article 11 is generally considered a broader definition than what we're talking about from ASC 805.
• 12:06
  SPEAKER_01: Under Article 11, there's a presumption that a separate entity, like a subsidiary or a division, is a business, and then a lesser component of an entity may also be a business under their model.
• 12:18
  SPEAKER_01: So there could be situations where the transaction is deemed to be a business for SAC reporting purposes, but not a business for GAAP.
• 12:26
  SPEAKER_01: For example, the the thing I like to share with people is that the acquisition of a legal entity that has one hotel building might get caught by the screen and therefore be an asset acquisition, because that building is a substantial amount of the fair value of the transaction.
• 12:41
  SPEAKER_01: However, when we look at Article 11, the presumption will be because a legal entity was bought, that that structure plus the continuation of revenues before and after that you've acquired a business for SEC reporting purposes.
• 12:55
  SPEAKER_02: So then, Beth, again, before we get into the accounting, uh, you know, you highlighted that there is a different definition from an SEC perspective.
• 13:03
  SPEAKER_02: But so now I'm, you know, a registrant and I have an asset acquisition for GAAP, but then I realize I have a business for SEC reporting.
• 13:12
  SPEAKER_02: Anything particular, and I this is not an SEC reporting, so this is not going to be a complete answer, but anything in particular that this might trigger if you do have if you are acquiring a business from an SEC perspective.
• 13:24
  SPEAKER_01: Yeah, I think um companies will want to think about any 8K reporting requirements for the acquisition of a business, which is a at certain significant levels, a required 8K with related financial statement requirements and performer requirements.
• 13:39
  SPEAKER_01: Okay.
• 13:40
  SPEAKER_02: And then finally, we'll get to the accounting model.
• 13:43
  SPEAKER_02: So how do you account for an asset acquisition?
• 13:47
  SPEAKER_01: Yeah.
• 13:47
  SPEAKER_01: So once an acquirer determines that a transaction is an asset acquisition, the acquirer should measure the assets acquired and liabilities assumed based on their cost, which includes the consideration the buyer paid to the seller and direct transaction costs.
• 14:00
  SPEAKER_01: And this is a difference between the asset and the BizCom guidance because in a BizCom, transaction costs are expensed, but here they're going to be capitalized as part of the cost of the underlying assets.
• 14:11
  SPEAKER_01: In an asset acquisition, the cost of the acquisition is allocated to the assets acquired based on their relative fair values.
• 14:18
  SPEAKER_01: And so another difference here, you don't have any goodwill in an asset acquisition.
• 14:22
  SPEAKER_01: Whereas in a BizCom, you're going to record things based on their fair value and you're going to either have goodwill or a bargain purchase gain.
• 14:28
  unknown: Okay.
• 14:29
  SPEAKER_02: So then, Beth, if the consideration transferred is non-cash, how do you think about that?
• 14:35
  SPEAKER_01: Yeah, so for asset acquisitions in which some or all the consideration transferred consists of non-cash consideration, the counting is going to depend, our favorite answer.
• 14:44
  SPEAKER_01: It's going to depend if the consideration is equity interest issued by the seller, because then companies can make a policy election to either follow the stock comp guidance in ASC 718 or they can follow the guidance in 805.
• 14:56
  SPEAKER_01: If the consideration is a non-monetary asset, then, assuming you don't meet any of the exceptions in that guidance, and those are primarily you're not buying inventory or your transaction doesn't lack commercial substance.
• 15:07
  SPEAKER_01: So if that isn't the case, then the fair value of the assets acquired shall be treated as non-cash consideration for the non-financial assets given up and any gain or loss is recognized by the acquirer.
• 15:18
  SPEAKER_02: All right.
• 15:19
  SPEAKER_02: What would you do though in the case that the cost of the asset acquisition exceeds fair value?
• 15:24
  SPEAKER_02: And I know that's actually a rather common scenario.
• 15:28
  SPEAKER_01: Yeah.
• 15:29
  SPEAKER_01: So when, you know, when the company believes that the cost of the assets exceed the fair value of the assets, then the acquirer should first confirm that they've identified all of the acquired assets, including some intangibles, right?
• 15:44
  SPEAKER_01: Because sometimes you might not think about all of those.
• 15:46
  SPEAKER_01: Then you're going to also want to confirm that the fair value of the assets acquired and liability assumes has been appropriately measured.
• 15:52
  SPEAKER_01: And then finally, you're going to want to assess whether there are any transactions that should be recognized separate from the asset acquisition.
• 15:59
  SPEAKER_01: So are there other transactions going on that need to be accounted for separately?
• 16:03
  SPEAKER_01: Once those steps are performed, the consideration paid may still exceed the fair value of the individual assets acquired and liability assumed.
• 16:10
  SPEAKER_01: This might be due to synergies existing among the acquired assets.
• 16:14
  SPEAKER_01: So what do you do there?
• 16:15
  SPEAKER_01: Well, any excess cost over the fair value should generally be allocated to the acquired assets on a relative fair value basis.
• 16:24
  SPEAKER_01: This could result in certain assets being recognized in excess of their fair value.
• 16:28
  SPEAKER_01: So, because of that, not all of the assets acquired should be allocated a portion of this excess, as this could result in an immediate impairment.
• 16:37
  SPEAKER_01: Specifically, you want to think about financial assets that are recorded at fair value each period mark to market and other assets subject to recurring fair value impairment testing, like indefinite lived intangible assets and assets held for sale.
• 16:50
  SPEAKER_01: Those should not be allocated a portion of the excess consideration because then they'd become be immediately above their fair value and you'd have this immediate impairment.
• 16:57
  SPEAKER_02: All right.
• 16:58
  SPEAKER_02: So then, Beth, what do you do in the scenario when the cost you paid, so your purchase price is actually less than the fair value?
• 17:06
  SPEAKER_01: Yeah, so it's a similar model, but here the first thing you probably want to do is confirm that all your liabilities that have been assumed by you have been identified and recognized.
• 17:15
  SPEAKER_01: Then you're gonna want to confirm the fair value of the assets acquired and liability assumed have been appropriately measured.
• 17:20
  SPEAKER_01: And then finally, like we did before, you're gonna reassess whether there are any transactions that should be recognized separate from the asset acquisition.
• 17:28
  SPEAKER_01: Once these steps are performed, the consideration paid may still be less than the fair value of the individual assets acquired and liabilities assumed.
• 17:36
  SPEAKER_01: However, because the measurement principle for asset acquisitions is based on a cost accumulation model, a bargain purchase gain should not be recognized in the asset acquisition.
• 17:45
  SPEAKER_01: Instead, the value of the long-lived assets acquired should be reduced.
• 17:50
  SPEAKER_01: Similar to what I talked about before, financial assets, which are marked to market each period, should not be reduced because that would result in an immediate gain.
• 17:57
  SPEAKER_01: And we don't want that to happen.
• 17:58
  SPEAKER_01: So we look at the long-lived assets and we bring those down.
• 18:01
  SPEAKER_02: All right, very similar.
• 18:02
  SPEAKER_02: And then Beth, you mentioned that management would need to reassess if there are any transactions that should be recognized separately from the asset acquisition.
• 18:10
  SPEAKER_02: So that kind of triggered my interest.
• 18:12
  SPEAKER_02: Could you give an example of something like that?
• 18:15
  SPEAKER_01: Yeah, certainly.
• 18:16
  SPEAKER_01: So sometimes the buyer and the seller in an asset acquisition may have some sort of pre-existing relationship that existed before they negotiated for the current transaction.
• 18:26
  SPEAKER_01: And that previous relationship is effectively settled as a result of the asset acquisition.
• 18:31
  SPEAKER_01: So there's no real guidance outside of business combinations for the settlement of a pre-existing relationship.
• 18:36
  SPEAKER_01: However, we believe settlement gains and losses relating to pre-existing relationships should generally be recognized in the income statement consistent with the guidance for BizCons.
• 18:46
  SPEAKER_01: So let me take an example.
• 18:48
  SPEAKER_01: So, like assume Company A is the defendant in litigation related to a patent infringement claim brought by Company B.
• 18:54
  SPEAKER_01: And then Company A subsequently goes out and says, I'm going to buy the intellectual property from Company B that is subject to this patent infringement lawsuit.
• 19:02
  SPEAKER_01: Company A would need to assess whether some of what they're paying for that asset, that intellectual property, is really also settlement of that pre-existing patent infringement case.
• 19:14
  SPEAKER_01: That is, should they describe some of the value to the effective settlement of the lawsuit?
• 19:19
  SPEAKER_01: If a portion of the consideration transferred is for the settlement of a pre-existing relationship, the consideration transferred would be allocated to the asset acquisition and the settlement of the litigation on a relative fair value basis.
• 19:31
  SPEAKER_02: Okay.
• 19:32
  SPEAKER_02: So definitely a case where you need to look at the whole circumstance and don't just narrowly focus on the transaction.
• 19:38
  SPEAKER_02: At least ask the question if there's anything else going on here.
• 19:41
  SPEAKER_02: That's right.
• 19:42
  SPEAKER_02: Okay.
• 19:42
  SPEAKER_02: And then this next question makes me laugh because I think we just talked about something that can be complex.
• 19:49
  SPEAKER_02: But my next question is is there anything else?
• 19:53
  SPEAKER_02: I guess I'll say else that could be complex that the buyer could be facing.
• 19:57
  SPEAKER_01: I think I think that's a great way to phrase it.
• 19:59
  SPEAKER_01: Yeah, I mean, contingent consideration can be an area, right?
• 20:02
  SPEAKER_01: So an asset acquisition could include contingent consideration, which is just to level set an obligation of the buyer to transfer additional consideration to the seller if a future event occurs.
• 20:14
  SPEAKER_01: So if you have an obligation of the buyer to transfer consideration based solely on the passage of time, that's not contingent consideration.
• 20:21
  SPEAKER_01: That's not what I'm talking about.
• 20:22
  SPEAKER_01: That's just seller financing.
• 20:24
  SPEAKER_01: But if it's you know contingent on this future event, that's contingent consideration.
• 20:29
  SPEAKER_01: But there is no specific gap guidance for the recognition and measurement of contingent consideration in an asset acquisition.
• 20:35
  SPEAKER_01: We believe that the contingent consideration, if it's not a derivative, so we're not in the derivative scope, then we recognize that when it's probable and reasonably estimable based on the contingency standard or ASC 450.
• 20:47
  SPEAKER_01: Contingent consideration recognized is included in the cost of the asset acquired.
• 20:51
  SPEAKER_01: So unlike in a BISCOM, so here again, another difference, subsequent changes in the recorded amount of contingent consideration will adjust the cost of the acquired asset, whereas in a BizCom, they're just going through the PL.
• 21:03
  SPEAKER_01: These subsequent changes should be allocated to the acquired asset based on the relative fair value at the original acquisition date.
• 21:09
  SPEAKER_01: So if on day one you had like two assets and now you change this value of contingent consideration, you're gonna allocate that to those two assets based on relative fair value on the original acquisition date, not fair value today.
• 21:20
  SPEAKER_01: And when that change in consider contingent consideration impacts the cost basis of the acquired assets, you also have to think about the income statement.
• 21:27
  SPEAKER_01: You have to think about the depreciation and amortization.
• 21:29
  SPEAKER_01: And you know, that's now gonna be more if we'd increase the value.
• 21:33
  SPEAKER_01: And so we have to address that through the PL as well.
• 21:36
  SPEAKER_02: Hey Beth, before you go on to the next scenario, because I know there's more, it you talked earlier that if you have, for example, financial assets measured at fair value, you wouldn't allocate to those.
• 21:47
  SPEAKER_02: So I presume this is the same, and I think you even said this that's only to the assets that you kind of allocated value, um, the relative fair value to to begin with.
• 21:57
  SPEAKER_02: Is that right?
• 21:58
  SPEAKER_02: That's correct.
• 21:59
  unknown: All right.
• 22:00
  SPEAKER_01: So other scenarios?
• 22:01
  SPEAKER_01: Yeah.
• 22:01
  SPEAKER_01: So other things to think about, um, in process research and development or IPRD.
• 22:05
  SPEAKER_01: I I want to mention that because one that's also a difference in BizCom versus asset acquisition.
• 22:11
  SPEAKER_01: In Bizcom, you get to capitalize and in asset acquisition you expense it.
• 22:15
  SPEAKER_01: But sometimes the seller in an IPRD exchange transaction continues to provide like the RD service for a specific period of time following the transaction.
• 22:24
  SPEAKER_01: In that scenario, the buyer needs to determine what amount related to the acquisition of the IPRD and what amount kind of relates to that continuation of service or TSA, sometimes we call it, or you know, an allocate value between the asset acquisition and that RD future service.
• 22:43
  SPEAKER_01: IPRD acquisitions also typically include an upfront payment and contingent consideration.
• 22:48
  SPEAKER_01: So the contingent consideration is usually based on a future event, such as the successful trial, an FDA approval, or future success of the output of the IPRD.
• 22:58
  SPEAKER_01: In an asset acquisition, the portion of the purchase price allocated to IPRD should be expensed immediately because it has no future use.
• 23:07
  SPEAKER_01: But the buyer would recognize the contingent milestone payments when probable and reasonably estimable, assuming, again, we're not in derivative land.
• 23:16
  SPEAKER_01: And depending on the status of the IPRD at the time the milestone is met, the buyer may determine at that point it's appropriate to capitalize the payment as an intangible asset because it's no longer sort of in process, but it's now an asset that can be recognized.
• 23:31
  SPEAKER_01: So that's a nuance I wanted to just highlight for people.
• 23:33
  SPEAKER_02: All right, very helpful.
• 23:34
  SPEAKER_02: And then Beth, I know we also get often questions around disclosure.
• 23:38
  SPEAKER_02: So if I've completed an asset acquisition, anything you'd highlight from a disclosure perspective?
• 23:44
  SPEAKER_01: So unlike a business combination, there's not really a specific disclosure requirement for an asset acquisition.
• 23:49
  SPEAKER_01: However, if material, companies really should consider disclosing the nature of the transaction and follow the disclosure requirements in accordance with GAAP based on the nature of the individual assets and liabilities they acquired or assumed and make sure they have appropriate disclosure there as well.
• 24:03
  SPEAKER_02: All right, good reminder there.
• 24:05
  SPEAKER_02: And then Beth, I know basically our whole discussion has been focused on the buyer, but there are things for the seller to think about too.
• 24:12
  SPEAKER_02: So anything you would highlight?
• 24:14
  SPEAKER_01: Yeah, I mean, each transaction should be evaluated to determine the appropriate derecognition guidance to apply in accounting for a disposal.
• 24:21
  SPEAKER_01: And a company is gonna need to determine if they're in the scope of 61020, which is the standard that talks about gains and losses from the derecognition of non-financial assets.
• 24:30
  SPEAKER_01: So that's something they're really gonna have to work through.
• 24:32
  SPEAKER_01: Goodwill is another important key reminder to the seller.
• 24:36
  SPEAKER_01: If the disposal group doesn't constitute a business, no goodwill would be attributed to the disposal group because it's an asset acquisition.
• 24:43
  SPEAKER_01: And maybe another thing to think about that is a scenario may arise where a disposal group previously met the definition of a business under the old guidance and it no longer meets the definition of a business.
• 24:55
  SPEAKER_01: For example, you know, if you acquired that hotel 10 years ago, it might have been a business.
• 25:01
  SPEAKER_01: But today, if I acquired it, I might get stuck in the screen test.
• 25:04
  SPEAKER_01: And so when I bought it, I had goodwill that was recognized as part of that BizCom accounting.
• 25:10
  SPEAKER_01: However, now when I get rid of the hotel, if it's not a business, because again, caught in that screen, then I'm not going to allocate goodwill to that disposal group when I put the hotel into held for sale.
• 25:23
  SPEAKER_01: And I think that's something that is also an area that kind of confuses people because then the goodwill sort of is left behind.
• 25:29
  SPEAKER_01: I don't want to say stranded, but it's kind of left in the the reporting unit that had this hotel in my example and whatever else it has in it.
• 25:37
  SPEAKER_01: I do think when you have that, you have to think about whether that reporting unit now has a trigger to test for impairment because we've taken away some of those cash flows.
• 25:46
  SPEAKER_01: So that's something you're gonna want to think about.
• 25:48
  SPEAKER_01: And certainly when you think about going to held for sale, you also have to think about discontinued operations.
• 25:54
  SPEAKER_01: And I think you're gonna cover that on a future fixed asset uh episode.
• 25:58
  SPEAKER_01: So maybe people can stay tuned.
• 26:00
  SPEAKER_02: All right, perfect.
• 26:01
  SPEAKER_02: And then Beth, two sort of closing questions for you.
• 26:04
  SPEAKER_02: So, first of all, I know um when you describe this, it seems so straightforward.
• 26:08
  SPEAKER_02: I know it's not quite so straightforward.
• 26:10
  SPEAKER_02: So if someone wanted to read more about this, where's the best place to go look?
• 26:15
  SPEAKER_01: Yeah, I'm gonna plug two of our guides because of that interplay between the BizCom and the PPE.
• 26:21
  SPEAKER_01: So I would suggest people take a look at our PP ⁇ guide, especially chapter two about asset acquisitions, um, and our business combination guide, which also talks about the screen test.
• 26:31
  SPEAKER_01: I think those are great places to start.
• 26:33
  SPEAKER_01: And then certainly we have this podcast series and we have some prior podcasts in our library that I think would be helpful as well.
• 26:40
  SPEAKER_02: All right.
• 26:40
  SPEAKER_02: And then the other question for you is I know you deal a lot with questions on asset acquisitions and business combinations.
• 26:47
  SPEAKER_02: So it'll be a little open-ended, but if you are helping a team or a client that, you know, is is dealing with some type of acquisition, any advice that you would give sort of to someone sort of starting out in that process?
• 27:02
  SPEAKER_01: I mean, I think it's important to understand the whole transaction, as I think you mentioned earlier, right?
• 27:08
  SPEAKER_01: You you want to make sure you know not only what you're buying, but if there are other elements to the transaction, sort of settling those pre-existing relationships we talked about, or continuation of service agreements.
• 27:18
  SPEAKER_01: Sometimes we see those transaction service arrangements and making sure we've got the full population.
• 27:23
  SPEAKER_01: And then certainly, as we talked about, then assessing the accounting, kind of starting with is it a business or is it an asset acquisition?
• 27:29
  SPEAKER_01: So that then you follow the appropriate model sort of all the way through.
• 27:33
  SPEAKER_02: All right, perfect.
• 27:34
  SPEAKER_02: So, Beth, I understand you're going to be a good sport and go along with my stump the gust question.
• 27:38
  SPEAKER_02: I have a multiple choice.
• 27:40
  SPEAKER_02: So, according to PwC's 2022 deals outlook, what percent of acquisitions have been made by private equity companies as opposed to corporate buyers?
• 27:52
  SPEAKER_02: And your choices are 20, 40, 60, and 80%.
• 27:56
  SPEAKER_02: And that's in 2021 and then through whenever this happened in 2022.
• 28:01
  SPEAKER_02: Any guesses?
• 28:02
  SPEAKER_02: I'm gonna go with 40%.
• 28:05
  SPEAKER_02: You did read the deal's outlook, I think, Beth, because you are correct on that.
• 28:09
  SPEAKER_02: Excellent uh choice.
• 28:10
  SPEAKER_02: I should have asked you to explain why you thought 40%, but I was too quick to uh to jump in and say, um, you know, give you the gold star.
• 28:18
  SPEAKER_02: As always, so nice to have you on, and thanks so much for joining me.
• 28:22
  SPEAKER_02: Thanks for having me.
• 28:23
  SPEAKER_02: That's our show for today.
• 28:25
  SPEAKER_02: Tune in Thursday for more ESG content, and we'll be back next Tuesday to continue our Toolkit series with a discussion of what you can and cannot capitalize into the cost of fixed assets.
• 28:38
  SPEAKER_02: So that you never miss any of our audio content, follow the PWC Accounting Podcast wherever you listen to your podcasts.
• 28:46
  SPEAKER_02: And to stay up to date on all the latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com.
• 28:55
  SPEAKER_02: From Thought Leadership at PWC, I'm Heather Horn.
• 28:59
  SPEAKER_02: Thanks for tuning in.
• 29:04
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