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Asset acquisition accounting · PwC's accounting podcast

0:00
SPEAKER_01: Thought Leadership from PWC's National Office.
0:06
SPEAKER_04: Welcome to PWC's Accounting Podcast.
0:10
SPEAKER_04: I'm Heather Horn.
0:11
SPEAKER_04: Today we'll conclude this month's focus on topics from our property, plant, and equipment guide by delving into asset acquisitions.
0:20
SPEAKER_04: While business combinations often steal the spotlight, understanding asset acquisition accounting is crucial given differences in the accounting models.
0:29
SPEAKER_02: So generally you're walking through these two steps, and if you get to the end of them, not very long steps, and you determine that it is not a business combination, then you're in asset acquisition land.
0:39
SPEAKER_02: I know I said that earlier, and you're in this kind of murky world of what do I do?
0:42
SPEAKER_02: And we'll get into that.
0:44
SPEAKER_02: But you know, you may very well end up going through these two steps and determining that you're in a business combination, in which case there's a lot of clear guidance in ASC 805, um, prescriptive guidance that tells you um kind of hold your hand through the process.
0:57
SPEAKER_02: And when you're in asset acquisition land, you don't quite get that level of hand holding.
1:09
SPEAKER_04: That was Matt Sabatini, who is joined by Alexander Martin, both partners in PwC's National Office Acquisitions, Divestitures, and Consolidation Team.
1:19
SPEAKER_04: Stay tuned for the valuable insights they have to share.
1:23
SPEAKER_04: All right, welcome.
1:24
SPEAKER_04: So nice to be joined by Matt and Alexandra today, both from the Acquisitions, Divestitures and Consolidation Team within our accounting and SEC services group.
1:35
SPEAKER_04: So, quite the introduction for the two of you.
1:36
SPEAKER_04: Lots of titles there.
1:38
SPEAKER_04: Um, and this is our third and final podcast for our March 2024 installment focused on the PPE guide.
1:44
SPEAKER_04: So, Matt, obviously, it's nice to have you back.
1:47
SPEAKER_04: And Alexandra, definitely welcome you.
1:50
SPEAKER_04: Um, so maybe it would be good to start things off just by covering in general what we're going to talk about today.
1:55
SPEAKER_04: And Matt, I'll go to you first since you are our experienced speaker.
1:59
SPEAKER_02: Sure.
1:59
SPEAKER_02: And uh, thanks for having me back.
2:01
SPEAKER_02: I appreciate it.
2:02
SPEAKER_02: So today we're going to be closing out our um podcast series on property, plant, and equipment.
2:07
SPEAKER_02: We're doing it with asset acquisitions.
2:09
SPEAKER_02: And so accounting for asset acquisitions, it's kind of the black sheep of the accounting world.
2:14
SPEAKER_02: Um it it's almost easier to describe what we're we're not talking about versus what we are talking about.
2:20
SPEAKER_02: So in situations where our client acquires a set of assets, they have to determine whether or not that set of assets meets the definition of a business.
2:28
SPEAKER_02: We're gonna get into that a little bit.
2:30
SPEAKER_02: When it doesn't meet the definition of a business, that's what we're talking about.
2:32
SPEAKER_02: We're talking about the world of how to account for acquiring assets either individually or in a group that aren't businesses.
2:40
SPEAKER_02: It's easy to get confused a little bit when folks are talking about asset acquisitions because in the tax world and the legal world, everybody's always talking about asset versus stock deals.
2:49
SPEAKER_02: And I just wanted to get that on record that that's not what we're dealing with here.
2:52
SPEAKER_02: What we're dealing with is from an accounting distinction, um, it can be either uh an acquisition of assets individually or an entity, the stock of an entity.
3:01
SPEAKER_02: Either way, you still have to figure out if you've acquired a business.
3:03
SPEAKER_02: And if not, we're in the world of asset acquisitions.
3:05
SPEAKER_00: Yep.
3:06
SPEAKER_00: And I'd say um maybe there's a misconception out there when people think about asset acquisitions that it's easier or simpler than business combinations.
3:13
SPEAKER_00: And I think the short answer is candidly that's not really the case.
3:17
SPEAKER_00: Um, so sometimes it's straightforward, but when it's not straightforward, it's really not straightforward.
3:21
SPEAKER_00: So I think what we're gonna try to talk about today is some of those trickier areas that come up so listeners can be aware of that when when it when it happens.
3:29
SPEAKER_00: Um, but maybe to Matt's point, before we do that, we probably want to level set and make sure that people know when they actually have an asset acquisition, right?
3:37
SPEAKER_00: And then after we do that, we can level set on the model that that's prescribed by ASC 80550.
3:42
SPEAKER_00: And then once we do that and we have a good understanding, we can finally talk about some of the fun areas.
3:47
SPEAKER_04: All right.
3:47
SPEAKER_04: That sounds good.
3:48
SPEAKER_04: And actually, even just Matt, your point that just the fact that you're acquiring the equity does not mean that you have a business.
3:55
SPEAKER_04: I think it's like probably the biggest myth that we need to dispel before we can get into anything.
4:00
SPEAKER_04: But maybe before we start talking about how you determine whether you have a business combination or an asset acquisition, uh, Alexander, you can run through for us why this actually matters.
4:10
SPEAKER_00: Yeah, yeah.
4:11
SPEAKER_00: And it's probably good to level set with that first, right?
4:13
SPEAKER_00: Uh the reason it matters is because the two models have different measurement principles, right?
4:18
SPEAKER_00: Which is gonna set the basis for the assets that you're buying.
4:21
SPEAKER_00: One uses fair value, the other one uses a cost approach, right?
4:24
SPEAKER_00: And we'll get into the nuts and bolts a little bit later.
4:27
SPEAKER_00: Um, but at the end of the day, right, the different measurement principles could result in us initially recording an asset at a higher or lower fair value, depending on which one we're in, which obviously is gonna have a downstream impact on earnings and then other issues that could come up when things are tied to earnings, such as compensation agreements and debt covenants and things like that.
4:46
SPEAKER_04: All right.
4:46
SPEAKER_04: Well, definitely.
4:47
SPEAKER_04: I think as soon as we start talking about earnings and or comp, people's ears perk up.
4:52
SPEAKER_04: So definitely something to focus on.
4:54
SPEAKER_04: So, Matt, maybe we can just finally jump in and talk about the difference between asset acquisition and a business, or I should just say an asset versus a business.
5:03
SPEAKER_02: Sure.
5:03
SPEAKER_04: Yeah.
5:04
SPEAKER_02: So the the model for trying to figure out if you're an asset acquisition land or business combination land is a two-step model, right?
5:11
SPEAKER_02: So generally you're walking through these two steps, and if you get to the end of them, not very long steps, um, and you determine that it is not a business combination, then you're in asset acquisition land.
5:21
SPEAKER_02: I know I said that earlier, and you're in this kind of murky world of what do I do?
5:24
SPEAKER_02: And we'll get into that.
5:26
SPEAKER_02: Um, but you know, you may very well end up going through these two steps and determining that you're in a business combination, in which case there's a lot of clear guidance in ASC 805, um, prescriptive guidance that tells you um kind of hold your hand through the process.
5:39
SPEAKER_02: And when you're in asset acquisition land, you don't quite get that level of hand holding.
5:44
SPEAKER_02: Um so the first step in the two steps that I mentioned, we call the screen test.
5:48
SPEAKER_02: Uh-huh.
5:49
SPEAKER_02: And that's really trying to figure out if the uh substantially all of the value, the fair value of what you've acquired is comprised of a single asset or a group of similar assets.
6:01
SPEAKER_02: So that's really the premise behind the screen test.
6:04
SPEAKER_02: What you're trying to do is figure out if if you know substantially all the value is in a single asset, then I acquired an asset, right?
6:12
SPEAKER_02: If not, well then we we move we move on to step two.
6:16
SPEAKER_04: So let me just already jump in here.
6:18
SPEAKER_04: So I immediately what popped into my head was power plants, because as at least Matt knows I'm from I always do this uh power and utilities industry.
6:26
SPEAKER_04: But so what you're saying is, and again, this is not conclusive.
6:30
SPEAKER_04: So if you are acquiring a power plant, don't automatically say it's an asset.
6:34
SPEAKER_04: But big picture, if all I'm acquiring is one power plant, then it's an asset.
6:39
SPEAKER_04: But what if there's two or more power plants?
6:42
SPEAKER_04: Then how do you think about that?
6:44
SPEAKER_02: I promise to you, I promise you we're gonna get to that.
6:46
SPEAKER_04: Okay, so I'll I'll hold my question until you're ready.
6:49
SPEAKER_04: So keep going then.
6:50
SPEAKER_02: Right.
6:51
SPEAKER_02: So so the screen test was introduced by the FASB into the guidance a couple of years back, really in response to um preparers' desires to simplify the model a little bit, right?
7:01
SPEAKER_02: So it used to be under the old rules that you'd have to jump right into this step two, which is a more complicated and judgmental analysis, which Alexander's gonna cover, thankfully, um, in a few minutes.
7:10
SPEAKER_02: So the screen test was introduced as, you know, hey, step one, let's make kind of a shortcut that says if you can look at the fair values of the assets you acquired and you could point to one asset or a group of similar assets and say, substantially all the values there, we're good.
7:23
SPEAKER_02: Like it's an asset acquisition.
7:25
SPEAKER_02: You don't have to do any more work on that.
7:26
SPEAKER_02: Um so it really was a matter of kind of convenience and limiting the cost and effort behind trying to do this analysis.
7:32
SPEAKER_04: All right, that's helpful.
7:33
SPEAKER_04: So then basically what you're saying is if I have two power plants that are similar, then that would be a group of similar assets.
7:39
SPEAKER_04: But if I have one power plant and some other asset that's also worth a lot of money, then I would fail this test.
7:45
SPEAKER_02: I am saying that, but I promise I'm gonna get to more detail.
7:48
SPEAKER_04: Okay, all right, that sounds good.
7:49
SPEAKER_04: So then once we've gone through the screen test, which is this very let's call it quick um test to see if you have this one asset or group of assets, then you conclude you have an asset acquisition.
8:00
SPEAKER_04: So is that right?
8:01
SPEAKER_02: Right.
8:01
SPEAKER_02: So you can you can definitely start with the screen test and end with the screen test.
8:05
SPEAKER_02: So that's step one.
8:06
SPEAKER_02: Um what I would tell you is some people uh prefer to jump into step two first, right?
8:11
SPEAKER_02: Like switch the order around, um, which is fine.
8:15
SPEAKER_02: Like you can you can do that when you're trying to figure out if if it's an asset versus business, but you're not allowed to skip the screen test ultimately.
8:22
SPEAKER_02: Okay, let me explain what I mean.
8:24
SPEAKER_02: So if you start with step two, right, and you go through the complicated model that Alexander's gonna walk you through, and you conclude you have an asset acquisition in step two, then you can be done.
8:32
SPEAKER_02: Because either way, whether you got to asset acquisition in the screen test or in step two in the in the full model, you're gonna get to the same answer.
8:39
SPEAKER_02: But if you go to step two and you do it first and you get and it indicates that you've acquired a business working through the full model, then you gotta go back and do the screen test anyway, because the screen test is not optional under USCAP.
8:50
SPEAKER_02: Right?
8:50
SPEAKER_02: So you got to go back and do it.
8:52
SPEAKER_02: And if you go back and do the screen test second and it says substantially all the values in one asset are similar assets, guess what?
8:57
SPEAKER_02: It's an asset acquisition.
8:59
SPEAKER_04: So, Matt, if that's the case, why would people choose to start with the more complicated test?
9:04
SPEAKER_02: Most people don't.
9:05
SPEAKER_02: Um, however, I can see a situation where the screen test is a quantitative analysis, right?
9:10
SPEAKER_02: So you are trying to figure out the fair value of all of the assets you've acquired as your denominator, and you're putting the one asset on top, but it requires a lot of valuation work.
9:17
SPEAKER_02: So if the answer is going to be obvious in the second test, some cases maybe it's less judgmental, or it's just gonna be obvious that it's an asset acquisition in the second part of the test, then you can skip the kind of detailed valuation work as well.
9:29
SPEAKER_02: I see.
9:29
SPEAKER_04: But then and like in that sort of contrary, if I flip it, then if I'm acquiring like a large multinational company, then it seems like doing this stuff one screen test could be a rather quick proposition.
9:42
SPEAKER_02: Definitely.
9:43
SPEAKER_02: Yeah.
9:43
SPEAKER_02: But it's when it's super obvious that you've acquired, you know, a hundred different types of assets.
9:48
SPEAKER_02: Yeah.
9:48
SPEAKER_02: You know, not all of them are gonna be grouped together and there's a lot of value in different ones.
9:52
SPEAKER_02: Yeah.
9:53
SPEAKER_02: Yeah.
9:53
SPEAKER_04: Or and we're gonna talk about the other things that make a business.
9:56
SPEAKER_04: Sometimes this can be pretty obvious that you you have done that.
9:59
SPEAKER_04: Correct.
9:59
SPEAKER_04: So then one of the things then, so we say we can't skip it, but you definitely mentioned the fact that substantially all of the fair value.
10:07
SPEAKER_04: And I feel like, you know, we we throw the words like that around and the meaning of those words is very important.
10:12
SPEAKER_04: So Beth and I spoke on an earlier podcast in the series about in the context of hell for sale.
10:18
SPEAKER_04: Um, but if we think about it in terms of this test, how do we think about substantially all?
10:23
SPEAKER_04: Is there a line or or how do you how do you think about it?
10:26
SPEAKER_02: Right.
10:26
SPEAKER_02: It's terminology that's definitely gonna sound familiar uh to folks who listen to podcasts around accounting or who just read accounting guidance for fun.
10:33
SPEAKER_04: Um hopefully you don't have too many of those listeners now.
10:37
SPEAKER_02: Um but it comes up a lot, right?
10:38
SPEAKER_02: It comes up in lease accounting, it comes up in consolidation, and like you said in the hold for sale assessment.
10:43
SPEAKER_02: Um, I'm gonna say what everybody says around this.
10:45
SPEAKER_02: There is no bright line for what substantially all means, and it's not defined here in the context of the screen test either.
10:51
SPEAKER_02: Um generally, the way practice has evolved over time and where practitioners kind of um go when they're looking for for a you know premise around substantially all is around 90%.
11:02
SPEAKER_02: Um so I'm not gonna say it's exactly 90%.
11:04
SPEAKER_02: Maybe we'll say it's on or around 90%.
11:06
SPEAKER_02: Um, but that's similar to what we do for lease accounting and for certain aspects of the consolidation rules.
11:11
SPEAKER_02: Um what that means though is since it's not a bright line, if you're at 89%, 91%, anywhere in that kind of area, maybe you're not done, right?
11:20
SPEAKER_02: Maybe you sharpen your pencils a little bit A on the valuation, because a lot of times you're doing this early in the process and you're working off very draft numbers and you're working off estimates of what the discount rate's gonna be.
11:29
SPEAKER_02: So sharpening your pencils is never a bad idea.
11:31
SPEAKER_02: But the other thing you do is you maybe look at some of the more qualitative factors, right?
11:34
SPEAKER_02: So um it's obvious that there's a single asset that has um a majority of the um of the value, are the assets operating independently or are they really dependent upon each other?
11:44
SPEAKER_02: Um, is there goodwill?
11:45
SPEAKER_02: Um, if there's a significant amount of goodwill, it might be more indic indicative um of a business.
11:50
SPEAKER_02: The other thing I say is you can also use step two to kind of help, right?
11:53
SPEAKER_02: Like the more complicated part of the model can help inform those close calls.
11:58
SPEAKER_04: Yeah.
11:58
SPEAKER_04: So then obviously you just said this, but when you think about like areas where there is going to be more complexity in judgment, I mean, as soon as you say that there's not a bright line, and as well the fact that you're dealing with evaluation, which there's a lot of inputs, what are some of the things that you think about then from a judgment perspective?
12:15
SPEAKER_02: Sure.
12:15
SPEAKER_02: I mean, those are two areas.
12:16
SPEAKER_02: I'll I'll bring up maybe two others, right?
12:18
SPEAKER_02: Yeah.
12:18
SPEAKER_02: So one is, and you brought it up already earlier, is the grouping of similar assets, right?
12:24
SPEAKER_02: So the guidance isn't just do you have a single asset that comprises substantially all the value?
12:28
SPEAKER_02: It's do you have a single asset or group of similar assets that comprise substantially all of the value?
12:33
SPEAKER_02: It's a lot of words.
12:35
SPEAKER_02: There is guidance um around how and when to group assets that might be considered similar in nature.
12:40
SPEAKER_02: You're generally looking to the nature of the asset and the risk profile of the asset, right?
12:44
SPEAKER_02: So you're looking at customer risk, commercialization risk, location risk, all sorts of, depending on really what the asset is, the risk profiles might be different.
12:52
SPEAKER_02: Frankly, and what you're going to compare might be different, right?
12:54
SPEAKER_02: You wouldn't think about the same risk factors for real estate assets as you would for like acquired intellectual property, right?
13:00
SPEAKER_02: Different different risk profiles that you would compare.
13:02
SPEAKER_02: Um, so it's it is a judgmental area.
13:04
SPEAKER_02: There are certain direct kind of prohibitions for combining assets as similar, right?
13:08
SPEAKER_02: So you can't necessarily group a tangible and an intangible asset as similar assets.
13:13
SPEAKER_02: You can't cross um classifications within intangibles.
13:16
SPEAKER_02: So if you have a certain like a brand name and a customer relationship, we're not combining those as similar assets.
13:21
SPEAKER_02: Um you're not going to combine financial assets with non-financial assets.
13:25
SPEAKER_02: So those are the prohibitions.
13:27
SPEAKER_02: And the last point on that is it sounds easy when you say I have a single asset that means substantially all, but the FASBI actually defines what a single asset is.
13:36
SPEAKER_02: And it's not just always one asset, which is a little bit confusing.
13:39
SPEAKER_02: Right, yes.
13:40
SPEAKER_02: And frankly, it it contradicts a little bit about the grouping characteristics and similar assets, right?
13:45
SPEAKER_02: So for a single asset, a single asset can include real estate, um, land and building, right?
13:50
SPEAKER_02: So like fixed assets that are attached to real estate, yeah, or it'd be very costly to move.
13:55
SPEAKER_02: That's a single asset under even though one's tangible.
13:58
SPEAKER_02: Well, they're both tangible in that situation.
13:59
SPEAKER_02: But one example of intangible and tangible might be the building and an in-place lease.
14:03
SPEAKER_02: Again, those are things that are considered a single asset under the under the rules, but it is an intangible and a tangible that you're combining.
14:10
SPEAKER_04: So how do you know then if you shouldn't the rules?
14:13
SPEAKER_04: Oh, so you just need to follow the rules?
14:15
SPEAKER_00: Yeah.
14:15
SPEAKER_00: And the way that I typically keep it straight in my head is that first part where you're figuring out your single assets, that's step one A.
14:22
SPEAKER_00: Yeah.
14:22
SPEAKER_00: Once I figure out all of my single assets, then I go to step one B.
14:25
SPEAKER_00: Single quote.
14:26
SPEAKER_00: Single quote assets.
14:28
SPEAKER_00: Then I figure out, okay, now I have my land and my intangible lease.
14:33
SPEAKER_00: And then I I go along and I say, okay, well, now I have all my single assets listed out.
14:37
SPEAKER_00: Can I combine those based on the criteria that Matt laid out?
14:41
SPEAKER_04: All right.
14:41
SPEAKER_04: That's definitely helpful.
14:43
SPEAKER_04: So then, Matt, the other thing, then, as we think about judgment, then we also have this concept of the gross assets.
14:50
SPEAKER_04: And so is there anything with that that we should be talking about or thinking about?
14:54
SPEAKER_02: Yeah, a couple of kind of pointers there.
14:56
SPEAKER_02: There is some complexity and judgment there.
14:58
SPEAKER_02: So the gross assets is generally what we call the denominator and the calculation, right?
15:02
SPEAKER_04: Um we all have to go back to our you know, high school math, but yes.
15:06
SPEAKER_02: Exactly.
15:06
SPEAKER_02: Um and and it's it might be easy to think of gross assets as being the purchase price or gap consideration transferred.
15:14
SPEAKER_03: Yeah.
15:15
SPEAKER_02: It's not always the same.
15:16
SPEAKER_02: Right.
15:16
SPEAKER_02: So the way gross assets is defined in AAC 805 for purposes of the screen test is um all of the assets that you record at their fair values, as if you were doing purchase accounting under AAC 805.
15:28
SPEAKER_02: So as if it was a business combination.
15:30
SPEAKER_02: So, in other words, what would the balance sheet look like in a in a in a business combination after purchase accounting or acquisition accounting?
15:36
SPEAKER_04: But no goodwill.
15:37
SPEAKER_02: No, there is goodwill.
15:38
SPEAKER_04: Oh, okay.
15:39
SPEAKER_02: So that's why this is a little bit different than than maybe what's in your head around purchase price.
15:43
SPEAKER_02: The other difference would be that the your purchase price uh or consideration transfer is going to incorporate your assumption of liabilities and how much leverage there is.
15:50
SPEAKER_02: That really doesn't apply in.
15:51
SPEAKER_02: This is just assets.
15:52
SPEAKER_02: Yes.
15:53
SPEAKER_02: So it's like it's like the left side of the balance sheet on a fair value basis after purchase accounting would have been or acquisition accounting would have been applied.
16:00
SPEAKER_02: Um, so it includes goodwill.
16:02
SPEAKER_02: Like one example that helps me think through this is leases.
16:05
SPEAKER_02: So if you think about in a in a business combination, um, you're when you acquire leases as the buyer of the business, the way you're gonna pay for an acquired lease is really just based on the difference between um the fair value of the lease and the contractual payments you owe.
16:20
SPEAKER_02: Right.
16:20
SPEAKER_02: So it's like the favorable or unfavorable contract is gonna influence your purchase price.
16:24
SPEAKER_02: In this situation, it's just the right of use asset.
16:26
SPEAKER_02: So it's the gross um asset that's on the balance sheet at its fair value that's gonna go into your denominator.
16:32
SPEAKER_02: So big difference between what you're willing to pay and what what's gonna be your denominator for the screen test.
16:37
SPEAKER_04: All right, definitely a lot to think about then.
16:39
SPEAKER_04: And then for that, is there anything that we would exclude when we're talking about this gross assets acquired?
16:46
SPEAKER_02: Yes.
16:46
SPEAKER_02: So yes, there are definitely items that you would exclude from your denominator in the screen test.
16:51
SPEAKER_02: The first is cash and cash equivalence, uh, the second is deferred taxes, and the third is any goodwill that arises from deferred tax liabilities.
16:59
SPEAKER_02: So those are three like explicit exclusions in the guidance from the denominator.
17:04
SPEAKER_02: What I'd say that's interesting about one of them, the cash and cash equivalents, is that um if you look at short-term investments, which is defined differently under gap, right?
17:11
SPEAKER_02: Has different maturity, but isn't that different from cash and cash equivalents has a slightly longer original maturity?
17:16
SPEAKER_02: Those are not excluded from the denominator.
17:18
SPEAKER_02: So there could be a situation where there's a lot of cash or cash available on a target, and depending how that cash has been invested, or you um it could result in a much different answer then.
17:28
SPEAKER_02: Exactly.
17:29
SPEAKER_04: All right, so now we've done this evaluation using the screen test.
17:32
SPEAKER_04: Obviously, there's more to this, and we will give um references at the end where people can go for more guidance.
17:38
SPEAKER_04: But so I've done this screen test that we just talked about, and let's say for this purpose of this discussion, I conclude that it's not representative of an asset acquisition.
17:49
SPEAKER_04: That doesn't necessarily mean that it's a business, correct?
17:53
SPEAKER_00: Yeah, that's right.
17:53
SPEAKER_00: So the the screen test is really just step one.
17:56
SPEAKER_00: Right.
17:56
SPEAKER_00: So if you meet it, it's it's determinative, right?
17:59
SPEAKER_00: You definitely have an asset acquisition, don't pass go, don't collect$200.
18:03
SPEAKER_00: But if not, all that really means is that you need to further analyze the set that you're acquiring itself and figure out whether it meets the gap definition of a business.
18:12
SPEAKER_00: Right.
18:12
SPEAKER_00: So what GAP would say, and not verbatim, is that a a business is basically an integrated set of assets and activities that's capable of being conducted to generate a return or outputs for investors.
18:25
SPEAKER_00: Right.
18:26
SPEAKER_00: A lot of words, but what that really just means is is GAP is focusing on whether, in addition to the assets or the inputs that you bought, right, did you also acquire one or more subset of processes?
18:37
SPEAKER_00: Right.
18:37
SPEAKER_00: So something like an organized workforce or operational protocols or strategic management processes, things like that.
18:44
SPEAKER_00: So if you did, then you might actually have a business, right?
18:47
SPEAKER_00: So if you can take those processes that you acquired and apply them to the inputs or the assets that you bought, then you can potentially generate returns, which means that you have a business.
18:57
SPEAKER_04: All right.
18:58
SPEAKER_04: So then you don't necessarily already need to be generating outputs in order to have a business.
19:02
SPEAKER_04: You just have to have the ability to do so.
19:04
SPEAKER_00: Exactly.
19:05
SPEAKER_00: Exactly.
19:05
SPEAKER_04: All right.
19:06
SPEAKER_04: So then how in this scenario would I know if this acquired process is substantive enough to cause the set to be a business?
19:14
SPEAKER_00: Excellent question.
19:15
SPEAKER_00: You you always have great questions.
19:17
SPEAKER_00: So the the model really lays out two paths here, right?
19:21
SPEAKER_00: There's a there's a what I'd call maybe an easier path to get to business or a lower bar, and then there's a harder path to get to business.
19:27
SPEAKER_00: And which path you get to go down is based on whether or not the set that you acquired already has outputs, right?
19:34
SPEAKER_00: So if the set is generating outputs, then the presumption is that there's probably already a substantive process there in place.
19:41
SPEAKER_00: So the bar is a little bit lower to say that you have a business, right?
19:44
SPEAKER_00: Conversely, if the set isn't producing outputs, then there's a bit of a higher bar to say that the set contains a substantive process, so you can call it a business, right?
19:52
SPEAKER_00: So to lay both of these paths out, right?
19:54
SPEAKER_00: The first path, let's say the set, I bought a set, it doesn't have outputs.
19:59
SPEAKER_00: Well, in order to be a business, the set has to include an organized workforce that's capable of producing outputs using the acquired assets, right?
20:07
SPEAKER_00: So the rationale here is that an organized workforce is necessary to say something's a business when you don't have outputs being present.
20:14
SPEAKER_00: Um, so one thing to keep in mind when we talk about an organized workforce, they have to be legal employees.
20:20
SPEAKER_00: So I can't have a contracted workforce or outsource labor and say that it's an organized workforce.
20:26
SPEAKER_04: So then in this scenario, for example, if I had, I'll use the term startup, if I have workforce working on something, it is potential then, even though if I haven't already started producing whatever this quote something is, I could potentially conclude that that's a business.
20:43
SPEAKER_04: I know there's way more judgment than that, but no, certainly that's a great example.
20:46
SPEAKER_00: And that that typically is where we see it.
20:48
SPEAKER_00: And a lot of times in practice, that's typically the first place people go.
20:52
SPEAKER_00: They say, okay, do I have outputs and do I have a workforce?
20:55
SPEAKER_00: If so, then there's probably a higher likelihood that I have a business.
20:58
SPEAKER_04: All right.
20:59
SPEAKER_04: So then let's go down this path too.
21:01
SPEAKER_04: And then again, this is my set that's already producing outputs.
21:04
SPEAKER_04: And again, maybe my large multinational could be a good example of something like this.
21:08
SPEAKER_00: Yeah.
21:09
SPEAKER_00: So here that that bar is a bit lower, right?
21:11
SPEAKER_00: So all you need to say that you have a business since you have outputs in place is uh a substantive process, but that bar to call something substantive is lower, right?
21:19
SPEAKER_00: So you can have an organized workforce, like we talked about, or you can even have a contracted labor workforce that that's fine in this one.
21:27
SPEAKER_04: It's a different bar then.
21:29
SPEAKER_04: That's right.
21:29
SPEAKER_00: Again, because it's it's lower, they figure it's something's happening there because we're producing outputs.
21:34
SPEAKER_00: So if it's a contracted workforce, then there's probably other processes in place too.
21:39
SPEAKER_00: Um lastly, you can have other processes that are significantly contributing to producing those outputs or have the ability to continue producing those outputs.
21:48
SPEAKER_00: Big takeaway here, though, is that if you have a set that's generating outputs before and after the transaction, um, it's probably more likely that there's a substantive process in place, which means you probably have a business.
21:59
SPEAKER_00: Um Our business combinations guide has some amazing examples that go into it when you're acquiring a set with and without outputs.
22:06
SPEAKER_00: So I'd encourage people to go check it out.
22:08
SPEAKER_04: All right.
22:08
SPEAKER_04: That's definitely helpful and definitely a lot to think about there.
22:12
SPEAKER_04: Anything else then before we move into the asset acquisition model, anything else that we should be talking about in terms of this sort of business versus asset acquisitions determination?
22:23
SPEAKER_02: Yeah, I guess not to belabor this uh topic um more than we have to, but it's important to remember that the SEC has a different definition of a business than the that under US GAAP.
22:32
SPEAKER_02: Um the way the SEC generally defines a business is, well, it focuses on the continuity of the operations and whether or not the revenue producing activities are similar before and after.
22:42
SPEAKER_02: Um there's also a presumption that if the assets that you've acquired are housed in a legal entity, that you've acquired a business.
22:49
SPEAKER_02: So there's a presumption you have to overcome for SEC, which doesn't exist for GAAP.
22:52
SPEAKER_02: They also don't have the screen tests under the SEC rules.
22:54
SPEAKER_02: So the end result of putting all that together is that it's going to be a lot more common that under SEC rules, the set of acquired assets is going to be a business versus US GAAP.
23:03
SPEAKER_02: So it is possible to have a transaction that is an asset acquisition for GAAP, but the acquisition of a business under SEC rules.
23:10
SPEAKER_04: Wow.
23:11
SPEAKER_04: A lot of complexity to these rules then.
23:13
SPEAKER_04: It's like someone needs you guys on speed dial to keep track of the fact that a single asset could actually be more than one asset.
23:19
SPEAKER_04: Right.
23:19
SPEAKER_04: And then the definition of business in the same set of financials, if it's followed with the SEC, actually could have two different definitions.
23:25
SPEAKER_02: Absolutely.
23:26
SPEAKER_02: And that can drive your 305 requirements, your performer requirements.
23:29
SPEAKER_02: So it definitely is important to keep in mind that you're working on two different sets of rules.
23:33
SPEAKER_04: Yeah.
23:33
SPEAKER_04: Maybe one question before we get into the actual accounting, and you may be answering this afterwards, but is there as you are working with clients, because I know you guys both come from like the deals background, do you see where there's like a leaning that, like, oh, I really am trying, I wish I had an asset or I wish I had a business?
23:51
SPEAKER_04: And obviously you have to go with your facts, but nonetheless, is there sort of one direction or the other that is people would quote prefer or it just depends?
24:00
SPEAKER_02: We do, and it depends.
24:01
SPEAKER_02: It's both of both answers.
24:02
SPEAKER_02: Okay.
24:02
SPEAKER_02: Right.
24:03
SPEAKER_02: Because um there are situations where our clients might prefer something to be an asset acquisition.
24:07
SPEAKER_02: And we're going to get into some of the key differences, but depending on how they want their um either their balance sheet to look or the earnings profile to look afterwards.
24:14
SPEAKER_02: And there are some that might want a business confidation because there are different different models.
24:17
SPEAKER_02: It really depends on what your goals are and what your perspectives are from an SEC lens, too, right?
24:22
SPEAKER_02: Like if you end up um with an asset acquisition, particularly based on the SEC definition, there might be fewer reporting requirements and performer requirements.
24:30
SPEAKER_02: So there are definitely differing perspectives and different differing wishes depending on the yeah.
24:34
SPEAKER_04: Is that your experience as well?
24:36
SPEAKER_00: Yeah, really similar.
24:36
SPEAKER_00: And I'd say back to the the scenario that you talked about where you have an asset acquisition for GAAP.
24:41
SPEAKER_00: Typically, people then are trying to make sure that they still have an asset acquisition for SEC rules because the the difference in filing requirements is just so huge.
24:50
SPEAKER_04: Yes, that that definitely makes sense.
24:51
SPEAKER_04: Okay.
24:52
SPEAKER_04: Well, I think this probably will also make more sense to our listeners if we actually talk about this framework.
24:57
SPEAKER_04: Um, because I I do know there's some very key um differences.
25:01
SPEAKER_04: So maybe Alexander going to you first.
25:03
SPEAKER_04: Now that we've decided, then what are some of the accounting points if we conclude that it is an asset acquisition that we're dealing with?
25:10
SPEAKER_00: Sure.
25:11
SPEAKER_00: So I'll talk about the framework that's laid out in ASC 80550.
25:15
SPEAKER_00: I'm gonna use a lot of examples here just because I think it's gonna illustrate the point a little bit easier.
25:19
SPEAKER_00: And I'm a debits and credits guy, so I need to keep myself honest.
25:22
SPEAKER_00: Um But I I mentioned a bit earlier that asset acquisition has a different measurement principle than business combination accounting, right?
25:29
SPEAKER_00: So if you talk to a really smart person like Matt, right, or you read any of the guidance, right, they'll tell you that asset acquisitions use a cost accumulation and allocation approach.
25:38
SPEAKER_00: Um, if you're anything like me, you probably say, okay, I understand each word that you said, but what does that mean in a sentence, right?
25:44
SPEAKER_00: So the the way I keep it straight in my head is really the idea is that I should be measuring the assets that I bought based on my cost to acquire them.
25:53
SPEAKER_00: Right.
25:53
SPEAKER_00: So as an example, if I buy a building that has a fair value of 90, and for whatever reason I paid 100 for it, and if I'm under asset acquisition model, I'd say my all-in cost was a hundred, so I need to record the asset at a hundred.
26:05
SPEAKER_04: Sort of like the amount Matt Pagey to call him super smart in this podcast.
26:09
SPEAKER_04: Exactly.
26:12
SPEAKER_00: Um so the the idea here is that my cost is gonna correspond to my basis in the asset, um, which is very different than business combination accounting, right?
26:21
SPEAKER_00: Where generally I measure those assets at their fair value, regardless of what I end up paying for it, right?
26:27
SPEAKER_00: So if I pay more or less, the difference really goes to goodwill, right?
26:30
SPEAKER_00: So in that same example, right, if I'm under business combination rules, then I need to book the building at 90 because that's its fair value.
26:37
SPEAKER_00: I still credit my cash for the hundred.
26:39
SPEAKER_00: And then that difference is gonna go to goodwill of 10.
26:42
SPEAKER_00: So in that example, you can kind of see how the different measurement principles can result in either a higher or lower asset balance, which is gonna trickle its way through the PL through higher or lower depreciation.
26:53
SPEAKER_00: Um, the big takeaway here, though, is that basically what I paid matters in an asset acquisition because that all in cost is gonna determine the basis of my assets.
27:02
SPEAKER_00: And so my starting point then is trying to figure out well, what did I pay, right?
27:06
SPEAKER_00: What's the cost of the assets?
27:07
SPEAKER_00: And then I end up allocating that cost to the individual assets that I bought.
27:11
SPEAKER_00: No goodwill, no bargain purchase gain.
27:14
SPEAKER_04: Right.
27:14
SPEAKER_04: And that's part of this no goodwill.
27:16
SPEAKER_04: That's why I asked the question earlier that it's interesting that you don't actually record goodwill, but when I'm doing my screen test, I take goodwill into account.
27:25
SPEAKER_04: If I understood you correctly, Matt.
27:27
SPEAKER_02: Correct.
27:27
SPEAKER_02: That's why the screen test is so weird, right?
27:29
SPEAKER_02: Because it's like a chicken and egg thing.
27:30
SPEAKER_02: Yeah, wait a minute, I'm trying to figure out if it's a business combination or asset acquisition.
27:34
SPEAKER_02: Why am I assuming it's a business combination for the screen test?
27:37
SPEAKER_02: But that's just what getting it.
27:38
SPEAKER_04: That's just how you do it.
27:39
SPEAKER_04: All right, that's helpful.
27:40
SPEAKER_04: And then so the Alexander, just going back to the point you just made, then if you're talking about allocation, it's this sounds a lot like our revenue model, where we say you take your transaction price and then you allocate the price to your performance obligations.
27:52
SPEAKER_00: Yeah, I think that's a perfect way to think about it.
27:54
SPEAKER_00: So if we kind of turn that into an unofficial framework here for asset acquisitions, right, I'd say it's probably a three-step approach.
28:01
SPEAKER_00: So first I need to determine the cost of the asset acquisitions for all the reasons that I talked about.
28:05
SPEAKER_00: Then I need to identify those individual assets that I bought.
28:09
SPEAKER_00: Generally speaking, it's going to be similar to how we do it in a business combination, but it's there's some differences that we'll get into.
28:15
SPEAKER_00: And then lastly, I allocate that total cost to the individual assets that I acquired in step three.
28:20
SPEAKER_00: Right.
28:20
SPEAKER_00: So we'll go through each one of the issues that come up in each one of these steps.
28:24
SPEAKER_00: But I think the the long and short is that the the cost accumulation and allocation approach is a key driver for a lot of the differences that we have in asset acquisition accounting versus business combination accounting.
28:36
SPEAKER_00: And it's one of the reasons that the model tends to get tricky and there's a lot of questions that come up in asset acquisitions.
28:41
SPEAKER_02: One of one of those, just to interrupt for a second, one of the things we uh we often do when we're talking about asset acquisitions is we're refer we refer to the assets that were acquired or the group of assets that were acquired.
28:50
SPEAKER_02: But I did say earlier that this could happen where you acquire the stock of a legal entity and it's still an asset acquisition.
28:56
SPEAKER_02: So we we are gonna allocate value to the assets acquired, but also the liabilities assumed in some cases.
29:01
SPEAKER_02: So just make sure we're not gonna you know gloss over that point.
29:04
SPEAKER_04: Yes, but back to the screen tests, you only are looking at the assets.
29:07
SPEAKER_04: Correct.
29:08
SPEAKER_04: All right, so it's important to anchor on that.
29:09
SPEAKER_04: But say for this purpose, then obviously you need to record those liabilities.
29:13
SPEAKER_04: You can't ignore the fact that you require them.
29:16
SPEAKER_04: Yeah, that's a good reminder.
29:17
SPEAKER_04: All right.
29:17
SPEAKER_04: Anything else then, Alexander?
29:19
SPEAKER_04: Like big picture?
29:20
SPEAKER_00: Yeah, I'd say the the cost accumulation is one reason stuff gets tricky.
29:25
SPEAKER_00: The other reason that stuff gets tricky is because ASC 805, which covers asset acquisition accounting, doesn't always have explicit guidance on a lot of the things that end up coming up when I start to do the accounting for these things.
29:36
SPEAKER_04: All right.
29:36
SPEAKER_04: So then since there's no guidance, how do people know what to do?
29:40
SPEAKER_02: Right.
29:40
SPEAKER_02: A lot of times we just make things up.
29:44
SPEAKER_04: I know uh clients love that answer, Matt.
29:46
SPEAKER_02: Mostly kidding on that.
29:47
SPEAKER_02: Um so so yeah, I mean, there's no there's no codification reference you can look to other than 8050 that talks about what do you do in an asset acquisition?
29:56
SPEAKER_02: So we generally have three buckets of alternatives as to how to figure out what to do with each individual asset or liability that I've acquired in that set of assets.
30:05
SPEAKER_02: The first is you determine does other gap apply?
30:07
SPEAKER_02: So that's pretty straightforward if you don't have um guidance that says, hey, you've done an asset acquisition, here's what you do.
30:12
SPEAKER_02: You look to each individual asset or liability and you say, well, what gap would I apply if I bought or assumed that individually?
30:18
SPEAKER_02: Um the second might be to analogise to business combination accounting.
30:22
SPEAKER_02: So in a lot of cases, these asset acquisitions feel very similar to a business combination, particularly when you get caught on the screen test, right?
30:29
SPEAKER_02: So you could be out there acquiring like a large biotech company that feels like it's a business, but it failed under the screen test, so it's an asset acquisition.
30:37
SPEAKER_02: And it might feel appropriate in certain cases for certain things to analogise to the BISCOM accounting.
30:42
SPEAKER_02: Um, the third would be to kind of rely on the historical accounting that used to exist in business combination world under FAS 141, for those of us old enough to remember.
30:52
SPEAKER_02: That model was a cost accumulation model.
30:54
SPEAKER_02: So very similar to what we're talking about with the current model for asset acquisitions.
30:58
SPEAKER_02: Um so there was a lot of useful guidance in there on certain areas that that you know maybe didn't carry forward because it was all superseded.
31:05
SPEAKER_02: Um, but might be good to like go back in your way back machine and and uh and figure out how we use it.
31:11
SPEAKER_02: Exactly.
31:11
SPEAKER_02: Exactly.
31:12
SPEAKER_02: And and for old people like us.
31:14
SPEAKER_04: Yes, exactly.
31:15
SPEAKER_02: Strike that.
31:15
SPEAKER_02: No, no, no, old people like me.
31:17
SPEAKER_04: I'm older than both of you by far.
31:20
SPEAKER_04: So just to be clear to our lips and ears.
31:22
SPEAKER_04: So, all right, so then if we kind of think this through, it sounds like some examples will be helpful because I know, again, to illustrate tricky things.
31:29
SPEAKER_04: And um, Alexander, you already made the point about deficit credits, so it's helpful.
31:33
SPEAKER_04: Maybe we can use then this sort of unofficial framework to run through that.
31:37
SPEAKER_04: Matt, if you want to start with that.
31:38
SPEAKER_02: So, yeah, and Alexander's unofficial model, I guess step one is determining what you paid for the assets, right?
31:44
SPEAKER_02: So, in certain cases, that's gonna be straightforward, right?
31:47
SPEAKER_02: So if you pay all cash and it's all up front to acquire a set of assets, um, you know what you've paid.
31:53
SPEAKER_02: It's the cash amount.
31:54
SPEAKER_02: Um, it can get a little trickier if your consideration includes non-cash consideration, right?
32:01
SPEAKER_02: That's where um there actually is guidance in ASC 8050 on non-cash consideration.
32:05
SPEAKER_02: It's kind of shoots you in different directions.
32:07
SPEAKER_02: It says, well, your transaction might be um in the scope of ASC 845, which is non-monetary exchanges, right?
32:13
SPEAKER_02: Non-cash, non-monetary.
32:14
SPEAKER_02: Or you might be in ASC 61020, right?
32:18
SPEAKER_02: So that sounds a little tricky, but it the the idea is you're buying an asset and you're giving up an asset to get it.
32:24
SPEAKER_02: So the derecognition of non-financial assets might be relevant for the one you gave up.
32:28
SPEAKER_02: Um so there is guidance around non-cash consideration.
32:32
SPEAKER_02: Um, one last area that comes up sometimes is when you issue equity to acquire a set of assets.
32:38
SPEAKER_02: And you know, some people analogize to or think the scope of 718, which is the stock comp guidance, might apply there, right?
32:44
SPEAKER_02: You're issuing equity in exchange for goods or services, and the goods here being the assets.
32:49
SPEAKER_02: Um and some folks would rather just rely on the guidance within ASE 80550 and account for it on the date that the transaction closes.
32:57
SPEAKER_02: The big difference there being the date that you measure the value of the consideration you transferred, right?
33:01
SPEAKER_02: Stock comp would be the grant date, and it's five fifty would be the date the transaction closes.
33:05
SPEAKER_02: So different difference in measurement date.
33:07
SPEAKER_02: That's really kind of up to folks uh as an accounting policy choice, but apply it consistently on deals.
33:13
SPEAKER_04: And listeners, if you are thinking that's a lot of details, so am I, but you definitely can check out the guidance.
33:18
SPEAKER_04: And I know there's more to think about here too, Matt.
33:21
SPEAKER_02: Right.
33:21
SPEAKER_02: So that was non-cash consideration.
33:23
SPEAKER_02: I think the other tricky area in step one is contingent consideration, right?
33:27
SPEAKER_02: And this we see probably w way more often than the non-cash consideration.
33:31
SPEAKER_02: And right, it's an area where we tend to send people into kind of bucket A, right, of the of the three three buckets, right?
33:39
SPEAKER_02: Because there is existing gap that that would tell you how to deal with contingent consideration.
33:42
SPEAKER_02: But first, let me back up, right?
33:43
SPEAKER_02: So, what is contingent consideration?
33:44
SPEAKER_02: I know we talk about this a lot on our VizCom podcasts, but it's generally a situation where like the buyer and seller haven't reached an agreement on the total purchase price.
33:53
SPEAKER_02: So the situation might be you pay an amount up front, you agree to pay uh an additional amount later on.
33:58
SPEAKER_02: A lot of times we'll see it based on performance metrics that the target or the set of assets that you've acquired has reached, right?
34:04
SPEAKER_02: So I'll pay an extra 10 bucks if you hit an EBITDA target of blank.
34:08
SPEAKER_02: Um that's generally how contingent consideration works.
34:11
SPEAKER_02: Um comes up a lot in the pharma space, right?
34:14
SPEAKER_02: Another example we see is an upfront payment with a contingent payment on FDA approval, right, down the road.
34:19
SPEAKER_02: Um, so like I said, there is existing gap that tells you how to deal with this.
34:23
SPEAKER_02: And we we generally refer to ASC 450 on contingencies or contingent liabilities.
34:28
SPEAKER_02: Um the general model in an asset acquisition when you have this contingent amount that you might have to pay based on a future event is when it's that future um payment is probable and it's estimable, right?
34:38
SPEAKER_02: The estimable one is generally easy because that's laid out in the contract.
34:42
SPEAKER_02: Probable can be harder.
34:43
SPEAKER_02: Um, so you're dealing with earnings targets, you kind of know as the year goes on or the two years goes on when that becomes probable.
34:49
SPEAKER_02: When you're dealing with events like FDA approval, you might not hit probable until the event actually occurs or right before.
34:56
SPEAKER_02: So all of that, right, ASC uh 450 or contingent liabilities assumes that the contingent consideration arrangement um doesn't have to be accounted for as a derivative, right?
35:05
SPEAKER_02: So we always have to look for derivative accounting first.
35:07
SPEAKER_02: I know our listeners don't want to hear that, but under ASC 815, most of these arrangements probably meet the technical definition of a derivative.
35:14
SPEAKER_02: However, most of them probably also qualify for a scope exception.
35:17
SPEAKER_02: So we do see a lot of situations where you got to run through the model to figure out if ASC 815 accounting is appropriate.
35:24
SPEAKER_02: And that model is a fair value day one with a mark to mark it over every reporting period over time until it's resolved.
35:30
SPEAKER_02: Um if if you don't meet the definition of a derivative or you qualify for a scope exception, then you default to the ASC450 model.
35:37
SPEAKER_02: Um, the next kind of area of complexity that we hear around contingent consideration is all right, well, what do I do when I make the payment, if I make the payment?
35:45
SPEAKER_02: Like what do I do when it occurs?
35:48
SPEAKER_02: Generally, in an asset acquisition, you think about that as being an addition to the basis of the assets you acquired.
35:53
SPEAKER_02: It sounds very simple when you've acquired one asset.
35:55
SPEAKER_02: So you acquire a building, you have to make an additional payment two years down the road, you add it to the basis of your building.
36:00
SPEAKER_02: There's a couple of complexities there.
36:02
SPEAKER_02: One is, well, if it's really meant to true up what the original purchase price of the building should have been, don't I have two years of depreciation I have to catch up on?
36:10
SPEAKER_02: Um generally we say, yeah, I mean, that's the appropriate way to do it, this catch up depreciation.
36:14
SPEAKER_02: So you gotta you gotta reflect that.
36:16
SPEAKER_02: And the other is, well, what if it's a lot of assets?
36:19
SPEAKER_02: What if I had five different assets?
36:21
SPEAKER_02: Um, and how do I allocate between them?
36:23
SPEAKER_02: So generally we we tell people look at the assets that were acquired on the original acquisition date and allocate amongst those assets using a similar methodology that you used originally.
36:31
SPEAKER_02: Sounds again like a straightforward answer, but the nature of certain assets changes over time, right?
36:36
SPEAKER_02: So if you think about my pharma example where you acquire IP R and D, well, two years ago it might have been IPRD.
36:42
SPEAKER_02: Today it might be IP.
36:43
SPEAKER_02: So you might have expensed a lot.
36:45
SPEAKER_02: Oh, spoiler alert, right?
36:47
SPEAKER_02: So you might have expensed a lot up front.
36:49
SPEAKER_02: Um, whereas now you might be taking some of that contingent consideration and capitalizing it.
36:54
SPEAKER_02: So there's some complexity there as well.
36:56
SPEAKER_04: So, Matt, what's been going through my head the whole time you were walking into your example is that this does not sound like a business combination.
37:03
SPEAKER_04: Am I thinking about that the right way?
37:05
SPEAKER_04: The way you handle contingent consideration?
37:07
SPEAKER_02: Totally.
37:08
SPEAKER_02: Yeah, you are thinking about that the right way.
37:09
SPEAKER_02: It's it's very different from what we do in a business combination, right?
37:12
SPEAKER_02: In a business combination, contingent consideration arrangements are fair valued as of the date of close of the transaction.
37:19
SPEAKER_02: Um, and you're generally recording them as a liability in almost all cases and marking it to market over time.
37:25
SPEAKER_02: So it's almost like when I was walking through how 815 accounting would work in an asset acquisition, it's almost like that accounting, right?
37:31
SPEAKER_00: Yeah, and I'd say the reason for the complexity here, right?
37:34
SPEAKER_00: And why maybe it doesn't sound familiar, Heather, is because business combinations do have specific guidance around contingent consideration, but the 80550 model for asset acquisitions is silent.
37:44
SPEAKER_00: So this is why we tend to look to our three buckets that Matt talked about to figure out how to do the accounting for it.
37:50
SPEAKER_04: So I'm slightly confused by something because there is guidance under business combinations.
37:56
SPEAKER_04: So wouldn't you just look to that guidance if you say, well, we don't have any guidance here under asset acquisitions?
38:02
SPEAKER_02: Yeah, the the reason why we laid out bucket A, B, and C in the order that we laid it out is we we tend to try to figure out first if there's other guidance that directly applies to the transaction we're talking about.
38:11
SPEAKER_02: So we do believe that ASC 450 is the more and and AC 815, when appropriate, are the more appropriate models to use for contingent consideration and asset acquisitions because it's directly on point.
38:22
SPEAKER_04: Got it.
38:22
SPEAKER_04: That's actually very helpful clarification.
38:24
SPEAKER_04: So one other scenario then that we didn't talk about here for thinking about contingencies is in your example, they paid in cash.
38:32
SPEAKER_04: And so like you kind of know upfront how much you're gonna get.
38:36
SPEAKER_04: But if it's settled in shares, how do you think about the gap?
38:40
SPEAKER_02: Yeah, no, I'm glad.
38:41
SPEAKER_02: Well, I'm not really glad you asked because it's hard, right?
38:43
SPEAKER_02: So we're laying we're layering complexity on complexity here, right?
38:46
SPEAKER_02: Um shared share deals with contingent considerations a little bit different.
38:50
SPEAKER_02: And you have to, again, we we're gonna look to whether or not there's any existing gap on point.
38:56
SPEAKER_02: Generally, there is for um contingencies that are gonna be settled in a variable number of shares down the road.
39:01
SPEAKER_02: We're generally looking to see if it meets the definition of a liability under AC 480, or potentially, um, if not, how do we how do we classify like a freestanding financial instrument that's settleable in shares?
39:12
SPEAKER_02: We do that using um a couple paragraphs in 815, right?
39:15
SPEAKER_02: It's A1540, uh, and try to figure out if it's liability or equity classified.
39:19
SPEAKER_02: It's very complicated, and we do have guidance in the financial instruments guides um around around both of those areas, around 480 and 815.
39:26
SPEAKER_02: The bottom line is you're usually gonna end up with a liability that you're marking to market when you have contingent consideration arrangements for asset acquisitions that are share settled.
39:36
SPEAKER_04: All right.
39:36
SPEAKER_04: Definitely a lot to think about there.
39:38
SPEAKER_04: Yeah.
39:38
SPEAKER_04: Um, and again, maybe we can get to some references there at the end.
39:42
SPEAKER_04: So I'm sort of hoping you say there aren't any, but what are any other areas of complexity that you would think about when you're trying to determine cost of an asset acquisition?
39:51
SPEAKER_02: Yeah, I'm gonna throw a simpler one out there.
39:54
SPEAKER_02: Okay, that's good.
39:54
SPEAKER_02: It's an area of complexity, but it's a simpler area of complexity.
39:57
SPEAKER_02: Uh so transaction costs.
39:59
SPEAKER_02: Right.
39:59
SPEAKER_02: So for business combinations, I think you know it's been drilled in all of our heads over the years that expens uh transaction costs of business combinations are expensed as incurred.
40:07
SPEAKER_02: All right, they're not part of the fair value of any of the assets you've acquired.
40:10
SPEAKER_02: For asset acquisitions, the guidance isn't clear, right?
40:14
SPEAKER_02: There's nothing in ASE 80550 that says here's what you do.
40:18
SPEAKER_02: Um, but it is a cost accumulation model.
40:20
SPEAKER_02: So it is kind of clear that if you've spent the money to acquire the asset, it should be part of the basis of your asset.
40:26
SPEAKER_02: So for asset acquisitions, we're looking at an all-in cost, inclusive of any direct and incremental transaction cost to acquire the asset.
40:33
SPEAKER_02: That's gonna be part of the basis of your asset.
40:36
SPEAKER_02: So again, it's a little bit simpler than some of the things we've been talking about.
40:39
SPEAKER_02: Um, why does this really matter?
40:41
SPEAKER_02: Well, it matters because your the basis of your asset's gonna be a little bit higher, right?
40:45
SPEAKER_02: Based on the cost you spent for legal or due diligence or whatever you had to pay to get that asset.
40:50
SPEAKER_02: So that's gonna be a little bit more of an increase in your future amortization and impact earnings in that way.
40:55
SPEAKER_02: You know, what are the areas of complexity here?
40:57
SPEAKER_02: Because there are a couple, right?
40:58
SPEAKER_02: One question we get a lot is hey, like I'm I'm doing this asset acquisition, I'm starting to incur costs this year, but it's not gonna close until the following year.
41:07
SPEAKER_02: So what do I do with those costs?
41:09
SPEAKER_02: Do I have to expense them or can I start capitalizing?
41:11
SPEAKER_02: And we generally tell people, yeah, if you're if you're working your way towards an asset acquisition where the costs have to be capitalized, those should be treated as a prepaid expense in the current period, and we'll re-characterize or reclassify them to the basis of the asset once the transaction's closed.
41:26
SPEAKER_02: Sometimes that's easier said than done because this year I might be working on a transaction.
41:31
SPEAKER_02: I might not know if it's going to be a business competition or an asset.
41:34
SPEAKER_02: Right.
41:34
SPEAKER_04: Or that it's even gonna thin a but close ultimately.
41:38
SPEAKER_02: Exactly.
41:39
SPEAKER_02: Um, I might also have to do proformas, right, in advance of determining whether a uh business.
41:44
SPEAKER_02: So this this issue comes up where you're doing things in advance of really knowing or doing the determination.
41:49
SPEAKER_02: And I can't tell you there's an easy answer for that.
41:51
SPEAKER_02: I can't tell you, you know, whether or not you think the the costs meet the definition of an asset, whether or not there's justification to capitalize them, that all has to come into play.
42:00
SPEAKER_02: Um, so that that's an area of complexity that I don't think there's an easy answer for, an easy easy solution.
42:05
SPEAKER_04: All right.
42:05
SPEAKER_04: So at the risk of bringing up another complex question, one of the things that we brought up a few times here is this idea that you could acquire this particular asset we're talking about either by acquiring sort of title to the asset or a group of assets themselves, or through a legal entity.
42:23
SPEAKER_04: So if in the case that I do wind up purchasing the shares of an entity, then what are some of the issues that come into play?
42:32
SPEAKER_00: Yeah, I'd say that maybe thinking about it two ways.
42:35
SPEAKER_00: First, the model is still the same, right?
42:37
SPEAKER_00: Regardless of whether you purchase an asset directly or you obtain control over a legal entity that that holds and controls the asset.
42:43
SPEAKER_00: The first thing you need to do is figure out, run through the fund model that we talked about, the two steps on figuring out if I have an asset acquisition or a business combination.
42:52
SPEAKER_00: So um, if it ends up being an asset acquisition, which definitely does happen, um, then there tends to be additional complexities and fun stuff to pop up.
43:00
SPEAKER_00: Um, so one example is when there's a non-controlling interest still left in the entity after I buy it, right?
43:07
SPEAKER_00: So this is when a buyer obtains control over a legal entity, but they buy something less than 100% of the shares.
43:12
SPEAKER_00: So illustrating with an example, right?
43:14
SPEAKER_00: So let's say I pay$80 to obtain an 80% controlling interest in a legal entity that holds an asset.
43:20
SPEAKER_00: And let's just say we did our analysis, we definitely have an asset acquisition.
43:24
SPEAKER_00: Well, I only bought 80% of the equity, which means there's a remaining 20% non-controlling interest or NCI.
43:30
SPEAKER_00: Question is how do I account for that 20%, right?
43:33
SPEAKER_00: I I know I need to book something, right?
43:35
SPEAKER_00: I'm getting to my debits and credits, I'm gonna credit cash for the 80, and I definitely need to credit the NCI for the portion of the entity that I don't own, right?
43:42
SPEAKER_00: But the real question is what value do I use to record that NCI?
43:46
SPEAKER_00: Uh, obviously, this is gonna matter because it's gonna set the basis in my asset and in the offsetting debit.
43:51
SPEAKER_00: Right.
43:51
SPEAKER_00: So, interestingly enough, this is another area where uh 80550 doesn't address NCI relationships, and so this is another area.
44:00
SPEAKER_00: Area where, you know, using Matt's model, we kind of make it up.
44:02
SPEAKER_00: So there's there's two commonly accepted approaches here in practice.
44:05
SPEAKER_00: So the first one is say, hey, record the NCI at its fair value at the acquisition date.
44:11
SPEAKER_00: Basically, an analogy to business combinations guidance, which has explicit guidance on dealing with NCI, and that guidance would say record it at fair value.
44:19
SPEAKER_00: So bucket B, I believe, in Matt's approach.
44:22
SPEAKER_00: So in our example, if the NCI had a fair value of 20 on the acquisition date, we'd record the NCI at 20, which would result in the asset being booked at 100, right?
44:30
SPEAKER_00: The$80 I paid plus a 20 NCI.
44:33
SPEAKER_00: Approach two, which is also acceptable, is to say, well, no, I should be recording the NCI at its carrying amount in the acquired entity.
44:40
SPEAKER_00: So basically applying that cost accumulation principle from the historical guidance bucket C.
44:45
SPEAKER_00: So if the asset had a carrying value in the entity pre-deal of 50, then 20% of that is going to be$10, right?
44:53
SPEAKER_00: So we'd record the asset at 90, right?
44:56
SPEAKER_00: That I'd pay the cash of 80 plus the$10 NCI value, which is going to result in a lower asset balance.
45:02
SPEAKER_00: Um I'd say we we say entities can apply either approach.
45:05
SPEAKER_00: The the big takeaway here though, it is a policy that needs to be consistently applied when people do it.
45:10
SPEAKER_04: And do you see people taking one approach over the other?
45:13
SPEAKER_04: To me, the the first seems more straightforward, but just curious.
45:18
SPEAKER_00: I've I've seen both.
45:19
SPEAKER_00: I typically see more people use the first approach as well.
45:22
SPEAKER_00: And just from a personal standpoint, I think that's more technically pure in my mind.
45:26
SPEAKER_04: Yeah, that's kind of immediately when you were describing it, what I was thinking.
45:30
SPEAKER_04: So okay, that's very interesting.
45:32
SPEAKER_04: And then so how about in the case where I know we see this often, where you maybe have a stake in um a legal entity and then you decide to purchase the controlling interest in the entity.
45:44
SPEAKER_04: How do you think about that initial interest that you're holding?
45:47
SPEAKER_00: Yeah.
45:48
SPEAKER_00: Uh so we typically call those previously held equity interests or PHEI, right?
45:53
SPEAKER_00: So an example of this would be if I owned a 20% stake in a legal entity that held an asset.
45:58
SPEAKER_00: And let's say today the carrying amount of my 20% interest is 10 bucks, but its fair value is 20.
46:05
SPEAKER_00: So then I decide I want to buy the remaining 80% for 80 bucks.
46:08
SPEAKER_00: So now I own 100% of the entity.
46:10
SPEAKER_00: Let's just skip the end and say the transaction is an asset acquisition.
46:14
SPEAKER_00: Question here is what do I do with that 20% previously held equity interest?
46:18
SPEAKER_00: Yeah, so I know I need to de-recognize it, but do I derecognize it at its current carrying amount of$10?
46:23
SPEAKER_00: Or do I first re-measure it to its fair value of$20 and then derecognize it?
46:28
SPEAKER_00: So again, this is all a measurement issue, but it's important because it's going to impact the basis of the asset that I'm buying.
46:33
SPEAKER_00: So just like the NCI that we discussed, 8050 doesn't actually have explicit guidance on previously held equity interests.
46:39
SPEAKER_00: Right.
46:40
SPEAKER_00: So typically we see people follow the same approach as they do with non-controlling interests, where we'd say two approaches are acceptable.
46:46
SPEAKER_00: Approach one would say to re-measure the PHEI to its fair value first before derecognizing it, which is a direct analogy to the business combinations guidance.
46:55
SPEAKER_00: So the result here would be a$100 basis in the asset because I'm re-measuring that PHEI to its fair value with an offsetting gain or loss to the PL before I then write it off at 20, recognize the cash that I'm de-recognizing at 80, and the offset being the$100 basis in the asset.
47:11
SPEAKER_00: Approach two would say no, use a cost accumulation approach, de-recognize that it's carrying amount, no remeasurement.
47:18
SPEAKER_00: So the result's a$90 basis in my asset.
47:21
SPEAKER_00: Um,$80 for the cash that I paid,$10 for the previously held equity interest that I'm de-recognizing, and$90 asset.
47:28
SPEAKER_00: Again, this is a policy election that should be consistently applied.
47:31
SPEAKER_04: All right.
47:32
SPEAKER_04: So thank you.
47:33
SPEAKER_04: That was very helpful.
47:34
SPEAKER_04: I think there's definitely a lot more of those types of scenarios in this sort of bucket A, but maybe we should go down the second step in this unofficial framework.
47:42
SPEAKER_04: So, Matt, from your point of view, are there any major issues that come up that, you know, in these asset acquisitions that our listeners should be aware of?
47:50
SPEAKER_04: And in particular, again, this is a place where I think there's some differences when we're talking out about IPRD.
47:55
SPEAKER_04: She could probably also explain to our listeners what that abbreviation means.
47:59
SPEAKER_02: I was intending to, I promise.
48:01
SPEAKER_02: Yeah.
48:01
SPEAKER_02: So the second step in the in the uh unofficial model, right, is identifying the assets acquired.
48:06
SPEAKER_02: And I think IPRD are in process of research and development is a good example of that.
48:12
SPEAKER_02: I mean, there are a few other examples.
48:13
SPEAKER_02: We're going to get into IPRD, right?
48:15
SPEAKER_02: But it's anywhere where ASC 805 is explicit about here's how you account for X, Y, or Z asset, or here's how you identify the various assets.
48:24
SPEAKER_02: If it's specialized ASC 805 accounting, we generally aren't going to see that for asset acquisitions, right?
48:30
SPEAKER_02: So other examples might be indemnification assets or reacquired rights or things where you can find whole paragraphs in 805 around this is how you account for these uh assets you've identified.
48:40
SPEAKER_02: We just don't have that kind of guidance for asset acquisitions.
48:43
SPEAKER_02: So IPRD is a good example because business combination accounting has special accounting for IPRD.
48:49
SPEAKER_02: Basically says you get to put that on your balance sheet, capitalize it as an intangible asset.
48:54
SPEAKER_02: It's indefinite live until either you abandon it so the research doesn't pan out, or until it's successful, at which point when it's ready to be placed in service, you start amortizing it over its useful life.
49:06
SPEAKER_02: Um, so why is that special accounting?
49:08
SPEAKER_02: Because any internally developed RD, so any IP RD that you're expending to develop your own assets are expensed as incurred, right?
49:16
SPEAKER_02: So ASC 730 dictates that unless those assets have an alternative future use, you have to run those through the PL as RD expense in the current period.
49:24
SPEAKER_02: So special accounting under AAC805, we don't get that accounting under asset acquisitions.
49:29
SPEAKER_02: And this is one of those examples where we go into bucket A, which is there is other gap on point, right?
49:34
SPEAKER_02: It mentioned it's ASC 730.
49:35
SPEAKER_02: So in an asset acquisition, you expense it.
49:37
SPEAKER_02: Wow.
49:38
SPEAKER_02: Right.
49:38
SPEAKER_02: Which is a huge difference if you're talking about pharma acquisitions in an asset deal versus a business combination where the the primary driver of the value of the deal is the IPRD you're acquiring.
49:48
SPEAKER_02: And it's either a one-time huge uh income statement or it could get capitalized and then eventually amortized through your PL.
49:55
SPEAKER_04: So you really want to acquire the employees when you're acquiring a bunch of pharma IPRD.
50:00
SPEAKER_02: So this is funny.
50:01
SPEAKER_02: You asked uh, do people have a preference between asset business combinations?
50:04
SPEAKER_02: It's even mixed here.
50:05
SPEAKER_04: Um it it really depends on Oh, because they might want to have this big upfront expense.
50:11
SPEAKER_04: And then you have these this IPRD that eventually pays off, and you don't have a big base.
50:17
SPEAKER_02: It really depends on the CFO and the investor relations uh department and how they've been communicating to you Wall Street and the analysts around what their plans are for internally versus externally developed IP, or if there have been preparations around what your EPS is going to look like.
50:30
SPEAKER_02: So all of that around is it really just a matter of perspective and what and what you've been communicating.
50:35
SPEAKER_02: And so it can really vary even within an industry.
50:38
SPEAKER_04: All right, very interesting.
50:39
SPEAKER_04: So I know again, probably have more to talk about there, but let's go to our final step, which is allocating costs to the individual assets.
50:45
SPEAKER_04: And this one I could probably answer the relative fair value basis.
50:49
SPEAKER_00: Yes, for the most part.
50:51
SPEAKER_00: Yes.
50:52
SPEAKER_00: So the allocation model is technically a relative fair value basis, and that's pretty straightforward when your cost equals the fair value of the individual assets, right?
51:01
SPEAKER_00: So if I buy two assets, each has a fair value of$50 and I pay a hundred bucks in total, right?
51:07
SPEAKER_00: I'm just gonna allocate the price of the individual assets, easy peasy.
51:10
SPEAKER_00: Life is good.
51:12
SPEAKER_00: But the allocation gets a little bit wonky when the cost that I pay starts to get significantly above or below the fair value of the assets that I'm buying.
51:20
SPEAKER_00: So it's a little bit easier to lay out with an example.
51:22
SPEAKER_00: So I'll start with a scenario where my cost is well above the fair value of the assets that I'm acquiring.
51:27
SPEAKER_00: So let's say I buy a building along with some working capital assets.
51:31
SPEAKER_00: I do the screen test, I get caught up, it's treated as an asset acquisition.
51:34
SPEAKER_00: So I paid$100 for the set, right?
51:36
SPEAKER_00: The building has a fair value of$50, and the working capital has a fair value of 20.
51:41
SPEAKER_00: Um, so in this scenario, I bought assets worth 70, but I paid 100, right?
51:46
SPEAKER_00: So that$30 excess indicates that there might be some value in the set that I'm not currently accounting for, right?
51:52
SPEAKER_00: So we'd say to do a couple of things here first, right?
51:55
SPEAKER_00: First, we'd say double and triple check that you've identified all of the assets in that set, right?
52:00
SPEAKER_00: Including any intangible assets that need to be brought on as part of that.
52:04
SPEAKER_00: Then we'd say confirm that you valued those assets correctly, right?
52:07
SPEAKER_00: And assuming you've done that and you still have an excess of cost over fair value, you probably need to recheck that it's not actually a business combination because that might excess might indicate that there's some sort of processes in place or potentially some synergies there that could indicate that the set actually is a business.
52:25
SPEAKER_00: So once you've rechecked everything and you're pretty sure you got everything right and you still have an excess, then you need to allocate that excess to the assets, which sounds pretty straightforward.
52:34
SPEAKER_00: But the thing to keep in mind is you don't want to allocate any excess to an asset that you're gonna have an immediate write down back to its fair value, right?
52:42
SPEAKER_00: So things like financial assets or other assets that require a recurring impairment test, practice doesn't like it when you have an immediate write down of those, right?
52:50
SPEAKER_00: The idea being that there's no economic event that triggered the write down, so it wouldn't make sense to set yourself up for failure and do it that way.
52:56
SPEAKER_00: Right.
52:56
SPEAKER_00: So because of that, things like financial assets or those other assets are typically capped at their acquisition date fair value to avoid that built-in write down.
53:05
SPEAKER_00: So when we go back to our example, when we have an excess of cost over fair value, we typically only allocate that excess to the non-financial assets or any assets that wouldn't get resulted in an immediate write down.
53:18
SPEAKER_00: So for our example, we paid$100 for assets worth$70, right?
53:22
SPEAKER_00: The building's worth$50, the working capital's worth$20.
53:25
SPEAKER_00: Since the working capital assets are financial assets, we'd allocate that entire$30 excess to the building, right?
53:31
SPEAKER_00: So we'd be crediting the cash that we paid for$100, we'd debit the working capital at its fair value of$20, and then the remainder would go into the building.
53:39
SPEAKER_00: So it'd be$80 in total, the$50 fair value plus that$30 excess.
53:44
SPEAKER_04: All right.
53:44
SPEAKER_04: And so what if you were a better negotiator and you actually paid less than the fair value of the house is acquired?
53:50
SPEAKER_04: Then what should I do?
53:51
SPEAKER_00: I've never done that.
53:52
SPEAKER_00: So that's typically Matt that might that might be in that scenario, master negotiator.
53:56
SPEAKER_02: My first advice, piece of advice is to approach the situation with a lot of skepticism and to remind folks that that situation is going to be extremely rare, which is exactly what we do when um folks um think they have a bargain purchase game and business combination, right?
54:09
SPEAKER_02: So we say go back and check your numbers.
54:11
SPEAKER_02: Um, like Alexander said in his example, you want to make sure you've got all your liabilities accounted for um because you might be missing something.
54:18
SPEAKER_02: The the ability to negotiate better than anybody else is just really something that doesn't exist in a marketplace unless there's a distressed sale, um, or you know, potentially there are some liabilities that don't get recognized, so under gap.
54:32
SPEAKER_02: So that could that could lead to these situations, but they don't come up a lot.
54:35
SPEAKER_02: Um, but it's generally the opposite of what um kind of Alexander laid out, right?
54:39
SPEAKER_02: So the example that he used was you acquired a set of assets, right?
54:43
SPEAKER_02: A building and working capital, the building's worth 50, the working capital is worth 20, um, but you only paid, what, 40, let's say, right?
54:50
SPEAKER_02: Okay.
54:50
SPEAKER_02: So you have this kind of difference or this implied kind of bargain that you got of$30.
54:55
SPEAKER_02: Um, generally, right, we're gonna take that and we're gonna reduce the um basis of the assets by that amount, right?
55:01
SPEAKER_02: We don't recognize bargain purchase gains and asset acquisitions, we reduce the basis of your assets.
55:06
SPEAKER_02: Because 20 is working capital, it's worth what it's worth, right?
55:09
SPEAKER_02: Those are generally receivables in inventory.
55:11
SPEAKER_02: We're gonna reduce long-lived assets um first.
55:13
SPEAKER_02: And and in this case, since we have the fair value, enough fair value in the building to reduce, because Alexander gave me an easy example to work with, we're gonna reduce that by 30.
55:21
SPEAKER_02: Um, and the basis of that of that building would be 20.
55:23
SPEAKER_02: When you have financial assets, again, this becomes harder, or assets that are marked to market, this becomes all right.
55:29
SPEAKER_04: Yeah, it's much more complicated.
55:30
SPEAKER_04: Yeah.
55:31
SPEAKER_04: All right.
55:31
SPEAKER_04: So then we're getting close to time, or maybe at time.
55:35
SPEAKER_04: So anything else in a lightning round that our listeners should think about.
55:39
SPEAKER_04: And then I have two theoretical questions for you.
55:41
SPEAKER_02: Yeah, no problem.
55:42
SPEAKER_02: I love a lightning round.
55:43
SPEAKER_02: So the first thing we'll bring up is um pushdown accounting.
55:45
SPEAKER_02: So push down accounting is when you have a business combination, right?
55:49
SPEAKER_02: And you are the acquirer, so you're fair valuing all of the assets and liabilities and acquisition accounting.
55:53
SPEAKER_02: And it's optional as to whether or not you want to push that basis down to the standalone financial statement to the target or any of its subsidiaries.
56:00
SPEAKER_02: Um, so that's a business combination.
56:01
SPEAKER_02: And in asset acquisition, that option doesn't exist.
56:04
SPEAKER_02: You cannot apply push down accounting in an asset acquisition.
56:07
SPEAKER_02: So we just wanted to make sure we get that across.
56:09
SPEAKER_04: Yes, important.
56:10
SPEAKER_00: Yep.
56:10
SPEAKER_00: In a business combination, acquirer typically has a year to adjust any amounts that are provisionally recognized.
56:15
SPEAKER_00: That concept of a measurement period doesn't exist in asset acquisition land.
56:20
SPEAKER_00: So sometimes the questions come up as to whether we have a measurement period.
56:23
SPEAKER_00: The answer is short answers, no.
56:25
SPEAKER_00: Any changes that you're gonna make are gonna have to run through ASC 250 for accounting changes and error corrections.
56:31
SPEAKER_04: Oh, very good reminder.
56:32
SPEAKER_04: All right, Matt, can you top that?
56:33
SPEAKER_02: Okay, last one.
56:34
SPEAKER_02: I don't know if I can top it, but I'm gonna bring up VIEs because I always bring up.
56:37
SPEAKER_04: Oh, yes, every time Matt and I talk to each other.
56:39
SPEAKER_02: It's like you with PowerPoint.
56:40
SPEAKER_04: Exactly.
56:41
SPEAKER_02: So VIEs, there there are specialized rules for asset acquisitions that are resident within a VIE.
56:45
SPEAKER_02: So if you acquire a legal entity that's a VIE, but also an asset acquisition, you don't follow anything that we just said.
56:50
SPEAKER_02: Um you look to 810, there's a paragraph in 810 that talks to you about you're really just doing more business combination like accounting in those situations with some differences, including that you don't get to recognize goodwill, and there may be a gain or a loss on that acquisition.
57:03
SPEAKER_02: So kind of bizarre accounting.
57:04
SPEAKER_04: All right, so good reminders there.
57:06
SPEAKER_04: So two questions for you guys.
57:07
SPEAKER_04: First of all, uh, this is gonna test your conceptual knowledge of gap.
57:11
SPEAKER_04: Why is there such a big difference between asset acquisitions and business combination accounting?
57:17
SPEAKER_02: I wish there was an easy answer.
57:18
SPEAKER_02: I mean, I think I think it relates to the the evolution of how kind of um changes to gap evolved over time, right?
57:24
SPEAKER_02: So um, you know, I'm not sure that when the writers of uh FAS 141R or what is now ASC 805 thought about it, they said, well, here's here's the world of business combinations and here's the specialized accounting that we want.
57:37
SPEAKER_02: And we want completely different accounting for asset acquisitions, right?
57:39
SPEAKER_02: It was just there happen to be deals that fall outside of the scope of that.
57:42
SPEAKER_04: And then it kind of developed because the related question then would be some of these examples you gave of things that there's no guidance for seem like they must come up all the time.
57:54
SPEAKER_04: And so it's surprising to me that we don't have guidance.
57:57
SPEAKER_00: Yeah, I'd say um, you know, the the first thing is there was a project on the the FASB's agenda for a while to try to align some of those differences between asset acquisitions and business conversations.
58:07
SPEAKER_03: Oh, yes, yes.
58:08
SPEAKER_00: And that fell off as part of the uh invitation to comment that happened uh a couple years back.
58:14
SPEAKER_00: And so because of that, these these differences, while they're there, the practice is kind of generally settled on how to do it.
58:20
SPEAKER_00: So I think it's good enough for now while they tackle bigger priorities.
58:23
SPEAKER_04: Yeah, and actually that does make sense.
58:25
SPEAKER_04: It's not like it involves judgment, but to your point, there is practice.
58:28
SPEAKER_04: People who are involved in these deals kind of know how to deal with it.
58:32
SPEAKER_04: And obviously, they should call the two of you because this is very complicated.
58:36
SPEAKER_04: So maybe with that point, um, either one of you, if you have more questions, business combinations guide, best place to go look, I presume.
58:44
SPEAKER_02: Yeah, I think there's two areas.
58:45
SPEAKER_02: I think the business combinations guide has all the stuff around the screen test and how to differentiate between the two.
58:50
SPEAKER_02: Also has a little bit on um 8050, but the PPE guide, the property plant and equipment guide, chapter two deals 100% with asset acquisitions.
58:58
SPEAKER_02: All right.
58:58
SPEAKER_02: In both places.
58:59
SPEAKER_04: All right, excellent.
58:59
SPEAKER_04: Well, it was a pleasure having you both on.
59:01
SPEAKER_04: Thanks so much for joining me today.
59:02
SPEAKER_02: Thank you.
59:03
SPEAKER_02: Thank you.
59:05
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59:27
SPEAKER_04: From Thought Leadership at PwC, I'm Heather Horn.
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