Negotiations were concluded and the purchase contract was signed and executed. Now the real fun begins – charged for the purchase! Navigating through the guidelines of CSA 805, Business Combinations, is not for the faint of heart. As stated in this blog post, there is no shortage of problems and challenges, and in this article we will discuss a common problem: asset purchases versus business combinations and why determination is important. While the term ”substantially all” is not explicitly defined in the new guidelines, in other U.S. generally accepted accounting principles (GAAP), all are generally interpreted at 90%. When applying the framework described in Figure 1, asU 2017-01 clarifies that the following two assets are to be considered individual assets under CSA 805-10-55-5B: The new definition of an entity does not change the method of adoption for business combinations or the recognition of the acquisition of assets under CSA 805-50. However, given the narrower definition of a business described in ASU 2017-01, asset acquisitions have become more common, particularly in life sciences, real estate, and asset management. As a result, we highlight some important differences between the accounting treatment of business combinations and the acquisition of assets under U.S. GAAP. Here are some advantages of an asset purchase transaction: A share purchase is conceptually easier than an asset purchase.

Therefore, in most cases, it is simply a simpler and less complex transaction. If the transaction is structured as a share purchase, the acquisition naturally results in a transfer of ownership of the business unit itself, but the company continues to own the same assets and has the same liabilities. According to Canadian Accounting Standards for Private Enterprises (ASPE), the relevant standard is 1582 Business Combinations, a copy of IFRS 3 Business Combinations. Therefore, the IFR guidelines can also be applied to the same issue of investment or business combination under ASPE. When applying the GAAP hierarchy in ASPE (Standard 1100 Generally Accepted Accounting Principles), the first consideration would be IFRS and not US GAAP. This makes sense given that 1582 and IFRS 3 are identical. The recognition of transaction costs differs between asset acquisitions and business combinations. According to CSA 805-50-30-1, transaction costs should generally be capitalized as part of the purchase price for the acquisition of assets. Costs must then be recorded as they are due. For business combinations, CSA 805-10-25-23 states that transaction costs should not be recorded in the purchase price and should instead be recorded as an expense.

Since transaction costs are capitalized when acquiring assets (and not recognised as expenses), short-term net income will be higher, but long-term net profit will be lower because depreciation is higher due to a higher asset base. The following table summarizes the significant differences between accounting for an asset acquisition and a business combination: In January 2017, the Financial Accounting Standards Board (FASB) released accounting standards update (ASU) 2017-01 to clarify the definition of an entity. This update was released in response to stakeholder comments that the definition of a corporation was too broad, resulting in many transactions being recorded as business combinations that could have been better classified as asset acquisitions. According to previous CSA 805 guidelines, three elements of an integrated set of activities (a ”set”) were required for a business to be classified as a business: inputs, processes and outputs. AsC 805-10-55-4 previously defined them as follows: According to the old CSA 805 guidelines, for a set of activities and assets to qualify as a business, they had to have only inputs and processes that were or would be used together to create outputs. In addition, the FASB noted that outputs do not need to be present at the time of acquisition for a number of activities and assets to be a business. When valuing a group of similar assets, the following do not meet the specified criteria: A business combination typically occurs when an acquiring entity acquires the net assets or assets of an entity in exchange for cash, interest from the acquiring entity, or other counterparty. We would like to point out that a business combination could also take place without a transfer of consideration. If the transaction meets the definition of a business combination and therefore a corporation, the FASB requires a corporation to account for the transaction as a business combination and apply the acquisition method in accordance with CSA 805-10 guidelines. According to the new ASC 805 guidelines, the FASB retains inputs, processes and outputs as the main elements of a business. However, it removes considerations that made the previous definition difficult and identifies new, less ambiguous considerations.

Inputs – Economic resources that can create or create outputs when one or more processes are applied to them. Examples include durable assets (such as buildings or machinery), intangible assets (such as patents, trademarks or any other intellectual property), the ability to access necessary equipment or rights, and employees. As you can see in the table above, accounting can differ significantly. The next time you`re tasked with accounting for or reviewing an acquisition, be sure to take that critical – often overlooked – first step and determine whether your business or customer has acquired a business or customer, or simply purchased an asset or group of assets. Here are some of the benefits of buying shares: The International Accounting Standards Board (IASB) conducted a post-implementation review (PIR) of IFRS 3 in 2014-2015. The review found that it is difficult for stakeholders to apply the definition of an entity in practice. The IASB issued an exposure draft in June 2016 proposing: to change the wording used in the Standard, to add examples of examples, and to simplify the application of the Standard in certain situations. The comment period ended on October 31, 2016. See a condensed article on IFRS on final amendments to the standard in this section.

Determining whether a transaction is a business acquisition or an asset acquisition is a call for judgment that must be disclosed. Inputs: are economic resources such as intellectual property, access to necessary materials, employees and non-current assets such as intangible assets or rights of use of non-current assets. In practice, one view is that the acquired processes must have a level of sophistication that includes a level of knowledge unique to the assets acquired for a company to exist. Common topics in the responses received are: In the coming weeks, we will be releasing additional information on how to properly account for and verify business combinations and how to resolve some of the complexities of CSA 805. Wait a moment! Note that this part of the article was removed following the publication of ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Company. In this article, you will find updated instructions on how to define a business. The acquirer buys the shares of the target company and takes the target as it appears, both in terms of assets and liabilities. Most contracts that have the purpose – such as leases and permits – are automatically transferred to the new owner.

For all these reasons, it is often easier to opt for a share purchase than for a purchase of securities. For business combinations, CSA 805 states that an intangible asset must be recognized as an asset outside of goodwill if it falls under the following conditions: We, as accountants and accountants, are a group of hard workers. Acquisition? No problem; we get it! Identify intangible assets, recognize the assets and liabilities of the acquired company at fair value, and determine the amount of goodwill we need to recognize. That`s how accountants and auditors come in – we dive in and get to work! Not so fast! The problem? We skipped the first step in the process, which is crucial in determining the proper accounting. .