The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity, to address stakeholder feedback about the lack of comparability between business combinations that involve the acquisition of a variable interest entity (VIE) and those that do not. This is primarily due to the existence of two different models in current guidance for determining the accounting acquirer based on whether the acquired business is a VIE or not.
Under current guidance, the accounting acquirer in a business combination is the entity that obtains a controlling financial interest in the acquired business. If the acquired business is a VIE, the primary beneficiary of the VIE is always the accounting acquirer. If the acquired business is not a VIE, the accounting acquirer is generally identified by determining which entity owns a majority voting interest. There may be situations, such as when the consideration transferred in a business combination is primarily equity interests, in which it is unclear who the accounting acquirer is after considering the voting interests. In these situations, Topic 805, specifically ASC 805-10-55-12 through 55-15, requires assessment of certain factors, such as the relative voting rights in the combined entity after the business combination and the composition of senior management of the combined entity, to help conclude which entity in the business combination is the accounting acquirer. Analysis of the factors may indicate that the accounting acquirer in the business combination is not the entity that issued the equity interests as consideration (or the legal acquirer), which is commonly referred to as a reverse acquisition.
To address stakeholder feedback, the proposed ASU would revise current guidance to require an entity involved in a business combination effected primarily by exchanging equity interests to assess the factors in ASC 805-10-55-12 through 55-15 to determine which entity is the accounting acquirer when the legal acquiree is a VIE that meets the definition of a business. That is, the proposal would generally align the guidance for identifying the accounting acquirer and result in similar accounting outcomes for business combinations that are affected primarily through the issuance of equity interests regardless of whether the legal acquiree is a VIE.
If finalized as exposed, the proposed ASU would require prospective application for business combinations that occur on or after the effective date to be determined after the FASB receives feedback on its proposal. Transition disclosures would be required, but no additional ongoing disclosures have been proposed.
The deadline for comment letter submission for the proposed ASU is December 16, 2024.
