Upon executing a business combination, consideration is generally transferred to the sellers from the buyer. The nature of the consideration transferred by the buyer in a business combination typically results in one or more of the following:
- Transferring cash or other assets on a contingent or noncontingent basis
- Incurring liabilities payable to former owners of the target
- Issuing equity interests
When preparing financial statement disclosures, the buyer is required to provide information about the consideration transferred, including the fair value of each major class of consideration transferred and the aggregate amount of consideration transferred. When determining the amount to disclose as cash consideration transferred, we believe the full amount of cash transferred in the business combination should be included. In other words, any acquired cash from the seller should be treated the same as all other assets acquired and not netted against cash consideration transferred. For example, if an entity acquires 100% of Target for $15 million in cash and the total identifiable net assets acquired measured in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations, is $12.5 million (which includes acquired cash of $1.2 million), the acquirer should disclose consideration transferred of $15 million and acquired cash of $1.2 million (rather than net consideration transferred of $13.8 million).
For additional guidance on this topic and other issues that arise when accounting for a business combination, refer to our publication, A guide to accounting for business combinations.
