FRF for SMEs--Business Combinations, Part 1

Larry Perry
CPA Firm Support Services, LLC
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A business combination under this framework occurs when an acquirer enters an agreement to acquire an entity or a group of assets that comprise a business.  The formation of a joint venture or the acquisition of an asset or group of assets that does not comprise a business are not business combinations under this framework.

The acquisition method, similar to U.S.GAAP, should be used to account for business combinations under this framework.  Applying the acquisition method includes the following:

  • Every combination should result in one party becoming the acquirer.  The acquirer is ordinarily the entity that has a controlling interest in the other party to the combination.
  • The contract or agreement for a business combination should guide the determination of the acquisition date.  Normally, the acquisition date will be the date all requirements of the contract or agreement are completed.  This period will normally not exceed one year from the date of the contract or agreement.
  • The assets, liabilities and any non-controlling interests in the acquiree must be identified and measured.  Generally, assets and liabilities acquired are valued at acquisition date market values.
  • Consideration given up in excess of the market values of net assets received by the acquirer will result in a carrying amount of goodwill.  The fair value of net assets received in excess of consideration given up will result in a gain from a bargain purchase.

Conditions for Recognition

Identifiable assets acquired, liabilities assumed and non-controlling interests in the acquiree must meet the definitions in this framework to be recognized at the acquisition date. Costs expected to be recognized in the future as a result of the combination, such as terminating employees, would not be accounted for as part of an acquisition transaction.

All assets and liabilities recognized in the transaction must be a part of the exchange and do not include separate transactions.  Some assets or liabilities may be recognized that the acquiree has not previously recognized in its financial statements, such as intangible assets like copyrights or patents for which costs have been previously expensed.

As mentioned above, identifiable assets acquired, liabilities assumed and any non-controlling interests should be recognized at their acquisition date market values.  Certain exceptions to this general principle exist and will be discussed further in the next blog.  For example, an entity may establish a policy for accounting for intangible assets as a separate asset or combined with the value of goodwill.  For definite lived intangibles, an entity should attempt to determine their fair values and useful lives for separate recognition and amortization.  If the acquisition date market value can’t be reliably determined or estimated, or if a useful life cannot be determined or estimated, the intangible asset would be recognized as a part of the value of goodwill.

More policies from the FRF for SMEs regarding business combinations will be discussed in my next blog. Future webcasts covering this framework can be accessed at


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