In 2017 the Financial Accounting Standards Board issued an accounting standards update (ASU 2017-01) clarifying the definition of a business. The revised definition made it more likely that an acquisition of a set of assets (or asset and liabilities) would be accounted for as an asset acquisition instead of a business combination. The change to the definition is effective for calendar year end 2019 financial statements for private companies, but many have decided to early adopt the standard because of potential benefits associated with accounting for an asset acquisition. So, what are the pros and cons of asset acquisitions?
| | Pro | Con |
| Limited Guidance in U.S. Generally Accepted Accounting Principles (GAAP) as Compared to a Business Combination | The entity may have more flexibility in choosing certain accounting policies, such as how to account for certain types of contingent consideration. | The accounting for the transaction may require additional effort, judgment and accounting resources due to limited guidance or requirement to evaluate other areas of GAAP. |
| Measurement at Cost | An asset acquisition is recognized by allocating the cost of the acquisition, with an allocation to the assets acquired (or assets and liabilities acquired) based on relative fair value. The measurement basis may result in a reduction in the amount of fair value analysis and expertise required to recognize the transaction, which could potentially save time and money. | Recognition based on cost may result in assets having a higher cost basis then their true value. This could result in future impairments, or negatively impact net income and EBITDA in future periods as the excess cost is depreciated, amortized, or otherwise expensed. |
| Capitalization of Transaction Costs | Net income and EBITDA will generally be higher in the year of acquisition relative to a business combination because in a business combination transaction costs are expensed. | Net income and EBITDA in future periods may be depressed as the capitalized costs are depreciated, amortized, or expensed. |
| Goodwill is Not Recognized | Impairment testing or amortization of goodwill is not required in future periods, thus reducing future accounting costs. | Amounts that would have been recognized as goodwill (if any) are spread to other assets acquired resulting in greater expense in future periods. |
| Assembled Workforce is Recognized | The cost of acquiring a workforce is recognized rather than subsumed into goodwill. | The fair value of a workforce is determined in order to allocate cost to the workforce, which is then amortized over time. |
Determining whether a transaction is a business combination or an asset acquisition is a matter of judgment, not a free choice, but there are benefits to understanding the benefits and costs of an asset acquisition. Knowing the difference may assist those entities that are still in the early adoption window for the revised definition of a business to decide whether early adoption is right for them. For all other entities, it may be easier to explain the financial results of your business after the acquisition has occurred once you better understand the pros and cons of an asset acquisition.
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