When a business is up for sale, a buyer decides whether they want to buy the business as a whole or only buy the company’s assets. This decision affects the buyer’s accounting for the transaction. Valuation and allocating the purchase price of such acquisitions can be complex. Accounting Standards Codification (ASC) 805 breaks down the rules of business mergers and how they appear on a balance sheet.
The buyer only purchases the target company’s assets in an asset acquisition. On the other hand, business combinations refer to acquisitions where the buyer purchases a company’s assets and liabilities.
What is asset acquisition?
Asset acquisition is the purchase of selected assets of a company. The main objective of asset acquisition is to acquire specific assets that the buyer will use in its business operations.
The new ASC 805 guidance qualifies a business as a business if its inputs and processes create outputs. The most common assets acquired in an asset acquisition are land and buildings. Other types of assets that are often acquired include machinery, equipment, and vehicles.
In an asset acquisition, the buyer only claims those liabilities specifically identified as being assumed in the purchase agreement. The best thing about asset acquisition is that the buyer can choose which assets and liabilities to assume.
The disadvantage of asset acquisition is that the buyer may have difficulty acquiring all the necessary licenses and permits if it does not already have them.
What counts as a business combination?
This is an acquisition of a company where the buyer obtains control of another company. A business combination can be achieved through various transactions such as a merger, consolidation, or purchase of assets. On the other hand, the buyer combines the two companies’ businesses and consolidates them into one company.
The combined company’s financial statements are presented as if the two companies have always been one entity. Business combinations are often complex transactions requiring careful planning and negotiation.
The main advantage of a business combination is that the buyer acquires all of the target company’s assets and liabilities. On the downside, the buyer might have to pay more for a business combination.
What does the acquisition of assets through business combinations mean?
When a company acquires assets through business combinations, it means that the buyer company has purchased the target company as a whole. Once the acquisition is complete, the buyer owns all of the target company’s assets and liabilities.
Asset acquisition through business combination grows the buyer company. All assets and liabilities are quantified at their current value at the acquisition time.
The main advantage of this type of acquisition is that the buyer acquires all of the target company’s assets and liabilities.
Asset acquisition Vs. business combination differences
Assembled assets
In an asset acquisition, the buyer only purchases selected assets and liabilities of a company. The main objective of asset acquisition is to acquire specific assets that the buyer in its business operations will use. The most common type of asset acquired in an asset acquisition is land and buildings. Other types of assets that are often acquired include machinery, equipment, and vehicles.
In a business combination, the acquirer obtains control of the other company. A business combination can be achieved through various transactions such as mergers, consolidations, or purchases of assets. The acquirer combines the businesses of the two companies into one.
Acquisition cost
Asset acquisition usually costs lower than a business combination because the buyer only acquires the target company’s assets. The buyer usually finances the purchase with debt. The advantage is that the buyer’s equity is not at risk.
While the buyer might have to pay interest if they fund the acquisition using a loan, their equity is protected.
The cost of a business combination is usually higher than the cost of an asset acquisition because the buyer acquires all of the target company’s assets and liabilities. The buyer can finance the purchase with either debt or equity.
While the buyer can choose to finance the purchase using debt or equity, they risk their equity.
Goodwill
Goodwill is not recognized in asset acquisition because the buyer only acquires the target company’s selected assets. In cases where there is economic goodwill in business transactions, the goodwill is transferred to recognizable assets based on fair values.
In a business combination, goodwill is recognized because the buyer acquires all of the target company’s assets and liabilities. The amount recorded as goodwill is equivalent to the fair value calculated as excess value over the company’s fair value of the business assets and liabilities.
Workforce
The business workforce usually remains with the target company in an asset acquisition. It is not considered an identifiable tangible asset that can be transferred to the buyer. The buyer does not have to worry about integrating the target company’s workforce into its own. However, employees might leave the target company if they fear for their job security.
The target company’s workforce is usually transferred to the buyer in a business combination. Usually, employees leave the company at their free will. The buyer may also have to pay termination benefits to those who are let go.
Contingencies
Acquired contingencies are recorded at their fair value in business combinations. The buyer does not automatically acquire the target company’s contingent liabilities in asset acquisitions. The buyer may, however, negotiate to assume some or all of the target company’s contingent liabilities.
Product and services
The buyer does not automatically acquire the company’s products and services in an asset acquisition. The buyer may, however, negotiate to assume a part or all of the products and services.
The buyer usually acquires all of the target company’s products and services in a business combination. The buyer does not have to worry about losing customers. However, the buyer may have to pay for products and services it does not want or need.
Which is better, asset acquisition or a business combination?
As a buyer, the choice between asset acquisition and the business combination should be driven by your long-term goals. Asset acquisition is better if you have a limited budget, would like to maintain most of the workforce, and protect your equity.
However, a business combination is better if your long-term plans involve fast growth of the buyer company and getting control of the target company.
If you are unsure about which type of acquisition is best for you, a qualified accountant or lawyer can guide you through Financial Accounting Standards Board (FASB) rules.
References
- Deloitte: ASC 805 Business Combinations.
- Accounting: U.S. GAAP Codification of Accounting Standards.
