ASC 805 Made Simple: What Every Business Buyer Needs to Know

Accounting Standards Codification (ASC) 805, issued by the Financial Accounting Standards Board (FASB), provides the rules companies must follow when they buy another business. ASC 805 requires all acquisitions be accounted for using the “acquisition method.” This means the acquiring company identifies who the acquirer is, determines the date the acquisition takes place, and records all assets and liabilities of the business being purchased at their respective fair values on the date of acquisition. The goal is to ensure that the financial statements clearly reflect the true economic substance of the transaction by using the fair value opposed to the cost.

In accordance with ASC 805, privately held companies acquiring another company must recognize all identifiable assets being purchased (i.e. cash, inventory, property, etc.) and liabilities assumed (accounts payable, debt and other obligations) at their fair values. Any excess of the purchase price over the fair value of those identifiable net assets is recorded as goodwill. On the other hand, if the fair value of the acquired net assets exceeds the purchase price, the acquirer records a gain from a bargain purchase in the income statement.

ASC 805 also distinguishes between business combinations and asset acquisitions, emphasizing that a business combination involves acquiring a set of inputs and processes capable of producing outputs—essentially, a functioning business rather than just a group of assets being used by the acquirer. If it is deemed the acquirer is only purchasing assets, these assets would be recorded at cost.

Finally, ASC 805 requires companies to disclose detailed information about each business combination so that investors and stakeholders can understand the nature and impact of the deal. These disclosures include the reasons for the acquisition, how goodwill was determined, and any contingent consideration or future obligations arising from the transaction. In short, ASC 805 ensures that business combinations are presented transparently, consistently, and fairly in financial statements, allowing users to assess the financial health and strategic decisions of a company with greater confidence.

If you are considering purchasing another business, please reach out to 415 Group to help with the proper recognition of this purchase in accordance with accounting principles generally accepted in the United States of America.