Proposed ASU Clarifies Identifying the Accounting Acquirer

The FASB has issued a proposed ASU to clarify guidance in determining the accounting acquirer when the acquisition involves a variable interest entity.

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On Oct. 30, 2024, the Financial Accounting Standards Board (FASB), issued a proposed Accounting Standards Update (ASU), “Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity.”
In April 2024, the FASB announced that it had reconstituted the Emerging Issues Task Force (EITF) to assist the FASB in improving financial reporting. The newly reconstituted EITF addressed the question of how the accounting acquirer is determined when the legal acquiree is a variable interest entity (VIE) and recommended the project be added to the FASB technical agenda.
GAAP states that in a business combination in which a VIE is acquired, the primary beneficiary of the legal acquiree is always the accounting acquirer. The proposal would require entities to consider the guidance within Accounting Standards Codification (ASC) 805-10-55-12 through 55-15 when determining the accounting acquirer in an acquisition transaction when the legal acquiree is a VIE that meets the definition of a business, primarily through the exchange of equity interests.
The purpose of the proposal is to enhance consistency when identifying the accounting acquirer in transactions that involve a VIE compared to other transactions that do not involve a VIE and the consideration primarily includes equity interests.
Entities would adopt the proposal prospectively to any acquisition transaction that occurs after the initial application date. Early adoption is permitted. Comments on the proposal are due Dec. 16, 2024.

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Background

Current guidance in ASC 805-10-25-5 asserts that in a business combination in which a VIE is acquired, the primary beneficiary of the legal acquiree is always the accounting acquirer.

Under existing business combination guidance, when the acquiree is not a VIE, the acquirer is assessed under the general sections of ASC 810-10 (voting interest model). If the accounting acquirer was not apparent after application of the general sections of ASC 810-10, a reporting entity considers the guidance in ASC 805-10-55-12 through 55-15 to determine the accounting acquirer. The identification of the accounting acquirer and acquiree will establish which entity will be required to remeasure its assets and liabilities in accordance with ASC 805. The application of existing guidance to VIEs in certain situations has led to outcomes that seemed counterintuitive. This is because the application of the guidance in ASC 805-10-12 through 55-15 would suggest that the VIE and not the primary beneficiary was the accounting acquirer. The following example special purpose acquisition company (SPAC) fact pattern highlights the differences between the acquirer’s accounting approach under current guidance and the approach under the proposed guidance.

Crowe observation: Under the existing guidance, if an acquiree is a VIE, the transaction may not be accounted for as a reverse acquisition. Under the proposed guidance, a transaction may be accounted for as a reverse acquisition if the acquiree is a VIE that qualifies as a business primarily through the exchange of equity interests.

Example: SPAC fact pattern*

Acquisition overview:

SPAC Company, a public company, is not classified as a business under ASC 805. It acquires a 30% stake in Company XYZ (a limited liability company), which meets the definition of a business under ASC 805.
SPAC Company issues its own equity interests in the SPAC to the former shareholders of Company XYZ. No cash or assets are transferred in the acquisition.
Company XYZ initiated the transaction with SPAC Company, and Company XYZ is significantly larger than SPAC Company.
Prior to this acquisition, Company XYZ was not under the control of any single party.

Postacquisition structure:

SPAC Company will act as the managing member of Company XYZ; nonmanaging members of Company XYZ lack substantive participation, liquidation, or kick-out rights.
No single party has control of SPAC Company.
Neither company has a significant minority shareholder.
SPAC Company’s senior management is primarily from legacy Company XYZ.
SPAC Company’s ownership consists of 30% legacy SPAC Company shareholders and 70% legacy Company XYZ shareholders.

Exhibit: Organizational structure after the transaction

Conclusion:

Under ASC 810-10-15-14(b)(1)(ii), Company XYZ is a VIE. Because SPAC Company meets the primary beneficiary conditions of ASC 810-10-25-38A, it is considered the accounting acquirer. If the voting interest model under ASC 810-10 were applied instead, Company XYZ would be deemed the acquirer because it is significantly larger than SPAC Company, controls SPAC’s senior management, and holds 70% ownership and voting rights compared to legacy SPAC Company shareholders owning 30%.

Crowe observation: An example of when the current guidance might result in different conclusions for VIE’s and non-VIE’s could include transactions in which a SPAC acquires a target. If the target is a VIE, the primary beneficiary is the accounting acquirer and reverse acquisition guidance is not applied. If the target is not a VIE, the guidance in ASC 805-10-55-12 through 55-15 is considered and could result in reverse acquisition guidance being applied. The proposal provides for consistent analysis for SPAC targets that are VIEs and non-VIE’s when the consideration primarily includes equity.

Scope

As demonstrated in the example, the possibility of reaching a different conclusion depends on whether the legal acquiree is a VIE or not. When the consideration exchanged is primarily equity interests, the FASB is proposing to amend guidance to ensure consistent application of GAAP.

Pursuant to the recommendation of the EITF, the FASB has proposed an amendment that would require entities to assess the following:

Is the legal acquiree a VIE?
Does the acquiree meet the definition of a business?
Was the transaction primarily conducted through the exchange of equity interests?

If the answer to all three of these questions is yes, then the guidance in ASC 805-10-55-12 through 55-15 would be applied to determine the accounting acquirer.

Under the proposal, in this circumstance, the accounting acquirer in a business combination would be determined by considering all relevant facts and circumstances, including the items noted within ASC 805-10-55-12 through 55-15.

Based on ASC 805-10-55-12 through 55-15
Criteria	Acquirer indicator
Relative voting rights	The acquirer usually is the entity whose owners, as a group, have the largest portion of voting rights in the combined entity. Special or unusual voting arrangements, options, warrants, or convertible securities are also considered.
Large minority voting interest	The acquirer likely is the entity with the largest minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest.
Governing body composition	The entity whose owners can elect, appoint, or remove the majority of the governing body members of the combined entity usually is the acquirer.
Senior management composition	The entity whose former management has a dominant role in the combined entity’s management usually is the acquirer.
Equity interest exchange terms	The entity that pays a premium over the precombination fair value of the other entity’s equity interests is typically the acquirer.
Size	The acquirer usually is the entity with a significantly larger size in terms of assets, revenues, or earnings.
Business combination involving more than two entities	The initiator of the combination and relative size of the entities are considered.
New entity formation	The entity formed is not automatically the acquirer; the acquirer is identified by applying the guidance in paragraphs 805-10-55-10 through 55-14. However, if the new entity transfers cash or other assets or incurs liabilities as consideration, it may be the acquirer.

The accounting acquirer is identified based on all the facts and circumstances present. Under the new guidance, this could result in an acquisition of a VIE where the primary beneficiary is not the accounting acquirer.

Transition method and disclosure

The proposal would require entities to adopt guidance prospectively to any transaction that occurs after the initial application date. Early adoption is permitted. Upon adoption, the entity would be required to disclose the nature of and rationale for the change in accounting principle in the period of adoption.

Next steps

Comments on the proposal are due on Dec. 16, 2024.

* Example based on EITF project “Determining the Accounting Acquirer,” Issue Summary, p. 18, https://fasb.org/page/pagecontent?pageid=/projects/current-projects/eitf-agenda.html

FASB materials reprinted with permission. Copyright 2024 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.