Alert

The Financial Accounting Standards Board (FASB) issued 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.

Overview of Proposed Amendments

The proposed amendments are intended to establish more consistent requirements for determining the accounting acquirer in an acquisition achieved by exchanging equity interests.

The proposed amendments would apply to entities involved in acquisitions effected primarily by exchanging equity interests when the legal acquiree is a variable interest entity (VIE) that meets the definition of a business.

Comments are due December 16, 2024.

Key Provisions

In an agenda request sent to the Board in November 2023, stakeholders indicated that the current guidance for determining the accounting acquirer in accordance with Topic 805, Business Combinations, results in a lack of comparability between transactions involving VIEs and those involving voting interest entities.

Specifically, stakeholders indicated the current guidance creates significant inconsistencies in financial reporting outcomes among economically similar transactions.

In a business combination in which the acquired entity is a voting interest entity, certain factors in Topic 805 should be considered when identifying the accounting acquirer. The application of these factors may result in a business combination being accounted for as a reverse acquisition where the legal acquirer is identified as the acquiree for accounting purposes.

If the accounting acquiree doesn’t meet the definition of a business, the transaction wouldn’t be accounted for as a business combination.

However, in a business combination in which a VIE is acquired, current GAAP requires the primary beneficiary—as determined in accordance with Topic 810, Consolidations—to be the accounting acquirer. Current GAAP prohibits the application of the factors to determine if the transaction is a reverse acquisition.

To address stakeholder concerns, the proposed amendments would revise current guidance to align the requirements for determining the accounting acquirer in acquisitions of a VIE that meet the definition of a business with the requirements applied in transactions involving a voting interest entity.

Scope

The proposed amendments would apply to acquisitions that meet all the following conditions:

• Legal acquiree is a VIE
• Legal acquiree meets the definition of a business
• Transaction was effected primarily by exchanging equity interests

The proposed amendments wouldn’t apply or impact the accounting for acquisitions when the acquired VIE doesn’t meet the definition of a business. If a VIE doesn’t meet the definition of a business, the primary beneficiary would continue to be the accounting acquirer.

Proposed Updates

The proposed amendments would require entities involved in an acquisition that meet the scope criteria to assess the existing factors in Topic 805 below to identify the accounting acquirer and determine if the transaction results in a reverse acquisition.

• Relative voting rights in the combined entity
• Existence of a large minority voting interest in the combined entity
• Composition of the governing body of the combined entity
• Composition of the senior management of the combined entity
• Terms of the exchange of equity interests
• Relative size of the combining entities
• Which of the combining entities initiated the combination
• Whether a new entity was formed to affect a business combination

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For more information on how the proposed amendments could affect your business, contact your Moss Adams professional.

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