Alert
Revised Guidance to Identify Accounting Acquirer in VIE Acquisitions
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-03, Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity.
The amendments clarify the requirements for determining the accounting acquirer in an acquisition achieved by exchanging equity interests.
The amendments 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.
Background
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, depending on whether the legal acquiree is considered a VIE.
As the assets and liabilities of only the accounting acquiree are measured at fair value under the acquisition method, the determination of the accounting acquirer and accounting acquiree can significantly affect the carrying amounts of the combined entity’s assets and liabilities and post combination net income.
In a business combination effected primarily by exchanging equity interests 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.
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 considered the accounting acquirer. Because of this requirement, current GAAP prohibits the application of the factors used in acquisitions of voting interest entities to determine if the transaction is a reverse acquisition.
Amended Guidance
To address stakeholder concerns, the amendments 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 acquisitions of a voting interest entity.
Scope
The amendments 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 amendments don’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 continues to be the acquirer.
In addition, the primary beneficiary continues to be treated as the accounting acquirer for business combinations not effected primarily by exchanging equity interests.
Accounting Acquirer
The entity that issues its equity interests is generally the accounting acquirer in a business combination effected by exchanging equity interests. However, the issuing entity or legal acquirer is identified as the accounting acquiree in a reverse acquisition.
The amendments 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.
- Relative voting rights in the combined entity. The accounting acquirer is typically the entity whose owners retain or receive the largest portion of the voting rights in the combined entity.
- Existence of a large minority voting interest in the combined entity if no other entity has a significant voting interest. The accounting acquirer is typically the entity whose owners holds the largest minority voting interest in the combined entity.
- Composition of the governing body. The accounting acquirer is typically the entity whose owners can elect or appoint or remove the majority of members of the governing body of the combined entity.
- Composition of senior management. The accounting acquirer is typically the entity whose former management dominates the management of the combined entity.
- Terms of the exchange of equity interests. The accounting acquirer is typically the entity that pays a premium over the pre-combination fair value of the equity interests of the other entity.
- Relative size. The accounting acquirer is typically the entity whose relative size is significantly larger than that of the other entity.
If a new entity is formed to issue equity interests, one of the combining entities that existed before the business combination should be identified as the accounting acquirer by applying the above factors.
Effective Dates
The amendments are effective for all entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods.
Early adoption is permitted as of the beginning of an interim or annual reporting period.
Transition Requirements
The amendments require that an entity apply the new guidance prospectively to any acquisition transaction that occurs after the initial application date.
We’re Here to Help
To learn more about the new amendments and how they can apply to your acquisition, contact your firm professional.