ASC 805 Business Combinations: Purchase Price Allocation Transaction Explained with Journal Entries

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The ASC 805 accounting standard, established by the Financial Accounting Standards Board (FASB), governs the accounting for business combinations. One crucial aspect of ASC 805 is the allocation of the purchase price to the acquired assets and assumed liabilities. In this article, we will provide an overview of purchase price allocation transactions under ASC 805 and illustrate how journal entries can be used to account for them.

 

Purchase Price Allocation under ASC 805

Under ASC 805, companies must allocate the purchase price in a business combination to the fair values of the acquired identifiable assets, liabilities assumed, and any non-controlling interests. The excess of the purchase price over the fair value of net identifiable assets is recognized as goodwill. The purchase price allocation process involves several steps, including:
 

1. Determine the fair value of the acquired assets and assumed liabilities.
    

2. Calculate the fair value of any non-controlling interests.
    

3. Allocate the purchase price among the acquired assets, assumed liabilities, and non-controlling interests.
    

4. Calculate and recognize goodwill.
    

Journal Entries for Purchase Price Allocation Transactions

To illustrate the concept of purchase price allocation and the accounting treatment under ASC 805, let's consider a simplified example involving a company (the acquirer) that purchases another company (the target) for $1,000,000. The fair values of the target's identifiable assets, liabilities, and non-controlling interests are as follows
:

• Identifiable assets: $900,000

• Assumed liabilities: $300,000

• Non-controlling interests: $100,000
   

1. Allocate the purchase price

The purchase price is allocated as follows:
 

• Identifiable assets: $900,000

• Assumed liabilities: $300,000

• Non-controlling interests: $100,000

• Goodwill: Purchase price - (identifiable assets - assumed liabilities) = $1,000,000 - ($900,000 - $300,000) = $400,000
   

2. Record the purchase price allocation

Now, let's create journal entries to account for the purchase price allocation transaction:
 

Debit: Identifiable Assets - $900,000

Debit: Goodwill - $400,000

Credit: Assumed Liabilities - $300,000

Credit: Non-controlling Interests - $100,000

Credit: Cash (or other consideration paid) - $1,000,000

 

The ASC 805 standard requires businesses to allocate the purchase price in a business combination to the fair values of the acquired assets, assumed liabilities, and any non-controlling interests. By understanding the concept of purchase price allocation and properly accounting for it through journal entries, organizations can maintain accurate financial reporting and compliance with ASC 805. As businesses continue to navigate the complexities of business combination accounting, it is essential to invest in the right tools and resources, such as advanced accounting software, to streamline the process and ensure ongoing compliance.