[Anonymous]

“QUESTION:

A combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Which of the following would be considered part of the acquisition cost of an acquired entity in a business combination?

I. Costs incurred by the acquiring entity that are directly related to the acquisition
II. Costs incurred by the acquired entity that are directly related to the acquisition
III. Indirect acquisition costs incurred by the acquiring entity

A.
I only

B.
I and II only

C.
I and III only

D. (CORRECT)
None of these items would be part of the acquisition cost.

EXPLANATION:

FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense. All of these costs are acquisition-related costs and should be expensed in the period incurred.

FASB ASC 805-10-25-23 states the following:

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.”

The question asks which of the following are acquisition-related costs. The correct answer is none of the above. The explanation says they are ALL acquisition costs…

So how does that make sense? Am I missing something here? Any help would be appreciated.

[LC2017]

The question is asking which, if any, of those costs should be added to the cost of the acquisition, not which ones are acquisition-related costs. The FASB standards provided in the answer are saying you expense any acquisition-related costs separately rather than factoring them into the price you paid to acquire the business.

Example: You paid $1,000,000 to acquire a business, of which $50,000 related to legal and administrative fees. The acquisition cost is $950,000 and you expense the $50,000 of legal and admin fees.

[Anonymous]

Ah okay, very tricky wording, but I think I get it. I'll read the section again and review it more closely.

[Anonymous]

It's still confusing because the explanation states:

“FASB ASC 805-10-25-23 states the following:

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.”

It's clearly contradicting itself saying the costs of issuing debt or equity securities are treated as expenses like all the other acquisition-related costs. And then it goes to say there is one exception, “the costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP”.

Doesn't even make sense 😲

[SchruteBeet]

Simple trick to remember this provided by Becker: FV = Acquisition Cost = Investment in Subsidiary. Everything else is a separate Dr/Cr item in itself. All acquisition-related costs are either expensed or reduce the APIC. Never capitalized to the investment in subsidiary account.

[Author]

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