Rule Atlas
FASB ASC 805: Business Combinations: Acquisition Method (ASC 805)
Under FASB ASC 805 (AICPA / FASB / IRS), business Combinations: Acquisition Method (ASC 805) establishes the authoritative rules tested on the CPA Exam. A world-class, exam-focused deep dive into the acquisition method under FASB ASC 805. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
Worked Example: Python Corp. Acquires Cobra Inc.
| Component | Calculation | Fair Value |
|---|---|---|
| Cash Paid | As given | $500,000 |
| Stock Issued | 10,000 shares * $30/share | $300,000 |
| Contingent Consideration | $50,000 60% 0.95 | $28,500 |
| Total Consideration | Sum of above | $828,500 |
On January 1, 2026, Phoenix Corp. acquired 100% of the outstanding common stock of Sparrow Inc. in a business combination. The consideration transferred consisted of $5,000,000 in cash, 100,000 shares of Phoenix Corp. common stock with a fair value of $30 per share, and contingent consideration with a fair value of $500,000. Phoenix also incurred $200,000 in legal and consulting fees related to the acquisition and $50,000 in stock issuance costs. On the acquisition date, the book and fair values of Sparrow's assets and liabilities were as follows: | Account | Book Value | Fair Value | | :--- | :--- | :--- | | Cash | $100,000 | $100,000 | | Accounts Receivable | $500,000 | $450,000 | | Inventory | $800,000 | $1,000,000 | | Property, Plant & Equipment (net) | $3,000,000 | $4,500,000 | | In-Process R&D | $0 | $600,000 | | Accounts Payable | $400,000 | $400,000 | | Bonds Payable | $1,000,000 | $1,100,000 | Under the acquisition method prescribed by FASB ASC 805, what is the amount of goodwill that Phoenix Corp. should recognize from this business combination?
Worked Example: Python Corp. Acquires Cobra Inc.
Scenario: Python Corp. acquires 100% of Cobra Inc. on January 1, 20X1. The following information is available:
- Cash Paid: $500,000 Stock Issued: 10,000 shares of Python Corp. stock, trading at $30 per share on the acquisition date. Contingent Consideration: A potential cash payment of $50,000, with a 60% probability of being paid. The present value factor is 0.95. Acquisition Costs: Python incurred $25,000 in legal and advisory fees. Cobra Inc. Net Assets: Book value is $600,000. Fair value of net identifiable assets is $750,000. This fair value includes a customer list (an unrecorded but identifiable intangible) valued at $50,000.
- Step 1: Calculate Consideration Transferred This is the total fair value given by Python to acquire Cobra. Acquisition-related costs are expensed and are NOT part of the consideration.
- | Component | Calculation | Fair Value | |---|---|---| | Cash Paid | As given | $500,000 | | Stock Issued | 10,000 shares $30/share | $300,000 | | Contingent Consideration | $50,000 60% * 0.95 | $28,500 | | Total Consideration | Sum of above | $828,500 |
- Step 2: Measure Fair Value of Net Identifiable Assets We use the fair value of Cobra's net assets, given as $750,000. This correctly includes the identifiable intangible asset (customer list) that was not on Cobra's books.
Common CPA Exam Distractors on FASB ASC 805
- 1Use this repeatable framework to deconstruct any business combination question on the BAR exam.
- 2Step 1. Pinpoint the Goal. Read the call of the question first. Are you solving for goodwill, total consideration, or a specific asset's basis? Knowing the target prevents you from performing unnecessary calculations.
- 3For acquisition accounting, this simple memory aid cuts through the complexity: Fair Value is King.
- 4Consideration Transferred: Measured at Fair Value.
- 5Assets Acquired: Recorded at Fair Value.
Frequently Asked Questions: FASB ASC 805
What is the core rule under FASB ASC 805 (Business Combinations: Acquisition Method (ASC 805))?
Under FASB ASC 805 (AICPA / FASB / IRS), business Combinations: Acquisition Method (ASC 805) establishes the authoritative rules tested on the CPA Exam. A world-class, exam-focused deep dive into the acquisition method under FASB ASC 805. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
How is FASB ASC 805 tested on the CPA Exam?
Use this repeatable framework to deconstruct any business combination question on the BAR exam. Step 1. Pinpoint the Goal. Read the call of the question first. Are you solving for goodwill, total consideration, or a specific asset's basis? Knowing the target prevents you from performing unnecessary calculations.
Where can I practice CPA Exam questions on Business Combinations: Acquisition Method (ASC 805)?
Test yourself instantly with the free playable CPA Exam question on this page, or launch VoraPrep's full CPA Exam adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cpa.