Rule Atlas
FASB ASC 805: Business Combinations: Goodwill and Bargain Purchase Gains
Under FASB ASC 805 (AICPA / FASB / IRS), business Combinations: Goodwill and Bargain Purchase Gains establishes the authoritative rules tested on the CPA Exam. Master the calculation of goodwill, the recognition of bargain purchase gains, and the subsequent accounting for impairment and measurement period adjustments under FASB ASC 805. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
Calculating Goodwill: The Core Formula
| Component | Description |
|---|---|
| A. Consideration Transferred | The fair value of assets transferred, liabilities incurred, and equity interests issued by the acquirer. |
| B. Fair Value of NCI | The fair value of the portion of the subsidiary not acquired by the parent (if the acquisition is for less than 100%). US GAAP requires this fair value approach, which results in recognizing 100% of the subsidiary's goodwill (both the acquirer's and NCI's share). |
| C. FV of Previously Held Equity | In a step acquisition, the fair value of any equity interest the acquirer held in the target before the business combination. |
| D. Net Identifiable Assets | The fair value of all identifiable assets acquired less the fair value of all liabilities assumed. |
Stellar Dynamics, a space exploration company, is evaluating a new project with a high degree of uncertainty regarding future revenue streams. Management is considering using simulation modeling to assess the project's potential outcomes. Which of the following is a key advantage of using simulation modeling in this scenario?
Worked Example: Goodwill Calculation in an 80% Acquisition
Scenario. On January 1, 20X1, Titan Corp. acquires 80% of the outstanding common stock of Juno Inc. for $10,000,000 cash. The fair value of the 20% non-controlling interest (NCI) is determined to be $2,500,000. Juno's identifiable assets and liabilities have the following book and fair values:
- | Account | Book Value | Fair Value | | :--- | ---: | ---: | | Cash & Receivables | $1,000,000 | $1,000,000 | | Inventory | $2,000,000 | $2,500,000 | | PP&E (net) | $5,000,000 | $7,000,000 | | Patents | $0 | $1,500,000 | | Total Assets | $8,000,000 | $12,000,000 | | Accounts Payable | $1,500,000 | $1,500,000 | | Long-Term Debt | $3,000,000 | $2,800,000 | | Total Liabilities | $4,500,000 | $4,300,000 |
- Here is the step-by-step calculation for goodwill:
- Step 1: Calculate the total implied fair value of Juno Inc. This is the sum of the consideration transferred by the acquirer and the fair value of the non-controlling interest. Consideration Transferred (for 80%): $10,000,000 Fair Value of NCI (for 20%): $2,500,000 Total Implied Fair Value: $10,000,000 + $2,500,000 = $12,500,000
- Step 2: Calculate the fair value of the net identifiable assets acquired. This is the fair value of Juno's assets minus the fair value of its liabilities. Fair Value of Total Assets: $12,000,000 Fair Value of Total Liabilities: $4,300,000 Fair Value of Net Identifiable Assets: $12,000,000 - $4,300,000 = $7,700,000
Common CPA Exam Distractors on FASB ASC 805
- 1Follow this systematic approach to solve any goodwill or bargain purchase scenario on the BAR exam.
- 2Step 3. Determine Goodwill or Bargain Purchase Gain. Subtract the result from Step 2 from the result from Step 1. If the result is positive, it's goodwill. If it's negative, you have a potential bargain purchase gain.
- 3To remember the essence of goodwill, think of it as the PREMIUM paid over the fair value of what you can specifically identify.
- 4On the exam, especially in a Task-Based Simulation, you will be given multiple exhibits with financial data. Before you start calculating, set up a simple template on your digital scratchpad:
- 5Consideration Transferred: [List items]
Frequently Asked Questions: FASB ASC 805
What is the core rule under FASB ASC 805 (Business Combinations: Goodwill and Bargain Purchase Gains)?
Under FASB ASC 805 (AICPA / FASB / IRS), business Combinations: Goodwill and Bargain Purchase Gains establishes the authoritative rules tested on the CPA Exam. Master the calculation of goodwill, the recognition of bargain purchase gains, and the subsequent accounting for impairment and measurement period adjustments 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?
Follow this systematic approach to solve any goodwill or bargain purchase scenario on the BAR exam. Step 3. Determine Goodwill or Bargain Purchase Gain. Subtract the result from Step 2 from the result from Step 1. If the result is positive, it's goodwill. If it's negative, you have a potential bargain purchase gain.
Where can I practice CPA Exam questions on Business Combinations: Goodwill and Bargain Purchase Gains?
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.