Rule Atlas
FASB ASC 805: The Acquisition Method (ASC 805)
Under FASB ASC 805 (AICPA / FASB / IRS), the Acquisition Method (ASC 805) establishes the authoritative rules tested on the CPA Exam. A world-class guide to the FASB acquisition method under ASC 805. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
Current Statutory Thresholds & Limits in Effect
Dollar-for-dollar reduction above $4,000,000 placed in service; limited to taxable income from active trades or businesses.
Triggers deposit by the next banking day AND converts monthly depositors to semiweekly status for the remainder of the current and entire next calendar year.
Step 3 (Part A): Measuring Consideration Transferred
| Type of Consideration | Measurement Basis | Key Considerations |
|---|---|---|
| Cash | Face value | The simplest form. |
| Acquirer's Equity (Stock) | Fair value on acquisition date | Use the market price on the closing date, not the announcement date. |
| Other Assets (e.g., PP&E) | Fair value on acquisition date | The acquirer must derecognize the asset and may recognize a gain or loss on the transfer. |
| Contingent Consideration | Fair value on acquisition date | An obligation to transfer additional assets or equity if future events occur. This is a complex area frequently tested. |
NovaTech Inc. is using regression analysis to predict its quarterly sales based on advertising expenditure. The resulting regression equation is: Sales = $100,000 + 5 * Advertising Expenditure. The model's R-squared value is 0.81. What is the correct interpretation of the R-squared value in this context?
Worked Example: Apex Acquires Synergy
Scenario: Apex acquires 80% of Synergy on January 1, 20X1. The remaining 20% NCI has a fair value of $95 million, based on the market price of Synergy's shares not acquired by Apex.
- Consideration Transferred: Cash paid: $300 million Apex common stock issued: 1 million shares, trading at $100/share on Jan 1, 20X1. Contingent Consideration: An agreement to pay $10 million in cash if Synergy's revenue exceeds $500 million in 20X1. The acquisition-date fair value of this liability is estimated to be $4 million.
- Acquisition-Related Costs: Legal and advisory fees: $10 million (paid in cash) Stock issuance costs: $5 million (paid in cash)
- Synergy's Balance Sheet (Book vs. Fair Value):
- | Account | Book Value | Fair Value | | :--- | :--- | :--- | | Cash & Receivables | $50M | $50M | | Inventory | $80M | $100M | | PP&E (net) | $200M | $250M | | Unpatented Technology | $0 | $60M | | Total Assets | $330M | $460M | | Accounts Payable | $40M | $40M | | Long-Term Debt | $100M | $90M | | Total Liabilities | $140M | $130M | | Net Assets | $190M | $330M |
Common CPA Exam Distractors on FASB ASC 805
- 1On the exam, use this systematic approach to deconstruct any business combination problem, especially a complex Task-Based Simulation.
- 2Step 1. Calculate Consideration Transferred. Identify every component the acquirer gave up (cash, stock, contingent consideration) and sum their acquisition-date fair values. Ignore acquisition-related costs for this calculation.
- 3Step 3. Identify the Fair Value of the Noncontrolling Interest (NCI). If the acquirer bought less than 100%, the problem will provide the fair value of the NCI. Find this number and set it aside.
- 4Step 4. Apply the Goodwill/Bargain Purchase Formula. Plug the values from the first three steps into the master formula: (Consideration Transferred + NCI) - FV of Net Assets. A positive result is goodwill. A negative result is a bargain purchase gain.
- 5Step 5. Account for Costs Separately. Address the acquisition-related costs last. Expense direct costs (legal, advisory) and reduce APIC for stock issuance costs. These never touch the goodwill calculation.
Frequently Asked Questions: FASB ASC 805
What is the core rule under FASB ASC 805 (The Acquisition Method (ASC 805))?
Under FASB ASC 805 (AICPA / FASB / IRS), the Acquisition Method (ASC 805) establishes the authoritative rules tested on the CPA Exam. A world-class guide to the FASB acquisition method under 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?
On the exam, use this systematic approach to deconstruct any business combination problem, especially a complex Task-Based Simulation. Step 1. Calculate Consideration Transferred. Identify every component the acquirer gave up (cash, stock, contingent consideration) and sum their acquisition-date fair values. Ignore acquisition-related costs for this calculation.
Where can I practice CPA Exam questions on The 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.