A company pays $10 million cash to acquire an office building, the land beneath it, and the building's outstanding tenant leases from a seller. The acquired set of assets does not meet the definition of a business under ASC 805 (no substantive processes or workforce are transferred). The fair values of the land, the building, and the in-place lease intangible are $4 million, $5 million, and $1.5 million respectively, totaling $10.5 million, which exceeds the $10 million price paid. Under ASC 805-50, how should the company account for this acquisition?
- Recognize the land, building, and lease intangible at their $4 million, $5 million, and $1.5 million fair values, and recognize a $0.5 million bargain purchase gain for the excess of fair value over cost
- Allocate the $10 million cost to the land, building, and lease intangible based on their relative fair values, with no goodwill or bargain purchase gain recognized, because an asset acquisition uses a cost accumulation model rather than a fair value model
- Recognize goodwill of $0.5 million as a plug to reconcile the fair values of the identifiable assets to the amount actually paid
- Recognize the assets at their full $4 million, $5 million, and $1.5 million fair values and record the $0.5 million difference as a reduction of additional paid-in capital
Why B? And why not the others?
Correct answer: B. Allocate the $10 million cost to the land, building, and lease intangible based on their relative fair values, with no goodwill or bargain purchase gain recognized, because an asset acquisition uses a cost accumulation model rather than a fair value model
ASC 805-50-30-3 requires that when a group of assets acquired does not constitute a business, the cost of the group is allocated to the individual assets acquired based on their relative fair values, and no goodwill is recognized. This reflects the cost accumulation model used for asset acquisitions, under which the transaction is recorded at the cost actually incurred rather than at the fair value model used for business combinations under ASC 805-30. Here, the $10 million cost is allocated across the land, building, and lease intangible in proportion to their $4 million, $5 million, and $1.5 million fair values, and the $0.5 million excess of aggregate fair value over cost paid simply reduces each asset's recorded amount pro rata — it is not recognized as a separate gain or as goodwill. The option recording full fair values and a bargain purchase gain applies business-combination accounting (ASC 805-30), which does not apply here because no business was acquired. The option recognizing $0.5 million of goodwill as a plug is wrong because goodwill can arise only in a business combination, never in an asset acquisition. The option recording full fair values and routing the difference through additional paid-in capital fabricates an equity adjustment that has no basis in the asset-acquisition cost accumulation model.
Source: FASB ASC 805-50-30-3 (allocating the cost of a group of assets acquired that does not constitute a business, based on relative fair values)