ASC 805 – Accounting For Business Combinations

Business combinations – mergers, acquisitions, and consolidations – have become integral to corporate growth, innovation, and sector transformation worldwide. M&A in Q1 of 2025 appeared to show building momentum to kick off the year. Announced deal values for the quarter totaled $719 billion, an 8% increase over Q4 2024 and a 15% increase over Q1 2024. This scale and pace underscore the critical importance of accurate and transparent financial reporting following the acquisition.

ASC 805 Business Combinations establishes the industry benchmark for identifying, valuing, and reporting these transactions in financial statements. It demands that acquiring companies record all identifiable assets and liabilities at fair value as of the acquisition date, ensuring consistency, comparability, and investor confidence.

By aligning financial reporting with the true economic impact of a transaction, the standard enhances consistency, transparency, and investor trust. This “acquisition method” departs from legacy methods and aligns reporting with the economic realities of the transaction. With M&A deals growing in complexity and involving a wider range of players, the correct application of ASC 805 has become foundational to strategic decision-making.

This article explains ASC 805’s requirements, global context, real-world challenges, and best practices to help ensure accurate and compliant post-acquisition financial reporting.

The Foundation of ASC 805

Primarily, ASC805 uses the acquisition method of accounting. However, a key characteristic is that this method departs from the legacy methods and aligns financial reporting with the economic realities of the transaction.

Key Components of the Acquisition Method

• Identifying the Acquirer – Determining the acquirer involves evaluating which entity gains control, often based on voting rights, management appointment power, or economic interests. This step requires careful analysis in complex scenarios such as mergers of equals or reverse acquisitions, where the legal acquirer may differ from the accounting acquirer.
• Establishing the Acquisition Date – The acquisition date marks the point at which control transfers. This date marks the point at which the fair value of all acquired assets and assumed liabilities is determined.
• Recognizing and Measuring Consideration Transferred – All forms of consideration exchanged, including cash, stock, and contingent payments, must be recorded at fair value. Contingent considerations, such as earn-outs, require special attention since their valuation affects the initial allocation of the purchase price.
• Identifying and Valuing Net Assets Acquired – ASC 805 requires companies to recognize all identifiable assets and liabilities separately. It also expects to separately recognize tangible as well as intangible assets such as technology, trademarks, and customer relationships.
  Careful analysis is necessary to ensure that previously unrecorded assets and obligations, including off-balance sheet or in-process research and development (R&D), are captured at their fair value. This step is particularly challenging for intangible assets and requires specialized valuation expertise.

Recognizing Goodwill or Bargain Purchase Gain

• Companies record goodwill when they pay more for a business than the fair value of its net assets. This excess reflects future economic benefits that aren’t captured as separate assets.
• When the fair value of the net assets exceeds the purchase price, they recognize a bargain purchase gain. These situations often trigger closer scrutiny to confirm that the valuation captured all relevant assets and liabilities.
• Goodwill isn’t amortized, but companies must test it annually for impairment. Bargain purchases, although rare, must be thoroughly documented and justified.

Exclusions from ASC 805 Scope

Not all transactions fall under ASC 805 – transactions involving asset purchases, joint ventures, and common-control events are excluded and follow other US GAAP standards. The “screen test” helps distinguish between asset deals and business combinations.

Special Considerations Under ASC 805

Arrangements entered with sellers (such as compensation contracts or consulting agreements) must be reviewed to determine whether they’re part of, or separate from, the business combination. When the acquirer obtains control, they can elect to apply “pushdown accounting” so the new fair value basis is reflected in the acquirer’s standalone financial statements, not just in consolidated statements.

Detailed disclosures are required for both material and, in aggregate, immaterial business combinations, aimed at ensuring that users understand the acquisition’s impacts.

Global M&A Activity: A Market of Fewer, Larger Deals

Despite a persistent decline in the number of mergers and acquisitions globally, deal values have surged in 2025, reflecting a market pivot toward fewer, but significantly larger, transactions. In Q2 2025, global M&A deal value reached approximately $564B, marking an 11% increase from Q2 2024.

However, deal volumes dropped by nearly 17% year-over-year to about 10,900 transactions, the lowest count since 2015 (excluding 2020). The technology, media, and telecom (TMT) sector led the charge, accounting for $169 billion in deals, while North America dominated regional activity with 3,027 deals valued at $357 billion in the quarter.

Mega-deals (transactions exceeding $1 billion) have become the market’s defining feature, with Q2 2025 alone recording $438 billion in such deals, a 21% increase from the prior year. This concentration can be traced to revised corporate strategies that prioritize resilience, technological capabilities, and supply chain localization in response to ongoing geopolitical uncertainty and regulatory changes.

Private Equity and Investment Firms: Opportunity and Challenge

Private equity (PE) continues to wield significant influence, especially as “dry powder” (unspent capital) remains ample, estimated at over $1T globally. PE firms are navigating a more complex terrain: rising interest rates have increased borrowing costs, regulatory scrutiny is at an all-time high, and buyer-seller valuation gaps have become more difficult to bridge, especially in the mid-market.

PE buyers now face mounting competition from both strategic corporate acquirers and mega-funds moving downstream. These dynamics pressure firms to differentiate through highly disciplined deal sourcing, digital-first due diligence, and robust post-acquisition integration. The ability to execute high-value, high-conviction deals—often involving creative earn-outs or flexible financing—is becoming a decisive advantage.

Joint Ventures and Complex Structures

The application of ASC 805 has recently expanded in scope, especially regarding joint ventures. Effective January 1, 2025, new FASB guidance (ASU 2023-05) requires that most newly formed joint ventures recognize the fair value of their assets and liabilities upon formation, aiming to enhance consistency and transparency in post-formation financial reporting. This represents a significant shift from past practices, where diversity in measurement approaches was common.

Complex structures—whether cross-border mergers, multi-entity carve-outs, or joint ventures—continue to face added challenges in determining the true acquirer, valuing intangible assets, and harmonizing disparate systems and cultures. These factors make expert involvement and cross-functional collaboration critical early in the transaction process.

The 2025 M&A landscape illustrates that robust application of ASC 805 principles—including transparent fair value allocation and strategic use of purchase price allocation (PPA)—is indispensable for accurate reporting and building investor confidence.

As dealmaking becomes more selective and complex, technical rigour in accounting for business combinations is now more important than ever.

Best Practices for ASC 805 Compliance

Given the complexity of modern business combinations, especially in high-impact industries, companies should integrate the following best practices to ensure accuracy and regulatory compliance:

Start Early and Involve All Stakeholders

Companies should initiate the ASC 805 assessment during the deal negotiation and due diligence phase. Early involvement of cross-functional teams is essential to:

• Identify key accounting implications of the deal structure
• Spot any complexities like earn-outs, contingent liabilities, or non-standard agreements
• Align acquisition objectives with financial reporting obligations

Establish a Clear Framework for Valuation and Fair Value Measurement

Since ASC 805 relies heavily on fair value measurement, companies should establish a structured approach to valuing all identifiable assets and liabilities. This involves:

• Defining valuation methodologies for tangible and intangible assets
• Engaging qualified third-party valuation experts for complex areas like intellectual property, customer relationships, or contingent liabilities
• Ensuring consistency with ASC 820 (Fair Value Measurement) principles

Robust Documentation and Audit Readiness

Detailed and transparent documentation is a cornerstone of ASC 805 compliance. All major judgments should be well-supported with internal memos, models, and third-party reports.

Ensure the following are thoroughly documented:

• Rationale for asset and liability recognition or non-recognition
• Approach used to measure non-controlling interests
• Treatment of contingent consideration and earn-out provisions
• Any deviations from standard acquisition accounting treatment

Integrate Technology and Reporting Systems Early

Post-acquisition, aligning accounting systems is often overlooked. Companies should:

• Update ERP and consolidation systems to reflect newly acquired assets and liabilities
• Automate the mapping of accounts and intercompany eliminations
• Ensure systems can support future impairment testing and ongoing disclosure requirements

Eqvista: Empowering Strong Post-Acquisition Financial Reporting

Navigating the complexities of ASC 805 is essential for companies seeking transparent and accurate post-acquisition financial reporting. Platforms like Eqvista simplify this process by offering comprehensive cap table management, equity issuance, and expert 409A valuations—all critical for fair value measurement and purchase price allocation.

Eqvista’s secure digital platform keeps shareholder data organized and provides clear financial insights, including tools like waterfall analysis, which helps teams make informed decisions throughout the acquisition journey. By leveraging Eqvista, companies can streamline compliance, reduce errors, and build stakeholder trust with up-to-date, transparent records.

Take control of your business combinations today – partner with Eqvista to make financial reporting seamless, precise, and strategic. Get started now and transform how you manage your equity and valuations post-acquisition!