Contingencies – Financial Reporting Advisory, LLC

Exception 03 - Assets and Liabilities Arising From Contingencies (ASC 805-20)

Does the entity you have acquired (the acquiree) have potential contingencies? The ASC master glossary defines a contingency as "[a]n existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur." Examples of contingencies include litigation, environmental liabilities, or warranty claims. *

Yes

No

Initial Recognition and Measurement of Assets and Liabilities Arising From Contingencies (ASC 805-20)

ASC 805 requires entities to perform two steps in determining whether an asset or liability arising from a contingency qualifies for recognition in a business combination. The first step is to evaluate whether the "fair value of the asset or liability arising from a contingency can be determined [at the acquisition date or] during the measurement period." If so, the asset or liability is recognized as of its acquisition-date fair value as part of the accounting for the business combination.

STEP 1 - can the acquisition date fair value of the contingency (asset or liability) be determined or fair valued during the measurement period? *

Yes

No

STEP 2 - If an acquirer cannot determine the acquisition-date fair value of a contingency during the measurement period, it proceeds to the second step and recognizes the contingency as its estimated amount if:

(1) Is it probable that the asset existed or that the liability had been incurred at the acquisition date? *

Yes

No

(2) Can the amount of the asset or liability be reasonably estimated? *

Yes

No

This exception does not apply.

Recognize the asset or liability at its acquisition-date fair value as part of the accounting for the business combination.