WHY ASC 805 MATTERS?

Every acquisition has a story — but behind every story lies structure, strategy, and accounting.

1. Fun Stat Teaser for Next Blog

"In 2023 alone, more than 35,000 global M&A deals were recorded. Each one had to apply some form of ASC 805 or its equivalent. That's 35,000 valuations of brands, users, codebases, and goodwill".

2. Real-World Examples

Facebook acquiring WhatsApp: Minimal tangible Almost all value attributed to technology, user base, and goodwill.

Amazon acquiring Whole Foods: Tangible assets (stores), inventory, and also brand name, customer relationships.

3. The Bigger Picture – Why ASC 805 Matters

Without a standard like ASC 805:

• Companies could report M&A however they wanted Critical intangible assets might be ignored
• Financial reporting would become inconsistent and misleading

ASC 805 ensures:

✅ Transparency

✅ Comparability

✅ Recognition of hidden value (customer base, tech IP, etc.)

4. What is ASC 805?

ASC 805 is the US GAAP accounting standard titled "Business Combinations". It lays out the framework for how companies must account for the acquisition of another business. When a merger or acquisition happens, ASC 805 ensures that the transaction is reflected accurately in financial statements by requiring the acquisition method of accounting.

5. Essence of ASC 805 – What Are We Really Doing?

We're trying to answer this:

"If I paid $100 million to buy a company, what part of that was for tangible stuff (buildings, computers), and what part was for intangible value (brand, customers, software)? And how much of it was just goodwill?"

ASC 805 forces a fair value analysis at the acquisition date.

6. What Happens Without ASC 805?

Imagine buying a software startup for $50 million and just putting the full amount into goodwill. Investors would have no idea what part of the value was in IP, team, or customer contracts. ASC 805 mandates detailed allocation.

7. What Is the Acquisition Method — and Why Do We Need ASC 805?

• When one business buys another, it's not just paying for buildings or inventory — it's also buying technology, customer relationships, brand value, and future potential.
• ASC 805 provides a standardized framework to allocate the purchase price across:
• Identifiable assets and liabilities (at fair value)
• Goodwill (what's left after allocation)
• The acquisition method ensures:

1. The buyer is clearly identified
2. The acquisition date is set
3. All assets & liabilities are valued properly
4. Goodwill or gain is recorded accurately

Without ASC 805, M&A reporting would be inconsistent and miss out on hidden intangibles. It brings clarity, comparability, and trust to every deal.

7. Why It's Not Just a Formality?

Incorrect purchase price allocation can:

• Inflate earnings (by under-recognizing amortization)
• Misrepresent asset base
• Cause future write-offs (impairment of goodwill)