The threshold call is the first real judgment point in most deals, and the analysis runs in two parts:
- The screen test. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets, the transaction is not a business — and the analysis stops there.
- Inputs and processes. If the screen is not met, the acquirer assesses whether the acquired set includes an input and a substantive process that together contribute to the ability to create outputs.
The answer changes the accounting materially: goodwill (or a bargain purchase gain) arises only in a business combination, transaction costs are expensed rather than capitalized, acquired in-process research and development is capitalized rather than expensed, and contingent consideration is measured differently.
Frequently asked questions
The two follow different accounting. In a business combination, assets and liabilities are generally recognized at fair value, goodwill or a bargain purchase gain is recorded, and transaction costs are expensed. In an asset acquisition, the cost (including transaction costs) is capitalized and allocated to the assets acquired on a relative-fair-value basis, and no goodwill is recognized.
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Related
References: FASB ASC 805, Business Combinations; ASU 2017-01. This page is general information, not accounting advice for a specific entity.
Written and maintained by the Gaapio team of CPAs. Last reviewed August 2026.