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Purchase Accounting (ASC 805)

What Is ASC 805?

ASC 805 is the FASB standard governing business combinations. It requires an acquirer to recognize the identifiable assets acquired, liabilities assumed, and any noncontrolling interest — generally at fair value as of the acquisition date — and to record goodwill, or a bargain purchase gain, for the difference from the consideration transferred.

The recognition and measurement principle is fair value with specified exceptions. The ones a technical accountant is expected to know include income taxes (ASC 740), employee benefits, indemnification assets, reacquired rights, share-based payment awards, and — under ASU 2021-08 — acquired contract assets and contract liabilities (including deferred revenue), which are measured under ASC 606 rather than at fair value.

ASC 805 also governs contingent consideration. The classification call — liability versus equity — determines whether an earnout is remeasured through earnings each period after the deal closes, which can make reported results volatile in ways management needs to explain.

A measurement period of up to one year from the acquisition date is available to finalize provisional amounts as new information about acquisition-date facts comes to light.

Frequently asked questions

Only transactions that meet the definition of a business combination — where an acquirer obtains control of one or more businesses. An acquisition of assets that does not constitute a business follows a different, cost-accumulation-and-allocation model and does not give rise to goodwill.

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Related

References: FASB ASC 805, Business Combinations; ASU 2021-08. 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.