ASU Offers Guidance on Identifying the Accounting Acquirer
FASB ASU 2025-03 revises guidance for determining the accounting acquirer in a transaction involving a variable interest entity.
In under a minute
- On May 12, 2025, the FASB issued Accounting Standards Update (ASU) 2025-03, “Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity.”
- The ASU revises guidance to require entities to apply the acquirer identification factors in Accounting Standards Codification (ASC) 805-10-55-12 through 55-15 when a variable interest entity (VIE) that meets the definition of a business is acquired in a transaction effected primarily by exchanging equity interests.
- Under existing GAAP, a VIE’s primary beneficiary was always considered the accounting acquirer. The ASU removes this default conclusion regarding the accounting acquirer, enabling more consistent accounting for transactions that involve VIEs and those that do not involve VIEs.
- The amendments are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, including interim periods within those years. Early adoption is permitted.
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Why issue the amendments?
In a business combination, the identification of the accounting acquirer determines which entity remeasures its assets and liabilities at fair value. Legacy guidance mandated that when a VIE is acquired, the primary beneficiary always should be designated as the accounting acquirer – regardless of transaction structure or control indicators. This precluded the application of reverse acquisition accounting, even when economic control clearly resided with the VIE.
Stakeholders raised concerns that this led to inconsistent outcomes, particularly in special purpose acquisition company (SPAC) or umbrella partnership corporation (Up-C) transactions where target companies organized as limited liability companies (LLCs) or limited partnerships frequently were VIEs. ASU 2025-03 addresses this by permitting the same evaluation based on facts and circumstances as the evaluation applied to voting interest entities – enhancing comparability and alignment with economic substance.
Key provisions of ASU 2025-03
The ASU requires entities to apply the acquirer determination guidance in ASC 805-10-55-12 through 55-15 – rather than defaulting to the primary beneficiary – when all of these are true:
- The legal acquiree is a VIE.
- The legal acquiree meets the definition of a business.
- The transaction is effected primarily by exchanging equity interests.
This means the same qualitative factors used for voting interest entity acquisitions (see table) must now be used to assess control in these VIE transactions. The primary beneficiary is no longer automatically the acquirer in these scenarios.
While ASU 2025-03 requires that the accounting acquirer be identified using the factors in ASC 805-10-55-12 through 55-15 when a transaction is effected “primarily by exchanging equity interests,” the FASB chose not to clarify the application of “primarily by exchanging equity interest.” The board observed that the factors in ASC 805-10-55-12 through 55-15 are already applied in practice to such transactions. The factors are particularly relevant in transactions where equity interests are the main form of consideration. Many of the factors listed in the table – such as postcombination voting rights, governance, and management composition – are inherently tied to equity ownership rights. As a result, the ASU relies on existing judgment frameworks consistent with current practice.
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Information based on ASC 805-10-55-12 through 55-15 |
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Criteria |
Acquirer indicator |
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Relative voting rights |
The acquirer usually is the entity whose owners, as a group, have the largest portion of voting rights in the combined entity. Special or unusual voting arrangements, options, warrants, or convertible securities are also considered. |
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Large minority voting interest |
The acquirer likely is the entity with the largest minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest. |
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Governing body composition |
The entity whose owners can elect, appoint, or remove the majority of the governing body members of the combined entity usually is the acquirer. |
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Senior management composition |
The entity whose former management has a dominant role in the combined entity’s management usually is the acquirer. |
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Equity interest exchange terms |
The entity that pays a premium over the precombination fair value of the other entity’s equity interests is typically the acquirer. |
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Size |
The acquirer usually is the entity with a significantly larger size in terms of assets, revenues, or earnings. |
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Business combination involving more than two entities |
The initiator of the combination and relative size of the entities are considered. |
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New entity formation |
The entity formed is not automatically the acquirer; the acquirer is identified by applying the guidance in paragraphs 805-10-55-10 through 55-14. However, if the new entity transfers cash or other assets or incurs liabilities as consideration, it may be the acquirer. |
Crowe observation: Prior to ASU 2025-03, SPAC transactions involving VIEs and non-VIEs could result in different accounting outcomes despite similar economic structures. For example, when a SPAC acquired a target that was a VIE, the primary beneficiary was automatically the accounting acquirer, precluding reverse acquisition accounting – even if the VIE’s former owners retained majority control. Conversely, if the target was not a VIE, entities applied the guidance in ASC 805-10-55-12 through 55-15, which could support reverse acquisition treatment. ASU 2025-03 resolves this disparity by requiring the same accounting acquirer identification framework be applied to both VIE and non-VIE targets – when the legal acquiree is a business and equity interests are the primary form of consideration. This change promotes consistency and better reflects the underlying economics of SPAC and Up-C transactions.
Scenario: SPAC transaction
Scenario overview:
- A SPAC acquires Company XYZ, an LLC and VIE that meets the definition of a business.
- Equity interests are exchanged; no cash consideration is involved.
- Company XYZ shareholders hold 70% postdeal ownership and control key management roles.
Impact of ASU 2025-03:
Under ASU 2025-03, Company XYZ could be designated the accounting acquirer – consistent with reverse acquisition principles – even though it is a VIE. This outcome was not permitted under legacy guidance, where the SPAC (as primary beneficiary) would have been the acquirer.
Scope and exclusions
The ASU applies only to transactions involving a VIE that qualifies as a business and is acquired primarily through an equity exchange. It does not apply to:
- Acquisitions where the legal acquiree is not a business
- Acquisitions not primarily effected through equity (for example, cash acquisitions)
- Acquisitions in which the legal acquiree is a voting interest entity
Effective date and transition
ASU 2025-03 is effective for all entities for annual periods beginning after Dec. 15, 2026, and interim periods within those years. Early adoption is permitted for any interim or annual period in which financial statements have not yet been issued.
Entities must apply the amendments prospectively. Retrospective application is not required or permitted. In addition, entities must disclose the nature and reason for the change in accounting principle in the period of adoption.
FASB materials reprinted with permission. Copyright 2025 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.
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