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8.6 Business combinations

The accounting for a lease acquired in a business combination depends on whether the acquiree is the
lessee or lessor. See LG 7.4 for information on the accounting for a leveraged lease acquired in a
business combination.

8.6.1 Acquiree in a business combination is a lessee

ASC 842-10-55-11 requires the acquiring entity in a business combination to retain the acquiree’s
previous lease classification unless the lease is modified. If the lease is modified and the modification
is not accounted for as a separate new lease, the modification is evaluated in accordance with the
guidance on lessee lease modifications. See LG 5.2 for information. ASC 805-20-30-24 (as amended
by ASC 842) provides guidance on the recognition and measurement of leases acquired in a business
combination in which the acquiree is the lessee.

ASC 805-20-30-24
For leases in which the acquiree is a lessee, the acquirer shall measure the lease liability at the present
value of the remaining lease payments, as if the acquired lease were a new lease of the acquirer at the
acquisition date. The acquirer shall measure the right-of-use asset at the same amount as the lease
liability as adjusted to reflect favorable and unfavorable terms of the lease when compared with
market terms.

As discussed in ASC 805-20-25-28B, an acquirer may elect to apply the short-term lease measurement
and recognition exemption to leases that have a remaining lease term of 12 months or less at the
acquisition date. In addition to not recording the lease on the balance sheet, under this exception, the
acquirer would not recognize an intangible asset if the terms of an operating lease are favorable
relative to market terms or a liability if the terms are unfavorable relative to market terms. See LG 2.2.1
for information on the short-term lease measurement and recognition exemption, BCG 4.3.3.5 for
information on favorable and unfavorable contracts, and BCG 4.3.3.7 for information on lease
arrangements.
ASC 842-20-35-13 provides guidance on the amortization of leasehold improvements acquired in a
business combination.

ASC 842-20-35-13
Leasehold improvements acquired in a business combination or an acquisition by a not-for-profit
entity shall be amortized over the shorter of the useful life of the assets and the remaining lease term
at the date of acquisition.

8.6.2 Acquiree in a business combination is a lessor

ASC 805-20-30-25 provides guidance on the recognition and measurement of sales-type and direct
financing leases acquired in a business combination.

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