Accounting Standards Update (ASU) 2025-03, released in May of this year, brings consistency to the identification of the accounting acquirer in a business combination. This Update provides new guidance regarding the identification of the accounting acquirer in transactions that primarily involve the exchange of equity interests when the legal acquiree is a variable interest entity (VIE) that meets the definition of a business, bringing it into alignment with other transactions involving the acquisition of a business.

The amendments in this Update are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, including interim periods within those years. Early adoption is permitted in interim and annual financial statements that have not yet been issued or made available for issuance. Reporting entities should apply the amendments prospectively to all business combinations that have an acquisition date on or after the date of adoption/implementation.

Why this matters: Providing consistency for transactions involving VIEs

In a business combination, the identification of the accounting acquirer affects the carrying amounts of the combined entity’s assets and liabilities. Generally, the accounting acquiree’s assets and liabilities are initially measured at fair value by the acquirer. 

Prior to the issuance of ASU 2025-03, in a business combination involving an acquiree that is not a VIE, certain guidance is considered to identify the accounting acquirer. Based on that guidance, a transaction could be accounted for as a reverse acquisition – where the legal acquirer is treated as the acquiree for accounting purposes – or it may be determined that the transaction does not qualify for business combination accounting (i.e., if the accounting acquiree does not meet the definition of a business). 

However, when a VIE is acquired, current accounting guidance mandates that the primary beneficiary – the entity that consolidates the VIE – is always considered the accounting acquirer. 
That legacy guidance has led stakeholders to express concerns that the existing guidance leads to inconsistencies between transactions involving VIEs and those that do not. The clarification and additional guidance provided by this Update seeks to eliminate this inconsistent treatment caused simply by whether the acquired entity is a VIE.

What’s changing: A closer look at ASU 2025-03

ASU 2025-03 applies when a business combination is effected primarily through an equity exchange and the legal acquiree is a VIE that meets the definition of a business. In transactions effected primarily through the exchange of equity, application of this Update will result in a reporting entity bypassing the application of consolidation guidance (Topic 810) and directly considering the factors in ASC 805-10-55-12 through 55-15 to determine which entity is the accounting acquirer. These factors include:

• The relative voting rights in the combined entity after the business combination.
• The existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest.
• The composition of the governing body of the combined entity.
• The composition of the senior management of the combined entity.
• The terms of the exchange of equity interests.

The Update, however, does not change the identification of the accounting acquirer in transactions that are not affected primarily by exchanging equity interests. In those transactions in which a VIE is acquired, the primary beneficiary continues to be the accounting acquirer. 

What does CohnReznick think?

The changes introduced in this Update aim to improve consistency and lack of comparability in financial reporting, as they are expected to align the accounting results for certain acquisition transactions in which the accounting acquiree is a VIE with those of economically similar transactions involving voting interest entities. Reporting entities should take care to understand this Update and its impact on their financial reporting. Begin by evaluating transactions involving VIEs occurring after the effective date to assess how the new guidance may impact your financial reporting.