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EITF Approves Clarification of Business Combinations Guidance

June 14, 2018

The FASB’s Emerging Issues Task Force (EITF) agreed that the accounting board needs to clear up an area of its business combinations guidance that has raised questions in the wake of the 2014 publication of the landmark revenue recognition standard. The task force forwarded to the FASB a recommendation to propose amending its business combinations guidance to require a business buying another business to recognize a liability when the customer contracts held by the selling company include performance obligations.

The FASB’s Emerging Issues Task Force (EITF) agreed on June 7, 2018, that the accounting board needs to clear up an area of its business combinations guidance that has raised questions in the wake of the 2014 publication of the landmark revenue recognition standard.

The task force forwarded to the FASB a recommendation to propose amending its business combinations guidance to require a business buying another business to recognize a liability when the customer contracts held by the selling company include performance obligations. The concept of a performance obligation in a revenue contract was introduced to U.S. GAAP when the FASB published its sweeping revenue standard, Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers.

The FASB has the final say on whether to release the proposed clarification for public comment, although the board is expected to affirm the task force’s recommendation. FASB members participate in EITF meetings, and most members weigh in on the task force debates.

“The performance obligation view just helped, to me, to provide clarity,” FASB Vice Chairman James Kroeker said. “It just gives you a scope that’s clearer to me [that] these are the things you now have to think about — your carryforward obligations.”

When one business buys another, it must follow the accounting guidance in FASB ASC 805, Business Combinations , to recognize the assets and liabilities assumed in the acquisition at fair value.

Customer contracts are often among the selling company’s assets during a corporate acquisition, and contractual requirements to provide customers goods and services are regarded as performance obligations in FASB ASC 606, Revenue From Contracts With Customers. Some contractual requirements may represent liabilities. Prior to the publication of ASU No. 2014-09, many businesses recognized contract liabilities only if they represented legal obligations to customers as of the business’s acquisition date. After the publication of the revenue standard, the FASB heard questions about whether this recognition pattern should continue or if businesses should recognize contract liabilities based on the remaining performance obligations as of the date of the acquisition.

In many cases, the answer would be the same — legal obligations and performance obligations may be viewed similarly, a FASB staffer told the task force. But it may not be the same in all cases.

“There isn’t going to be that many differences between legal and performance obligations, but there are some, so we need to address this issue,” said Deloitte & Touche LLP partner Robert Uhl. “‘Performance obligation’ seems to fit right in line with the definition of a liability… It’s going to be easier for people to apply, it maintains more convergence with IFRS.”

The task force also addressed how to measure the assumed liabilities in a business combination. EITF members said the business doing the acquisition must measure at fair value the remaining obligation it assumed. It would not be appropriate for the acquiring business to measure liabilities on a carry-over basis — recording the liability on its balance sheet equal to the amount of deferred revenue on the acquired business’s balance sheet.

The EITF also agreed that the acquiring business should consider the value of the other assets and liabilities that it acquires when it measures the assumed liability’s fair value.

The FASB’s research staff recommended that the measurement questions should be addressed via nonauthoritative guidance, such as the minutes to the EITF meeting. But the task force agreed that the FASB should include the information in the Codification of U.S. GAAP if the board decides to amend FASB ASC 805.

“I think the educational information has been very useful to practice, but if people can’t retrieve it a year or three years or five years from now, it’s going to lose its usefulness,” FASB Chairman Russell Golden said.

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