The FASB on July 28, 2021, voted 5 to 1 to finalize a proposal that would clarify the accounting for revenue contracts with customers that have been acquired in a business combination, a topic where reporting differences have bubbled up among companies due to lack of specific guidance. One board member abstained.
Generally, under the changes an acquirer would recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers.
The rules would be simpler for accountants to apply, resulting in better information for investors at lower cost, according to board discussions.
“This is an area where we’re actually reducing costs to entities and increasing relevance to users,” FASB Vice Chair James Kroeker said. “I think we’ve heard that relatively consistently from users. In fact, I think [it is] clearly reducing cost because where it’s material entities are actually coming up with non-GAAP numbers that approximate what this accounting would be and they’re hearing from users that that’s actually the more relevant information for their analysis so I think it’s a reduction of cost and an increase in relevance and benefits, so I think a clear, useful improvement to financial reporting,” he said.
The guidance will be issued during the fourth quarter this year, to take effect for fiscal years after December 15, 2022, including interim periods within that fiscal year for public companies – both big and small, the board said. For private companies it takes affect after December 15, 2023, and interim periods within that fiscal year.
Under the forthcoming guidance, an entity would use the definition of the performance obligation that is applied in Topic 606 to determine whether to recognize a contract liability at the acquisition date, a FASB staff member explained during the discussions.
Additionally, acquired contract assets and contract liabilities would be measured in accordance with Topic 606 at the acquisition date, therefore the acquirer would no longer measure contract assets and contract liabilities at fair value, but instead utilize the contract transaction price in accordance with the principles of Topic 606.
Topic 606 contains comprehensive guidance surrounding the estimates and judgments that an entity must make when accounting for contracts with customers, the staff member said. Certain of those estimates were required by Topic 606 to be made at contract inception and other estimates were made on a recurring basis – and “the rules will not alter the timing of those estimates and thus an acquirer would need to assess and, or, update estimates as of either the contract inception date or the acquisition date,” staff said.
FASB Chair Richard Jones, Kroeker and board members Susan Cosper, Marsha Hunt and Gary Buesser affirmed the proposal. New board member Fred Cannon abstained from voting, as he was not on the board during initial deliberations.
Board academic Christine Botosan, said she would dissent believing – among other views – that the rules would not faithfully represent the economics of an acquisition, could result in the overstatement of revenue and income post-acquisition and because of that “can create perverse incentives for entities to buy revenues, [issues] that were raised back when business combination accounting was first debated by the board.”
Another concern is that “we are taking what is an area that is currently converged with the IFRS standards and deconverging it, and if I thought we were ending up in a better place I’d be okay with that, but since I don’t feel that way, that concerns me as well,” she added.
The board vote would finalize Proposed Accounting Standards Update (ASU) No. 2020-1000, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which was issued in December 2020. The board received 43 comment letters on the proposal, according to a meeting handout.
In agreeing to finalize the proposal, the board also voted:
- To allow practical expedients to be used “if the contracts are complex and long term,” and “if an acquirer is unable to rely on the acquiree’s Topic 606 accounting.” [A practical expedient is a cost-effective way of achieving the same or a similar accounting or reporting objective.] Specifically companies can use practical expedients already offered in Topic 606 transition paragraph 606-10-65-110, which discuss contracts that are completed that still have variable consideration outstanding and contracts that have been previously modified. Another practical expedient would also be added to allow an acquirer to determine the standalone selling price for the acquired contract at the acquisition date and spread out the contract inception date and use the acquisition date standalone selling price to allocate the transaction price for that contract. Practical expedients would be applied on an acquisition-on-acquisition or contract-by-contract basis and be available to all acquirers. Like the requirements in Topic 606, entities would need to disclose practical expedients that have been used, and to the extent reasonably possible, a qualitative assessment of the estimated affect of applying each of the expedients.
- To table an issue related to whether the recognition and measurement from the associated allowance for current expected credit losses (CECL) from acquired contract assets would not be addressed under the forthcoming rules. Board members said the issue could be dealt with in another project addressing CECL issues.
- To affirm the scope of the rules would apply to contract assets and contract liabilities from contracts with customers and other contracts to which the provisions of Topic 606 are applied.
- Not to add more disclosures, other than what was proposed.
For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: US GAAP — Revenue Recognition, also on Checkpoint.
Additional analysis of the revenue standard can be found on Checkpoint in the Accounting and Auditing Update Service and the SEC Accounting and Reporting Update Service [SARU No. 2014-21] (June 2014): Special Report: Comprehensive Coverage of the New U.S. GAAP Revenue Recognition Requirements.
An analysis of the guidance for business combinations can be found atCatalyst: US GAAP — Business Combinations, also on Checkpoint.
This article originally appeared in the July 29, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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