The Financial Accounting Standards Board released an accounting standards update Thursday with guidance on accounting for revenue contracts with customers acquired in a business combination.
The update aims to reduce the differences in the way companies account for the assets and liabilities they end up with when they acquire another company. Under the current rules, an acquirer would typically recognize the assets they’ve acquired and the liabilities they’ve assumed in a business combination, including the contract assets and contract liabilities that come from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers, at fair value on the acquisition date.
But some of FASB’s stakeholders said it’s unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after the revenue recognition standard is adopted. Under the current rules, the timing of the payment of a revenue contract could later affect the post-acquisition revenue that’s recognized by the acquirer. To address this, the accounting standards update requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.
“The new ASU provides specific guidance on how to recognize and measure contract assets and contract liabilities related to revenue contracts with customers acquired in a business combination,” said FASB chair Richard R. Jones in a statement. “This will align the accounting for these acquired contracts to the accounting for revenue contracts originated by the acquirer and will provide more comparable information to investors and other financial statement users seeking to better understand the financial impact of these acquisitions.”
The amendments in the update also aim to improve comparability after a business combination by offering more consistent recognition and measurement guidance for revenue contracts with customers that have been acquired in a business combination, as compared to revenue contracts with customers not acquired in a business combination.
For public companies, the amendments take effect for fiscal years starting after Dec. 15, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years starting after Dec. 15, 2023, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date. Early adoption is permitted, including adoption in an interim period.