The FASB proposes improvements in a proposed Accounting Standards Update (ASU) intended to address inconsistency and diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Stakeholders are encouraged to review and share input on the proposed ASU by March 15, 2021.
Current GAAP provides guidance on when to recognize and how to measure assets and liabilities in a business combination but does not provide guidance specific to contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers.
Some stakeholders indicated that it is 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 Topic 606 is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer.
The proposed ASU would address these issues by providing guidance in Topic 805, Business Combinations, that would require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. Generally, this would result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements before the acquisition. The proposed ASU would not affect the accounting for other assets or liabilities that may arise from revenue contracts from customers in a business combination, such as customer-related intangible assets and contract-based intangible assets.