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In October 2021, the FASB issued Accounting Standards Update 2021-08 ("Update"), which amends the accounting for contract assets acquired and liabilities assumed from contracts with customers in business combinations ("acquired contract balances"). 

Prior to the Update, acquired contract balances were required to be recorded at fair value at the acquisition date.  The amendments in the Update require that an entity (acquirer) recognizes and measures the acquired contract balances in accordance with Accounting Standards Codification (ASC) Topic 606, with the acquirer accounting for the revenue contracts acquired as if they had originated the contracts.

When applying the Update, entities may elect one or both of the following practical expedients on an acquisition-by-acquisition basis but must apply any expedients elected to all contracts acquired in the same business combination:

  1. For contracts modified before the acquisition date, an acquirer may reflect the aggregate effect of all modifications that occurred before the acquisition date when:
    1. Identifying the satisfied and unsatisfied performance obligations
    2. Determining the transaction price
    3. Allocating the transaction price to the satisfied and unsatisfied performance obligations
  2. For all contracts for purposes of allocating the transaction price, an acquirer may determine the standalone selling price at the acquisition date (instead of the contract inception date) of each performance obligation in the contract

This Update is effective for public business entities for fiscal years beginning after December 15, 2022, and for all other entities for fiscal years beginning after December 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. 

The ASU further states that "an entity that adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application[1]."

Does the Update impact you?

If your entity has had business combinations during the year, you should consider whether you would like to elect early adoption of the Update. It may be preferable to elect early adoption given that the Update, in most cases, will eliminate complexity around determining the acquisition date value of contract liabilities acquired in business combinations.  If early adoption is elected, keep in mind that the guidance in the Update must be applied to all acquisitions that occurred during the fiscal year of adoption, even if the measurement period for the acquisition closed before the adoption of the guidance. As a result, entities should consider what impact this may have and determine the cost-benefit of applying the Update to previous interim periods versus postponing early adoption until the next fiscal year.

It is anticipated that adoption of this Update will generally result in acquirers recognizing acquired contract balances at amounts consistent with those recorded by the acquiree immediately before the acquisition date.  However, an assessment should be performed by the acquirer to ensure that recording the acquired contract balances at carryover value makes sense.  There may be circumstances in which the acquirer cannot rely on the acquiree's ASC 606 accounting including but not limited to:

  • The acquiree's revenue recognition policies are different from those applied by the acquirer and the acquirer elects to conform the acquiree's accounting to their policy at the acquisition date
  • The acquiree does not follow US GAAP
  • There are errors identified in the acquiree's accounting under ASC 606

In these cases, an independent assessment of the acquired contracts balances should be performed as of the acquisition date utilizing the guidance as found in ASC 606. 

Read the full Update issued by the FASB.

References

[1] FASB Accounting Standards Update No. 2021-08

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