FASB proposes narrow simplification to business combination accounting

By Ken Tysiac

FASB continued its work to simplify accounting standards Thursday, issuing a proposal designed to make it easier to account for adjustments made to provisional amounts recognized in a business combination.

The board issued a Proposed Accounting Standards Update, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The proposal is part of FASB’s simplification initiative, which aims to reduce cost and complexity in financial reporting without sacrificing the usefulness of information provided to financial statement users.

Stakeholders have told the board that the requirement to retrospectively apply adjustments made to provisional amounts recognized in a business combination adds cost and complexity without significantly improving the usefulness of information in financial statements.

The proposal would require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined.

The acquirer also would record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects that may occur as a result of the change in the provisional amounts. This amount would be calculated as if the accounting had been completed at the acquisition date.

If approved, the amendments would be applied prospectively to adjustments to provisional amounts that are identified after the effective date and are within the measurement period. Upon transition, an entity would be required to disclose the nature of and reason for the change in accounting principle. This disclosure would be made in the first annual period of adoption and in interim periods within that annual period.

The board plans to consider feedback on the proposal before setting an effective date. Comments on the proposal are due July 6.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.

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