FASB addresses revenue contracts with customers acquired in a business combination

By Ken Tysiac

FASB proposed a new accounting standard Tuesday that is designed to increase consistency in the accounting for revenue contracts with customers acquired in a business combination.

The proposed Accounting Standards Update would provide guidance on Topic 805, Business Combinations, that would require an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue From Contracts With Customers.

Generally, this change would result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistently with how they were recognized and measured in the acquired entity’s financial statements before the acquisition.

The proposal 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.

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.

Some stakeholders told FASB that current GAAP is unclear on how an acquirer should recognize a contract liability from a revenue contract with a customer acquired in a business combination after the adoption of Topic 606.

In addition, under current practice, the timing of payment of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer.

Comments on the proposal can be made by March 15 on FASB’s website.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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