NEW FASB STANDARD IMPROVES CONSISTENCY IN ACCOUNTING FOR ACQUIRED REVENUE CONTRACTS WITH CUSTOMERS IN A BUSINESS COMBINATION

Norwalk, CT, October 28, 2021—The Financial Accounting Standards Board (FASB) today issued an Accounting Standards Update (ASU) that addresses diversity in practice related to the accounting for revenue contracts with customers acquired 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,” stated FASB Chair Richard R. Jones. “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.”

Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including 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, at fair value on the acquisition date.

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 postacquisition revenue recognized by the acquirer. To address this, the ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

Finally, the amendments in the ASU improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

The ASU, including effective date information, is available at www.fasb.org.