Key Takeaways
- Though ASU 2021-08 has already been effective for public business entities, it becomes effective for all other entities with fiscal years beginning after December 15, 2023.
- The amendments require that contract assets and contract liabilities acquired in a business combination be recognized and measured at the acquisition date in accordance with Topic 606, rather than at fair value.
- Certain practical expedients are available to the acquirer on an acquisition-by-acquisition basis.
Under legacy accounting guidance, identifiable assets and liabilities acquired in a business combination that meet the FASB Concepts Statement No. 6 definitions of assets and liabilities are recognized and measured at fair value on the acquisition date with certain limited exceptions. However, some diversity of practice has emerged.
To improve consistency and comparability regarding revenue contracts, FASB has issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08).
What is ASU 2021-08?
The ASU is applicable to all entities that enter a business combination within the scope of Subtopic 805-10, Business Combinations – Overall.
Within a business combination transaction, the amendments apply only to contract assets and contract liabilities acquired arising from (1) contracts with customers or (2) other contracts to which the provisions of Topic 606 apply.
Recognition and Measurement
The amendments of the ASU require that the acquirer in a business combination recognize contract assets and contract liabilities from contracts with customers or other applicable contracts on the acquisition date following the provisions of Topic 606 instead of fair value.
In applying Topic 606 at the acquisition date, the acquirer should measure the contract assets and contract liabilities as if the acquirer had originated the contract.
- In many instances, applying the Topic 606 guidance to contract assets and contract liabilities acquired may result in no change from the values of the contract assets and contract liabilities reported by the acquiree. However, differences in the amounts recorded by the acquirer and the acquiree may result from (1) differences in revenue recognition accounting policies between acquirer and acquiree (2) differences in estimates, (3) errors by the acquiree in their application of Topic 606, and (4) use of practical expedients by the acquirer.
Practical Expedients
The amendments of the ASU provide two practical expedients available to the acquirer. The acquirer may elect one or both of the practical expedients below on an acquisition-by-acquisition basis. Once elected, the practical expedient must be applied to all contracts acquired in that business combination.
- The first practical expedient allows the acquirer to aggregate the effect of all modifications that occur before the acquisition date when (1) identifying the satisfied and unsatisfied performance obligations, (2) determining the transaction price, and (3) allocating the transaction price to the satisfied and unsatisfied performance obligations.
- The second practical expedient allows the standalone selling prices to be determined at the acquisition date instead of the contract inception date for each performance obligation in the contract (for purposes of allocating the transaction price).
Presentation and Disclosure
The amendments in the update do not result in any changes to the financial presentation.
If practical expedients are used, the acquirer must disclose the expedients used and provide a qualitative assessment (to the extent possible) of the estimated effect of applying the expedient(s). Otherwise, the amendments do not result in any new disclosure requirements.
What is the Effective Date of ASU 2021-08?
The ASU has already become effective for public business entities. For all other entities, it becomes effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments of the ASU are to be applied prospectively to business combinations occurring on or after the effective date.
Early adoption is permitted for annual and interim financial that have not been made available for issuance. If early adopted in an interim period, the entity must apply the amendments retrospectively to any business combinations for which the acquisition date occurred on or after the beginning of the fiscal year that includes the interim period of early application.
Why Was it Necessary to Enact ASU 2021-08?
FASB Concept Statement No. 6 suggests that a present obligation in the context of the definition of a liability is broader than simply a legal obligation; however, there has been diversity in how this has been interpreted and applied in practice concerning contract liabilities.
Some acquirers have recognized contract liability at the acquisition date to the extent that a legal obligation exists. In contrast, others have applied the ASC Topic 606 concept of performance obligations when determining whether a liability exists. In applying fair value measurement, it has been observed that the amount of revenue recognized in an acquirer’s post-acquisition financial statements relating to a revenue contract with a customer may differ depending on when payments were received, even when a significant financing component does not exist. The fair value measurement requirement also results in a lack of comparability between revenue contracts acquired in a business combination compared to those not acquired.
Next Steps for ASU 2021-08
Staying informed about changes from this and other ASUs ensures that entities comply with the latest Generally Accepted Accounting Principles (GAAP), avoiding potential legal and financial penalties. Eide Bailly’s team of audit and assurance professionals can help you adapt to new standards as they arise, so you can streamline financial processes, reduce the risk of errors, and make informed decisions.
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