There currently is inconsistency and diversity in the accounting for revenue contracts with customers acquired in a business combination. Therefore, the Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which specifically addresses how an acquirer should recognize and measure revenue contracts acquired in a business combination.

If finalized, the proposed ASU would require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 of the FASB’s Accounting Standards Codification (ASC), “Revenue from Contracts with Customers.” At the acquisition date, an acquirer would assess how the acquiree applied ASC 606 to determine what to record for the acquired revenue contracts. Generally, this would result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements before the acquisition. However, the acquirer would need to apply ASC 606 to the acquired contract if:

• The acquiree did not prepare financial statements in accordance with U.S. generally accepted accounting principles.
• There were errors identified in the acquiree’s accounting.
• Changes were needed to conform with the acquirer’s accounting policies.

The proposed ASU also would apply to contract assets and contract liabilities from other contracts that apply ASC 606, such as contract liabilities from the sale of nonfinancial assets within the scope of ASC 610-20, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets.” However, the proposed ASU 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.

The effective date of the proposed ASU is yet to be determined. If finalized, the proposed ASU would be applied prospectively to business combinations occurring on or after the effective date. Early adoption of the proposed ASU would be permitted. An entity that early adopts in an interim period would need to apply the proposed amendments to all prior business combinations that have occurred since the beginning of the annual period that includes that interim period.

The proposed ASU is available for comment until March 15, 2021.