The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to address diversity in practice on how an acquirer should recognize and measure revenue contracts acquired in a business combination.
Under current GAAP, an acquirer recognizes contract assets acquired and contract liabilities assumed in a business combination at fair value at the acquisition date. ASU 2021-08 will require an acquirer to instead recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. To achieve this, the acquirer may assess how the acquiree applied ASC 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and assumed contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements before the acquisition. However, if the acquirer is unable to assess or rely on the acquiree’s application of ASC 606, the acquirer would need to evaluate and apply ASC 606 to the acquired contracts.
ASU 2021-08 also applies to contract assets and contract liabilities from other contracts that apply the provisions of 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, ASU 2021-08 does not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in a business combination, such as customer-related intangible assets and contract-based intangible assets.
For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The ASU should be applied prospectively to business combinations occurring on or after the effective date. Early adoption of ASU 2021-08 is permitted, including in an interim period. An entity that early adopts in an interim period should apply the amendments (a) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (b) prospectively to all business combinations that occur on or after the date of initial application.