Pittsburgh, USA

Accounting for contract assets and liabilities in a US business combination

By Jeffrey A. Ford, Grossman Yanak & Ford LLP

Prior guidance dating to the early 2000s typically treated acquired deferred revenue liabilities as legal obligations in a business combination. This, and varying practices related to subsequent revenue recognition on revenue contracts, was seen as inconsistent with Topic 606, Revenue from Contracts with Customers. In response, the Financial Accounting Standards Board (FASB) issued ASU 2021-08 to achieve clarity, consistency of practice and conformity with Topic 606.

The main provisions

At the acquisition date, the acquirer should account for acquired revenue contracts in accordance with Topic 606 as if it had originated the contracts. In doing so, the acquirer may assess how the acquiree applied Topic 606, typically resulting in the acquirer treating the contracts as did the acquiree if the acquiree followed US GAAP. The amendments specify for all acquired revenue contracts, regardless of their timing of payment, or circumstances where an acquirer should recognise acquired contract assets and liabilities and how to measure these contract assets and liabilities.

While these amendments primarily address contract assets and liabilities from revenue contracts with customers acquired in a business combination, they also apply to other contracts to which Topic 606 applies, such as contract liabilities from the sale of non-financial assets. They do not affect accounting for specified acquired assets or liabilities such as refund liabilities, customer-related intangible assets, or contract- based intangible assets.

Practical expedients

In recognising that complexity, as sequence of contract modifications, and access to information may inhibit the acquirer’s ability to assess acquired contracts, ASU 2021-08 provides the following practical expedients (note that a “practical expedient” is a more cost-effective way of achieving the same or a similar accounting or reporting objective while an “accounting alternative” is a different method for recognising or measuring a transaction or event):

  1. The acquired may reflect the aggregate effect of all pre- acquisition contract modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price among performance obligations.
  2. The acquirer may determine the standalone selling price at the acquisition date for each performance obligation.

Effective Dates

These amendments are effective for fiscal years 15 December 2022 for public companies and 15 December 2023 for other entities, and are to be applied to business combinations occurring on or after the effective date. Early adoption is permitted.

Jeffrey A. Ford

Jeffrey A. Ford

GGI member firm
Grossman Yanak & Ford LLP
Advisory, Auditing & Accounting, Tax
Pittsburgh (PA), USA
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Grossman Yanak & Ford LLP is a full-service CPA firm, headquartered in Pittsburgh, Pennsylvania. Their accounting and consulting service offerings include audit and assurance, tax advisory and compliance, business valuation and litigation support, business advisory/ management consulting, and ERP solutions.

Jeffrey A. Ford is a Founding Partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served a variety of ownership groups including public and private companies, private equity groups and international investors.

Published: Auditing, Reporting & Compliance Newsletter, No. 09, Spring 2023 l Photo: Aevan - stock.adobe.com

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