FASB Proposal Aims to Make Accounting for Business Combinations Less Complexby
The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update on May 21 that is intended to simplify the accounting for adjustments made to provisional amounts recognized in a business combination.
The proposal is part of the US standard-setting board’s simplification initiative, which targets areas of US Generally Accepted Accounting Principles (GAAP) that can be made less costly and less complex for financial statement users, without compromising the usefulness of the information.
According to the proposed Accounting Standards Update, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, stakeholders have told the FASB that the requirement to retrospectively apply adjustments made to provisional amounts recognized in a business combination adds cost and complexity to financial reporting without significantly improving the quality of the information provided to users of financial statements.
Currently under US GAAP, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquiring company reports in its financial statements provisional amounts for the items for which the accounting is incomplete.
“During the measurement period, when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of other assets or liabilities, the acquirer must retrospectively adjust the provisional amounts recognized at the acquisition date to reflect that information with a corresponding adjustment to goodwill,” the FASB wrote.
In addition, under current accounting rules, the acquirer would revise comparative information for prior periods presented in financial statements as needed, including making changes to depreciation, amortization, or other income effects as a result of changes made to provisional amounts.
Under the new proposed rules, the acquirer would recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined.
The acquirer also would record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts. Those amounts would be calculated as if the accounting had been completed at the acquisition date.
Individuals and organizations have until July 6 to submit comments to the FASB on the proposed changes to business combination accounting. Instructions on how to submit feedback can be found in the proposed Accounting Standards Update.
The effective date will be determined after the FASB considers feedback from stakeholders on the proposed rule changes.