New guidance issued by the Financial Accounting Standards Board (FASB) on Sept. 25 is intended to simplify accounting for adjustments made to provisional amounts recognized in a business combination.
Under the amendments included in Accounting Standards Update No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, the standard-setting board eliminated a requirement in US GAAP to retrospectively apply measurement-period adjustments to provisional amounts.
The action taken by the FASB was a result of comments from stakeholders who said the requirement added cost andcomplexity to financial reporting without significantly improving the quality of the information provided to financial statement users.
Previously, if the initial accounting for a business combination was incomplete by the end of the reporting period in which the combination occurred, the acquiring company reported in its financial statements provisional amounts for the items for which the accounting was incomplete.
The new guidance requires that the acquiring company 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 must also now 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. This effect is to be calculated as if the accounting had been completed at the acquisition date.
In addition, an entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
For public business entities, the amendments go into effect for fiscal years beginning after Dec. 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date. Earlier application is permitted for financial statements that have not yet been issued.
For all other entities, the amendments go into effect for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec. 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date. Earlier application is permitted for financial statements that have not yet been issued.
The FASB decided that the only disclosures required at transition should be the nature of and reason for the change in accounting principle. An entity should disclose that information in the first annual period of adoption and in the interim periods within the first annual period if there is a measurement-period adjustment during the first annual period in which the changes are effective, according to the FASB.
The new guidance is part of the FASB's simplification initiative, which targets areas of US GAAP that can be made less costly and less complex for financial statement users, without compromising the usefulness of the information.
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Jason Bramwell is a staff writer and editor for AccountingWEB. He has nearly 20 years of experience in print and online media as a journalist and editor.