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FASB Updates Business Combination Accounting

October 20, 2015

The Financial Accounting Standards Board (FASB) recently released an accounting standards update (ASU) for business combination accounting. ASU 2015-16 Business Combinations (Topic 805), Simplifying the Accounting for Measurement Period Adjustments will affect how entities report items when the accounting for the assets is incomplete at the end of the reporting period and the provisional amounts are subsequently finalized.

Background

When a business combination occurs, the acquirer re-measures the assets and liabilities acquired from the target when applying the acquisition method. The measurement of the acquired assets and liabilities is incomplete in some instances, when the financial statements for the period including the acquisition are issued or made available for issuance. In current practice, when acquiring entities finalize the incomplete (provisional) values during the period subsequent to the acquisition, they are required to go back and revise the prior period financial statements to reflect the final measurement. The revision made to the prior period financial statements includes adjusting the balance sheet line items, including goodwill, and updating the income statement for revisions to depreciation, amortization and other income effects.

The FASB identified this as an accounting area that added complexity to financial reporting and was costly to perform, which led to the accounting standards update.

New Requirements

Acquiring entities will no longer have to retrospectively revise prior period financial statements for adjustments made to the provisional amounts recognized in a subsequent period. They will instead recognize adjustments to the provisional amounts during the measurement period in the reporting period in which the adjustments are made. Included in the requirements is that the entity compute the cumulative effect on the income statement from the date of acquisition as if the change was recognized upon the date of acquisition and record the cumulative effect in the period of the change to the provisional amounts.

For example, assume an acquirer completes an acquisition on July 1, 2016, and provisionally recognizes $400,000 of 10-year amortizable intangible assets and $600,000 of goodwill in its December 31, 2016, financial statements. As a result of the business combination, it recognizes $20,0001 of amortization expense in 2016. In the subsequent year, after issuance of its December 31, 2016, financial statements, the acquirer finalizes the measurement. The final value of the intangible assets is $500,000. For its December 31, 2017, financial statements, the acquirer increases the cost basis of the amortizable intangibles by $100,000 with an offsetting decrease in goodwill. The entity would recognize amortization expense of $55,0002 on its 2017 income statement.

Disclosure of the adjustment to the provisional amounts recognized is also required. In addition, the acquirer presents on the income statement, or discloses in the notes to the financial statements, the amounts recorded in current period earnings (by line item) that would have been recorded in previous reporting periods had the final measurement been completed at the acquisition date.

Please note, if an adjustment to the acquisition method accounting is the result of correcting an error instead of the re-measurement of a provisional amount, the financial statements must account for the error under the guidance of Accounting Standards Codification (ASC) Topic 250 Accounting Changes and Error Corrections. As a result, preparers will be required to distinguish those items that are measurement period adjustments accounted for prospectively under ASU 2015-16 from those that are corrections of accounting errors that require restatement of prior period amounts.

Effective Date

Public business entities are required to adopt the ASU for fiscal years beginning after December 15, 2015 (calendar year 2016), including interim periods within. All other entities are required to adopt the ASU for fiscal years beginning after December 15, 2016 (calendar year 2017), and interim periods within fiscal years beginning after December 15, 2017 (calendar year 2018). Early adoption for financial statements of public business entities that have not yet been issued, or for non-public business entities that have not yet been made available for issuance, is permitted.

All changes to provisional amounts that occur after the ASU's effective date should be adopted prospectively.

For More Information

If you have specific comments, questions or concerns about the changes to business combination accounting, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at mwiniarski@cbiz.com or 816.945.5614.



1 - $400,000 / 120 months * 6 months

2 - $500,000 / 10 years + $500,000 / 120 months * 6 months - $40,000

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