Business Combination Accounting Simplified
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to simply business combination accounting rules.
One of the more challenging and potentially costly requirements under current guidance was how measurement-period adjustments were treated. The measurement period represents the period between when an acquisition closes until the date in which final values of the acquired business are determined. The measurement period ends the earlier of when final values are determined or one year from the acquisition date.
Acquirers were required to account for measurement-period adjustments retrospectively as if the adjustments were recorded at the acquisition date. Previously, an acquirer were required to revise comparative information in prior period financial statements. This requirement resulted in additional cost and complexity to accounting and reporting for business combinations.
How Will Measurement-Period Adjustments Now Be Accounted For?
Under the ASU, measurement-period adjustments are recorded in the period determined, including the effect on prior period earnings had the business combination accounting been completed at the acquisition date. Disclosure of the amount and by line item is required of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the measurement period adjustment had been recognized as of the acquisition date. Alternatively, amounts may be reported separately on the face of the income statement.
The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. For all other entities, it is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted for any interim and annual financial statements that have not yet been made available for issuance. The ASU is applied prospectively to adjustments to provisional amounts that occur after the effective date.
Opportunity and Reminder
We encourage companies to early adopt this ASU as applicable. As a reminder, a measurement period adjustment continues to be an adjustment to business combination accounting based on clarifying information about facts and circumstances existing at the acquisition date. We often see this concept misapplied as companies account for any adjustment as a measurement period adjustment rather than current period, post-acquisition adjustment. It is important to consider whether the new facts and information are current developments or information existing at the acquisition date.