A proposed regulatory update to accounting standards for business combinations will help reduce complexity and better enable acquirers to capture the value of deferred revenue from an acquired organization.
In December, the Financial Accounting Standards Board (FASB) proposed a change to the fair value principles in Topic 805, Business Combinations. The change would enable organizations that have adopted ASC 606, Revenue from Contracts with Customers, to recognize and measure the contract assets and liabilities (deferred revenue) using the values on the target company’s GAAP financial statements if the company is ASC 606-compliant or its statements are adjusted to ASC 606 compliance.
This change differs from the current guidance, which requires recording the deferred revenue at fair value at the time of acquisition. Because that revenue is revalued as the transaction closes — usually resulting in a haircut— that revenue, in effect, vanishes from future periods.
The FASB proposal, if adopted, offers several benefits for companies that engage in M&A activity:
The proposal would also improve the comparability of organizations that grow primarily through acquisition with those that rely on organic growth by eliminating the reduced post-acquisition revenue for acquisitive companies.
To ensure regulatory compliance, we encourage financial statement preparers and investors to offer their support for this proposal by sending the FASB a comment letter at this link. The comment deadline is March 15, 2021.
