FASB Implements Improvements to Deferred Revenue Accounting in Acquisitions

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On October 28, the FASB issued its final ASU guidance on the accounting for contract liabilities (aka deferred revenues) in a business combination.  The new guidance allows companies to apply the revenue recognition standard (ASC 606) instead of determining the fair valuing the liability. This change results in a value that more closely reflects the target company’s book value.

The change differs from the previous requirement to determine the fair value of deferred revenues resulting from a business combination under ASC 805. This previous guidance created challenges concerning the valuation of deferred revenue, resulting in a significant downward adjustment (i.e., haircut) to the target company’s book value, making it appear as though revenues have disappeared from future periods.

The FASB’s update No. 2021-08 offers better clarity and consistency for acquisitive organizations:

  • Better aligns the guidance within ASC 805 and ASC 606 for financial statement preparers.
  • Reduces complexities in determining fair value of contract liabilities.
  • Resolve payment term inconsistencies by providing specifics on recognizing and measuring acquired contract assets and liabilities from revenue contracts in a business combination.
  • Delivers revenue recognition consistency for contract assets and liabilities between the acquirer and acquiree (assuming the acquiree’s financial statements were prepared using U.S. GAAP.)
  • Improves post-acquisition reporting giving better comparability of cash flows and revenue.
  • Eliminates reporting diversities among different organizations.

For public companies, the update is effective for fiscal years beginning after December 15, 2022. For all other organizations, the effective date is December 15, 2023. Early adoption is permitted.

Learn how VRC can help your organization transition seamlessly to the new FASB guidance and deliver valuation analyses for your next business combination. We welcome you to Contact Us or visit our team directory to connect with a VRC professional nearest you.