If you’re reading this blog, then you are probably familiar with GAAP Dynamics and you know we love accounting – that’s what we live for! But lately, I feel like all we’ve been talking about is ASC 606 (Revenue Recognition), ASC 842 (Leases), and ASC 326 (CECL) which we affectionately refer to as “the Big 3”. Don’t get me wrong, I love the Big 3 but when I see a new ASU has been released I can’t help but get so excited! And that’s what brings me here today. There’s a new ASU in town!
On October 28, the FASB issued ASU 2021-08, Business Combinations (ASC 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.
But before we get into the specifics of ASU 2021-08, I wanted to provide a reminder on the definition of contract assets and contract liabilities:
- Contract assets: An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (e.g., the entity’s future performance)
- Contract liabilities (i.e., deferred revenue): An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer
Contract assets/liabilities are essentially the balance sheet holding account for revenue recognition under ASC 606. For example, if an entity pays money for contract costs that are capitalized, they would credit “Cash” and debit “Contract assets”. Conversely, if an entity receives an upfront payment for a revenue contract, but has yet to complete the work, they would debit “Cash” and credit “Contract liabilities”.
ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606 (meaning the acquirer should assume it has entered into the original contract at the same date and using the same terms as the acquiree). The FASB noted that the requirements of ASU 2021-08 should not be applied as just a “carryover” basis of the acquiree’s contract balances (e.g., the acquirer must assess the reasonableness of ASC 606 by the acquiree).
This new ASU applies to contract assets and contract liabilities acquired in a business combination (i.e., in the scope of ASC 805) and to other contracts that directly/indirectly apply the requirements of ASC 606 (e.g., ASC 610-20, Other Income--Gains and Losses from the Derecognition of Nonfinancial Assets, ASC 808, Collaborative Arrangements). ASU 2021-08 does not impact items such as refund liabilities, assets related to upfront payments, or costs to obtain/fulfill a contract (ASC 340-40).
Currently, ASC 805 requires the acquirer to recognize contract assets and contract liabilities acquired in a business combination at fair value. This new ASU will create an exception to both the general recognition and measurement principles of ASC 805. As a reminder, other exceptions to both the recognition and measurement principles of ASC 805 also relate to:
- Certain assets and liabilities arising from contingencies
- Employee benefits
- Indemnification assets
- Deferred tax assets and liabilities
In these areas, the acquirer must apply specified U.S. GAAP or specified requirements rather than the overall recognition and measurement principles to determine when to recognize and how to measure the assets or liabilities acquired.
If you need a refresher on the requirements of ASC 805, we have a great 3-course eLearning collection available!
Effective dates and transition
For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 (i.e., fiscal year 2023), including interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023 (i.e., FY 2024), including interim periods within those fiscal years.
ASU 2021-08 should be applied prospectively to business combinations occurring on or after the effective dates and early adoption is allowed, including adoption in an interim period! Note that for any entity that early adopts in an interim period, the entity should apply the amendments:
- Retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and
- Prospectively to all business combinations that occur on or after the date of initial application.
Because this ASU is not effective for public companies until 2024, you won’t see it discussed in our annual A&A update. However, if you sign-up for the update, you’ll see that we talk about other new, fun ASUs effective in 2021 and 2022! Contact us today if you have any questions and don’t forget to sign-up for the A&A update, because it’ll be January before you know it!
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