Measurement Period Adjustments (ASC 805)

After acquiring a business, many companies believe they have up to one year to finalize the purchase price allocation through measurement period adjustments. However, this is not exactly true! While acquirers do potentially have up to one year to make certain measurement period adjustments, it’s not a free for all.

Recognizing measurement period adjustments is a common issue when acquiring a business under ASC 805, which this post explores in more detail. If you are looking for more information on other common accounting issues, visit our Business Combinations topic page!

Measurement period adjustments: The basics

When the initial accounting for a business combination is not complete by the end of a reporting period, the acquirer reports provisional amounts for any incomplete amounts. During the measurement period, the acquirer then adjusts those provisional amounts as it obtains the necessary information or, alternatively, determines that the necessary information will not be obtainable by the end of the measurement period.

Measurement period adjustments are only meant to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. These adjustments can be as a result of incomplete initial accounting for the business combination or to reflect new information.

Adjustments may be made to:

• Assets acquired, liabilities assumed, and non-controlling interests
• Consideration transferred
• If a business combination is achieved in stages, the equity interest in the acquiree previously held by the acquirer
• The resulting goodwill recognized or the gain on a bargain purchase

What is the measurement period?

If the accounting for a business combination is not complete by the end of a reporting period in which the combination took place, the acquirer has a period of time to finalize its accounting. The period during which adjustments can be made to the amounts originally recorded at the acquisition date is known as the measurement period.

So how long is the measurement period? One year from the acquisition date? Well, maybe…

The measurement period is not a fixed period! The measurement period ends once the acquirer is able to determine that it has obtained all necessary information that existed as of the acquisition date or has determined that such information is not available. In practice, the acquirer determines the information that it is seeking on an item-by-item basis and must document the information that it has not yet obtained, but has arranged to obtain, for each reporting period that the measurement period remains open.

The SEC has clarified that the measurement period ends when the acquiring company obtains the necessary additional information or determines that additional information is unobtainable. In either case, the measurement period cannot exceed one year from the acquisition date. So, “one year” is really the measurement period’s ceiling, but the measurement period could be even shorter than that if the company obtains the information it is missing, or determines that it is unobtainable.

What classifies as a measurement period adjustment?

In order to be classified as a measurement period adjustment, as opposed to the correction of an error, there are three strict criteria that must be met:

• The acquirer obtains new information about facts and circumstances that existed at the time of the acquisition that, if known then, would have impacted the amounts recognized;
• The company’s initial disclosures indicate that the accounting for the acquired assets and liabilities assumed is incomplete; and
• The measurement period has not ended.

If this new information did not qualify as a measurement period adjustment by meeting the criteria above, it would instead be accounted for as an error correction or post-acquisition item, which means the corresponding entry would be to the income statement, and not to goodwill.

Recognizing measurement period adjustments

ASC 805 requires an acquirer to recognize measurement period adjustments in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings for changes in depreciation, amortization, or other income effects, if any, as a result of the measurement period adjustment (i.e., change to the provisional amounts).

These measurement period adjustments are calculated as if the accounting had been completed at the acquisition date (i.e., the acquirer records the measurement period adjustment as if it had this information all along).

ASC 805 also requires the acquirer to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.

Final thoughts

When provisional amounts exist at the end of a reporting period, make sure your company / your clients have adequately documented which amounts are provisional (and why) and what remaining documentation or information is yet to be obtained. Remember the three criteria for classifying the subsequent adjustment as a measurement period adjustment.

If these criteria are met, the corresponding entry to the measurement period adjustment is to goodwill. If these criteria are not met, treat the adjustment as a change in estimate due to an error, with the corresponding entry to the income statement.

We discuss measurement adjustments in more detail within our Business Combinations: Advanced Issues and Disclosures course if you’re looking for more information.

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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.