The Financial Accounting Standards Board (FASB) issued a new accounting standards update (ASU) that simplifies business combination accounting by eliminating the requirement to account for measurement-period adjustments retrospectively.
Under US generally accepted accounting principles (GAAP), the acquirer in a business combination must account for all aspects of the transaction as of the acquisition date. If circumstances prevent the acquirer from completing the initial accounting for certain items at the end of the reporting period in which the acquisition occurred, provisional amounts are used to record those items. In subsequent periods, as the acquirer obtains more information about the facts and circumstances that existed at the transaction date, the acquirer finalizes the provisional amounts through what are referred to as measurement period adjustments.
Prior to the update, US GAAP required these measurement-period adjustments to be accounted for retrospectively. That is, the acquirer had to revise previously reported financial statements for the effects of these adjustments back to the acquisition date.
The amendments in the ASU now allow acquirers to recognize measurement period adjustments during the period in which the adjustment amounts are determined. This change is expected to eliminate the costs related to retrospective restatements, without significantly reducing the relevance of information provided in the financial statements.
It’s important to note that the ASU doesn’t change the existing requirements for determining provisional amounts and qualifying measurement period adjustments, nor does it eliminate any of the existing required disclosures. The ASU also requires the acquirer to present on the face of the income statement, or disclose in the notes, the portion of current period earnings by line item that would have been recorded in previous reporting periods if the measurement period adjustment had been recognized as of the acquisition date.
The amendments take affect for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, for public business entities. For all others entities, they’re required to apply these new requirements for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
For adjustments to provisional amounts that occur after the effective date, all entities must prospectively apply the amendments. Early application is permitted for financial statements that haven’t been issued.
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