FASB Proposes Improvements to Deferred Revenue Accounting in Acquisitions

FASB Proposes Improvements to Deferred Revenue Accounting in Acquisitions

by Jill Rapier
March 10, 2021

A proposed change 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:

  • Reducing the complexity associated with determining the fair value of contract liabilities at the time of acquisition
  • Providing better information to investors and stronger comparability of post-acquisition reporting of cash flows and revenue
  • Providing consistent revenue recognition between the acquirer and the acquiree for contract assets and liabilities
  • Eliminating a need to revalue deferred revenue and determine the cost to deliver contracted services
  • Reducing the effort and cost associated with post-acquisition accounting
  • Enhancing alignment for financial statement preparers between the guidance within ASC 805 and ASC 606
  • Eliminating diversity in reporting among different organizations

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.

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.

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Jill Rapier - Director, Consulting - San Ramon CA | Armanino
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