FASB Seeks to Align Accounting Guidance Between Asset Acquisition and Business Combinations
There’s an effort underway by the Financial Accounting Standards Board (“FASB”) to look at closing the gap between the accounting standards for business combinations and the accounting standards for acquisition accounting. Because these two sets of accounting guidance are different, businesses are sometimes motivated to structure merger and acquisition (“M&A”) deals in ways that avoid complex accounting. Decreasing the differences between these standards could help make M&A activity more straightforward in the future. This effort is also a continuation of the FASB’s work to more clearly define what a business is for U.S. generally accepted accounting principles (“GAAP”).
Some critics have said that the definition of a business under GAAP is too broad and captures too many day-to-day asset purchases. On August 2, 2017, the FASB agreed to look into what could be aligned between the guidance in Subtopic 805-50, Acquisition of Assets Rather than a Business, and the guidance in Topic 805, Business Combinations. The intention is to change the business combinations guidance to be more in line with the relatively simpler asset acquisition guidance.
The three main areas they want to tackle first are:
- Transaction costs
- In-process research and development
- Contingent consideration
This latest effort by the FASB is known as “phase three” of the board’s ongoing work to clarify the definition of a business for U.S. GAAP. Other important milestones leading up to this moment include:
- January 2017: The FASB publishes Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Goal: To more easily determine if the purchase of an asset or group of assets qualifies as the sale or disposal of a business.
- February 2017: The FASB publishes ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinacial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. Goal: Specifically for better explaining how to account for sales and disposals of nonfinancial assets, such as real estate.