FASB Proposes Amendments on Acquired Liabilities in Customer Contracts

February 27, 2019

A new Financial Accounting Standards Board (“FASB”) proposal aims to clarify U.S. GAAP’s business combinations guidance concerning specific issues following implementation of Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts With Customers.

Issued as Proposed ASU No. 2019-300, Business Combinations (Topic 805): Revenue from Contracts with Customers—Recognizing an Assumed Liability, a consensus of the FASB Emerging Issues Task Force, the proposal offers clarifications regarding when an entity acquiring another entity must recognize a contract liability in a business combination. The amendments would require the acquiring entity to recognize a liability from a customer contract in a business combination if the liability is an unsatisfied performance obligation under Topic 606, Revenue From Contacts with Customers, for which the acquired entity has received consideration from the customer. The Emerging Issues Task Force (“EITF”) worked with the FASB in developing this proposal.

In addition, the FASB released Invitation to Comment (“ITC”) No. 2019-200, Measurement and Other Topics Related to Revenue Contracts with Customers under Topic 805. Considered a preliminary standard-setting document, the invitation to comment aims to solicit public feedback on calculating liabilities in business combinations. ITC No. 2019-200 also seeks comments on matters related to acquiring contracts with customers in business combinations and their impact on future revenue recognized and costs to fulfill a performance obligation in calculating the fair value of a revenue contract’s contract liability.

Comments on both releases are due Tuesday, April 30. If approved, the proposed amendments would be applied prospectively to business combinations transpiring either on or following their effective date. The effective date and early adoption will be decided once the EITF reviews stakeholder feedback.