Business Combinations Expected to made Easier by FASB
As a part of the continuing initiatives of GAAP simplification, the Financial Accounting Standards Board released some updates of accounting standards which eliminate the need for retrospective adjustment in accounts that are made on provisional amounts recognized for a business combination.
From the board’s point of view, stakeholders had raised concerns that the requirement of applying adjustments retrospectively resulted to complexity and more costs in the financial reporting but never improved significantly the usefulness of the information that users were provided with.
The 2015-16 ASU, (Topic 805), Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, states that:
· The acquirer must recognize adjustments to amounts that are provisional which were identified during the period of measurement in the period of reporting where adjustment amounts are normally determined
- The acquirer has to record financial statements in the same period where the earning’s effect of changes in amortization, depreciation or if there is any effect in income as a result of provisional amount changes whose calculations are done as if the accounting had been completed at the date of acquisition.
- An organization separately presents on the income statement face or in the disclosure notes, that portion of the recorded amount in earnings of the prevailing period by line item which would otherwise have been recorded previously in other reporting periods if only the provisional adjustment amounts were recognized.
- The ASU is applicable to all organizations which have reported amounts that are provisional for items in a business combination where the accounting is not complete by the close of the reporting period where the combination occurs and in the period of measurement where there are adjustments to the recognized provisional amounts.
- In the case of public entities, this update comes to effect on 15th Dec 2015 including the interim periods within these fiscal years. This should be applied prospectively to adjustments of provisional amounts which occur following the effective date where earlier application is allowed for financial statements that are not issued yet.
- For any other entity, the updated amendments will take effect for the fiscal years starting 15th December 2016. The interim period are for the fiscal years starting after 15th December 2017 which need to also be prospectively applied.