Simplification May Not be so Simple

The Adoption of ASU 2021-08

Nathan S. Slavin, PhD, CPA, and Jianing Fang, DPS, CPA, CITP

ASB issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to address the diversity in practice on the accounting for contract assets and contract liabilities acquired in a business combination. Contract assets and contract liabilities fall under the guidance for revenue recognition, which is covered under ASC 605, Revenue Recognition. Assets and liabilities in a business acquisition are valued at their respective fair values under ASC 805, “Business Combinations”; any residual value is allocated to goodwill. In order to avoid the complexities in valuing contract assets and contract liabilities, FASB has carved out an exception to ASC 805 whereby the acquirer simply records these contracts at the acquiree's carrying values. Under ASU 2021-08, the acquirer will account for the contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the revenue contract.