FASB Proposal Outlines When Contract Liabilities in Business Combinations Are Recognized

By:
Chris Gaetano
Published Date:
Feb 15, 2019
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The Financial Accounting Standards Board (FASB) has issued a proposed standards update that, if implemented, would guide when and how an entity recognizes contract liabilities it assumes in the wake of a business combination. 

The FASB said that practitioners have differing opinions over whether the concept of a performance obligation, which was introduced in the revenue recognition standard, applies to contractual liabilities that an entity acquires as part of a business combination. Before the revenue recognition standard, the general practice was to recognize the liability if it represented a legal obligation. However this was done absent any specific guidance on this particular circumstance. 

The FASB proposal is simple: Entities would be required to recognize a liability assumed in a business combination from a contract with a customer if that liability represents an unsatisfied performance obligation, as outlined in the revenue recognition standard, for which the business being acquired has already received consideration, or is due to consideration, from the customer. 

The proposal so far does not include a possible effective date, but the exposure draft said that it would be applied prospectively to business combinations occurring on or after the effective date when it is determined. Stakeholders are encouraged to review and provide input on the proposal by April 30, 2019.

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