When it comes to accounting for business combinations, many are not aware that U.S. generally accepted accounting principles (U.S. GAAP) permit an entity to report provisional amounts during a measurement period. Others have been concerned with the current requirement to retrospectively present any adjustments made during the measurement period.
What is the measurement period?However, new guidance in Accounting Standards Update (ASU) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, eliminates the current requirement to retrospectively present any adjustments made during the measurement period and may increase the use of the measurement period as a result.
According to FASB Accounting Standards Codification (FASB ASC) 805, Business Combinations, and specifically FASB ASC 805-10-25-13:
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete.
FASB ASC 805-10-25-15 allows the acquirer to adjust provisional amounts recognized in a business combination. It also provides the acquirer with a reasonable time to obtain the information necessary to identify and measure items as of the acquisition date.
How long is the measurement period?
FASB ASC 805-10-25-14 indicates that the measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date.
What happens to adjustments to provisional amounts during the measurement period?
Under current U.S. GAAP, in FASB ASC 805-10-25-13, during the measurement period, the acquirer retrospectively adjusts the provisional amounts recognized at the acquisition date to reflect the new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized at the acquisition date. Accordingly, the acquirer will revise comparative information for prior periods presented in financial statements as needed, including making any change in depreciation, amortization or other income effects recognized in completing the initial accounting.
As a result of the feedback received, the FASB added a project as part of its simplification initiative to address whether simplifications could be made to measurement period adjustments. The FASB concluded that simplifications for measurement period adjustments were warranted and issued ASU 2015-16.
The amendments in ASU 2015-16 eliminate the guidance in FASB ASC 805-10-25-13 that requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period. Therefore, the acquirer would no longer be required to revise comparative information for prior periods presented in financial statements for depreciation, amortization or other income effects as a result of changes to provisional amounts.
The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
Additional disclosure requirements for those using the measurement period were not impacted by ASU 2015-16. These include disclosure of the reasons why the initial accounting is incomplete and the assets, liabilities, equity interests or items of consideration for which the initial accounting is incomplete.
For public business entities, the amendments in ASU 2015-16 are effective for fiscal years beginning after Dec. 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of ASU 2015-16, with earlier application permitted for financial statements that have not been issued.
For all other entities, the amendments in ASU 2015-16 are effective for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec. 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of ASU 2015-16, with earlier application permitted for financial statements that have not yet been made available for issuance.