In October 2021, the FASB issued ASU 2021-08
, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
. The guidance affects all entities that enter into a business combination within the scope of ASC 805-10
is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should apply the guidance in ASU 2021-08
on a prospective basis to all business combinations with an acquisition date on or after the effective date.
Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued. However, adoption in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance is adopted.
No adjustment can be made to acquisitions that occurred in previous fiscal years, even if the “measurement period” described in ASC 805-10-25-14
is still open for such acquisition. See BCG 2.5.16A
for applicable guidance before adoption of ASU 2021-08
The acquiree in a business combination may have revenue contracts with customers for which it had recognized contract assets and/or contract liabilities in its precombination financial statements. In accordance with ASC 805-20-30-28
, the acquirer should determine what contract assets and/or contract liabilities it would have recorded under ASC 606
(the revenue guidance) as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquiree.
provides guidance on when certain assessments and estimates should be made (i.e., at contract inception or on a recurring basis). ASC 805-20-30-28
states that the acquirer should make those assessments as of the dates required by ASC 606
. Accordingly, the acquirer should evaluate the performance obligations, transaction price (e.g., significant financing considerations), and relative standalone selling price at the original contract inception date or subsequent modification dates (unless certain practical expedients are applied—see BCG 22.214.171.124
). The acquirer should then assess the measure of progress (for performance obligations satisfied over time) or timing of control transfer (for performance obligations satisfied at a point in time) compared to the amount of consideration received (or receivable) to determine the amount of contract asset or contract liability as of the acquisition date. The acquirer should also determine its estimate of variable consideration (subject to the constraint described in ASC 606-10-32-11
through ASC 606-10-32-13
, or the exception for sales- or usage-based royalties described in ASC 606-10-55-65
) as of the acquisition date. As noted in FSP 33.3.4
, while the amounts are calculated based on individual performance obligations, a single net contract asset or contract liability should be determined for each acquired revenue contract. See PwC’s guide to Revenue from contracts with customers
for further guidance on these calculations and estimates.
While the unit of account for the recognition and measurement of contract assets and liabilities in a business combination should be the customer contract, there may be acquired intangible assets or liabilities associated with customer contracts that meet the contractual-legal or the separability criterion for which separate recognition of these intangible assets would be required. For example, acquired contract-related intangible assets such as off-market contracts, customer relationships, or contract backlogs may require separate recognition. See BCG 4.3.5
and BCG 126.96.36.199
for further discussion of the accounting for customer contract-related intangible assets.
The recognition and measurement of contract assets and contract liabilities will likely be comparable to what the acquiree has recorded on its books under ASC 606
as of the acquisition date. However, the FASB noted in paragraph BC33 in the basis for conclusions of ASU 2021-08
that the accounting is not simply a “carryover” basis of the acquiree’s books and records. For example, the acquirer has to consider the reasonableness of the application of ASC 606
by the acquiree. Further, if the acquirer’s accounting policies differ from those of the acquiree (e.g., applying the practical expedient for a significant financing component when the time between performance and payment is less than one year), the acquirer’s policies are required to be applied.
Generally, the amount of revenue recognized by the acquirer subsequent to the acquisition date will be the same as the amount that would have been recognized by the acquiree absent the business combination, or that would be recognized for identical contracts entered into by the acquirer. However, as the FASB noted in paragraphs BC33 and BC43 in the basis for conclusions of ASU 2021-08
, there may be differences due to the recording of off-market contract assets or liabilities (see discussion on off-market contracts in BCG 188.8.131.52
) as well as differences arising from:
- Situations when the acquiree has not applied ASC 606 (e.g., prepared financial statements under IFRS, statutory reporting requirements, or other financial reporting frameworks)
- Differences in the acquirer’s and acquiree’s revenue recognition accounting policies
- Differences in estimates between the acquirer and acquiree (e.g., estimates of variable consideration or measure of progress)
- Errors in the ASC 606 accounting of the acquiree prior to the business combination
states the acquirer should measure the contract assets and contract liabilities of the acquired contract as if the acquirer originated the contract and then subsequently followed the guidance in ASC 606
. Therefore, estimates (e.g., measurement of progress to completion) should be determined from the perspective of the acquirer, which may differ from the amounts recorded on the acquiree’s books immediately prior to the business combination (for example, due to a different cost structure of the acquirer or expected synergies arising from the acquisition).
Example BCG 2-14 illustrates the accounting by an acquirer in a business combination in which the acquiree entered into a long-term construction contract with a customer prior to the acquisition date, including how progress should be measured for that acquired in-progress performance obligation.
EXAMPLE BCG 2-14
Long-term construction contract
Company A enters into an arrangement with Company B on January 1, 20X1 to construct a new office building for total consideration of $40 million, which is paid in various installments as certain defined milestones are met over the construction period. The construction of the facility is considered a single performance obligation under ASC 606
that is satisfied over time, and is expected to take approximately two years to complete. Company A concludes that the contract does not include a significant financing component and determines that the most appropriate measure of progress is an input method based on costs incurred as compared to total anticipated costs to complete the building.
On January 1, 20X2, Company C acquires Company A in a business combination. Based on the measure of progress, Company A estimated the contract to be 50% complete immediately before the acquisition and had recognized $20 million in revenue (50% x total consideration of $40 million) and received $18 million in payments from Company B through that date. Therefore, as of the acquisition date, Company A would have recognized a contract asset of $2 million under ASC 606
since payment of this amount is conditioned on something other than the passage of time.
However, on the acquisition date, Company C estimates that the performance obligation is 55% complete based on its assessment of the cost of the remaining post-acquisition performance obligation and Company C’s cost structure (which differs from the cost structure of Company A due to Company C’s greater purchasing power).
How should Company C account for this arrangement in acquisition accounting?
The measure of progress for a performance obligation satisfied over time should reflect the reporting entity’s performance in transferring control of goods or services. In a business combination, the acquirer should assess the measure of progress for a performance obligation satisfied over time (multiplied by the total consideration for the contract) compared to the amount of consideration received as of the acquisition date to determine the amount of contract asset or liability to record in acquisition accounting. Such calculations should reflect the acquirer’s estimates associated with the acquired contract.
Company C would record a contract asset or contract liability in acquisition accounting based on what it would have recorded if Company C had entered into the original contract with Company B at the same date and on the same terms. Based on its measure of progress toward completion (55%) at the acquisition date, multiplied by the total contract consideration of $40 million, less the $18 million of payments received from Company B to date, Company C would record a contract asset of $4 million. Note that this differs from the $2 million contract asset that Company A would have recorded as of that date, due to differences in estimates between the companies.
In accordance with ASC 805-20-25-28C(b)
, the guidance in ASU 2021-08
also applies to other contracts that apply the provisions of ASC 606
, including contract liabilities from the sale of nonfinancial assets within the scope of ASC 610-20
, Other Income--Gains and Losses from the Derecognition of Nonfinancial Assets
. Additionally, the guidance could apply to other arrangements that apply the provisions of ASC 606
either directly or by analogy, such as those accounted for under ASC 808
, Collaborative Arrangements