Reminders on Changes to Accounting for Business Combinations

During 2015, the Financial Accounting Standards Board (FASB) released two Accounting Standards Updates (ASU) that impact the way companies account for business combinations. In September, the FASB issued an ASU which revises the way companies account and report for adjustments to provisionally recorded business combinations. In May, the FASB also issued another ASU that conforms the FASB’s guidance on pushdown accounting to that of the SEC.

As we are quickly approaching year-end for many companies, we want to reiterate the tenants of this guidance that will become effective as we start 2016.

ASU 2015-16 applies to all entities who have reported provisional amounts for items in a business combination that subsequently require an adjustment to the provisional amounts recognized. The amendments in this Update should be applied prospectively and are effective for calendar year public companies beginning in 2016 and for nonpublic companies in 2017, with early adoption permitted.

GAAP requires the acquirer to retrospectively adjust provisional amounts during the measurement period, including adjustments to comparative prior periods as needed. Adjustments to provisional amounts are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized. The requirements for adjustment remain unchanged.

The initial reporting for a business combination remains unchanged as companies use their best estimates to record provisional amounts. This Amendment simplifies the reporting of provisional adjustments by eliminating the requirement to retrospectively account for those adjustments. In addition, the newly-issued guidance requires the cumulative effect on earnings as a result of any changes to depreciation, amortization, and other income effects be reflected in the same period the adjustment is made.

The measurement period is the period beginning at the acquisition date and ends as soon as the acquirer receives sufficient information for the amounts existing at the acquisition date. The measurement period shall not exceed one year from the acquisition date. Disclosure is required by the acquirer at each reporting period as to the status of the purchase accounting and any items that are incomplete. The new guidance is applicable when the purchase accounting is not yet finalized and the measurement period is open.

Companies must disclose of the nature and reason for the change in the first annual period after the entity’s adoption date and in the interim periods within the first annual period of adoption if there is a measurement-period adjustment.

The revised guidance requires disclosure of any provisional adjustments recognized during the reporting period, including the income effects that would have been recognized in previous periods if the adjustment to provisional amounts were recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement.

It is anticipated that this Update will eliminate costs related to retrospectively adjusting financial information of prior periods, however this cost reduction may be partially offset by incremental disclosures required by the amendment. As such, we encourage companies to review the relevance to their organization in order to allow the appropriate time and resources necessary to update documentation, gather newly required inputs and communicate potential changes to management, auditors, and other stakeholders.

In May 2015, the FASB issued this Amendment to align to SEC the application of pushdown accounting by substantially owned newly acquired companies to guidance issued by SEC.

ASU 2014-17 provides entities with the option to apply pushdown accounting when a change-in-control event occurs. This ASU brought guidance to an area where existing FASB pronouncements offered little guidance on the threshold for pushdown accounting. The pushdown accounting option superseded any previously-issued guidance by the SEC staff. The SEC had previously required that pushdown accounting be applied in any financial statements included in an SEC filing. The SEC also agreed that the pushdown accounting can be an accounting policy decision and is no longer required in financial statements filed with the SEC.

ASU 2014-17 provided guidance to all entities that the requirement to pushdown any purchase accounting adjustments to a subsidiary’s separate financial statements was an accounting policy election. The accounting policy election must be made at the time a change of control event occurs. This policy election is still available if a change-of-control event has occurred and the most recent stand-alone financial statements of a subsidiary have not yet been issued or widely distributed to its shareholders or other users for general purpose and reliance.

Notably, under the amendment any acquisition related debt would be recognized in the acquired entity’s separate financial statements only if required in accordance with other applicable GAAP. Previously, circumstances existed where an acquired entity would reflect the acquirer’s debt, related interest expense, and allocable debt issuance costs.

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