The amendments aim to establish a more consistent approach for determining the accounting acquirer. Credit: Volha_R/Shutterstock.

The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that seeks to refine the process of identifying the accounting acquirer in Topic 805, business combinations.  

This topic focuses on accounting for contract assets and liabilities arising from contracts with customers. 

This proposal is based on recommendations from the Emerging Issues Task Force and is open for stakeholder feedback until 16 December 2024. 

The proposed ASU is set to impact how the carrying amounts of assets and liabilities are determined in a business combination, which in turn can influence the combined entity’s net income post-transaction.  

The amendments aim to establish a consistent approach for determining the accounting acquirer, especially in transactions involving the exchange of equity interests. 

The proposal is designed to align the identification of the accounting acquirer in variable interest entity (VIE) acquisitions with the existing requirements for transactions that do not involve a VIE.  

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This alignment is expected to improve the comparability of financial statements by offering consistent requirements for economically similar transactions. 

According to the proposed update, the current Generally Accepted Accounting Principles (GAAP) would be modified.  

Instead of the primary beneficiary always being the acquirer, an assessment would be required to determine which entity should be identified as the accounting acquirer.  

This change is anticipated to improve financial statement comparability across entities engaging in equity interest exchange transactions when the legal acquiree is defined as a business. 

For transactions identified as reverse acquisitions, the existing accounting requirements would remain unchanged.  

Similarly, transactions where the legal acquirer is not a business and is determined to be the accounting acquiree would also retain the current accounting treatment. 

The proposed amendments require entities to apply the new guidance prospectively to any acquisition transactions occurring after the initial application date.  

FASB is permitting early adoption of the proposed ASU, with the effective date to be decided after considering stakeholder input. 

Id addition, FASB has recently proposed an ASU to refine accounting for share-based consideration payable to customers. 

It is aiming to ensure revenue estimates more accurately reflect an entity’s expectations and to enhance financial reporting comparability.