The Financial Accounting Standards Board (FASB) announced an update to its business combinations standard (Topic 805) aimed at clarifying how to apply requirements under its revenue recognition rule. The update requires companies to apply the new revenue recognition standard, ASC 606 (Revenue From Contracts With Customers), which will result in companies recognizing contract assets and contract liabilities at amounts consistent with those the acquiree recorded immediately before the acquisition date. This is expected to result in the acquirer recognizing more revenue in its post-acquisition financial statements related to acquired deferred revenue. Prior to this update, fair value measurement commonly resulted in a reduction, or “haircut,” to the amount of deferred revenue that was previously recognized in the acquiree’s financial statements prior to the acquisition.

The update applies to all entities that enter a business combination within the scope of Subtopic 805-10 (Business Combinations—Overall). The amendments are effective for public companies for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years, and for all other entities beginning after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.