T-Mobile US Inc., Cisco Systems Inc., IBM Corp., Pfizer Inc., and others said a FASB December 2020 proposal would simplify the recognition and measurement of revenue-generating contracts acquired in business combinations and ease accounting costs.
The proposal would also provide for consistent financial reporting outcomes for investors, companies said in March 2021 comment letters to the FASB.
“We believe the proposed amendments would reduce the cost of accounting for a business combination under US GAAP and provide for more consistent financial reporting outcomes,” T-Mobile’s accounting team wrote on March 16.
The FASB developed the proposal last year to clarify the reporting of revenue-earning contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers, acquired in a business combination.
The proposal aims to remove accounting differences among companies that have bubbled up related to: recognition of an acquired contract liability; and payment terms and their effect on subsequent revenue recognized by an acquirer. These differences hinder comparability, making it tough for investors to make decisions that are useful in their business dealings.
The proposal would provide a simpler accounting approach, some companies said.
In addition, it would significantly improve the relevance and usefulness of financial information as investors assess the impact of business combinations on an acquiror’s financial statements.
“As users of financial statements assess the impact on the acquiring company’s financial results of a business combination, the current guidance often leads to confusion and, sometimes, misleading interpretations,” Prat Bhatt, senior vice president, chief accounting officer of Cisco Systems, Inc., said in a March 15 letter.
Current accounting rules have been criticized as essentially requiring a fair value based “haircut” to deferred revenue in purchase accounting. This can distort the trend of revenue and earnings growth as the revenue recognized from the deferred revenue post-acquisition is lower than expected by investors as compared to the pre-acquisition periods, finance chiefs said.
“This effect is particularly pronounced as the current guidance is applied to deferred revenue related to acquisitions of software companies as the deferred revenue valuations based on the current fair market value based guidance requires substantial reductions in purchase accounting,” Bhatt said. “This can result in confusion and misinterpretations of financial results by investors.”
Pfizer, IBM, United Health Group, NVIDIA Corp., Ball Corp., and others in March letters echoed the view that the proposal would simplify costly and complex rules.
IFRS divergence issue flagged
The guidance was floated under Proposed Accounting Standards Update (ASU) No. 2020-1000, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, with a March 15, 2021, comment deadline.
The board received 41 comment letters to date from pharmaceutical, telecoms, technology, software, trade groups, accounting firms, among others.
Portions of the proposal would need revisions, some companies said.
Companies cautioned, for example, it would cause IFRS standards and Topic 805, Business Combinations, with respect to the measurement of contract assets and contract liabilities acquired in a business combination to diverge – thereby adding cost and complexity.
“In general, we believe that the resulting differences will create additional costs or complexity; and therefore, a practical option as discussed above may enable preparers to minimize additional costs to comply with both standards,” Gabor Turschl, director of SEC Reporting and Technical Accounting at Alphabet, said in a March 16 letter. “Lastly, we encourage the Board to consider working in collaboration with the International Accounting Standards Boards in addressing the subject matter discussed in the Proposal,” he wrote.
Some companies also asked the board to consider bringing the accounting for inventory acquired in a business combination into the proposal.
“Under current accounting guidance, inventory acquired in a business combination must be initially measured and recorded at fair value, which generally results in an upward adjustment from acquiree to acquirer and, in the near-term, lowers gross margin until such inventory is depleted,” Donald Zakrowski, vice president, finance and chief accounting officer at Eli Lilly and Co., wrote on March 10. “Such distortions of financial presentation are not decision-useful to users of companies’ financial statements and, as a result, are commonly adjusted out of certain GAAP performance measures for non-GAAP reporting,” he said.
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