The Financial Accounting Standards Board published an Accounting Standards Update (ASU) on May 12 that the board says improves the requirements for identifying the accounting acquirer in FASB Accounting Standards Codification Topic 805, Business Combinations.
The new standard is based on a recommendation of the Emerging Issues Task Force. The panel identifies and develops proposed solutions to address narrowly scoped financial accounting issues within the framework of the FASB Accounting Standards Codification.
Based on feedback from stakeholders, the FASB revised the EITF’s membership makeup and operating procedures a little more than a year ago to better enhance the efficiency of the group and more effectively utilize the resources and knowledge its members bring to the table.
- Related article: FASB Proposal Aims to Clarify Guidance on Accounting Acquirer in Business Combinations
- Related article: FASB Selects 11 Professionals to Sit on Emerging Issues Task Force
“The new ASU is the first recommendation from the recently reconstituted EITF to be issued as a final standard, and we thank the group for providing a path forward in making financial reporting in this area more comparable and decision useful for investors,” FASB Chair Richard Jones said in a statement on Monday.
In a business combination, the determination of the accounting acquirer can significantly affect the carrying amounts of the combined entity’s assets and liabilities. The accounting acquiree’s assets and liabilities are generally required to be initially measured at fair value, subject to specific exceptions in Topic 805. By contrast, the accounting acquirer’s existing assets and liabilities aren’t remeasured under the business combinations guidance, the FASB said in the ASU.
The ASU states:
In a business combination in which the acquired entity is not a variable interest entity (VIE), an entity may be required to consider certain factors to identify the accounting acquirer. When applying those factors, an entity may determine that a transaction is a reverse acquisition (in which the legal acquirer is identified as the acquiree for accounting purposes) or that the transaction should not be accounted for as a business combination (because the accounting acquiree is not a business). However, in a business combination in which a VIE is acquired, current guidance requires that the primary beneficiary (the entity that consolidates a VIE) always is the accounting acquirer.
Stakeholders indicated that the current guidance for determining the accounting acquirer results in a lack of comparability between transactions involving VIEs and those not involving VIEs. Specifically, stakeholders noted that if the legal acquiree is a VIE, the transaction cannot be accounted for as a reverse acquisition. Stakeholders also noted that the current guidance affects not only the determination of which entity is the accounting acquirer but also whether a business combination has occurred.
The ASU will revise current guidance for determining the accounting acquirer for a transaction effected primarily by exchanging equity interests in which the legal acquiree is a VIE that meets the definition of a business, according to the FASB. The amendments require an entity to consider the same factors that are currently required for determining which entity is the accounting acquirer in other acquisition transactions.
The amendments in the ASU are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, and interim reporting periods within those annual reporting periods. The amendments require that an entity apply the new guidance prospectively to any acquisition transaction that occurs after the initial application date.
Early adoption is permitted as of the beginning of an interim or annual reporting period.
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