The FASB’s Simplification Initiative is designed to make small changes to GAAP that will reduce costs and complexity, while maintaining or improving the usefulness of financial statements. One such potential change to ASC Topic 805 was announced on May 21, 2015. In response to stakeholder feedback, the FASB has proposed modifying standards related to how companies are required to account for business combinations.
Under current guidance, if the initial transaction accounting is incomplete by the end of the reporting period in which the transaction occurs, companies are required to report provisional estimates. If new information is obtained that would have affected the type and magnitude of assets and liabilities recognized, companies are required to adjust the provisional estimates. If needed, comparative prior periods must also be restated. All changes must be made retrospectively.
Under the proposed revision, companies would only be required to recognize adjustments in the current reporting period and would not need to restate prior periods. Any changes in depreciation, amortization, or other income effects would be recorded in the current period and the acquirer would state the effect the changes would have had if the accounting had been completed at the acquisition date.
In the FASB’s discussions regarding the proposed revisions, it was noted that one potential unintended consequence of this revision might be that companies would be less diligent about finalizing provisional estimates. However, the Board ultimately concluded that the benefits from requiring retrospective revisions do not justify the resulting costs and complexity. The FASB is accepting comments on the proposed revision through July 6 and has not yet decided when the revision will take effect if it is accepted.
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