What should 360 Painting do if errors are identified in the acquiree's accounting during a business combination?
360_Painting Franchise · 2025 FDDAnswer from 2025 FDD Document
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree's financial statements (if the acquiree prepared financial statements in accordance with generally accepted accounting principles [GAAP]). However, there may be circumstances in which the acquirer is unable to assess or rely on how the acquiree applied Topic 606, such as if the acquiree does not follow GAAP, if there were errors identified in the acquiree's accounting, or if there were changes identified to conform with the acquirer's accounting policies. In those circumstances, the acquirer should consider the terms of the acquired contracts, such as timing of payment, identify each performance obligation in the contracts, and allocate the total transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception (that is, the date the acquiree entered into the contracts) or contract modification to determine what should be recorded at the acquisition date. The amendments in this Update also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 56)
What This Means (2025 FDD)
According to the 2025 FDD, 360 Painting must adhere to specific accounting standards when acquiring another business. In business combinations, 360 Painting must account for revenue contracts according to Topic 606, as if 360 Painting originated the contracts. To do this, 360 Painting may need to assess how the acquired company applied Topic 606 to determine what to record for the acquired revenue contracts.
However, there might be situations where 360 Painting cannot rely on the acquiree's application of Topic 606. This could occur if the acquired company did not follow GAAP (generally accepted accounting principles), if errors are found in the acquiree's accounting, or if changes are needed to align with 360 Painting's accounting policies.
In such cases, 360 Painting should consider the terms of the acquired contracts, including payment timing, identify each performance obligation within the contracts, and allocate the total transaction price to each obligation based on its relative standalone selling price at the contract's inception or modification date. This process helps determine what should be recorded at the acquisition date. The FDD also mentions that there are practical expedients available for acquirers when recognizing and measuring acquired contract assets and liabilities from revenue contracts in a business combination.