What practical expedients are available to 360 Painting when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in 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. The amendments in this Update are effective for fiscal years beginning after December 15, 2023. The Company is currently reviewing the requirements of the standard and evaluating the impact on its consolidated financial statements.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 56)
What This Means (2025 FDD)
According to 360 Painting's 2025 Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued ASU 2021-08, concerning business combinations, which is relevant to how 360 Painting accounts for contract assets and liabilities acquired in a business combination. This update mandates that 360 Painting, as the acquirer, must recognize and measure these assets and liabilities according to Topic 606, essentially treating the acquired revenue contracts as if 360 Painting had originated them.
To comply, 360 Painting may evaluate how the acquired company applied Topic 606 to determine the appropriate values to record for these contracts. Ideally, this should align with how the acquired company recognized and measured these items in their financial statements, assuming they followed Generally Accepted Accounting Principles (GAAP).
However, the update also acknowledges situations where 360 Painting might not be able to rely on the acquiree's accounting practices, such as if the acquiree didn't adhere to GAAP, if errors are found in their accounting, or if adjustments are needed to align with 360 Painting's accounting policies. In such cases, 360 Painting should assess the contract terms, identify performance obligations, and allocate the transaction price based on standalone selling prices at the contract's inception or modification date to determine the appropriate values at the acquisition date. The update also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. These amendments are effective for fiscal years beginning after December 15, 2023, and 360 Painting is currently assessing the standard's requirements and its impact on their consolidated financial statements.