Business Deal Accounting Update Clarifies Acquirer Guidance (2)

Companies gained clearer insight Monday on which party in certain business deals counts as the acquirer for financial reporting purposes.

The Financial Accounting Standards Board published final guidance to improve requirements for making the key determination that affects which entity’s assets and liabilities are remeasured in a business combination. The accounting acquirer can be different from the legal acquirer.

The standards update responds to concerns that current guidance can result in inconsistent outcomes across transactions depending upon whether they involve variable interest entities, or VIEs.

“It always is a good outcome when you get the accounting to better match the economic substance of the transaction,” said Jeffrey Johanns, an associate professor at The University of Texas at Austin and chair of the Texas Society of Certified Public Accountants’ professional standards committee.

VIEs are defined in accounting guidance as entities that can be controlled through means other than a majority voting interest. The structure is sometimes set up to manage credit or legal risks.

The final guidance will revise current rules for determining which entity is the accounting acquirer for a transaction primarily involving the exchange of equity interests in which the legal acquiree is a VIE that meets the definition of a business.

For certain transactions, the changes replace the current accounting guidelines that the primary beneficiary always is the acquirer, with a test that requires entities to consider factors to determine which one is the accounting acquirer.

The updates are effective for businesses’ annual reporting periods—and interim reporting periods within those periods—beginning after Dec. 15, 2026. Early adoption is permitted.

Increasing Comparability

Deloitte & Touche LLP lent support to FASB’s standards update, saying in a statement Monday it simplifies accounting rules and enhances transactions’ comparability.

The project was spurred by the Big Four accounting firm’s November 2023 letter expressing concerns about contradictory accounting outcomes among transactions that are economically similar.

FASB’s draft plan, released last October, was broadly supported by accounting firms and professional associations in comment letters due in December.

The plan is clear and will make it easier to compare transactions with analogous economics, Grant Thornton LLP wrote at the time.

Some comment letter respondents suggested FASB consider broadening the project to address acquisitions in which the VIE doesn’t meet the definition of a business. Still, others expressed concern that expanding the project could lead to unintended consequences.

By focusing specifically on acquisitions of VIEs that do meet that definition, the changes “address a pervasive issue while minimizing the risks of unintended consequences,” according to the basis for conclusions in FASB’s update.

The project is the first recommendation from FASB’s recently reconstituted Emerging Issues Task Force to be issued as a final standard, FASB Chair Richard Jones said Monday in a statement.

The advisory panel, which works to offer quick-hit solutions to narrow financial reporting questions, was revamped in April 2024.