The Financial Accounting Standards Board (FASB) on Thursday announced an update to its business combinations standard (Topic 805) aimed at clarifying how to apply requirements under its revenue recognition rule.

The update addresses longstanding uncertainty that arose once FASB issued Topic 606 regarding revenue in May 2014. Current GAAP suggests an acquirer recognize assets received and liabilities assumed in a business combination at fair value on the acquisition date, but stakeholders questioned whether the practice should change if the acquirer has adopted Topic 606. Clarification was also requested regarding assessment of the reliability of an acquiree’s application of the revenue recognition standard.

As part of the updated standard, “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,” FASB explained. “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.”

Exceptions to that approach include if the acquiree doesn’t follow GAAP or if their accounting can’t be relied upon. “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,” FASB stated.

In addition to clarity, FASB noted the updates improve comparability by providing consistent recognition and measurement guidance for revenue contracts related to both acquirers and acquirees.

“This (standard update) will align the accounting for these acquired contracts to the accounting for revenue contracts originated by the acquirer and will provide more comparable information to investors and other financial statement users seeking to better understand the financial impact of these acquisitions,” said FASB Chair Richard Jones in a media advisory.

The update applies to all entities that enter a business combination within the scope of Subtopic 805-10 (Business Combinations—Overall). The amendments are effective for public companies for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years, and for all other entities beginning after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.