Business Combination (Principle versus Agent)

BusinessCombination (Principle versus Agent)On21 September 2015, FASB issued new guidance meant to simplifyaccounting for modification carried out to provisional amountsacknowledged in business combination. The obligation toretrospectively account for those amendments has been removed by theamendment in accounting standards No. 2015-16, Business Combination(Tysiac, 2015a). This guidance by the FASB was prompted by complaintsfrom many stakeholders that the requirement to retrospectively applythe use of amendments increases cost and augmented complexities tofinancial reporting (Robert etal.2015). These extra costs and complexities would inflict a heavyburden to the process of reporting financial statements withoutimproving the information available to the users of the financialstatement. Theamendment on calls upon the acquirer to “recognizechanges to the provision amounts established during the measurementphase in the reporting period in which the adjustment amount isestablished”(FASB,2015).All business entities are called upon to implement theamendments from 15 December 2015. Non-business entity are required toapply the amendments from 15 December 2015. The new guidancestandards are supposed to reduce the costs and complexities that theprevious amendment had imposed on business entities (FASB, 2015).

FASBalso proposed changes to the revenue recognition standard that areintended to clarify how to determine if an entity is a principal oran agent in a contract (Tysiac,2015b).Inthe new standard a business entity is called upon to establishwhether:

  • To offer a good/service to a client, that makes the entity a principal

  • To arrange for the good/service to be made available to the client by another party

  • The determination is pegged on whether an entity controls the good/service prior the time that it changes ownership and ends up in the hands of the customer. The new standards are meant to have indicators that will help in such an assessment (FASB, 2015).

Stakeholdershave raised concerns about the FASB guidance via the joint transitionresource group that is helping the IASB and FASB to assess theexecution concerns relating to the new, congregated standard (Tysiac,2015b).Thenew standards will affect all entities that have transactions thatare encompassed within the realm of the Topic 606. Transaction inthis topic includes those relating to entities entering in contractwith clients to transfer goods/services, which emanate from theordinary activities of the entity, in exchange for consideration(FASB, 2015).

Themain provisions of the of the new guidance is that an entity shouldmake out revenue to portray the reassignment of promisedgoods/services to clients in an amount that shows the considerationto which the entity anticipates being entitled in exchange for thosegoods/services (FASB, 2015). To make this provision possible, FASBhas designed some steps that entities should follow. This include:

  • Recognize the contract with customers

  • Recognize the performance obligations in the contract

  • Establish the price of the transaction

Proponentsof this new amendment state that it is a pragmatic move by the FASBthat will go a long way in solving the confusion that existed. Evenso may have stated that they may have preferred the disclosure in theaudit report, as was previously proposed by the PCAOB (Tysiac,2015b). Opponents of the FASB proposal indicate that disclosure ofthe engagement partner’s name, whether it is in the AP Form or inthe audit report, will be costly, may give confusing information tothe investors and risk ruining the commitment of partner’sreputation (Tysiac, 2015b).

Advantagesand Disadvantages about the New Accounting Standards

Themain goal of any business combination is to remove fierce contest andprotect the advantages of large scale manufacturing. The mainadvantages that the new FASB standards confers to the acquirer arethat the intense and sometime, unnecessary completion between twofirms and among companies will be totally removed (Tysiac, K.(2015b). This is expected to increase profits. It is evident thatmonopoly is the market can be attained through the elimination ofcompetitors by combining businesses. The amount of capital availablefor business operations can be augmented by combining business thatmay be very beneficial for the new marketplace. Business operatingcost can be reduced by purchasing in a huge amount of material. Theacquirer can also use the intangible asset from the businessacquired. To the acquirer, the business has a lager of fundstransferring from the acquiree, where the market risks aresignificantly reduced (Tysiac, K. (2015b).

Themain disadvantage of the new business combination standard is thatthere are extra costs to the acquirer this will still impose aprofound burden to the process of reporting financial statements. Thecompany that wishes to combine another company has to deal with thedisadvantages of financing the combination arrangement and organizingthe combination of companies.


Fromthe above, it is clear that the new FASB new standards on businesscombination and guidance revenue recognition standard are meant toeliminate the costs and complexities that the previous amendment hadimposed. The revenue recognition standard will also go a long way inhelping entities determine if an entity isa principal or an agent in a contract.


FASB.(2015). Revenuefrom Contacts with Customers: Principal versus Agent Consideration.FASBExposure Draft.

RobertA. D., Craig T. G., Wood, A.M. (2015).ProposedAccounting Standards Update – Revenue From Contracts With Customers(Topic 606): Principal Versus Agent Considerations (Reporting RevenueGross Versus Net).New York

Tysiac,K. (2015a). FASB moves to simplify business combination accounting.Journalof Accountancy.Retrieved from:

Tysiac,K. (2015b). Principal? Or an agent? FASB proposal aims to clarify.Journalof Accountancy. Retrieved from: