4.4 Working Capital
ASC 805 requires the components of working capital (e.g., accounts receivable, accounts payable, and
accrued liabilities) to be recorded at their acquisition-date fair values. An acquirer cannot recognize a
separate valuation allowance as of the acquisition date for assets initially recognized at fair value (see
Section 4.5). Before the FASB incorporated this guidance into ASC 805, an entity generally recorded
working capital as the present value of amounts to be received or paid, determined at current interest
rates. Because of the short duration in expected cash flows, acquired working capital was often
recorded at the acquiree’s carrying value as of the acquisition date.
According to the FASB’s Valuation Resource Group (VRG),1 because ASC 805 requires working capital items to be measured at fair value,
simply carrying over the amounts recorded in the acquiree’s precombination financial
statements may not be appropriate. In addition, VRG members have indicated that they
do not believe that the exit price notion requires entities to value receivables at
the amount they would receive if they sold the receivables to a market participant
who engaged in the business of acquiring receivables. The VRG has indicated that the
in-exchange price would generally not be the highest and best use of the accounts
receivable.
Footnotes
1
The FASB established the VRG to provide the FASB staff with
information on implementation issues about fair value measurements used for
financial statement reporting and the alternative viewpoints associated with
those implementation issues. The VRG’s conclusions are not
authoritative.