4.5 Assets With Uncertain Cash Flows (Valuation Allowances)
ASC 805-20
Assets With Uncertain Cash Flows (Valuation Allowances)
30-4 The acquirer shall not
recognize a separate valuation allowance as of the
acquisition date for assets acquired in a business
combination that are measured at their acquisition-date fair
values because the effects of uncertainty about future cash
flows are included in the fair value measure, unless the
assets acquired are financial assets for which the acquirer
shall refer to the guidance in paragraphs 805-20-30-4A
through 30-4B.
Except as noted below for financial assets, entities are not permitted to
recognize separate valuation allowances as of the acquisition date for assets that
are initially recognized at fair value; uncertainty about collectibility and future
cash flows is incorporated into the fair value measurement. For example, no separate
valuation allowance is recognized as of the acquisition date for acquired loans and
receivables measured at fair value. To comply with disclosure or regulatory
requirements, entities may need to track their estimates of uncollectible acquired
receivables and loans separately from preexisting receivables and loans. Valuation
allowances are permitted for assets not measured at fair value, such as deferred tax
assets.
In June 2016, the FASB issued ASU 2016-13, which, in addition to
providing a model for recognizing credit losses on financial assets held at
amortized cost and AFS debt securities, also amends ASC 805 to provide guidance on
accounting for purchased financial assets in a business combination. After an entity
adopts ASU 2016-13, the way it measures financial assets within the scope of ASC 326
acquired in a business combination will depend on whether the assets have
experienced more-than-insignificant deterioration in credit quality since
origination. See Section
4.3.10 for more information.