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.
Entities that have not yet adopted ASU 2016-13 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 in 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.