The FASB, in conjunction with the Private Company Council (PCC), recently issued an accounting alternative for private companies which is intended to reduce the cost and complexity associated with the measurement of certain identifiable intangible assets acquired in a business combination.
This ASU allows a private company to elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination. In this alternative, a private company would no longer recognize the following separate from goodwill:
(a) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business, and
(b) noncompetition agreements.
Some customer-related intangible assets that are capable of being sold or licensed independently would continue to be separately recognized, such as mortgage servicing rights, commodity supply contracts, core deposits, and customer information (e.g., names and contact information).
Who is Affected?
This guidance, if elected, is applicable to all entities except for public business entities and not-for-profit entities. The accounting alternative applies when an entity within the scope of this Update is required to recognize or otherwise consider the fair value of intangible assets as a result of a business combination under Topic 805. Other transactions where this accounting alternative can be applied are:
- Assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity in net assets of an investee when applying the equity method under Topic 323 on investments—equity method and joint ventures
- Adopting fresh-start reporting under Topic 852 on reorganizations.
Considerations for Private Companies
It is important to note that a private company adopting this guidance MUST adopt the previous PCC guidance issued in January 2014 where goodwill may be amortized over a period of 10 years or less (ASU No. 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill). The amortization of the goodwill will impact the income statement whereas, previously, there would have been no effect to the income statement if no impairment was indicated. The amortization effect may not be significant to the Company if financial covenants related to debt agreements scope out amortization. However, an entity that elects the accounting alternative in ASU No. 2014-02 is not required to adopt the amendments in this Update. These factors should be evaluated by Private Companies in making a decision whether to adopt these alternatives.
The decision to adopt ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, must be made upon the occurrence of the first transaction within the scope of this accounting alternative. If the transaction occurs in the first fiscal year beginning after December 15, 2015, the adoption will be effective for that fiscal year and all periods thereafter. If the transaction occurs in fiscal years beginning after December 15, 2016, the adoption will be effective in the interim period that includes the date of that first transaction and all periods thereafter. Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance.
Contributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial, not-for-profit and governmental organizations.