A recent FASB update simplifies the way private companies account for intangible assets acquired in a business combination, by no longer requiring them to recognize certain assets separately from goodwill. Companies that want to adopt this accounting alternative must do so for their first applicable business combination in fiscal years beginning after December 15, 2015, but can apply the new approach earlier for financial statements that have not yet been issued.
FASB issued Accounting Standards Update No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination on December 23. Under this new guidance, private companies no longer have to separately recognize:
- Customer-related intangible assets that can't be sold or licensed independently from other assets of the business; or
- Noncompetition agreements.
Companies must continue to separately recognize mortgage servicing rights, commodity supply contracts, core deposits, customer information and other customer-related intangible assets that can be licensed or sold on their own.
If a business elects to use the new alternative, it must also use the private company goodwill amortization alternative created in FASB Update No. 2014-02 (but not vice versa). Once it adopts the new accounting treatment, a company also must apply it to all future business combinations.
In addition to business combinations, the new guidance applies to the adoption of fresh-start reporting in a reorganization (under Topic 852), and when assessing the nature of the difference between the carrying amount of an equity investment and the underlying equity in its net assets (under Topic 323).
Effective date
Companies must decide whether to adopt the new accounting alternative for their first applicable business combination in fiscal years beginning after December 15, 2015. The effective date of the adoption depends on the timing of that transaction. If the deal is in the first fiscal year beginning after Dec. 15, 2015, the adoption will be effective for that fiscal year and all periods afterward. If the transaction occurs in a fiscal year that begins after Dec. 15, 2016, the adoption will be effective in the interim period that includes the date of that first transaction, and all periods afterward.
A company can also choose early application for any period for
which it hasn't yet issued financial statements. So if a
company had a business combination in 2014 and has a fiscal year
that ends December 31, it could use the new approach for its 2014
year-end financial statements.
Companies should apply the alternative prospectively from the
effective date. They must continue to recognize any existing
customer-related intangible assets and noncompetition agreements
separately.
New Guidance Won't Work for Everyone
The new guidance is meant to decrease accounting cost and complexity, but businesses should carefully consider their situation before applying it. For example, the alternative may not be appropriate for a company that plans to go public or be acquired by a public entity. Under these scenarios, the newly public company would have to stop using the accounting alternative and retroactively restate its financials―a downside that would likely outweigh the benefits of adoption.
Businesses also need to make sure that lenders, investors and other users of their financials will accept the alternative approach, before they adopt it.
Future Expansion Possible
Update No. 2014-18 currently applies only to private companies. However, FASB plans to consider also making it applicable to public companies and nonprofits. For additional information on the new guidance, or to learn more about how it could affect your financial statements, contact Paul Peterson, Audit Partner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.