Private companies have a new option for the recognition of identifiable intangible assets in certain transactions. Released December 23, 2014, the Financial Accounting Standards Board (FASB) ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination permits an alternative for a qualifying private company (see MHM Messenger: Private Company Decision Making Framework & Definition of a Public Business Entity) to not record or measure certain intangible assets that would otherwise be required to be recorded at fair value as part of the following transactions:
- Business combinations pursuant to Topic 805;
- Reorganizations that use fresh start accounting; or
- When assessing the difference between the carrying amount of investments and the amount of underlying equity in an investee's net assets using the equity method outlined in ASC Topic 323.
The update came out of the Private Company Council's concern that the current accounting method for identifiable intangible assets was too costly and complex.
In current practice, the acquirer in a business combination or other in-scope transaction must recognize any liabilities and assets, including intangible assets it receives from the transaction at the date of the acquisition.
Intangible assets are identifiable if they meet either of the following conditions:
- The intangible asset arises from contractual or other legal rights, regardless of whether rights are transferable or separable from the entity or from other rights and obligations; or
- The intangible asset is capable of being divided from the entity and sold, transferred, licensed, exchanged or rented individually or as part of a related contract, identifiable asset or liability.
The accounting alternative allows entities to subsume customer-related tangible assets (unless the assets are capable of being separated and sold/licensed separately) and noncompetition agreements into goodwill. Qualitative disclosures currently used under U.S. generally accepted accounting principles (GAAP) will remain the same.
It is predicted that when electing the the accounting alternative, private companies will recognize fewer intangible assets separately from other acquired assets.
If ASU No. 2014-18 is adopted, private companies must also adopt the private company accounting alternative introduced in ASU No. 2014-02, Intangibles-Goodwill and Other (Topic 350): Accounting for Goodwill . When adopted, ASU No. 2014-02 requires the amortization of goodwill over a period not to exceed 10 years.
Private companies can use the accounting alternative for in-scope transactions conducted in fiscal years and interim periods within fiscal years that begin after December 15, 2015. Early adoption is available for entities that have not yet released their interim or annual financial statements. The decision to adopt the alternative must be made upon the date of the first in-scope transaction. If the first in-scope transaction occurs after December 15, 2016, the elective adoption will be effective in the interim period that includes the date of that transaction. It will also be effective for every interim and annual period that follows.
For More Information
MHM's Professional Standards Group will continue to monitor progress on private company standard setting, and we are prepared to help our private company clients with any implementation issues that may arise. If you have any specific questions, comments or concerns, please share them with Mark Winiarski of MHM's Professional Standards Group or your MHM service professional. You can reach Mark at firstname.lastname@example.org or 816.945.5614.
Published on January 26, 2015