The Financial Accounting Standards Board (FASB) issued final guidance that allows private companies to simplify their accounting by recognizing fewer intangible assets in a business combination. The guidance is part of a broader effort by the FASB to address the needs of private companies.
A private company can now choose to limit the customer-related intangibles it recognizes separately to those that are capable of being sold or licensed independently from the other assets of the business acquired. As a result, private companies that elect the new alternative will include as part of goodwill many of the types of customer-related intangible assets that they recognize separately under existing guidance. Under the alternative, private companies also would not recognize noncompetition agreements, separately.
The guidance includes a presumption that customer-related intangibles would not meet the criterion for separate recognition, because they typically are not capable of being sold or licensed separately from other assets.
The guidance also clarifies that contract assets and leases are not considered customer-related intangible assets and, therefore, would not be eligible to be part of goodwill. Instead, any contract assets or favorable and unfavorable components of a lease would be recognized separately.
Companies that elect the new alternative will be required to elect the goodwill accounting alternative, which requires goodwill to be amortized over a period of 10 years or less. However, companies that elect the goodwill accounting alternative would not be required to elect the intangible assets accounting alternative.
The decision to adopt the alternative must be made when the first qualifying transaction occurs after December 15, 2015. Early application is permitted for 2014 financial statements that have not yet been made available for issuance. A company that elects the alternative must apply it to all future qualifying transactions.
Under the alternative, a company would continue to recognize and measure customer-related intangibles and noncompetition agreements that exist as of the beginning of the period of adoption. That is, these intangible assets would not be eligible to be reclassified as goodwill upon adoption of the alternative.
Carl Kampel, CPA is the Director in charge of professional standards at Ellin & Tucker in Baltimore, MD. Carl’s rich career spanning more than 30 years and personal contributions to financial and special reporting services standards of the audit and accounting profession have rippled internationally. He is a member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Financial Reporting Executive Committee.