Under current accounting standards, private companies that enter into a business combination are required to record the assets acquired, including any intangible assets, at fair value. Any difference between the fair value of the assets acquired and the consideration paid is recorded as “goodwill”. As you are probably aware, the recently issued accounting guidance for intangible assets ASU No. 2014-02 gives private companies the option of amortizing such goodwill over 10 years (or fewer years, if more appropriate in the circumstances). A change is also on the horizon that would increase the amount of goodwill recorded.
Historically, private companies have also had to record any separately identifiable intangible assets in a business combination. Such intangible assets have typically included things like trade names, customer contracts, brands, technology, and patents. In July 2013, the Financial Accounting Standards Board (FASB) issued an Exposure Draft at the recommendation of the (PCC) Private Company Council that would allow a private company the option of only recording separately identifiable contractual-legal intangible assets in a business combination. Other intangible assets would be considered part of goodwill.
Under this option:
- Private companies would be allowed to include non-contractual intangible assets acquired and goodwill in the same financial statement account and amortize the total amount over the same ten year period.
- Essentially all non-contractual intangibles (for example, customer relationships) would be treated similar to an assembled workforce, which the FASB recognizes has the attributes of an asset but does not meet the criteria for being a separately identifiable asset for accounting purposes.
The Exposure Draft generated a number of comments, including around what intangible assets meet the definition of being contractual-legal intangible assets, and as a result, in January 2014, the PCC directed the FASB to “conduct further research and analysis on alternatives, including recognizing and measuring separately from goodwill only those intangibles in a business combination that are capable of being sold or licensed independently from other assets of the business as well as alternatives focusing solely on types of customer-related intangibles that may not warrant recognition and measurement separate from goodwill”.
It remains to be seen what intangibles will be separated from goodwill in the ultimate revised accounting standard for private companies, but in the meantime, private companies contemplating acquisitions should consider what implications this standard could have on future acquisition activities, including cost savings from reduced involvement of valuation specialists, and acceleration or deceleration of expense recognition for intangibles under Generally Accepted Accounting Principles (GAAP).
If you would like more information on what these changes mean for your potential acquisitions, feel free to leave a comment below. Our Transaction Advisory professionals are more than happy to answer your questions.
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