Business & Individual Tax - PYAPC
Published March 6, 2015

FASB’s Final Guidance on Accounting for Intangible Assets in Business Combinations by Private Companies

Overview

Based on consensus reached by the Private Company Council (PCC), the Financial Accounting Standards Board (FASB) issued final guidance at the end of 2014 to help simplify the accounting for intangible assets acquired in a business combination by private companies. Specifically, Accounting Standards Update (ASU) No. 2014-18 (Update), Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (ASC 805), will allow private companies to recognize fewer intangible assets in a business combination separate from goodwill.


Key Takeaways:

  • FASB’s final guidance in ASC 805, update No. 2014-18, allows private companies to simplify their accounting by recognizing fewer intangible assets in a business combination and certain other transactions.
  • The companies that elect this accounting alternative must also elect the goodwill accounting alternative for private companies in ASU 2014-02.
  • If this alternative accounting method is desired, a company must adopt it for the first qualifying transaction occurring in fiscal years beginning after December 15, 2015. Early adoption is allowable if a company has not yet made its fiscal year 2014 financial statements available for issuance. Later adoption would be considered a voluntary change in accounting principle, which would be appropriate only if that change was determined to be preferable.
  • Most hospitals and health systems will not have the opportunity to adopt this provision as ASC 805 defines “private company” as “an entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.” However, FASB has added a project to its agenda to consider similar guidance (see explanation further herein) for public business entities and not-for-profits. The timing for any similar changes is not yet clear.

Main Provisions of the Update

The Update allows private companies to avoid the cost and complexity associated with recognizing and measuring certain customer-related intangible assets and non-competition agreements. Specifically, a private company that elects this accounting alternative would no longer recognize separately from goodwill:

  • Customer-related intangible assets, unless they are capable of being sold or licensed independently from the other assets of the business.
  • Non-competition agreements.

Companies that elect the new alternative accounting treatment will also be required to elect the goodwill accounting alternative in ASU 2014-02, which requires goodwill to be amortized over a period of ten years or less. However, companies that elect the goodwill accounting alternative would not be required to elect the new intangible assets accounting alternative.

Impact of Update

The accounting alternative applies when a private company is required to recognize or otherwise consider the fair value of intangible assets as a result of any one of the following transactions:

  • Applying the acquisition method under ASC 805, Business Combinations.
  • 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 in accordance with Topic 852 on reorganizations.

Publicly traded companies and not-for-profit organizations are not permitted to elect this accounting alternative. However, FASB has added a separate project to its agenda to consider the applicability of this accounting alternative to publicly traded companies and not-for-profit organizations.

This Update will have limited impact on hospitals and health systems as most hospitals and health systems tend to be not-for-profits or publicly traded entities.

Existing customer relationship and non-compete assets cannot be included as part of goodwill upon adoption of this accounting alternative. These assets would need to be amortized consistent with prior periods or measured in accordance with ASC 350, Intangibles – Goodwill and Others. ASC 805 also clarifies that leases are not considered customer-related intangible assets and, therefore, are not eligible to be combined with goodwill.

Timing Considerations

The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction in fiscal years beginning after December 15, 2015; and the effective date of adoption depends on the timing of that first transaction.

  • If the transaction occurs in the first fiscal year beginning after December 15, 2015, the elective adoption will be effective for that fiscal year’s annual financial reporting and all interim and annual periods thereafter. „
  • If the transaction occurs in fiscal years beginning after December 15, 2016, the elective adoption will be effective in the interim period that includes the date of that first transaction and subsequent interim and annual periods thereafter.

Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance. As always, private companies should consider any future plans to become publicly traded before changing their accounting methodologies.

If you have questions about accounting for intangible assets in business combinations, contact the experts listed below at PYA, (800) 270-9629.

 

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