New Accounting Alternative for Private Company Business Acquisitions

On December 23, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination.

Previous U.S. GAAP regulations mandated that the acquirer of a business must identify and recognize separately from goodwill, the fair value of intangible assets that are separable or that arise from, contractual or other legal rights. Identifiable intangibles include customer lists or relationships, and non-compete agreements (NCA). These segregated intangibles would then generally be amortized over the expected remaining useful lifespan of each asset.

Under this new guidance, a private company could elect an accounting alternative that would recognize certain intangible assets acquired from a business combination. If elected, the company would no longer recognize customer-related intangible assets that cannot be sold or licensed independently and non-compete agreements.

If a private company elects this standard, it will require the adoption of Accounting Standards Update 2014-02, whereby goodwill will be amortized on a straight-line basis over ten years, or less, if the entity demonstrates that another useful life is more appropriate.  Election of these standards requires careful consideration relating to the impact of readers and/or users of these financial statements.

Ex: If a company goes public or is bought by a public company, the financial statements will need to be converted back to traditional GAAP.

While this might save some efforts in purchase price accounting, a company first needs to decide whether or not they wish to amortize their goodwill.  Certain companies will find that perfectly acceptable, while other companies will not.  That determination plays a key role in whether or not to adopt this option that FASB will be providing.

This decision to elect the alternative must be made upon the first transaction within the scope of this alternative. This standard will be effective for business combinations made within the first annual period beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016.

Early adoption will be permitted for any annual period in which an entity’s financial statements have not been made available for issuance. An entity would continue to recognize and measure NCAs and customer-related intangibles that exist as of the beginning of the period of adoption.

We can help you evaluate the best accounting alternative for your business circumstances. Contact us if you have questions or would like to discuss your business situation in greater detail.

About the Authors

James E. Merklin
James E. Merklin
Partner, Assurance and Advisory


Stay up-to-date with the latest news and information delivered to your inbox.

Subscribe Now