The Financial Accounting Standards Board has released an Accounting Standards Update to improve the way private companies account for intangible assets in a business combination.
ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, is based on a consensus reached by the Private Company Council, and allows a private company to elect an accounting alternative for recognizing certain intangible assets that are acquired in a business combination.
In this alternative, an electing company would no longer recognize the following apart from goodwill:
- Customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business; and,
- Noncompetition agreements.
The board noted that some customer-related intangible assets that are capable of being sold or licensed independently — such as mortgage servicing rights, commodity supply contracts, core deposits, and customer information -- would continue to be separately recognized.
“This accounting alternative will, for private companies, avoid the unnecessary costs and complexity encountered when measuring certain customer-related intangible assets and noncompetition agreements,” said FASB Chairman Russell G. Golden. “Although public companies and not-for-profits are not permitted to elect this alternative, the board added a separate project to its agenda to consider the applicability to public companies and not-for-profits.”
The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative. If the transaction occurs in the first fiscal year beginning after Dec. 15, 2015, the adoption will be effective for that fiscal year and all periods thereafter. If the transaction occurs in fiscal years beginning after Dec. 15, 2016, the adoption will be effective in the interim period that includes the date of that first transaction and all periods thereafter. Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance.
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