FASB Issues Private Company Alternative For Business Combination Intangible Assets

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By Denise Lugo

Dec. 23 — The Financial Accounting Standards Board issued an accounting standards update that allows private companies to recognize fewer intangible assets in a business combination separately from goodwill.

The guidance was issued Dec. 23 as ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, to reduce cost and complexity in financial reporting for private companies.

It allows private companies an alternative whereby they won't be required to separately recognize from goodwill, customer-related intangible assets that aren't capable of being sold or licensed independently from the other assets of the business.

Furthermore, private companies won't be required to recognize noncompete agreements separately from goodwill if they elect the alternative, the ASU states.

Some intangible assets, however, would continue to be separately recognized. For example, companies would separately recognize customer related intangible assets such as mortgage servicing rights, commodity supply contracts, core deposits, and customer information (names and contact information), the ASU states.

When it Applies

The guidance 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 Topic 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; or

• adopting fresh-start reporting in accordance with Topic 852 on reorganizations.

Effective Date

The effective date of the alternative is dependent on a company's decision to adopt the accounting alternative, according to the ASU. If a transaction fitting the criteria for adoption occurs in the first fiscal year beginning after Dec. 15, 2015, the guidance would be effective for that fiscal year's annual fiscal reporting and all interim and annual periods thereafter.

If the transaction occurs in fiscal years beginning after Dec. 15, 2016, the guidance would be effective in the interim period that includes the date of that first transaction and subsequent interim and annual periods thereafter.

Existing customer-related intangible assets and noncompete agreements as of the beginning of the period of adoption, can't be subsumed into goodwill upon adoption of the guidance, the guidance also stipulates.

Three Board Members Dissented

Three of FASB's seven board members dissented to the issuance of the standard. FASB Vice Chairman James Kroeker, members Thomas Linsmeier, and Lawrence Smith, in written dissents, said—among other comments—that it isn't appropriate to finalize an accounting recognition and measurement alternative for private entities while at the same time exploring the same accounting issues for public entities.

“The Board has not concluded that a difference in accounting for private entities is warranted based on differences in the benefits and/or costs of the reported information to stakeholders of private versus public entities,” the board members' stated.

The board members also said comparability of decision-useful information is important, and differences in reporting for private and public entities is only justified “by differences in the benefits and/or costs of the reported information for private versus public entities; otherwise, the accounting for private and public entities should remain the same.”

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor on this story: Laura Tieger Salisbury at lsalisbury@bna.com

For a copy of the ASU go to: http://goo.gl/sHl1dT.

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