In its continued effort to simplify financial reporting for private companies, the Financial Accounting Standards Board (FASB) has issued an update to its standards for accounting for business combinations. The update, Accounting for Identifiable Intangible Assets in a Business Combination, offers private companies an alternative method of accounting for certain acquired intangible assets.
Main Concern
Of primary concern to private company stakeholders is that benefits from the current accounting for identifiable intangible assets acquired in a business combination do not justify the related costs, especially when those costs include expensive valuations. Although the valuation services are meaningful and useful, the cost can outweigh the benefit received – especially for smaller businesses.
Update Provides Alternative Accounting Method
The two most common intangible assets impacted by this alternative are customer lists and non-compete agreements. Under current U.S. generally accepted accounting principles (GAAP), these types of intangible assets are required to be carved out from goodwill, and valued as separate assets.
The cost of valuing these types of assets, and subsequently accounting for them, can sometimes be prohibitive for a small business, and not provide a benefit commensurate with the cost. The most meaningful component of the Accounting Standards Update (ASU) is that any entity choosing to adopt this alternative will no longer have to separate certain intangibles from goodwill acquired in a business combination.
Advantages to Private Companies
Implementing this alternative method of accounting can enable private companies to:
- Cut down on the expense of financial reporting
- Reduce the need for costly intangible asset valuations
- Create more useful financial statements that still comply with GAAP
Other Points of Interest
Any entity that adopts this accounting alternative must also adopt the policy to amortize goodwill in accordance with an option that was released by the FASB earlier this year. This alternative allows an entity to amortize goodwill over a period of 10 years, or less if a shorter useful life can be demonstrated.
Conversely, an entity that adopts this alternative is not required to adopt the new alternative for accounting for intangible assets. In addition, if the new accounting alternative is adopted, an entity must apply this method to all future transactions of this nature.
The new accounting alternative is available in fiscal years beginning after Dec. 15, 2015, with early application permitted. If a company effects a business combination prior to that date, this option can offer welcome relief from some of the burdensome costs and analysis required by the current standard.
For more information on this and other accounting industry updates, please contact Aaron K. Waller, CPA at (334) 887-7022.
