As part of the continued efforts to reassess accounting standards attributable to private companies, the FASB issued a new accounting alternative in December 2014 to further reduce the cost and complexity of accounting for intangible assets in a business combination. Under this alternative, private companies would not be required to separately value and record balances attributable to non-competition agreements and customer-related intangible assets unless they were capable of being sold or licensed independently of other assets of the business.
If a company elects to adopt this accounting alternative, the company must also elect to adopt the accounting alternative for amortization of goodwill under ASU 2014-02. However, a company may elect to adopt the goodwill alternative under ASU 2014-02 but not elect to adopt this alternative for intangible assets.
Examples of customer-related intangibles that would continue to be recorded under this alternative are:
- Mortgage servicing rights.
- Commodity supply contracts.
- Core deposits.
- Customer information (names and contact information).
This standard does not eliminate separate recording of other identifiable intangible assets arising out of a business combination. Some examples of common intangible assets that would still be recorded separately from goodwill under ASC 805 include trade names, trademarks, leases with favorable or unfavorable terms compared to market rates and customer-related intangible assets that are able to be sold or licensed outside of other assets.
Identifiable intangible assets are defined as assets meeting both of the following criteria:
- It arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
- It is separable, that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so.
The decision to elect to adopt this accounting alternative must be made in the fiscal year of the occurrence of the first transaction within the scope of this alternative for any fiscal years beginning after Dec. 15, 2015. However, early adoption of this accounting alternative is available, and we recommend that companies consider early adoption if a transaction has occurred during 2014, especially if the company has already adopted ASU 2014-02.
Though there are still several other intangibles that may be present in a business combination, this standard should provide some relief for companies completing transactions where the main intangible asset would be a non-compete agreement with a seller.
About the Author: Brad Bonde is a senior audit manager with LBMC's Healthcare Services Assurance team. To learn more, Brad can be reached at 615/309-2434 or by email at firstname.lastname@example.org. LBMC is the largest regional and financial services family of companies based in Tennessee and was recently named a Top 50 firm in the nation.