Two accounting rules offer relief to privately held companies who have made acquisitions in the past or are planning one.
The first standard allows a company to amortize goodwill over a period of 10 years instead of doing a sometimes costly and time-consuming annual impairment test.
The annual impairment test was required to be done every year for companies with goodwill on their books. For example, one company buys another for $50 million. Its “hard” assets are valued at $40 million, but the company pays a $10 million premium because of its growth prospects. They book that difference as goodwill.
The annual impairment test would check to see if that goodwill had diminished in value. If it had, the company would write down the value of goodwill on its books.
Now companies can elect to avoid the annual impairment test, potentially saving significant expense and time once spent examining independent valuations annually to determine if the company was still worth what they said it was when they bought it.
The other practical benefit of the rule change is that financial statements, sometimes delayed while waiting for a finalized impairment test, could be completed sooner.
Companies who elect to take advantage of the new accounting standard will still have to consider whether there has been a significant event — a triggering event — that would put into question the value of the goodwill.
But the streamlining of the new process is something many companies should consider.
The other standard also helps companies who make acquisitions and relates to certain identifiable intangible assets purchased in those transactions. These are things such as non-compete agreements, customer lists, trademarks, trade names and other intellectual property.
The standard (ASU 2014-18) reduces the cost and complexity for accounting for these intangible assets in a business combination by no longer requiring private companies to separately identify and record the value of non-compete agreements and customer-related identifiable intangible assets. The only time the acquiring company would have to obtain a valuation on customer-related identifiable intangible assets is if the assets were something that could be sold or licensed.
Generally speaking, the new rule should allow companies to eliminate some of the lower level intangible asset valuations they had been doing under the previous standards, thus saving costs related to the transaction.
Both rules could be advantageous for companies in certain circumstances. If you’ve not yet explored whether electing to adopt the new standards will benefit you, talk with one of our accountants.