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Private company guidance issued on intangible assets in a business combination

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FASB issues private company guidance on accounting for intangible assets
At the end of 2014, the FASB released ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination – a consensus of the Private Company Council. Under the ASU, private companies, as defined in the Codification, can elect to no longer recognize acquired intangible assets pertaining to noncompete agreements and customer relationships separately from goodwill, except for customer-related intangible assets that can be separately sold or licensed independently from other assets of the business. Examples of customer-related intangibles that may be independently sold or licensed and thus require separate accounting include mortgage servicing rights, commodity supply contracts, core deposits, and customer information lists.
    Besides business combinations, the ASU also applies to fresh start accounting situations and to the assessment of differences between the carrying amount of an investment and the underlying equity in an investee’s net assets when applying the equity method of accounting.

    If a private company elects the ASU’s accounting alternative, it must also elect (or have already elected) to adopt the alternative in ASU 2014-02, Accounting for Goodwill, which requires, among other things, the amortization of goodwill. However, private companies that elect or have elected to adopt the alternative in ASU 2014-02 are not required to adopt the alternative in ASU 2014-18.

    If a private company chooses to elect the accounting alternative in ASU 2014-18, it must apply the guidance on the first occurrence (and on all subsequent occurrences) of any of the following transactions in a fiscal year beginning after December 15, 2015:
    • Business combination
    • Fresh start accounting as a result of a reorganization
    • Assessment of the nature of differences between the carrying amount of an investment and the underlying equity in an investee’s net assets when applying the equity method of accounting

    The effective date for the new guidance depends on the date when the first transaction within the scope of the alternative occurs. If the transaction occurs in a fiscal year beginning after December 15, 2015, the election is effective for that fiscal year’s annual reporting and for all interim and annual periods thereafter. If the transaction occurs in a fiscal year beginning after December 15, 2016, the election is effective for the interim period in which the event occurs and for subsequent interim and annual periods thereafter. Early adoption is permitted for interim or annual financial statements that have not yet been made available for issuance.

    Any noncompete or customer-related intangibles that exist as of the beginning of the period of adoption of this ASU must continue to be separately measured and accounted for; they cannot be absorbed into goodwill.

    For more information on ASU 2014-18, refer to FASB in Focus, “Accounting Standards Update for Private Companies Accounting for Identifiable Intangible Assets in a Business Combination.”

    © 2015 Grant Thornton LLP. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other conclusions with respect to the matters addressed in this issue. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at accounting that complies with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.