United States

Recognition of goodwill and intangible assets by private companies

FINANCIAL REPORTING INSIGHTS  | 

Accounting Standards Update 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, introduced the private company goodwill alternative. Electing this alternative has several accounting outcomes, one of which is amortizing goodwill over a period not to exceed ten years. Given this accounting outcome, some question whether it is necessary to separately recognize and measure finite-lived intangible assets and goodwill when the alternative is elected. In other words, given that both goodwill and finite-lived intangible assets are amortized under the alternative (compared to only finite-lived intangible assets being amortized when the alternative is not elected or applicable), some question why the two need to be separately recognized and measured. U.S. generally accepted accounting principles (GAAP) require separate recognition and measurement of finite-lived intangible assets and goodwill regardless of whether the alternative is elected.

Some of the reasons it is important to continue to separately recognize and measure finite-lived intangible assets and goodwill include the following:

  • The amortization period and (or) method applied to the finite-lived intangible assets may differ from the amortization period and (or) method applied to the goodwill.
  • There are different impairment models in U.S. GAAP for goodwill and finite-lived intangible assets.
  • There are different presentation and disclosure requirements in U.S. GAAP related to goodwill and finite-lived intangible assets.
  • There may be different tax treatments for finite-lived intangible assets and goodwill depending on a business combination’s specific facts and circumstances, including its overall structure as a taxable or nontaxable transaction.

For additional information about the private company goodwill alternative, refer to our white paper, Simplified accounting for private companies: Goodwill.

There is another private company accounting alternative that allows a private company to elect an accounting policy under which it would not separately recognize the following intangible assets in the accounting for a business combination: (a) intangible assets that would otherwise arise from noncompete agreements or (b) customer-related intangible assets that cannot be separately sold or licensed. The value of these intangible assets is effectively subsumed into goodwill when the alternative is elected. A private company may elect this alternative only if it also elects (or has already elected) the private company goodwill alternative. While election of the private company intangible asset alternative would eliminate the separate recognition of certain finite-lived intangible assets, there could be other finite-lived intangible assets acquired in a business combination that should continue to be separately recognized (e.g., customer lists that can be separately sold or licensed, trademarks, patents). For additional information about the private company intangible asset alternative, refer to our white paper, Simplified accounting for private companies: Certain intangible assets.