In December 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the private company council), which provides an accounting alternative for private companies and not-for-profit entities related to the identifiable intangible assets recognized in the accounting for a business combination. The ASU includes the final decisions reached by the Private Company Council in its Issue No. 13-01A, "Accounting for Identifiable Intangible Assets in a Business Combination."
Under the ASU, a private company may choose 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 non-compete agreements (NCA) or (b) customer-related intangible (CRI) assets that cannot be separately sold or licensed. The value of these intangible assets is effectively subsumed into goodwill. A private company may elect this alternative only if it also elects (or has already elected) the private company goodwill accounting alternative (refer to our summary, Simplified accounting for private companies: Goodwill).
A private company electing the intangible asset accounting alternative will apply ASU 2014-18 prospectively beginning with the first interim and annual period in which a business combination occurs. Any previously recognized NCA intangible assets or CRI assets should continue to be recognized and measured in accordance with pre-existing guidance. In other words, these pre-existing intangible assets should not be subsumed into goodwill. A private company that elects the intangible asset accounting alternative in any future accounting period does not have to (a) establish preferability under Topic 250, Accounting Changes and Error Corrections or (b) retrospectively apply a change in accounting principle to all periods presented—a requirement under Topic 250 generally applicable to accounting changes.
This white paper provides additional information about the ASU’s scope, recognition provisions related to CRI assets and NCAs, disclosure requirements, effective date and transition provisions and the factors a private company should consider before electing the accounting alternative. In addition, an appendix is provided with answers to frequently asked questions about the accounting alternative.
