Megan Broomfield, The Daily Record Newswire
Accounting for goodwill for private companies has had its challenges over the years and the Financial Accounting Standards Board recognized these challenges and has issued guidance to relieve some the burden as it relates to accounting for goodwill. We have seen a growing number of companies elect the following standards in an effort to streamline their financial reporting for goodwill. The following is a description of two of the applicable standards:
ASU 2014-2 - Intangibles Goodwill and other
Under existing accounting standards, goodwill is not amortized but is instead reviewed for impairment at the reporting unit level annually and whenever an event occurs that might cause an impairment of the asset. The alternative accounting method for goodwill permits private companies to elect to amortize goodwill on a straight-line basis over 10 years or a shorter period if management concludes that another useful life is more appropriate.
Private companies that elect to amortize goodwill would no longer be required to perform annual goodwill impairment tests. An impairment test of goodwill would still be required if an event occurs or circumstances change that indicate that the fair value of the entity may be below its carrying amount: a triggering event.
Upon the occurrence of a triggering event, the required impairment test would be performed under a simplified approach by companies that adopt the alternative accounting method. The two-step goodwill impairment test required in other circumstances is replaced with a one-step test. In the one-step test, the company estimates the fair value of the entity and compares the fair value with its carrying amount including goodwill. A goodwill impairment charge is recognized for the excess of the carrying amount of the entity over its fair value.
ASU 2014-2 is effective for fiscal years beginning after Dec. 15, 2014. A private company that elects to adopt the new standard would do so prospectively, and start amortizing existing goodwill over its remaining life as of the beginning of the period of adoption.
ASU 2014-18 - Accounting for Identifiable Intangible Assets in a Business Combination
This ASU establishes an accounting alternative for private companies. The alternative relates to intangible assets that arise as a result of applying the acquisition method, accounting for equity method “basis differences,” or in connection with fresh-start accounting. Under the alternative, a private company would not recognize separately from goodwill the following intangible assets:
a) Customer-related intangible assets unless they are capable of being sold or licensed independently from other assets of the business; and
b) Noncompetition agreements.
As noted above, not all customer-related intangible assets are exempt from being separately recognized apart from goodwill. The standard cites mortgage servicing rights, commodity supply contracts, core deposits and customer information (such as names and contact details), as assets that may need to be separately recorded. The FASB concluded that intangible assets which can be independently sold or licensed are typically the most relevant to users because they frequently provide discrete cash flows, and therefore warrant separate accounting.
Further, the board does not expect it to be costly to assess whether customer-related intangible assets meet the separation test because this assessment should be clear in most cases. For example, if the transfer of a customer relationship depends on the decisions of a customer, it would be clear that the reporting entity is not capable of selling that asset separately.
In addition, the ASU states contract assets and leases are not customer-related intangible assets, thus, a private company electing the alternative would recognize such assets separately.
Finally, a private company that elects the alternative must also prospectively adopt the accounting alternative for amortizing goodwill established by ASU 2014-02 Intangibles – Goodwill and Other, if not already adopted. However, a private company which has previously adopted the goodwill alternative is not required to adopt the intangibles alternative in ASU 2014-18.
Private companies are required to decide whether to elect the accounting alternative upon the occurrence of the first in-scope transaction (e.g., a business combination) in fiscal years beginning after Dec. 15, 2015.
If the first in-scope transaction occurs in the first fiscal year beginning after Dec. 15, 2015, the elective adoption will be effective for that fiscal year’s annual financial reporting and all interim and annual periods thereafter.
If the first in-scope transaction occurs in fiscal years beginning after Dec. 15, 2016, the elective adoption will be effective in the interim period that includes the date of that first in-scope transaction and subsequent interim and annual periods thereafter.
Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance. Once elected, the accounting alternative must be applied to all in-scope transactions on a prospective basis. However, customer-related intangible assets and noncompetition agreements that exist upon adoption shall continue to be subsequently measured under Topic 350. That is, such existing intangible assets should not be subsumed into goodwill upon the adoption of ASU 2014-18.
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Megan Broomfield, CPA, is a partner at Mengel, Metzger, Barr & Co. LLP and may be reached at Mbroomfield@mmb-co.com.
