Business Combinations (Topic 805)

By: Nicholas Lombardi Jr., CPA

ASU No. 2014-18 Accounting for Identifiable Intangible Assets in a Business Combination

Under current professional standards governing the accounting for business combinations, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination at their acquisition-date fair values, including all intangible assets that are identifiable. Many private company stakeholders have long held that the benefits obtained from having a valuation performed to identify and value these separately identifiable intangibles acquired in a business combination may not justify the related costs.

In response to these private company concerns, in December 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-18, Business Combinations: Accounting for Identifiable Intangible Assets in a Business Combination. ASU No. 2014-18 amends Accounting Standard Codification (ASC) 805 Business Combinations by allowing private companies to choose an accounting alternative for recognizing specific identifiable intangible assets acquired in a business combination. Additionally, the accounting alternative provided by ASU 2014-18 reduces the cost and complexity associated with the measurement of these certain identifiable intangible assets without significantly diminishing the usefulness of private company financial statements.

Generally speaking, a private company that elects the accounting alternative to recognize or otherwise consider the fair value of intangible assets as a result of any in-scope transactions should no longer recognize separately from goodwill 1) noncompetition agreements, and 2) customer-related intangible assets, unless they can be sold or licensed separately from other assets. Many customer-related intangible assets would not meet the requirement to be separately recognized under the accounting alternative. However, customer-related intangible assets that are capable of being sold or licensed independently from other assets would continue to be recognized separately from goodwill.

The accounting alternative applies when an entity within the scope of the Update is required to recognize or otherwise consider the fair value of intangible assets as result of any of the following in-scope transactions:

  1. Applying the acquisition method under ASC 805, Business Combinations.
  2. Assessing the nature of the difference between the carrying amount of an investment and the amount of the underlying equity in net assets of an investee when applying the equity method under ASC 323, Investments – Equity Method and Joint Ventures.
  3. Adopting fresh-start reporting under ASC 852, Reorganizations.

The in-scope transaction that will most likely affect private companies is applying the acquisition method under ASC 805, Business Combinations.

A private company adopting the provisions of ASU No. 2014-18 must also adopt the private company alternative to amortize goodwill as described in ASU No. 2014-02, Accounting for Goodwill. However, this does not hold in reverse. Therefore an entity that adopts the provision of ASU No. 2014-02 is not required to adopt the provisions of ASU No. 2014-18.

The decision to adopt the accounting alternative in the Update must be made upon the occurrence of the first transaction within the scope of the accounting alternative in fiscal years beginning after December 15, 2015, and the effective date of the adoption depends on the timing of that first in-scope

transaction. Once elected, the accounting alternative would be applied to all future business combinations entered into in the first annual period beginning after December 15, 2015. Additionally, customer-related intangible assets and noncompetition agreements that exist as of the beginning of the period of adoption shall continue to be subsequently measured in accordance with ASC 350, Intangibles Goodwill and Other. In other words, existing customer related intangible assets and noncompetition agreements should not be grouped with goodwill upon adoption.

Early adoption is permitted for any interim and annual financial statements that have not yet been made available for issuance.

nick_headshotNicholas Lombardi, Jr., CPA joined the Stancil & Company team in 1994 after working in the banking industry for over ten years. Nick serves clients in the firm’s accounting and auditing, taxation, and small business consulting practice areas. He works extensively with both for-profit and not-for-profit entities including foundations, associations, medical and dental practices, construction contractors, and other closely-held businesses.

Nick is a member of the North Carolina Association of Certified Public Accountant’s Accounting and Attestation Committee and a former member and past chairman of the NCACPA’s Not-For-Profit Committee. In addition, Nick is a frequent speaker for SCORE (Service Corps of Retired Executives) and a contributing author for the NCACPA’s magazine Interim Report and the North Carolina Center for Nonprofit’s quarterly newsletter Common Ground.

Nick is a graduate of the University of North Carolina at Chapel Hill and is a member of both the American Institute of Certified Public Accountants and the North Carolina Association of Certified Public Accountants. He and his wife Kate, and their daughter Jessica, are members of St. Francis of Assisi Catholic Church.