Private Companies - New Cost Saving Accounting Alternative for Intangible Assets
Mark Isaacson, CPA, Senior Associate, Johnson Lambert LLP
 

If your company is a private company (i.e. does not meet the definition of a public business entity (PBE) and is not a not-for-profit (NFP) entity) and carries intangible assets, you may be eligible to adopt the Financial Accounting Standards Board’s (FASB or the Board) recently issued simplified accounting alternative.  The Private Company Council (PCC) worked with the Board to publish this alternative in response to feedback regarding the costs associated with determining the fair value of certain identifiable intangible assets outweighing the purported benefits.

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If adopted, private companies will recognize the following identifiable intangible assets as goodwill:

  • Noncompetition agreements
  • Customer-related intangible assets that a company could not sell or license independently from its other assets.

Private companies may make this election when the above intangible assets resulted from one of the following transactions:

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

Upon election the private company must apply this alternative to all similar future transactions. It is important to note the disclosure requirements do not change with the adoption of this alternative. Additionally, the private company must adopt the PCC accounting alternative for amortizing goodwill, which requires straight-line amortization over 10 years, or less if the private company is able to justify a shorter useful life.

The election of this alternative must be made when the first eligible transaction occurs in fiscal years beginning after December 15, 2015. If your company is considering the adoption of this or any other PCC accounting alternative, you should give careful consideration to whether your company has any future aspirations of going public.  To date, no guidance has been published regarding “unwinding” the PCC elections to ensure a company’s financial statements are in compliance with the accounting standards PBE’s must follow.

While this update applies to private companies, FASB is reconsidering the accounting model for goodwill for PBE’s and NFP’s.

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