4.7 The intangible assets alternative (private companies/ NFPs)
In accordance with ASC 805-20-25-30, a private company/NFP entity may elect an alternative that simplifies the accounting for intangible assets acquired in a business combination. Under the intangible assets alternative, an acquirer other than a public business entity can make an accounting policy election not to recognize and measure: (a) customer-related intangibles (unless they are capable of being sold or licensed independent from the other assets of the acquired business) and (b) noncompetition agreements.
A private company/NFP entity that elects the intangible assets alternative should continue to separately recognize and measure customer-related intangible assets that are capable of being sold or licensed independently, as well as all other identifiable intangible assets (e.g., trade names). A private company/NFP entity that elects the intangible assets alternative on intangibles must also adopt the accounting alternative related to amortizing goodwill. See BCG 9.11 for further information. However, the opposite is not the case. That is, a private company/NFP entity can elect to adopt the goodwill accounting alternative without being required to adopt the intangible assets alternative.
The intangible assets alternative is available to private companies/NFP entities and applies when the entity is required to recognize or otherwise consider the fair value of intangible assets as a result of any one of the following qualifying transactions subsequent to the adoption of both accounting alternatives:
- Business combinations under ASC 805
- Investments in an equity method investee under ASC 323 with respect to intangible assets acquired (when assessing basis differences between the investor basis and the investee’s net assets)
- Fresh-start reporting under ASC 852 for reorganizations
Similar to other PCC alternatives, there is no effective date (also referred to as an “open-ended” effective date) for the intangible assets alternative; a private company/NFP entity has an unconditional one-time election to apply the alternative to prospective acquisitions, as long as the entity also adopts the goodwill amortization alternative. A private company/NFP entity that elects the alternative on intangibles for the first time does not need to justify that the use of the accounting alternative is preferable.
The guidance for intangible assets is required to be applied prospectively to all new acquisitions after adoption. That is, customer-related intangible assets and noncompetition agreement intangible assets that have been recognized in previously issued financial statements prior to the period of adoption of the accounting alternatives are not affected by the intangible assets alternative and should not be subsumed into goodwill.
Before electing any of the PCC alternatives, companies should consider the possibility of a future initial public offering (IPO) or a sale of the company to (or a significant ownership interest by) a public entity. The SEC staff has indicated that any changes in the entity’s status as a private company (e.g., as a result of an IPO), or if its financial statements are included in an SEC filing (e.g., subject to the requirements of SEC Regulation S-X Rule 3-05 upon acquisition as a significant subsidiary), would require the retrospective reversal of all elected private company alternatives. See FSP 30.4 for additional information on private companies assessing preferability.
Disclosures
The intangible assets alternative does not include any incremental disclosure requirements. ASC 805 disclosure requirements continue to apply to private companies/NFP entities electing the intangible assets alternative. Those disclosures include a qualitative description of intangible assets that do not qualify for separate recognition. Accordingly, while the fair value of certain intangible assets would not need to be determined by private companies/NFP entities, the nature of all acquired intangible assets should be described in the financial statement footnotes. See FSP 17.4.8 for additional information.
FASB extends private company alternatives to not-for-profits
FASB proposals would change the accounting for goodwill and intangible assets for not-for-profits.
KPMG reports on the FASB’s amendments to ASC 350, ASC 805 and ASC 958. NFPs are permitted to include certain intangible assets with goodwill, amortize goodwill over a period of up to 10 years and test goodwill for impairment at either the entity level or the reporting unit level when a triggering event occurs.
Applicability
- All not-for-profit entities, including those that are conduit bond obligors
Relevant dates
- The amendments are effective immediately. An NFP may adopt these alternatives at any time without having to demonstrate preferability.
Key Impacts:
- An NFP may elect to amortize goodwill on a straight-line basis over 10 years (unless a shorter useful life is more appropriate)
- Under this election, an NFP is required to test goodwill for impairment only when a triggering event occurs and is permitted to test at either the entity level or the reporting unit level
- An NFP may elect not to separately recognize intangible assets related to (1) certain customer-related intangible assets and (2) noncompete agreements when applying the acquisition method and in certain other limited circumstances
- The alternatives are intended to (1) reduce the frequency of impairment tests, (2) simplify the impairment test when it is required and (3) result in recognition of fewer intangible assets in future business combinations
Report contents
- Applicability
- Key facts and impacts
- Goodwill Accounting Alternative
- Identifiable Intangible Assets Accounting Alternative
- Effective dates and transition
- Related project
Download the document:
FASB extends certain private company alternatives to not-for-profits
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