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FASB Seeks to Simplify Business Combinations for Private Companies

January 2nd, 2015 by Associate

Earlier this month, the Financial Accounting Standards Board (FASB) offered a formal, practical response to an ongoing complaint that accounting for business combinations is unnecessarily costly for private companies. Having received input from stakeholders of private companies arguing that the complexities associated with accounting for certain aspects of business combinations were too great, FASB now provides an alternative treatment aimed at simplifying the business combination methodology for private companies. Specifically, FASB Accounting Standards Update 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, provides private companies the option to avoid recognizing the following items separately from goodwill.

  1. Certain customer-related intangible assets and
  2. Noncompetition contracts.

The standard is expected to reduce the costs incurred by private companies to comply with the previous standards, which required that the value of intangibles in the categories above be measured individually, potentially necessitating the services of specialists. The new guidance is not, however, applicable to customer-related intangible assets that are capable of being sold or licensed separately from the other assets of the business acquired. Examples of such assets, to which the new standard would not apply, are mortgage servicing rights, commodity supply contracts, core deposits and customer information. Because assets such as these are not fully tethered to a business as a whole, even private companies must continue to measure and recognize them individually.

If so inclined, private companies must elect to adopt the alternative upon the occurrence of the first transaction within its scope. Early adoption of the alternative is permitted for any financial statements that have not yet been made available for issuance.

While the alternative is not available to public companies or not-for-profit organizations, FASB has indicated that a project has been added to its agenda to address the potential need for a similar alternative that would be available to non-private-company entities.

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