Private Company Alternatives for Purchase Accounting
By Jeffrey A. Ford, Grossman Yanak & Ford LLP
Private companies and their investors, particularly private equity funds, experienced much frustration with purchase accounting standards until relief arrived in 2014.
In 2001, the FASB deemed that substantially all business combinations should be purchases and, thus, eliminated the pooling method and required the recognition of certain intangible assets apart from goodwill. Goodwill was not to be amortised. Further, by 2007, fair value concepts were to be applied, sometimes prompting recognition of gains when fair values of net assets acquired exceeded their purchase price. With private company lenders and investors focused primarily on cash flow and EBITDA, many expressed frustration at the costs of the intangible assets valuations and the lack of relevance of the resulting intangible assets.
In December 2014, the FASB issued ASU 2014-18 (Topic 805): Business Combinations: Accounting for Identifiable Intangible Assets in a Business Combination. ASU 2014-18 was based on a consensus that was reached by the Private Company Council (PCC), providing an alternative for private companies. The goal of the accounting alternative is to reduce costs while not significantly diminishing decision-useful information for users of the financial statements.
Essentially, under ASU 2014-18, customer-related intangible assets and noncompetition agreements need not be recognised separately from goodwill for entities that are not public filers. Customerrelated intangible assets are often the majority of intangible assets acquired by private companies. Further, goodwill must be amortised over a period not to exceed ten years for acquisitions accounted for under this alternative method.
Similar to previous guidance, recognition of identifiable intangible assets separately from goodwill is required if they meet the contractuallegal criteria or the separability criteria. Common examples include:
- Mortgage servicing rights,
- Commodity supply contracts,
- Core deposits.
Additionally, leases and contract assets, as defined in Topic 606, are not considered to be customerrelated intangible assets and are not eligible to be subsumed into goodwill under this alternative.
What does the adoption of this accounting alternative mean in practice for private companies? In most cases, entities will recognise fewer intangible assets separately in a business combination as compared to companies that do not elect this alternative. To that end, they will recognise larger amounts of goodwill than their counterparts who do not elect to use this alternative, and this goodwill must be amortised.
Private entities will continue to provide decision-useful information to the users of their financial statements, while reducing the costs and complexity associated with measuring certain identifiable intangible assets. The disclosures required under US GAAP will continue to provide valuable information, but the cost and complexity of measuring the fair value of certain intangible assets will be less costly.
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Grossman Yanak & Ford LLP
Advisory, Auditing & Accounting, Tax
Pittsburgh (PA), USA
T: +1 412 338 93 02
Grossman Yanak & Ford LLP is a full-service CPA firm, headquartered in Pittsburgh, Pennsylvania. Their accounting and consulting service offerings include audit and assurance, tax advisory and compliance, business valuation and litigation support, business advisory/ management consulting, and ERP solutions.
Jeffrey A. Ford is a founding partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served a variety of ownership groups including public and private companies, private equity groups and international investors. He currently serves on the AICPA Governing Council.
Published: Auditing, Reporting & Compliance Newsletter, No. 02, Autumn 2019 l Photo: f11photo - stock.adobe.com