Thomas L. Wolf, The Daily Record Newswire
Recently, the Financial Accounting Standards Board issued several financial reporting changes that apply to private companies. The intent of the changes was to simplify financial reporting and control the costs incurred by private companies in connection with their financial reporting. Two of the changes that will affect many private companies are described in more detail in this article.
ACCOUNTING
ALTERNATIVE RELATED TO INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS
The FASB recently issued new guidance for private companies establishing an accounting alternative for certain intangible assets acquired in a business combination. If a private company elects the alternative, it would not recognize separately from goodwill certain assets arising from customer relationships and noncompetition agreements upon acquisition.
Rather, they would be subsumed into goodwill, and the goodwill would be amortized. The alternative is intended to reduce cost and complexity for private companies. The decision to elect the alternative must be made upon the occurrence of the first in-scope transaction in years beginning after Dec. 15, 2015, with early application permitted.
Main provisions
Accounting Standards Update 2014-181 establishes an accounting alternative for private companies. The alternative relates to intangible assets that arise as a result of applying the acquisition method under Topic 805, accounting for equity method "basis differences" under Topic 323, or in connection with fresh-start accounting under Topic 852. Under the alternative, a private company would not recognize separately from goodwill the following intangible assets:
- Customer-related intangible assets unless they are capable of being sold or licensed independently from other assets of the business;
- Noncompetition agreements.
In accordance with the new standard, not all customer-related intangible assets are exempt from being separately recognized apart from goodwill. The standard cites mortgage servicing rights, commodity supply contracts, core deposits and customer information (such as names and contact details), as assets that may need to be separately recorded.
The FASB concluded that intangible assets which can be independently sold or licensed are typically the most relevant to users because they frequently provide discrete cash flows, and therefore warrant separate accounting.
Further, the Board does not expect it to be costly to assess whether customer-related intangible assets meet the separation test because this assessment should be clear in most cases. For example, if the transfer of a customer relationship depends on the decisions of a customer, it would be clear that the reporting entity is not capable of selling that asset separately.
In addition, the ASU states contract assets (a concept introduced by Topic 6063) and leases are not customer-related intangible assets, thus, a private company electing the alternative would recognize such assets separately.
Finally, a private company that elects the alternative must also prospectively adopt the accounting alternative for amortizing goodwill established by ASU 2014-02, if not already adopted. However, a private company which has previously adopted the goodwill alternative is not required to adopt the intangibles alternative in ASU 2014-18.
Effective date and transition
Private companies are required to decide whether to elect the accounting alternative upon the occurrence of the first in-scope transaction (e.g., a business combination) in fiscal years beginning after Dec. 15, 2015.
If the first in-scope transaction occurs in the first fiscal year beginning after Dec. 15, 2015, the elective adoption will be effective for that fiscal year's annual financial reporting and all interim and annual periods thereafter.
If the first in-scope transaction occurs in fiscal years beginning after Dec. 15, 2016, the elective adoption will be effective in the interim period that includes the date of that first in-scope transaction and subsequent interim and annual periods thereafter.
Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance. Once elected, the accounting alternative must be applied to all in-scope transactions on a prospective basis. However, customer-related intangible assets and noncompetition agreements that exist upon adoption shall continue to be subsequently measured under Topic 350. That is, such existing intangible assets should not be subsumed into goodwill upon the adoption of ASU 2014-18.
FASB ELIMINATES CONCEPT OF EXTRAORDINARY ITEMS FROM U.S. GAAP
The FASB recently published an ASU to eliminate the concept of extraordinary items from accounting principles generally accepted in the United States of America (U.S. GAAP). However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The new standard takes effect in 2016.
Main provisions
ASU 2015-011 eliminates the requirement in Subtopic 225-20 to consider whether an underlying event or transaction is extraordinary, and if so, to separately present the item in the income statement net of tax, after income from continuing operations. The FASB concluded this change will save time and reduce costs for practitioners and their clients.
Items that are either unusual in nature or infrequently occurring will continue to be reported as a separate component of income from continuing operations. Alternatively, these amounts may still be disclosed in the notes to the financial statements. The same requirement has been expanded to include items that are both unusual and infrequent, i.e., they should be separately presented as a component of income from continuing operations or disclosed in the footnotes.
Effective date and transition
For all entities (public and non-public), the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.
The guidance may be applied either prospectively or retrospectively. If applied prospectively, the ASU requires disclosure of the nature and the amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the date of adoption, if applicable. If applied retrospectively, the ASU requires the disclosures in paragraphs 250-10-50-1 through 50-2 on applying a change in accounting principle.
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Thomas L. Wolf, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. He can be reached at (585) 423-1860 or via email at twolf@mmb-co.com.
Published: Wed, Jun 17, 2015
