The U.S. Generally Accepted Accounting Principles (GAAP) outlines for mergers and acquisitions include a lot of red tape. When it comes to intangibles, the standards get especially complex. A lot of the hassle can be avoided using the Financial Accounting Standards Board (FASB) reporting alternative for private companies.
The red tape
Beneficiaries of a private business combination often wonder about the importance of reporting the values of all their intangibles. Stakeholders are much more interested in tangible assets, cash flows, and earnings before interest, taxes, depreciation and amortization (EBITDA). These measures are unrelated to the reporting of intangible assets in mergers and acquisitions.
Generally speaking, companies that merge with or acquire another business must identify and recognize — separately from goodwill — the fair value of intangible assets that are separable or arise from contractual or other legal rights. This is a complicated process; the value of intangibles is highly subjective, and usually requires outside appraisal to determine. The need to hire a third-party leads to an increase in audit costs.
Fortunately, since 2015 the FASB has allowed private companies to elect an accounting alternative without requiring any new disclosures. The process exempts specific customer-related intangibles and noncompetes from being reported separately after a merger or acquisition.
By electing this alternative, and therefore reporting fewer intangible assets, the accounting of intangibles on both the acquisition date and amortization is simplified for future periods.
Items such as trade names and patents must still be valued separately under the GAAP requirement. Also, the alternative does not work retroactively. Noncompetes and other customer-related intangibles that were acquired before the 2015 alternative must continue to be amortized over the expected life set when the combination occurred.
Auditors typically rely on fair value estimates made by a third-party separable and contract-based intangibles, so even though the FASB reporting alternative simplifies matters, merger and acquisition appraisals in-house will likely not become the norm.
We can help
We can advise throughout the post-acquisition process, including whether or not to elect the private company reporting alternative. We can also help to avoid costly mistakes in accounting for business combinations that might alarm stakeholders with restatements and write-offs in the future. Contact us at 949-860-9902 or click here and we will contact you