PCC approves private company GAAP exception for certain acquired intangible assets

BY KEN TYSIAC

The Private Company Council (PCC) voted Tuesday to approve a GAAP alternative that will allow private companies to elect not to separately recognize and measure certain intangible assets acquired in a business combination.

Private companies that elect the alternative would not recognize:

  • Noncompetition agreements.
  • Customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business.


It is anticipated that customer-related intangible assets often would not meet one of the criteria for recognition. Customer-related assets that may meet one of the criteria for recognition would include mortgage servicing rights, commodity supply contracts, and core deposits.

If FASB endorses the alternative, it can be written into GAAP. FASB’s endorsement is required for all PCC-originated GAAP alternatives. FASB will discuss the topic in the coming weeks.

Companies that elect the alternative would be required to separately disclose qualitatively any intangible assets that did not meet separate recognition under this alternative.

The alternative would be applied prospectively for all business combinations entered into after the effective date, and there would be no option to apply it retrospectively.

A private company that elects the alternative would continue recognizing and measuring under existing GAAP all intangible assets that exist at the beginning of the period of adoption. That means that noncompetition agreements and customer-related intangibles that were recognized prior to the adoption of the alternative would continue to be amortized over the expected life that was set previously.

Private companies that elect to adopt the alternative also would be required to adopt Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council).

Under ASU No. 2014-02, a private company can elect to subsequently amortize goodwill on a straight-line basis over 10 years, or less if the company demonstrates that another useful life is more appropriate. ASU No. 2014-02 also permits a private company to apply a simplified impairment model to goodwill.

The linkage between the two alternatives is one-way. A private company that adopts ASU No. 2014-02 is not required to adopt the alternative approved Tuesday by the PCC.

The alternative the PCC approved Tuesday would take effect for business combinations entered into in the first annual period beginning after Dec. 15, 2015, and interim periods within annual periods beginning after Dec. 15, 2016. Early adoption would be permitted for any annual period for which the entity’s annual financial statements have not yet been made available for issuance.

The PCC also gave FASB feedback on the board’s ongoing project to change financial reporting for leases. FASB is working on a model that would bring lease assets and liabilities onto the balance sheet, but the PCC in discussions Tuesday referred the board to a comment letter from December.

In the letter, the PCC said that when the lessee “is not consuming a significant portion of the asset’s utility, the PCC believes that no lease assets or lease liabilities should be recognized.”

In addition, the PCC agreed to let FASB take the lead in exploring possible improvements for accounting for stock-based compensation. FASB will consider adding a project to its agenda for public and private companies; if a project is added, the PCC will continue to advise FASB on private company issues related to the topic.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.

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