Chapter 8 — Private-Company Accounting Alternatives

8.2 Accounting Alternatives for Private Companies and Not-for-Profit Entities

The paragraphs below discuss the accounting alternatives for certain intangible assets and goodwill. Entities do not need to perform a preferability assessment the first time they elect such alternatives; however, any later change to an accounting policy election requires justification that the change is preferable under ASC 250.

Connecting the Dots

Before electing the private-company accounting alternatives, a private company should consider whether it might become a PBE in the future (e.g., the entity may file an IPO or may be required to have its financial statements included in a registrant’s filing under SEC Regulation S-X, Rule 3-05). Neither the FASB nor the SEC has provided relief or transition guidance for private companies that have elected the private-company accounting alternatives and later become PBEs; thus, private companies that might become PBEs should be cautious about electing them. Private companies that do apply the accounting alternatives and later become PBEs would need to retrospectively remove the effects of the accounting alternatives in any financial statements filed with, or furnished to, the SEC. The removal of such effects could become increasingly complex as more time passes.

8.2.1 Accounting Alternative for Intangible Assets

ASC 805-20

Accounting Alternative

15-1A Paragraphs 805-20-15-2 through 15-4 and 805-20-25-29 through 25-33 provide guidance for an entity electing the accounting alternative in this Subtopic. See paragraph 805-20-65-2 for transition guidance for private companies and not-for-profit entities on applying the accounting alternative in this Subtopic.

15-2 A private company or not-for-profit entity may make an accounting policy election to apply the accounting alternative in this Subtopic. The guidance in the Accounting Alternative Subsections of this Subtopic applies when a private company or not-for-profit entity is required to recognize or otherwise consider the fair value of intangible assets as a result of any one of the following transactions:

Applying the acquisition method (as described in paragraph 805-10-05-4 for all entities and Subtopic 958-805 for additional guidance for not-for-profit entities)
Assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity in net assets of an investee when applying the equity method of accounting in accordance with Topic 323 on investments — equity method and joint ventures
Adopting fresh-start reporting in accordance with Topic 852 on reorganizations.

Pending Content (Transition Guidance: ASC 805-60-65-1)

Applying the acquisition method (as described in paragraph 805-10-05-4 for all entities and Subtopic 958-805 for additional guidance for not-for-profit entities)
Assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity in net assets of an investee when applying the equity method of accounting in accordance with Topic 323 on investments—equity method and joint ventures
Adopting fresh-start reporting in accordance with Topic 852 on reorganizations
Accounting for the formation of a joint venture in accordance with Subtopic 805-60.

15-3 An entity that elects the accounting alternative shall apply all of the related recognition requirements upon election. The accounting alternative, once elected, shall be applied to all future transactions that are identified in paragraph 805-20-15-2.

15-4 An entity that elects this accounting alternative must adopt the accounting alternative for amortizing goodwill in the Accounting Alternatives Subsections of Topic 350-20 on intangibles — goodwill and other. If the accounting alternative for amortizing goodwill was not adopted previously, it should be adopted on a prospective basis as of the adoption of the accounting alternative in this Subtopic. For example, upon adoption, existing goodwill should be amortized on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. However, an entity that elects the accounting alternative for amortizing goodwill is not required to adopt the accounting alternative in this Subtopic.

To achieve comparability, an entity should apply the accounting alternative to all eligible intangible assets. That is, if an entity adopts the accounting alternative for intangible assets, it cannot choose to recognize the customer-related intangible assets within its scope but subsume noncompetition agreements into goodwill. Furthermore, an entity that elects the accounting alternative for intangible assets must also adopt the accounting alternative for amortizing goodwill (see Section 8.2.2). “However, an entity that elects the accounting alternative for amortizing goodwill is not required to adopt the accounting alternative” for intangible assets.

If elected, the accounting alternative would be applied prospectively to (1) all intangible assets arising from business combinations occurring after adoption and (2) future transactions in which fresh-start reporting is adopted. In addition, when determining basis differences, an entity would apply it prospectively to all equity method investments acquired after adoption. The accounting alternative cannot be applied to previously recognized intangible assets (e.g., the option would not affect intangible assets recognized from previous business combinations).

8.2.1.1 Customer-Related Intangible Assets

ASC 805-20

25-30 An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion described in the definition of identifiable. However, under the accounting alternative, an acquirer shall 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 a business
Noncompetition agreements.

25-31 Customer-related intangible assets often would not meet criterion (a) in paragraph 805-20-25-30 for recognition. Customer-related intangible assets that would meet that criterion for recognition under this accounting alternative are those that are capable of being sold or licensed independently from the other assets of a business. Examples of customer-related intangible assets are listed in paragraph 805-20-55-20. Many of the customer-related intangible assets that would meet criterion (a) for recognition also would be considered contract-based intangible assets as described in paragraph 805-20-55-31. Customer-related intangible assets that may meet that criterion for recognition include but are not limited to:

Mortgage servicing rights
Commodity supply contracts
Core deposits
Customer information (for example, names and contact information).

Before the issuance of ASU 2014-18, many stakeholders indicated that separately recognizing customer-related intangible assets does not provide decision-useful information unless the contract giving rise to the asset could be sold separately from the other assets of the business. As a result, the PCC and FASB concluded that the benefits of recognizing customer-related intangible assets separately may not justify the related costs. Consequently, ASC 805-20-25-30 gives private companies the option to subsume into goodwill customer-related intangible assets unless they are capable of being sold or licensed independently from other assets of a business. While many customer-related intangible assets would meet that criterion, ASC 805-20-25-31 provides examples of such assets that generally could be sold separately, including, but not limited to, mortgage servicing rights, commodity supply contracts, core deposits, and customer information (e.g., names and contact information).

Under this accounting alternative, favorable customer contracts would be included in goodwill, but unfavorable customer contracts would not because they are liabilities and not within the alternative’s scope. However, in paragraph BC20 of ASU 2014-18, the FASB noted that “the concept of ‘at market’ is a broad range and customer contracts generally are considered to fall within the range that is considered ‘at market.’ Therefore, most customer contracts do not fall under the favorable-unfavorable contract guidance.” Paragraph BC20 of ASU 2014-18 also states, in part:

[S]ubsuming a significant favorable contract into goodwill will not necessarily create subsequent impairment issues. FASB Accounting Standards Update No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill, allows reporting entities to choose a life for goodwill that is less than 10 years. The PCC and the Board concluded that significant favorable contracts with a life shorter than 10 years may justify a shorter useful life for goodwill. As a result, the PCC and the Board concluded that favorable customer contracts will be included within the scope of this Update.

8.2.1.2 Noncompetition Agreements

Noncompetition agreements represent another category of intangible assets that are not separately recognized under this accounting alternative. In response to comments by stakeholders that noncompetition agreements are among the most subjective and difficult intangible assets to measure and that their value is disregarded by many users, the FASB determined that the benefits of recognizing them separately may not justify the related costs. Furthermore, the FASB indicates in paragraph BC19 of ASU 2014-18 that the “PCC and the Board chose not to require an assessment of whether a noncompetition agreement is capable of being sold or licensed separately from the other assets of a business because, in their view, noncompetition agreements will seldom, if ever, meet the criteria for recognition.”

8.2.1.3 Contract Assets

ASC 805-20

25-32 Contract assets, as used in Topic 606 on revenue from contracts with customers, are not considered to be customer-related intangible assets for purposes of applying this accounting alternative. Therefore, contract assets are not eligible to be subsumed into goodwill and shall be recognized separately.

The ASC master glossary defines a contract asset as “[a]n entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).” Contract assets are not eligible for this accounting alternative. In paragraph BC21 of ASU 2014-18, the FASB elaborates on this decision as follows:

The PCC and the Board decided that contract assets as defined in the Master Glossary and used in Topic 606, Revenue from Contracts with Customers, are not considered intangible assets eligible to be subsumed into goodwill and therefore are not within the scope of this Update. In certain situations, an entity satisfies a performance obligation but does not have an unconditional right to consideration, for example, because it first needs to satisfy another performance obligation in the contract. That leads to recognition of a contract asset. Once an entity has an unconditional right to consideration, it should present that right as a receivable separately from the contract asset and account for it in accordance with other guidance (for example, Topic 310, Receivables). As a result, the PCC and the Board concluded that it is inappropriate to classify a contract asset as a customer-related intangible asset at the acquisition date when the contract asset will eventually be reclassified as a receivable.

8.2.1.4 Leases

ASC 805-20

25-33 A lease is not considered to be a customer-related intangible asset for purposes of applying this accounting alternative. Therefore, favorable and unfavorable leases are not eligible to be subsumed into goodwill and shall be recognized separately.

ASU 2014-18 clarifies that leases are not considered to be customer-related intangible assets. Therefore, favorable and unfavorable leases must be recognized separately from goodwill.

8.2.1.5 Disclosures

There are no incremental disclosure requirements associated with this accounting alternative. As discussed in the Background Information and Basis for Conclusions of ASU 2014-18, the PCC and FASB determined that the disclosure requirements already in ASC 805 were sufficient for intangible assets that do not require separate recognition and that requiring additional disclosures could potentially offset any cost savings associated with an entity’s adoption of the accounting alternative.

8.2.2 Goodwill Accounting Alternative

ASC 350-20

Accounting Alternative

05-5 The Accounting Alternatives Subsections of this Subtopic provide guidance for the following:

An entity within the scope of paragraph 350-20-15-4 that elects the accounting alternative for amortizing goodwill. If elected, this accounting alternative allows an eligible entity to amortize goodwill and test that goodwill for impairment upon a triggering event.
An entity within the scope of paragraph 350-20-15-4A that elects the accounting alternative for a goodwill impairment triggering event evaluation. If elected, this accounting alternative allows an eligible entity to evaluate goodwill impairment triggering events only as of the end of each reporting period.

05-5A The accounting alternatives guidance can be found in the following paragraphs:

Scope and Scope Exceptions — paragraphs 350-20-15-4 through 15-6
Subsequent Measurement — paragraphs 350-20-35-62 through 35-86
Derecognition — paragraphs 350-20-40-8 through 40-9
Other Presentation Matters — paragraphs 350-20-45-4 through 45-7
Disclosure — paragraphs 350-20-50-3A through 50-7
Implementation Guidance and Illustrations — paragraphs 350-20-55-26 through 55-29.

05-6 An entity should continue to follow the applicable requirements in Topic 350 for other accounting and reporting matters related to goodwill that are not addressed in the Accounting Alternatives Subsections of this Subtopic.

Entities that elect the goodwill accounting alternative (1) amortize goodwill on a straight-line basis over a useful life of 10 years, or less than 10 years if they can demonstrate that a shorter useful life is more appropriate, (2) test goodwill for impairment only when a triggering event occurs instead of having to perform the test at least annually, and (3) test goodwill for impairment at either the entity level or the reporting-unit level. In addition, entities would be required to comply with the accounting alternative’s requirements related to subsequent measurement and disclosures.

ASC 350-20 provides the following guidance related to the goodwill accounting alternative:

ASC 350-20

35-62 The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for amortizing goodwill.

Amortization of Goodwill

35-63 Goodwill relating to each business combination, acquisition by a not-for-profit entity, or reorganization event resulting in fresh-start reporting (amortizable unit of goodwill) shall be amortized on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate.

Pending Content (Transition Guidance: ASC 805-60-65-1)

35-63 Goodwill relating to each business combination, acquisition by a not-for-profit entity, joint venture formation, or reorganization event resulting in fresh-start reporting (amortizable unit of goodwill) shall be amortized on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate.

35-64 An entity may revise the remaining useful life of goodwill upon the occurrence of events and changes in circumstances that warrant a revision to the remaining period of amortization. However, the cumulative amortization period for any amortizable unit of goodwill cannot exceed 10 years. If the estimate of the remaining useful life of goodwill is revised, the remaining carrying amount of goodwill shall be amortized prospectively on a straight-line basis over that revised remaining useful life.

Recognition and Measurement of a Goodwill Impairment Loss

35-65 Upon adoption of this accounting alternative, an entity shall make an accounting policy election to test goodwill for impairment at the entity level or the reporting unit level. An entity that elects to perform its impairment tests at the reporting unit level shall refer to paragraphs 350-20-35-33 through 35-38 and paragraphs 350-20-55-1 through 55-9 to determine the reporting units of an entity.

When to Test Goodwill for Impairment

35-66 Goodwill of an entity (or a reporting unit) shall be tested for impairment if an event occurs or circumstances change that indicate that the fair value of the entity (or the reporting unit) may be below its carrying amount (a triggering event). Paragraph 350-20-35-3C(a) through (g) includes examples of those events or circumstances. Those examples are not all-inclusive, and an entity shall consider other relevant events and circumstances that affect the fair value or carrying amount of the entity (or of a reporting unit) in determining whether to perform the goodwill impairment test. For those entities that have elected the accounting alternative for a goodwill impairment triggering event evaluation in paragraph 350-20-35-84, a goodwill triggering event evaluation shall be performed only as of the end of each reporting period. If an entity determines that there are no triggering events, then further testing is unnecessary.

The Goodwill Impairment Test

35-67 Upon the occurrence of a triggering event, an entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the entity (or the reporting unit) is less than its carrying amount, including goodwill. Paragraph 350-20-35-3C(a) through (g) includes examples of those qualitative factors.

35-68 Because the examples included in paragraph 350-20-35-3C(a) through (g) are not all-inclusive, an entity shall consider other relevant events and circumstances that affect the fair value or carrying amount of the entity (or of the reporting unit) in determining whether to perform the quantitative goodwill impairment test. An entity shall consider the extent to which each of the adverse events and circumstances identified could affect the comparison of its fair value with its carrying amount (or of the reporting unit’s fair value with the reporting unit’s carrying amount). An entity should place more weight on the events and circumstances that most affect its fair value or the carrying amount of its net assets (or the reporting unit’s fair value or the carrying amount of the reporting unit’s net assets). An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that its fair value is less than its carrying amount (or the fair value of the reporting unit is less than the carrying amount of the reporting unit). If an entity has a recent fair value calculation (or recent fair value calculation for the reporting unit), it also should include that calculation as a factor in its consideration of the difference between the fair value and the carrying amount in reaching its conclusion about whether to perform the quantitative goodwill impairment test.

35-69 An entity shall evaluate, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount. None of the individual examples of events and circumstances included in paragraph 350-20-35-3C(a) through (g) are intended to represent standalone events or circumstances that necessarily require an entity to perform the quantitative goodwill impairment test. Also, the existence of positive and mitigating events and circumstances is not intended to represent a rebuttable presumption that an entity should not perform the quantitative goodwill impairment test.

35-70 An entity has an unconditional option to bypass the qualitative assessment described in paragraphs 350-20-35-67 through 35-69 and proceed directly to a quantitative calculation by comparing the entity’s (or the reporting unit’s) fair value with its carrying amount (see paragraphs 350-20-35-72 through 35-78). An entity may resume performing the qualitative assessment upon the occurrence of any subsequent triggering events.

35-71 If, after assessing the totality of events or circumstances such as those described in paragraph 350-20-35-3C(a) through (g), an entity determines that it is not more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount, further testing is unnecessary.

35-72 If, after assessing the totality of events or circumstances such as those described in paragraph 350-20-35-3C(a) through (g), an entity determines that it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount or if the entity elected to bypass the qualitative assessment in paragraphs 350-20-35-67 through 35-69, the entity shall determine the fair value of the entity (or the reporting unit) and compare the fair value of the entity (or the reporting unit) with its carrying amount, including goodwill. A goodwill impairment loss shall be recognized if the carrying amount of the entity (or the reporting unit) exceeds its fair value.

35-73 A goodwill impairment loss, if any, shall be measured as the amount by which the carrying amount of an entity (or a reporting unit) including goodwill exceeds its fair value, limited to the total amount of goodwill of the entity (or allocated to the reporting unit). Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying amount of the entity (or the reporting unit), if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss. See Example 2A in paragraph 350-20-55-23A for an illustration.

35-74 The guidance in paragraphs 350-20-35-22 through 35-27 shall be considered in determining the fair value of the entity (or the reporting unit).

35-75 The guidance in paragraphs 350-20-35-39 through 35-44 shall be considered in assigning acquired assets (including goodwill) and assumed liabilities to the reporting unit when determining the carrying amount of a reporting unit.

35-76 For an entity subject to the requirements of Topic 740 on income taxes, when determining the carrying amount of an entity (or a reporting unit), deferred income taxes shall be included in the carrying amount of an entity (or the reporting unit), regardless of whether the fair value of the entity (or the reporting unit) will be determined assuming it would be bought or sold in a taxable or nontaxable transaction.

35-77 The goodwill impairment loss, if any, shall be allocated to individual amortizable units of goodwill of the entity (or the reporting unit) on a pro rata basis using their relative carrying amounts or using another reasonable and rational basis.

35-78 After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis, which shall be amortized over the remaining useful life of goodwill. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.