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.
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 alternative 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.
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.
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.
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.
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.