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20Aug2015

Goodwill Accounting for Private Companies

Last winter, private companies received a beneficial accounting update as a recommendation from the Private Company Council (PCC). On December 23, 2014, with thanks to the PCC, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014 -18. The new update gives private companies an alternative for recognizing intangible assets such as trademarks, business methods and patents. It should be noted that favorable contracts are also intangible assets, and therefore lie within the scope of ASU 2014-18. Unfavorable assets are liabilities, and remain outside of ASU’s guidelines.

The alternative accounting methods are recognized in (1) a business combination, (2) investments in the equity method, and (3) When a company begins fresh-start accounting. Business combination accounting will not be as complex as in previous years.

Updates to Main Provisions

Businesses that choose the update, will identify fewer tangible assets than companies who do not employ the new tax guidelines. Currently, companies purchase assets in combinations at fair market value. The market values are determined by the Accounting Standards Codification (ASC) under the FASB. The ASU update will provide useful financial information for decision-makers, without extra money being spent on estimating the fair value of intellectual property and other intangible assets. Intangible assets that cannot be sold or licensed independently will continue to be recognized under the Generally Accepted Accounting Principles (GAAP). Disclosures practiced under the GAAP, will continue to provide necessary information without the extra associated costs from the complexities of estimating fair value on intangible assets.

Goodwill is a big plus for the new update. Assets such as Non-Compete Agreements would no longer be separately recognized if within the scope of the ASU. Therefore, goodwill will be acknowledged more frequently. Some companies have huge stakes in their trademarks, logos and other branding identifications. These items may be accounted for at less costly measures.

Starting (Effective) Date

Entities adopting the update, would apply the new accounting rules to eligible transactions in the annual period that begins after December 15, 2015. Early adoption is permitted. Existing consumer related intangible assets and Non-Compete Agreements, would still be defined by ASC 350, and not reclassified or subsumed into goodwill.

Prepared for an Audit?

Significant impacts should be considered for businesses planning to adopt this new alternative. Some businesses may default to the requirements of a public business entity. There are currently no requirements on how a private company using the alternative would transition to public business entity requirements. Companies may need to resubmit their financial records. The resubmission of assets to goodwill can be very cumbersome if previous financial records are no longer available.

Applying the ASU alternative should not be handled alone. Business entities should consider seeking expert advice. Pogosian & Company, CPA, is a firm specifically suited for ASU alternatives and other tax audit assistance. Pogosian & Company was founded by a former IRS agent experienced in big and small business transactions. Do not handle any serious business tax law transactions alone. Let our team guide your business through the necessary procedures. This will save you time and other resources from being wasted with unnecessary audits.

  • 20 Aug, 2015
  • Pogosian CPA
  • 0 Comments

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