The Private Company Council (PCC) recently voted to provide private companies an alternative for identifying certain intangible assets acquired in a business combination. In their continuing effort to simplify the accounting requirements for private companies, on September 14, 2014 the PCC reached a consensus which would allow private companies that enter into a business combination to no longer be required to separately recognize the following intangible assets:
- Non-competition agreements
- Assets that are not typically capable of being independently sold or licensed
Question: Will this change the scope of your company’s valuation? Answer: It might.
If this alternative is chosen, private company acquirers will only be required to value intangible assets that arise from non-cancelable contracts or other legal rights. Other intangible assets which are not typically capable of being independently sold or licensed, such as non-competition agreements, non-contractual customer-related intangible assets and unpatented technology, may be included in goodwill. Other common intangibles such as trade names, patents and contractual customer relationships will still need to be valued and recorded separate from goodwill.
Question: Does this mean that private companies will no longer need to value their non-contractual assets? Answer: Not necessarily.
There are circumstances when a private company may still value their non-contractual assets and non-competition agreements. For instance:
- If a private company is expecting to go public in the future, either by an IPO or acquisition by a public company, they may decide to maintain conformity with public company GAAP and value all the intangible assets rather than choosing the alternative.
- If any of the contractual- related intangible assets are being valued using the multi-period excess earnings method (“MPEEM”) then non-competition agreements and non-contractual customer relationships are often considered contributory assets that may need to be valued to determine the value of the contractual-related intangible asset.
While the PCC voted to allow private companies to have this alternative for identifying intangible assets, the FASB must endorse the proposal before it becomes effective. The alternative would not be available for public companies or not-for-profit entities and current disclosures required under ASC Topic 805, Business Combinations, would still be required.