Accounting for Acquired Intangible Assets (#189)
/In this podcast episode, we discuss the new accounting standard relating to the accounting for intangible assets in a business combination. Key points made are noted below.
The Amortization of Goodwill
If you elect to amortize goodwill, then there is an option to stop separately recognizing some kinds of intangible assets. The first kind is noncompetition agreements. The second kind is customer-related intangible assets, unless they can be sold or licensed – which is unlikely. It is difficult to place a value on these types of assets, which means that someone reading the balance sheet of a company that has recognized these assets tends to ignore them. In short, no one thinks they’re real assets.
Rules for the Treatment of Acquired Assets
Under the old rules, if your business acquires another entity, it’s usually necessary to bring in a valuation expert who figures out what these intangible assets are worth. Then you record these manufactured assets as separate assets, and amortize them over time. And the outcome is just a number that’s stuck on the balance sheet. No one really cares if you now have an asset called customer relationships that’s worth a million dollars. In short, the acquirer pays a lot of money to create an unusable asset.
With the new standard, these types of intangible assets are shifted back into goodwill, which is probably where they should have been all along. And once they’re in goodwill, they’re subject to the standard amortization period, which is ten years or less.
The new standard does not apply to existing intangible assets. So any of those intangibles that are already on the books have to stay there, and you should continue to amortize them.
There is not much of a downside to this new standard. A private company will now spend less money on valuation experts, the accounting staff will spend less time tracking intangible assets, and the balance sheet will look a bit cleaner.
However, if there’s any reason to believe that a privately held company is going to go public in the next few years, then avoid this option. Since it only applies to privately held companies, going public means that you’d have to recast prior financial statements to include those intangible assets that you’ve previously avoided.