Private companies/NFP entities electing the intangible assets alternative would generally recognize and measure fewer customer-related intangibles separate from goodwill because most acquired customer contracts and relationships are not capable of being sold or licensed independent from other assets of the acquired business. Customer-related intangible assets that would not be recognized under the intangible assets alternative include non-transferable customer contracts (regardless of their duration, cancellability, or other terms) and non-transferable customer relationships (with or without outstanding contracts). Examples of customer-related intangible assets that would continue to be separately recognized include customer lists and information (e.g., contact information that is capable of being bought and sold), mortgage servicing rights, commodity supply contracts, and core deposits.
Example BCG 4-12 illustrates how a private company that has elected the accounting alternative for intangible assets would account for acquired customer relationships (an NFP entity would follow the same accounting treatment).
EXAMPLE BCG 4-12
Private company acquisition with customer relationships
Company A, a privately-held equipment manufacturer and servicer, acquired Company B in a business combination. Company B is in the same industry as Company A. Company B typically conducts business with its customers through purchase orders. Company B also has a five-year agreement with one of its customers to service equipment. The purchase orders are non-transferable (i.e., they must be fulfilled by Company B), and the five-year service agreement cannot be transferred to a third party without the consent of the customer. Company A has elected the private company alternative for intangible assets.
How should Company B account for the acquired customer relationships?
The acquired customer relationships arising from the purchase orders and the service agreement cannot be sold independent from other assets of the business. Essentially, the value of these intangibles would be subsumed into goodwill. If Company A had not elected the alternative, it would have had to separately recognize the customer relationship intangibles at their acquisition date fair values, apart from goodwill.
The intangible assets alternative is likely to have less of an impact in industries in which customer information is capable of being independently sold or exchanged (such customer information is often referred to as customer lists). In these cases, the customer lists should continue to be recognized and measured apart from goodwill.
Example BCG 4-13 illustrates how a private company that has elected the accounting alternative for intangible assets would account for acquired customer lists (an NFP entity would follow the same accounting treatment).
EXAMPLE BCG 4-13
Private company acquisition of an online apparel business with customer lists
Company C, a privately-held apparel business, acquired Company D, an online apparel business. The acquired business includes identifiable intangibles, including Company D’s trade name, technology, and customer lists. Customer lists include known information about its preferred customers, such as customer names, contact information, and order histories. Some preferred customers consented to the sale of their information to third parties, while others have not. Company D makes regular contact with all of its preferred customers. Company C has elected to apply the private company alternative for intangible assets.
How should Company C account for the acquired customer lists?
In addition to the trade name and technology intangibles, Company C should recognize and measure the fair value of Company D’s customer lists that can be independently sold or exchanged (i.e., information about customers that gave their consent) as a separate intangible. The expected selling price of the customer lists typically would approximate the related intangible’s fair value. The customer information that cannot be sold, whether due to lack of customer consent or other restrictions, would not be recognized and measured separate from goodwill.
If Company C had not elected the private company alternative, in addition to the customer lists, it also would have recognized and measured an intangible for its ability to generate future cash flows from the sale of the apparel to preferred customers (i.e., customer relationship intangible).
Companies often do not distinguish between customer relationships and customer lists relating to the same group of customers when measuring their acquired intangible assets; a single intangible asset is often recognized for both. Private companies/NFP entities electing the intangible assets alternative would need to consider the recognition and fair value of customer lists separate from customer relationships since, unlike customer lists, customer relationships cannot be sold independent from other assets.
The intangible assets alternative indicates that unfavorable customer contracts (for example, a customer contract with forecasted costs in excess of revenues over the term of the contract) should continue to be recognized as liabilities at fair value. Even if a customer contract has certain terms that are unfavorable relative to market, the overall value of the customer contract could still be in a net asset position. In that case, a private company/NFP entity electing the intangible assets alternative would recognize neither a customer contract intangible asset nor an unfavorable contract liability.
The intangible assets alternative does not apply to acquired contract assets that represent rights to consideration in exchange for goods or services that have been transferred prior to the acquisition date, and would eventually be reclassified as a receivable. Furthermore, the intangible assets alternative does not apply to leases. Thus, right-of-use assets and liabilities and favorable and unfavorable lease terms should continue to be recognized and measured separate from goodwill.