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4.7 The intangible assets alternative (private companies/ NFPs)
Publication date: 15 Jun 2023
us Business combinations guide
In accordance with ASC 805-20-25-30, a private company/NFP entity may elect an alternative that simplifies the accounting for intangible assets acquired in a business combination. Under the intangible assets alternative, an acquirer other than a public business entity can make an accounting policy election not to recognize and measure: (a) customer-related intangibles (unless they are capable of being sold or licensed independent from the other assets of the acquired business) and (b) noncompetition agreements.
A private company/NFP entity that elects the intangible assets alternative should continue to separately recognize and measure customer-related intangible assets that are capable of being sold or licensed independently, as well as all other identifiable intangible assets (e.g., trade names). A private company/NFP entity that elects the intangible assets alternative on intangibles must also adopt the accounting alternative related to amortizing goodwill. See BCG 9.11 for further information. However, the opposite is not the case. That is, a private company/NFP entity can elect to adopt the goodwill accounting alternative without being required to adopt the intangible assets alternative.
The intangible assets alternative is available to private companies/NFP entities and applies when the entity is required to recognize or otherwise consider the fair value of intangible assets as a result of any one of the following qualifying transactions subsequent to the adoption of both accounting alternatives:
- Business combinations under ASC 805
- Investments in an equity method investee under ASC 323 with respect to intangible assets acquired (when assessing basis differences between the investor basis and the investee’s net assets)
- Fresh-start reporting under ASC 852 for reorganizations
Similar to other PCC alternatives, there is no effective date (also referred to as an “open-ended” effective date) for the intangible assets alternative; a private company/NFP entity has an unconditional one-time election to apply the alternative to prospective acquisitions, as long as the entity also adopts the goodwill amortization alternative. A private company/NFP entity that elects the alternative on intangibles for the first time does not need to justify that the use of the accounting alternative is preferable.
The guidance for intangible assets is required to be applied prospectively to all new acquisitions after adoption. That is, customer-related intangible assets and noncompetition agreement intangible assets that have been recognized in previously issued financial statements prior to the period of adoption of the accounting alternatives are not affected by the intangible assets alternative and should not be subsumed into goodwill.
Before electing any of the PCC alternatives, companies should consider the possibility of a future initial public offering (IPO) or a sale of the company to (or a significant ownership interest by) a public entity. The SEC staff has indicated that any changes in the entity’s status as a private company (e.g., as a result of an IPO), or if its financial statements are included in an SEC filing (e.g., subject to the requirements of SEC Regulation S-X Rule 3-05 upon acquisition as a significant subsidiary), would require the retrospective reversal of all elected private company alternatives. See FSP 30.4 for additional information on private companies assessing preferability.
Disclosures
The intangible assets alternative does not include any incremental disclosure requirements. ASC 805 disclosure requirements continue to apply to private companies/NFP entities electing the intangible assets alternative. Those disclosures include a qualitative description of intangible assets that do not qualify for separate recognition. Accordingly, while the fair value of certain intangible assets would not need to be determined by private companies/NFP entities, the nature of all acquired intangible assets should be described in the financial statement footnotes. See FSP 17.4.8 for additional information.
4.7.1 Customer-related intangible assets (private companies/NFPs)
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
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?
Analysis
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
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?
Analysis
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.
4.7.2 Noncompetition agreements under the intangible assets alternative
Noncompetition agreements are legal arrangements that generally prohibit another party (e.g., a person or business) from competing with the acquired business for a specified period of time. The intangible assets alternative allows private companies/NFP entities to subsume noncompetition agreements into goodwill, thereby eliminating the need to estimate their fair value. Private companies/NFP entities electing the intangible assets alternative would not recognize noncompetition agreements acquired in a business combination separate from goodwill.
The intangible assets alternative applies to noncompetition agreements acquired in a business combination, for example, those already in place between the acquired business and its employees at the acquisition date. The intangible assets alternative also applies to new noncompetition agreements when a reporting entity determines that such agreements were entered into concurrent with the business combination.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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