Accounting for Mergers and Acquisitions: Private Companies Welcome Simplified M+A Reporting

Last year was the hottest year for mergers and acquisitions (M+As) since the recession began. Many companies are expected to join the bandwagon in 2015, thanks to healthy cash reserves, improved growth prospects, greater access to financing and a large number of baby boomers in search of exit strategies. As an added bonus, the Financial Accounting Standards Board (FASB) simplified the reporting requirements for private deals.

New rule may sweeten the deal

On December 23, 2014, FASB issued Accounting Standards Update (ASU) No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This update exempts private companies from recognizing noncompetition agreements and certain customer-related intangible assets separately when they buy or merge with another company. Instead, companies can simply combine these hard-to-value items with goodwill, which is the residual asset recognized in a business combination after recognizing all other identifiable assets acquired and liabilities assumed.

However, intangibles that can be sold or licensed independently from other assets of the business — such as mortgage servicing rights, commodity supply contracts, core deposits and customer information — will continue to be separately recognized. 

The changes will be effective for deals entered into during fiscal years that begin after December 15, 2015. But many companies are expected to adopt it sooner. Once elected, a company must apply the accounting alternative to all future transactions.

Simplification is ongoing

In January 2014, FASB approved ASU 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Effective for annual periods beginning after December 15, 2014, this alternative allows private companies that acquire goodwill and other indefinite-lived intangible assets in a business combination to elect to amortize them straight-line over 10 years or less, if the borrower can justify a shorter useful life. This alternative reporting method eliminates the need to test goodwill annually for impairment.

A private company that elects to combine noncompetes and certain customer-related intangibles with goodwill under ASU 2014-18 must adopt the alternative to amortize goodwill under ASU 2014-02. But the reverse does not apply. Because borrowers will tend to implement these alternative methods in tandem, lenders should know that adoption will result in fewer unexpected impairment write-offs. Instead, amortization of goodwill creates a consistent, predictable method of writing goodwill off the balance sheet.

Stay tuned

Private companies applaud FASB’s simplification measures as a way to minimize unnecessary costs and complexity related to reporting M+A deals. FASB is currently deciding whether it makes sense to extend these options to public companies and nonprofits.

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