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Private Company Council amendment: Simpler accounting rules may pave the way for business acquisitions

Mar 27, 2022

Smaller firms that have avoided pursuing acquisitions because of onerous accounting rules need to be aware of an option that helps streamline the process and reduce costs.

Given the current strength of the acquisitions market, many firms may come to see how they can take advantage of purchase price allocation rules related to accounting of identifiable intangible assets in a business combination that are far simpler now than they were a decade ago. After all, with interest rates still comparatively low, financing opportunities continue to be abundant.

The Private Company Council (PCC), the primary advisory body to the Financial Accounting Standards Board (FASB) on issues related to private companies, introduced an amendment in 2014 (Accounting Standards Updates (ASU) 2014-18) that revised the accounting for identifiable intangible assets in a business combination. The council aimed to reduce costs and complexity associated with the measurement of certain identifiable intangible assets for small, privately held companies seeking to make acquisitions.

Further, an entity that elects this accounting alternative must also adopt the private company alternative to amortize goodwill (ASU 2014-02). In May 2019, the FASB issued ASU 2019-06, extending the private company accounting alternatives on goodwill and certain identifiable intangible assets to nonprofit entities. They were endorsed by the FASB and are now reflected in generally accepted accounting principles (GAAP).

If you weren’t actively looking into an acquisition as part of a growth strategy, it would be easy to have missed this significant change and its impact on a potential acquisition for your business. And market conditions for acquisitions have only grown more favorable for companies of all sizes since the purchase price allocation rule’s implementation.

These rules apply to business combinations that are accounted for in accordance with the guidance within Accounting Standard Codification (ASC) 805 Business Combinations (ASC 805).

Updated standards

Here’s how key points under ASU 2014-18 and ASU 2014-02 may help sway your decision about an acquisition:

  • Certain intangible assets, including customer relationships and non-compete agreements, may now be counted as goodwill and are not subject to separate valuations. Without this option under the PCC amendment, an entity would have to recognize all the assets and liabilities at their acquisition date fair values, including all the intangible assets that are identifiable.

     

  • Existing goodwill can be amortized on a straight-line basis over 10 years, or less than 10 years if the company demonstrates that a shorter useful life of this intangible asset is more appropriate. Without this option under the PCC amendment, the goodwill would have to be tested for impairment every year, a formidable hurdle for many smaller businesses. Most would have determined it was not worth the cost and effort to show every year whether the company they purchased was worth less than in the year they bought it unless a triggering event occurs in the company.

With fewer intangible assets needing to be valued and no annual goodwill impairment test required under the new rules (unless a triggering event occurs), many companies will have an easier time with the decision to go forward with an acquisition.

Limitations of PCC amendment (ASC 2014-18)

Keep in mind that the election of the PCC amendment is not appropriate or even permitted for all companies. It is not available for public companies. It may not make sense if your company is contemplating an initial public offering or looking for a sale to a public entity.

How Wipfli can help

While the benefits of making the PCC election are significant for many smaller companies, not all are a good candidate. Wipfli professionals can discuss acquisition and valuation processes with you and the merits of making the PCC election for acquisition as it applies to your company. Being aware of your options will help you shape the right growth strategy for your company.

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Author(s)

Francis P. Egan, CFA, ASA
Senior Manager, Valuation Litigation and Transaction Services
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Megha Jain, CFA, ABV
Manager
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