CFOs and other top execs should anticipate a big learning curve when they finally begin implementing FASB’s proposed changes to the goodwill accounting rules, many of which are still ambiguous.
The new rules for treating goodwill and other intangible assets acquired from business combinations are expected to go into effect as early as the quarter beginning July 1. But clearly, FASB’s Revised Exposure Draft has some kinks that will first have to be worked out over the next four months.
FASB has said that companies don’t have to amortize intangibles other than goodwill if they can prove that the assets don’t have a determinable useful life.
Lehman Brothers tax and accounting guru Bob Willens says FASB has yet to detail the accounting treatment for certain intangibles, particularly what he calls “self-perpetuating assets,” such as customer lists from a merger or acquisition.
Or the assets of an assembled workforce. “That to me is where a lot of the action will be,” says Willens. “When you’re acquiring a high-tech company or skilled personnel, that’s sometimes one of the largest assets.”
The same question surrounds other intellectual property, including subscriber lists and client files. “Some people believe that brand names that show long staying power should qualify [for exemption from amortization],” adds Raymond Beier, partner at PricewaterhouseCoopers. But, he points out, “It’s not necessarily clear. [It depends upon] how this statement gets implemented.”
Rather, FASB lists just broadcast licenses, taxicab medallions and airport landing rights as assets that would not have to be amortized.
Why not more? Every company’s review of their assets will be different. “We’re giving you guidelines, and companies have to apply them,” says Kim Petrone, FASB project manager. “We can’t give you a different list for each company of which [intangible] will fall where.”
That said, Petrone says it is unlikely that FASB will do more than possibly add a few intangibles to the list. For the most part, companies will have to make individual interpretations of their acquired assets.
Willens is troubled with this prospect. “I’m scared that FASB won’t look at all the learning and knowledge that’s been gained in the tax area,” he says. “All of that has been addressed scores of times [in the past] in the tax world and pretty much in every case [it has been determined] that they [intangible assets] don’t have a determinable useful life.”
For instance, customers come and go, but the larger asset [the customer lists themselves] don’t terminate and therefore do not need amortization. “I hope FASB takes that into consideration,” Willens adds. “It’s the same criteria.”
However, Willens says most accountants he speaks with assume that everything has to be amortized.
Indeed, FASB’s Petrone confirms his biggest fears. “I think most intangible assets would have a defined life,” she says.
Petrone also disagrees with Willens’ belief that a customer list does not terminate. “The customer list has a finite life,” she tells CFO.com. “You can’t presume you’re going to replace them with another customer.”
Petrone says that in order for an asset to qualify to be listed separately from goodwill and therefore not have to be amortized, it has to meet either of the following criteria:
- Control over the future economic benefits of the asset is obtained through contractual or other legal rights (regardless of whether those rights are transferable or separable from other rights and obligations).
- The asset is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged (regardless of whether there is an intent to do so or whether a market exists for that asset).
“Assembled workforce doesn’t meet either of those two criteria,” Petrone adds. She admits, however, that those details are listed under Appendix A in the “Tentative Decisions” on FASB’s site, rather than the new exposure draft.
The comment period for the revised exposure draft expires on March 16. At this point, FASB hasn’t received many responses. Notes Petrone one day earlier this week, “We just got our first batch this morning.”