FASB’s Accounting Standards Codification (ASC) 805, Business Combinations, and ASC 350, Goodwill and Intangible Assets drive the valuation of intangible assets acquired in a business combination. ASC 805 requires all business combinations to be evaluated using the purchase method of accounting, and it specifically prohibits use of the pooling-of-interests method. It also provides recognition criteria for intangible assets other than goodwill, along with general guidelines for assigning values to assets acquired and liabilities assumed.
Under FASB ASC 820, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Under this definition, fair value is an exit price from a market participant perspective.
An intangible asset is recognized as an asset apart from goodwill if it arises from contractual or legal rights, such as a patent or trademark, or if it is separable, such as if it can be sold, transferred, licensed, rented or exchanged (either separately or if it can be paired with a related contract, asset or liability). An assembled workforce is categorized within the components of goodwill because it fails the separability and transferability test.
Examples of intangible assets that meet these criteria are:
- Marketing-related: trademarks, trade names, trade dress, Internet domain names
- Customer-related: customer lists, order backlog, customer relationships
- Artist-related: plays, books, videos, musical works
- Contract-based: licensing rights, supply contracts, leases, franchise rights
- Technology-based: patents, software, databases, trade secrets, IPR&D (in-process research and development)
Under ASC 805, parties to a business combination are required to estimate the fair value of acquired intangible assets in the following manner. First, intangible assets must be categorized by type, such as customer lists, trademarks, patents, software, intellectual property, etc. Second, intangible assets with an identifiable remaining useful life must be separated from those with an indefinite useful life. The latter are then classified with goodwill, which is subject to test for impairment under ASC 350.
ASC 805 requires an acquirer to recognize all of the assets acquired and all of the liabilities assumed, as well as any minority (that is, non-controlling) interest (in acquisitions of less than 100 percent of the target company’s stock), at their respective fair values at the acquisition date. ASC 805 requires acquisition related costs to be accounted for separately from the acquisition, and expensed as incurred.
An appraiser must understand FASB’s various pronouncements on fair value to properly handle the nuances of intangible asset and goodwill valuation for financial reporting. Center Point ensures that our written reports comply with relevant accounting standards, SEC reporting requirements, AICPA practice guides, and IRS regulations. We hold the requisite qualifications to satisfy the requirements under the Statement on Auditing Standards 73, Using the Work of a Specialist and have participated in a number of SAS 73 reviews.