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Intangible Assets & Goodwill for SFAS 141R & 142
Statement of Financial Accounting Standards (SFAS) 141 and 142 were enacted by the Financial Accounting Standards board (FASB) in recent years. SFAS 141 requires all companies to account for business combinations using the purchase method (the pooling method was eliminated). Furthermore, all intangible assets can no longer be “lumped” into goodwill but instead all intangible assets acquired that are identifiable and have a finite life must be assigned a value and amortized over their estimated useful life. The value remaining after identification and valuation of all tangible and intangible assets is then assigned to goodwill. Goodwill, however, is then subject to periodic impairment reviews under SFAS 142.
Statement of Financial Accounting Standard (SFAS) 141R, effective for fiscal years beginning after December 15, 2008, is designed to improve, simplify and converge internationally the accounting for business combinations. SFAS 141R supersedes SFAS 141 and enhances the accounting for, and valuation aspects of, business combinations, and, now, other change of control events. 141R requires contingent assets and liabilities to be recorded at their fair values as of the acquisition date. In addition, 141R requires capitalization of IPR&D—technology that’s in process as of the acquisition date but not fully developed. IPR&D will be considered an indefinite-lived intangible asset until it becomes developed, at which point a life will be assigned.
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).
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)
An assembled workforce is categorized within the components of goodwill because it fails the separability and transferability test. Intangible assets which have an identifiable useful life must be identified and separated from intangible assets which do not have an identifiable remaining useful life. SFAS 142 tests for impairment of goodwill and indefinite-lived intangible assets (such as a trade name) for which a useful life may not be readily estimated.
SFAS 144 (Accounting for the Impairment or Disposal of Long-Lived Assets) governs the impairment testing for definite-lived intangible (and tangible) assets, which are subject to amortization in the years following the acquisition.
There are now nearly three dozen FASB statements that mention fair value, and SFAS 157 (Fair Value Measurements), effective for fiscal years beginning after November 15, 2007, attempts to clarify these by: (a) defining fair value, (b) establishing a framework for measuring fair value in GAAP, and (c) expanding disclosures about fair value measurements.
The definition of fair value as stated in SFAS 157 is:
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.
This definition still raises questions regarding “market participants” and “orderly transaction,” but in general, SFAS 157’s definition of fair value is now much closer to fair market value, the standard of value mostly commonly used in the business valuation field. 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. Our experienced valuation specialists 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.