ASU 2014-18: Accounting for Intangibles in a Business Combination

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-18 to provide an alternative accounting method. This guidance was developed to reduce the cost and complexity for private companies when they account for acquisitions, as standard accounting for identifiable intangible assets was seen as too burdensome. It allows these entities to simplify their accounting by not separately recognizing specific intangible assets from goodwill.

Eligibility for the Accounting Alternative

The option to apply the accounting alternative provided by ASU 2014-18 is available to entities that are not classified as “public business entities.” An entity is generally considered a public business entity if it is an SEC filer, has securities traded on a public exchange, or is a conduit bond obligor for securities that are traded in a public market. The alternative is also available to not-for-profit organizations, which were granted this eligibility through ASU 2019-06.

The Core Accounting Simplification

The central provision of ASU 2014-18 allows an eligible company to make an accounting policy election to no longer recognize certain intangible assets separately from goodwill during a business combination. This simplification specifically targets customer-related intangible assets and noncompete agreements. When this election is made, the value of these assets is included within the total value of goodwill recorded on the balance sheet.

For customer-related intangibles, this includes assets such as customer lists, order backlogs, and established customer relationships. The alternative specifies that these assets are not recognized separately unless they are capable of being sold or licensed independently from the other assets of the business. Similarly, all noncompete agreements acquired in the transaction are automatically grouped into goodwill under this election.

This simplification does not apply to all intangible assets. Other identifiable intangibles, such as patents, trademarks, favorable lease agreements, or certain customer assets like mortgage servicing rights, must still be recognized separately at their fair value if they meet the standard recognition criteria. The election only changes the accounting for the specified customer-related assets and noncompete agreements, resulting in fewer separately identified intangibles and a correspondingly higher goodwill balance.

Goodwill Amortization Under the Alternative

A direct and mandatory consequence of electing the intangible asset simplification under ASU 2014-18 is the requirement to adopt a different accounting model for goodwill. A company cannot choose the intangible simplification without also committing to the goodwill accounting alternative detailed in ASU 2014-02.

Under this required method, goodwill is no longer tested for impairment annually but is instead amortized, or expensed over time. The default amortization period is on a straight-line basis over 10 years. A company may use a shorter period if it can demonstrate that another useful life is more appropriate, but it cannot exceed the 10-year ceiling without specific justification.

This alternative also simplifies how companies test for a reduction in the value of goodwill, known as impairment. Instead of a complex annual two-step test, a company only assesses goodwill for impairment when a “triggering event” occurs. A triggering event is a situation or change in circumstances that indicates the fair value of the entity might be below its carrying amount. The impairment test itself is also simplified and can be performed at the overall entity level or at the reporting-unit level.

Adoption and Disclosure Requirements

Adopting the accounting alternative is a policy election that a company makes when it enters into its first eligible transaction, such as a business combination. Once made, the policy must be applied to all future acquisitions.

When a company elects the simplification under ASU 2014-18, it must provide specific disclosures in the footnotes to its financial statements. The company must clearly state that it has elected the accounting alternative for intangible assets. This disclosure informs financial statement users that certain assets, which would be recognized under standard U.S. GAAP, are included within the goodwill balance.

Further disclosures include the amortization period for goodwill, which is typically 10 years. The company must also disclose the weighted-average amortization period for the entire group of intangible assets that were subsumed into goodwill. These disclosures provide transparency and allow users of the financial statements to understand the impact of the accounting policy election on the company’s balance sheet and income statement.