FASB Rule Changes to Impact Values of Intangible Assets

Goodwill and other intangible assets are an increasingly important economic resource for many businesses, and can be significant components of an enterprise's balance sheet. Recent changes to the Financial Accounting Standards Board's (FASB) rules regarding intangible assets may have a material effect on the carrying values of intangible assets, and consequently, on shareholders' equity.

The FASB has issued two new pronouncements: Statement on Financial Accounting Standards (SFAS) No. 141 - Business Combinations, and SFAS No. 142 - Goodwill and Other Intangible Assets. These new pronouncements have been implemented in response to the need for improved accounting standards regarding business combinations and the carrying value of intangible assets.

Under SFAS 141, the pooling of interests method of accounting has been eliminated in favor of the purchase method of accounting for all business combinations. It also provides criteria regarding the identification, valuation and evaluation of the useful lives of intangible assets other than goodwill, and guidelines regarding the allocation of the purchase price among the newly acquired assets and liabilities. SFAS 141 defines an intangible asset (other than goodwill) as:

• An asset arising from a contractual or legal right, such as a patent, trademark or copyright
• An asset other than contractual that can be sold, transferred, licensed, rented or exchanged individually or in combination with a related contract, asset or liability.

The identifiable intangible assets owned or acquired in a business combination may include items such as customer lists or relationships, trademarks, patents, software, in-process research and development, specialized know-how, etc.

Under SFAS 142, goodwill and other intangible assets with indefinite lives will no longer be amortized. Rather, they will be subject to impairment of value testing on at least an annual basis. SFAS 142 requires businesses to perform impairment testing within each "Reporting Unit" (similar to an operating segment) of a business. That statement also requires the evaluation of the remaining useful lives of identifiable intangible assets on at least an annual basis.

It is important to note that these changes will affect the accounting treatment of current and future business combinations, as well as any residual (unamortized) goodwill and other intangible assets from prior acquisitions. Given the current economic climate, the Securities & Exchange Commission, lenders and other users of financial statements are likely to scrutinize the accounting for past, present and future business combinations. A well researched and fully documented valuation report is a wise investment that should be considered an integral component of any business combination. Further, a valuation report will provide the requisite support for intangible assets as presented in a company's financial statements.

Alpern Rosenthal has developed a committed team of experts who are well versed in the specific nuances and requirements of SFAS 141 and 142, as well as general valuation theory and practice.

If you require assistance, or if you have specific questions or comments, please do not hesitate to contact James B. Hankins, CPA/ABV, CVA, BVAL, a Shareholder in our Business Valuation and Litigation Support Services Group, at 412.281.2501, ext. 423.