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Ext. PublicationASC 805 Business Combinations: Private Company Alternatives
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In today’s active merger and acquisition (M&A) environment, accounting decisions made at close can have lasting implications for private company reporting, valuation and deal economics. ASC 805 can introduce significant complexity in recognizing and measuring intangible assets and goodwill, often requiring extensive valuation work, additional costs and ongoing compliance considerations.
Recognizing this, the Financial Accounting Standards Board (FASB) introduced private company alternatives through ASU 2014-18 and ASU 2014-02 to reduce costs and streamline reporting without compromising decision-useful information. These alternatives allow eligible entities to subsume certain intangibles into goodwill and amortize goodwill over time, easing the burden of fair value measurements and impairment testing.
Understanding how these options work and when they make strategic sense can help organizations control costs, simplify post transaction reporting and make more confident decisions as they pursue growth through acquisition.
Comparing Standard ASC 805 Business Combinations to Private Company Alternatives
The private company accounting alternatives notably change how certain intangible assets and goodwill are recognized, measured and disclosed in a business combination. The table below compares traditional ASC 805 and ASC 350 requirements with the private company options, highlighting differences that can impact valuation effort, reporting complexity and key financial statement metrics.
| Standard Guidance | Private Company Alternative | |
|---|---|---|
| Intangible Assets Recognition | Recognize all identifiable intangibles at fair value if contractual-legal or separable (ASC 805-20-25-1) | Do not recognize customer-related intangibles (unless sellable/licensable independently) or noncompetition agreements; subsume into goodwill (ASC 805-20-25-30) |
| Goodwill Subsequent Accounting | No amortization; annual impairment testing (ASC 350-20-35-1) | Amortize over 10 years (or less if appropriate); impairment only upon triggering events (ASC 350-20-35-63) |
| Impairment Testing | Two-step test: compare fair value to carrying amount, then implied fair value (ASC 350-20-35-2) | Simplified: MLTN assessment; loss limited to excess of carrying amount over fair value (ASC 350-20-35-71) |
| Disclosures | Detailed reconciliations and assumptions (ASC 350-20-50-1) | Similar, but no tabular reconciliation of goodwill changes (ASC 350-20-50-1) |
ASU 2014-18: Simplifying Intangible Assets in Business Combinations
Under ASU 2014-18, private companies can elect not to separately recognize customer-related intangible assets (unless capable of being sold or licensed independently) and all noncompetition agreements in a business combination (ASC 805-20-25-30). This subsumes them into goodwill, avoiding costly fair value assessments.
For example, customer lists that cannot be sold independently or noncompete covenants are included in goodwill rather than recognized separately. However, contract assets, leases and other separably identifiable intangibles (e.g., trademarks) are still recognized on their own.
To elect, companies must also adopt ASU 2014-02 for goodwill amortization. The election is prospective and irrevocable for future transactions.
ASU 2014-02: Accounting for Goodwill Amortization and Impairment
ASU 2014-02 allows private companies to amortize goodwill on a straight-line basis over 10 years or less if a shorter life is appropriate (ASC 350-20-35-63). It also simplifies impairment to a triggering-event-based model: test only when events suggest the entity’s fair value may be below carrying amount, using a more likely than not threshold (ASC 350-20-35-71). This eliminates annual testing and the complex two-step process, with impairment limited to the excess of carrying amount over fair value.
Why These Alternatives Matter for Private Companies
Electing these alternatives can cut valuation expenses and simplify reporting, especially for serial acquirers in private equity. However, they may increase amortization expense and reduce comparability with public peers. Weigh pros like cost savings against cons like potential EBITDA impacts before electing.
Private Companies Should Pay Close Attention
With private equity dry powder at historic levels and strategic buyers pursuing carve-outs, roll-ups and tuck-ins, adopting private company alternatives can trigger:
- Securities and Exchange Commission (SEC) comment letters or restatements when going public
- Audit fee overruns from scope creep
- Valuation disputes with investors or lenders
- Tax surprises (goodwill amortization vs. asset basis step-up)
Being deliberate about these decisions helps private companies reduce risk, streamline reporting and maintain deal economics without sacrificing transparency.
Weaver Can Help
Navigating ASC 805 alternatives requires careful analysis. Weaver’s accounting advisory and transaction teams are ready to guide you on elections, valuations and compliance. Contact us. We’ll help evaluate if these simplifications align with your goals.
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