Question

Answer the questions using ASC code

What is the meaning of the term “Goodwill” acquired in a business combination?

What is Goodwill, and how is Goodwill measured at the acquisition date?

What two criteria are used by the FASB to recognize "identifiable" intangible assets which are reported separately from Goodwill?

Answer 1

ASC 805-20-25-10 offers specific guidance on identifying intangible assets: to be identified separately on the balance sheet, an intangible asset acquired in a business combination must first meet the general definition of an asset. ASC 805-20-25-2 refers directly to the definition of assets given in Concept Statement 6. ASC 805-20-25-3 reflects the concept of “future economic benefits obtained as a result of past transactions,” and requires that intangibles separately identified must be part of what the acquirer and the acquiree exchanged in the business combination, rather than the result of separate transactions.

In addition, ASC 805-20-25-10 points out that an asset is separately identifiable if it meets either one of two criteria:

• The intangible asset is separable—that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, regardless of whether the entity intends to do so.
• The potential future economic benefit of the asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity.

In sum, identifiability for intangible assets requires the satisfaction of either the separability criterion or the contractual-legal criterion.

The value of acquired intangible assets that are not separately identifiable as of the acquisition date should be subsumed into goodwill. In the implementation guidance, ASC 805-20-55-6 gives an example of a non-identifiable intangible: an assembled workforce acquired in a business combination. Because an assembled workforce cannot be sold or transferred separately from the other assets in the business, any value attributed to it is subsumed into goodwill.

The process of identifying intangibles acquired in business combination involves a due diligence review of the acquired company to obtain an understanding of the business and the resources it depends upon to generate profits. The idea is to identify the resources that are likely to be the primary sources of the company’s cash flows in the future. The primary driver of value in the entity depends upon the nature of the business. For example, in the food and beverage business, the main driver of value is most likely marketing-related assets, such as a brand name or trademark. For some technology companies, however, profit is generated via contract-related assets, such as licensing or royalty contracts on products or processes owned by other companies. The next step is to identify secondary resources that generate revenue for the business, either in conjunction with primary resources or as stand-alone revenue-generating assets.