Skip to main content
Rehmann
Rehmann
Solutions
Industries
Resources
About Us

Reporting inseparable customer relationships with goodwill

October 31, 2022

Contributors: Thomson Reuters

On March 2, the Financial Accounting Standards Board (FASB) tentatively voted to require public companies to subsume all customer relationships that can’t be separated into goodwill. This change inches the rules for public companies toward what private companies can now do.

Current rules

In mergers and acquisitions, how you divvy up the selling price among acquired assets and liabilities can have important financial reporting consequences after a deal closes. Under Accounting Standards Codification Topic 805, Business Combinations, purchase price allocations start with the recognition of tangible and “identifiable” intangible assets and liabilities. A seller’s balance sheet tells only part of the story.

Various intangible assets and contingencies may be excluded from the financial statements. Examples include internally developed brands, patents and customer lists, along with environmental claims and pending lawsuits. Overlooking identifiable assets and liabilities often results in inaccurate reporting of goodwill from the sale.

Currently, private companies can elect to combine noncompete agreements and customer-related intangibles with goodwill. If this alternative is used, it specifically excludes customer-related intangibles that can be licensed or sold separately from the business.

FASB decision

The FASB’s tentative decision for public companies would apply to both contractual and noncontractual customer relationships that are inseparable, a change from current rules. Today, only contractual customer relationships are separated under U.S. Generally Accepted Accounting Principles.

Goodwill is the residual figure that is recorded on the balance sheet after subtracting the book value of a business from the higher price that was paid for it. Overall, the decision could mean that the initial goodwill balance from an acquisition would be larger than under the current rules.

FASB research found that generally investors don’t distinguish between goodwill and intangible assets. However, views on the topic differ.

The discussions

The change is part of the FASB’s ongoing efforts to revise the subsequent accounting for goodwill for public companies. Members deliberated on whether an intangible asset acquired in a business combination is sufficiently different from goodwill to warrant a separate accounting. At the crux of the matter is whether the intangible asset is identifiable. This means whether it’s of a contractual legal nature or is able to be separated from the entity.

Customer relationships are deemed to be very similar to goodwill, and some financial statement users don’t distinguish those assets in their analyses. If customer relationships and goodwill are amortized and displayed together, it would be easier for users to include or exclude the amortization as needed.

The FASB also tentatively voted to keep the following types of goodwill within the scope of the subsequent accounting guidance in Subtopic 350-20, Intangibles — Goodwill and Other — Goodwill:

  • Goodwill from a reorganization, such as a bankruptcy,
  • Subsidiary goodwill, including “pushdown” accounting, and
  • Goodwill arising from application of the equity method of accounting.

Dissenting opinions

This decision wasn’t unanimous. Five members voted against the staff’s position that some people still find utility in the current rules.

Two FASB members, Richard Jones and Fred Cannon, sided with FASB staff and voted against changing the current rules. Cannon, an analyst, indicated that he wouldn’t object to subsuming all customer relationships into goodwill — but only if the FASB beefed up the disclosure requirements to make up for information that investors would lose about customer relationships.

Stay tuned

This decision is tentative, based on early-stage discussions. The FASB could change its position at a later date. Contact us for the latest developments.

© 2022