FASB relaxes M&A rules for private entities

The US Financial Accounting Standards Board (FASB) made it easier for private equity firms, their portfolio companies and other private entities to measure certain customer-related intangible assets and non-competition agreements.

Guided by the Private Company Council – which is deciding where in the current accounting code rules should be tailored for private entities – the FASB released its ASU No. 2014-18, Business Combinations (Topic 805) shortly before the holiday break.

Over the past few months the council and the FASB received input from private company stakeholders indicating that the benefits of the current requirements relating to the accounting for identifiable intangible assets acquired in a business combination do not justify the related costs.

In the alternative accounting guidance provided, FASB said private entities could opt not to recognize certain customer-related intangible assets (unless they can be sold separate from other business assets) and non-competition agreements as separate from goodwill.

There are doubts about the value of the PCC’s work for the private funds industry. Even though private fund CFOs have long complained that accounting rules were written primarily with large public companies in mind – which have different accounting traits from typically smaller, more owner-driven private companies – the switch to private company accounting comes at a cost.

For instance, a GP considering an IPO exit couldn’t make use of the exemption because the “portfolio company may have to go back and restate using ‘public company’ accounting rules, which could be costly and disruptive,” said in an interview with pfm David Larsen, a managing director at valuation specialist Duff & Phelps.

Larsen added that selling a portfolio company to a larger strategic public company would run into the same problem as would any acquisition financed by “public debt” that triggers the requirement of public company rules.

Nonetheless, for certain private companies with no ambition to enter public scrutiny, the new accounting alternative may prove valuable to private fund CFOs, market sources add.