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Identify Your Intangible Assets

Accounting rules around the world require companies to record the values of certain intangible assets obtained from an acquired entity.  There are two types of intangible assets, those that need to be separately valued and recorded on financial statements and those that fall under a broad umbrella of goodwill.  There is no shortage of guidance on how to identify which intangible assets require individual analysis.

Critical guidance on separating individual intangibles from goodwill can be found in Accounting Standard Codification (“ASC”) Topic 805.  An intangible asset is recorded separately if it:

  • arises from contractual or other legal rights, regardless of whether those rights are transferable, and, if they are transferable, regardless of whether the acquirer intends to transfer them; and/or
  • is separable. This means that the asset can be transferred, licensed, or rented individually or in combination with a related contract, asset, or liability, regardless of whether the acquirer intends to transfer, license, or rent it.

The accounting guidance provides several examples of such intangible assets including technology, customers, contracts, and artistic-related assets.  Most of them you can see, touch, or hear.  You can see software code and corporate logos.  You can touch contracts and patents.  Intangibles such as corporate culture or geographic location cannot be seen or touched.  They belong to goodwill.

Customer relationships take many different forms.  From long term contractual commitments to retail store foot traffic, customers may or may not satisfy the requirements for being separately identified and recorded on the balance sheet.

Follow these links to see examples of intangible assets recognized in Application Software, On-Line Gaming, and Bio-Pharmaceutical industries.

More Updates

Financial Forecast For Purchase Price Allocation (ASC 805/IFRS 3)

This article covers several key factors to consider when building a financial forecast or projected financial information (PFI).  This guidance is designed for financial forecasts used in purchase price allocations, i.e., valuation of intangible assets as part of purchase accounting under US GAAP ASC 805 and IFRS 3.  Here are a few requirements:   PFI has to be long enough

Shadow Preferred Stock Devalues Convertible Note

Convertible notes are starting to resemble CDOs, collateralized debt obligations that led to the 2008 financial crisis, partly because few understood how they worked. From the economic perspective, convertible notes are complex; that includes Simple  Agreements for Future Equity (SAFEs). In fact, they are referred to as “complex financial instruments” by auditors and financial regulators.  A typical convertible note is

What M&A Purchase Consideration Is Actually Worth?

Most M&A pricing efforts are focused on valuing an acquired business. Essentially no consideration is given to the value of assets an acquirer is giving up in a transaction. We will attempt to clarify some of these issues.

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