Questions on Handling Of Intangibles Post-Pooling: Dealmakers Face New Rules Regarding the Criteria Needed To Be Met to Separate Intangibles From Goodwill

Dealmakers may have kicked up their heels earlier this year when the Financial Accounting Standards Board (FASB) lightened the impact of its ruling to end the pooling-of-interest accounting method by including a non-amortization approach for purchased goodwill. But like many other celebrations, lawyers and accountants who work in m&a found that there was a potential hangover the morning after in the form of questions about how to handle the amortization of intangible assets in the post-pooling environment. For deals that previously had qualified for pooling treatment, life was simple because there was no goodwill created. But now dealmakers are challenged by new rulings that have tightened the criteria that need to be met in order to separate identifiable intangibles from goodwill, says Michael Capilouto, a partner at Ernst & Young. He lists three steps that a dealmaker must perform under the new purchase rules. First, he must identify acquired intangible assets and separate them from goodwill. Second, he must allocate these identified intangible assets and goodwill to the newly merged company’s reporting units. Finally, he must test on an ongoing basis for the impairment of the goodwill at the reporting-unit level. Capilouto says that the new rules do not provide a lot of guidance on how much goodwill gets allocated to each reporting unit. But even if some of the guidance may be fuzzy, overall, regulators expect companies to pay close attention to what is described as identifiable intangible assets. “The FASB is saying that it wants companies to be careful about identifying the various intangible assets in an acquisition,” says Robert Willens, a tax and accounting specialist at Lehman Brothers. One downside for dealmakers is that a larger portion of the purchase price may be allocated to identifiable intangibles, which must then be amortized. And with amortization comes a hit on earnings. Capilouto says that because the allocation of the purchase price between intangible assets and goodwill is a “fertile ground for judgment calls,” these decisions could conceivably be a point of contention between companies and regulators. And because of the subjective nature of the separating of assets between the goodwill and the intangibles categories, Capilouto notes that a third-party valuation expert would be needed in some deals to help the financial advisers by providing an independent judgment that identifies and values a company’s intangible assets. In fact, Willens says that the rule change would likely create a renaissance for appraisers as companies comply with the new purchase requirements. In all, Capilouto thinks that the new impairment test will be even more difficult to use than the former amortization model that existed under the old business combination rules. But on a brighter note, Willens says he thinks that the new rules could cause some deals to be completed that would not have been viable under the old rules. “It’s not that there will be no amortization; it’s just that there will be less than there used to be,” he states.