Question

Using the FASB Codification

            In this case, LinkedIn and Microsoft followed GAAP. Your task is to identify the exact part of the FASB codification that contains the applicable rules. For each question, cite the section number, and cut and paste the rule into your answer. What section of the codification requires?

1. Internally developed intangible assets should NOT usually be recorded as assets?
2. As of the date of an acquisition, the acquirer should allocate the purchase price to assets acquired based on their fair values?
3. Companies must amortize intangible assets with a definite life over their useful lives?
4. Goodwill should not be amortized?
5. Income from an acquired subsidiary should be reported by the acquirer from the date of acquisition onwards
6. A pro forma disclosure is required by an acquirer of revenues and income as if the acquisition had occurred as of the first day of the prior year.
7. Changes in accounting principles should be reflected retrospectively, by restating prior years.

Answer 1

1. Section 350-20-25-3 & 350-30-25-3 - Internally developed intangible assets (Excerpt from Accounting Standards Codification Intangibles Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred.

2. Section 350-30-30-1 - An intangible asset that is acquired either individually or with a group of other assets (but not those acquired in a business combination) shall be initially measured based on the guidance included in paragraphs 805-50-15-3 and 805-50-30-1 through 30-4.

Intangible assets acquired either individually or with a group of other assets outside of a business combination are initially recognized and measured based on their cost to the acquiring entity. The cost3 of a group of assets that does not meet the definition of a business in ASC 805 is allocated to the individual assets based on their relative fair value. The recognition of goodwill is precluded in asset acquisitions, as goodwill can be recognized only in a business combination. The relative fair value allocation process could result in acquired assets being valued in excess of or less than their individual fair values.

3. Section 350-30-05-04 - The accounting for an intangible asset after acquisition depends on its useful life. If that life is indefinite, the intangible asset should not be amortized but should be tested for impairment at least annually in accordance with paragraphs 350-30-35-15 through 35-20. If that life is finite, the intangible asset should be amortized in accordance with paragraphs 350-30-35-6 through 35-13 and tested for impairment under the guidance for long-lived assets in Subtopic 360-10.

4. In 2001, the Financial Accounting Standards Board (FASB) declared in Statement 142, Accounting for Goodwill and Intangible Assets, that goodwill was no longer permitted to be amortized. In accounting, goodwill is accrued when an entity pays more for an asset than its fair value, based on the company's brand, client base, or other factors. Corporations use the purchase method of accounting, which does not allow for automatic amortization of goodwill. Goodwill is carried as an asset and evaluated for impairment at least once a year.

However, in 2014, this policy was partially rolled back with FASB Accounting Standards Update No. 2014-02, Intangibles Goodwill and Other (Topic 350). The FASB re-allowed private companies to elect to amortize goodwill on a straight-line basis over 10 years. However, the election is not required. If desired, the option to amortize enables private companies to forgo the costly annual impairment tests that are required of public companies.