Which costs are considered in the measurement of an acquired intangible asset?

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Publication date: 27 May 2020   

us NFP guide 10.4

Like PP&E, intangible assets are long-lived assets employed in day-to-day operations to deliver an NFP’s goods or services or to otherwise generate revenues. Unlike PP&E, however, they lack physical substance. Figure NP 10-7 includes examples of intangibles assets that might be held by NFPs.

Figure NP 10-7
Typical intangible assets held by NFPs

10.4.1 Overview of intangible asset recognition and measurement

For NFPs, the GAAP applied to accounting for intangible assets is generally the same as for business entities. Outlays for intangible assets are capitalized or expensed according to prescriptive rules. If capitalized, assets are amortized over their estimated useful lives (if finite lived) and tested for impairment as necessary.

The rules for recognition and measurement vary based on how an intangible asset arose or was acquired, and whether it has finite-life or an indefinite life. Figure NP 10-8 provides a road map to the locations of this guidance within the FASB’s codification.

Figure NP 10-8
Road map to intangible asset GAAP

Like PP&E, intangible assets can be purchased, acquired by gift, internally-developed, or acquired in business combinations. However, similar to business entities, an NFP only recognizes an intangible asset on the balance sheet if it acquires it from another party, either in a business combination or in an asset acquisition. In accordance with ASC 350-30-25-3, if an intangible asset is self-developed in its entirety, none of the costs may be capitalized.

ASC 350-30-25-3

Costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business or nonprofit activity and related to an entity as a whole, shall be recognized as an expense when incurred.

As a result, an NFP with internally-developed intangibles may have valuable revenue-generating assets that are not reflected on its balance sheet. However, as illustrated in Example NP 10-2, if another entity subsequently licenses the rights to use the intangible or acquires the developer of the intangible in a business combination, the other entity is permitted to recognize the intangible (or its rights to use the intangible).

EXAMPLE NP 10-2
Accounting for acquired versus internally-developed intangible assets

NFP A creates a unique logo that it trademarks. NFP A subsequently licenses to Company B the rights to use the logo for 5 years. One year later, NFP A is acquired by NFP C.

How would NFP A account for the logo in each of these transactions?

Analysis

When NFP A creates the logo, it possesses an intangible asset with economic value. However, NFP A cannot capitalize the costs of developing the logo because GAAP requires entities to expense the costs associated with internally-developed intangible assets.

NFP A would recognize revenue for the license fees received from Company B in accordance with ASC 606 (see NP 12); however, the underlying asset itself would remain unrecognized on NFP A’s books.

When NFP C acquires the logo in connection with its acquisition of NFP A, NFP C would recognize the logo (trademark) as an asset that is initially measured at its fair value on the date acquired.

10.4.2 Acquired identifiable intangible assets

Intangible assets might be acquired individually, as part of a group of assets in a transaction that is not a business combination (referred to an “asset acquisition”), or in a business combination.

Intangible assets acquired individually or as part of a group in an asset acquisition are initially measured at cost if purchased, or at fair value if received through contribution. If intangibles are acquired as part of a group of assets, see BCG 7.2.2 for a discussion of the considerations related to their initial measurement and BCG 7.2.3 for a discussion of the allocation of the cost.

Intangible assets acquired in a business combination are initially measured at their fair values, as described in NP 5.5.2 and BCG 4.

Subsequently, the accounting for the acquired intangible asset follows the general guidance in ASC 350 that is applicable to business entities. If the intangible asset’s life is finite, the asset should be amortized over its estimated life in accordance with ASC 350-30-35 and tested for impairment using the guidance for long-lived assets in ASC 360-10. PPE 3 provides information on determining estimated lives and various methods of amortization, and PPE 4 discusses how to assess, calculate, and record impairments of finite-lived intangibles. If the intangible asset’s life is indefinite, the asset is not amortized, but is tested for impairment at least annually in accordance with ASC 350-30-35. See BCG 8 for considerations regarding assets acquired in business combinations or asset acquisitions, including how to determine if an intangible asset is indefinite lived.

10.4.3 Goodwill

Goodwill arises less frequently in NFP acquisitions than in business entity acquisitions due to fundamental differences in the nature of the transactions. See NP 5.

ASC 958-805’s guidance on initial recognition and measurement of goodwill by an NFP differs from the guidance provided in ASC 805 for business entities. Goodwill is only recognized in the following situations:

• When a net deficit is acquired (i.e., the fair value of liabilities assumed exceeds the fair value of identifiable assets acquired) and the combined entities will operate predominantly with fee for service revenues. If the acquiree's operations are expected to be predominantly supported by contributions and returns on investments, an acquired net deficit is instead immediately written off (as if the acquirer had made a contribution in taking on the acquired entity). The meaning of “predominantly” is discussed at NP 5.5.3.2.
• When consideration is paid, and the fair value of liabilities assumed and consideration transferred exceeds the fair value of identifiable assets acquired. This might occur, for example, in an acquisition of a business entity (for example, an NFP health care system acquires a for-profit physician practice). The goodwill created in these transactions is similar in nature to that of business entities.

10.4.3.1 Subsequent accounting for goodwill

Subsequent to initial recognition, goodwill is accounted for in accordance with ASC 350-20, consistent with the requirement for business entities. ASC 350-20 provides guidance on impairment testing and derecognition, other presentation matters, and disclosures.

NFPs can make a one-time decision to adopt an accounting alternative used by private companies in subsequently accounting for goodwill at any time without assessing whether using the alternative is preferable. An NFP that elects the alternative will:

• Amortize goodwill existing at the beginning of the fiscal year in which the alternative is adopted prospectively on a straight-line basis over ten years (or less if the NFP can demonstrate that a shorter period is more appropriate)
• Make an accounting policy election as to whether it will test for impairment going forward at the entity level or at the reporting unit level
• Perform future impairment tests only upon the occurrence of a triggering event that indicates carrying value may be less than fair value (in lieu of the annual impairment test)
• Amortize goodwill arising from future acquisitions on a straight-line basis over 10 years (or less, if appropriate)

For additional information on the private company accounting alternative for goodwill, see BCG 9.12.

10.4.4 Intangibles associated with internal-use software

ASC 350-40, Internal-Use Software, provides guidance on accounting for costs of computer software developed or obtained for internal use. The determination of which costs are capitalized as intangible assets and which are expensed depends on the nature of the cost and the stage of the software development project. SW 2.1 discusses the types of costs that fall into each stage, whether they can be capitalized or expensed, and the subsequent accounting considerations (e.g., amortization and impairment).

Existing systems may be upgraded voluntarily (based on management determination), or upgrades may be required as a result of regulatory changes (for example, Congressionally-mandated changes to US health system rules and regulations). The costs of upgrades are accounted for based on the guidance for the “post-implementation” stage of ASC 350-40. Modifications that add “additional functionality” are considered “upgrades or enhancements” whose costs are expensed or capitalized in accordance with guidance in ASC 350-40-25-8 through ASC 350-40-25-10 (see SW 3.4.1). AICPA TQAs 6400.34, Accounting for Computer Systems Costs Incurred in Connection With the Health Insurance Portability and Accountability Act of 1996 and 6400.48, Accounting for Costs Incurred during Implementation of ICD-10, provide factors to consider in making such assessments. While these TQAs are specific to HCOs, they may also be helpful to other types of NFPs.

Large-scale system changes often will require changes to an entity’s business processes. In those situations, ASC 720-45,

Other Expenses, Business and Technology Reengineering

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What costs are included in intangible assets?

What costs can be Capitalised for intangible assets?

What is acquired intangible assets?

How is the cost of the intangible determined?