3 Intangible Assets You Might Overlook During a Merger or Acquisition

I recently received a phone call from a CFO asking for a crash course in accounting for business combinations.  Merger and acquisition activity is increasing as corporations look to grow, so the need for info on business combinations is great.  In fact, a couple of my more successful clients underwent acquisitions in 2011 to larger corporations.  In addition, clients are also interested in acquiring companies that will strategically benefit their growth.   As I was putting materials together for this CFO, a couple things jumped out at me regarding intangible assets that I feel are not often thought about during the merger and acquisition process.

As most of us are aware, each business combination is unique based on the terms that are agreed to by the buyer and seller.

This is by no means an all-inclusive list of the accounting treatment for mergers and acquisitions, but a list of three intangible assets that might be easily overlooked:

  1. Operating leases:  The acquirer needs to determine whether the terms of an operating lease are above, below or at market terms of the lease of the same or similar item at the acquisition date.  Depending on the assessment, the acquirer may be recording an intangible asset for a favorable market lease or a liability for an unfavorable lease.
  2. Separately identifiable assets:  Typically, the acquiring company wants to identify separate intangibles when recordiing the purchase price rather than to treat all intangibles as goodwill.  To do this, the acquiring company must determine whether an asset is capable of being separated from the acquired business.  A good example of this is a customer list.  If the acquirer could potentially sell the customer list, it meets the criteria for being separable even if the acquiring company has no intention of selling the list.
  3. Contractual value:  An intangible asset may be recognized if there is a contract in place that has value.  Examples of this type of intangible assets would be licenses, contracts, or even a purchase order.

If you want to know more about about the pitfalls to avoid in a merger or acquisition, attend our Navigating the Treacherous Path of M&A on May 2nd.  You’ll get a chance to hear directly from a CFO and Foley Attorney about their M&A experiences and the lessons they’ve learned.