Tax implications of FASs 141 and 142.

• Author: Bakale, Anthony
• Position: Financial Accounting Standards Board - Goodwill and intangibles

With the enactment of Sec. 197 in 1993, over 200 types of intangible assets claimed by taxpayers as separable from then-nondeductible goodwill (and therefore arguably amortizable for tax purposes) were rolled into 15-year tax goodwill.

In 2001, the Financial Accounting Standards Board (FASB) resurrected 30 categories of goodwill and intangibles for financial accounting purposes.

The FASB noted the difficulty in comparing the financial results of entities, because the entities used different methods of accounting for business combinations. The need for better information about intangible assets is growing, as those assets are an increasingly important economic resource for many entities and are an increasing proportion of the assets acquired in many business combinations.

Financial Accounting Statement (FAS) No. 141, Business Combinations, addresses financial accounting and reporting for business combinations and supercedes Accounting Principles Board (APB) Opinion 16 rules on purchase and pooling accounting. All business combinations within the scope of FAS 141 are to be accounted for using the purchase method.

FAS No. 142, Goodwill and Other Intangible Assets, addresses financial accounting and reporting for acquired goodwill and other intangibles and supercedes APB Opinion 17.

An understanding of the accounting treatment of acquisitions under FAS 141 and 142 and how those provisions compare to the corresponding tax accounting treatment under the Code is important.

Acquisitions Measured at FMV

Like other exchange transactions, acquisitions are measured in general on the basis of the fair market values (FMVs) of the exchanged or acquired properties. For Federal income tax purposes, this same concept is found in Sec. 1001. Generally, the cost or amount realized in an exchange equals the cash received plus the FMV of the property received. If that value cannot be determined with reasonable accuracy, the amount received would be based on the value of the property given up.

Allocation of Cost to Individual Assets

General guidance for assigning amounts to assets acquired and liabilities assumed, except goodwill, is provided in FAS 141. Under FAS 141, acquired assets are placed into groups and the cost of those asset groups ascertained. The purchase price of an asset group must then be allocated among the assets within the group. For Federal income tax purposes, the same concept is applied in a taxable asset acquisition under Sec. 1060, which requires that the...