The Financial Accounting Standards Board (FASB) recently issued two new statements that materially change the financial accounting for merger and acquisition (M&A) transactions. FASB Statement No. 141 is titled "Business Combinations." Statement 142 is titled "Goodwill and Other Intangible Assets."
Statement 141 was issued to improve the generally accepted accounting principles ("GAAP") financial reporting for business combinations. Under Statement 141, the pooling-of-interests method of accounting for acquisitions is no longer acceptable. All corporate M&A business combinations will now have to be accounted for under the purchase method of accounting. Statement 141 is effective for business combinations initiated after June 30, 2001.
Statement 142 requires that goodwill acquired in a business combination can no longer be periodically amortized to earnings; rather, the value of acquired goodwill must be periodically reviewed for possible impairment charges. The FASB believes that this GAAP change will allow investors to better understand the true economics of a company's acquired goodwill. The amortization of acquired goodwill will no longer be allowed after a company's adoption of this Statement. Statement 142 must be adopted for fiscal years beginning after December 31, 2001. However, Statement 142 does allow for the periodic amortization of a significant number of discrete intangible assets acquired in an M&A business combination. Discrete intangible assets are those that may be (1) identified separately and (2) valued separately from acquired general goodwill. While Statement 142 identifies many categories of discrete intangible assets, one category of such a discrete intangible is acquired customer lists and customer relationships.
Customer/client relationships represent a valuable intangible asset to many industrial and commercial companies. Customer/client relationships may represent the most valuable asset--tangible or intangible--to many service-oriented companies. The expectation of periodic business from recurring customers/clients can be a substantial component of the value of service organizations, such as communications, transportation, pipeline, utilities, and cable TV companies. Accordingly, under the provisions of Statement 141, customer-related intangible assets will now be recorded on the GAAP balance sheets of acquisitive companies. However, there are numerous other reasons--including property taxation reasons--to value a company's customer relationship's intangible assets. For example, many taxing jurisdictions specifically exclude the value of such intangible personal property as customer/client relationships from ad valorem taxation.
This article will discuss the approaches and methods with respect to the identification, valuation, and remaining useful life analysis of customer relationship intangible assets for ad valorem property tax assessment or appeal purposes. In particular, we will discuss the importance of--and analytical methods related to--the remaining useful life of customer relationships. Finally, we will also present a simple illustrative example of the valuation of customer/client relationships within a property taxation context.
Identification of Discrete Intangible Assets
There are various definitions of the term "intangible asset." In a property tax valuation, the analyst may have to perform research to determine if a particular definition is appropriate to the subject analysis, given the purpose and objective of the valuation. Obviously, relevant judicial precedent and statutory authority should be consulted in this research. For purposes of this discussion, we will focus on the economic (and not the legal) questions that are relevant to the valuation of discrete intangible assets. From this economic perspective, there are two fundamental questions that the analyst should consider:
1. What economic phenomena qualify as discrete intangible assets?
2. What economic phenomena manifest--or are indicative of--value in discrete intangible assets?
For a discrete intangible asset to exist from an economic perspective, it should typically possess certain attributes. The following are some of the more common attributes:
1. It should be subject to specific identification and recognizable description.
2. It should be subject to legal existence and protection.
3. It should be subject to the right of private ownership, and this private ownership should be legally transferable.
4. There should be some tangible evidence or manifestation of the existence of the intangible asset (e.g., a contract, a license, a set of patient files, a set of client workpapers, a listing of customers, a set of financial statements).
5. It should have been created or have come into existence at an identifiable time or as the result of an identifiable event.
6. It should be subject to being destroyed or to a termination of existence at an identifiable time or as the result of an identifiable event.
In other words, there should be a specific bundle of legal rights associated with the existence of discrete intangible assets.
For a discrete intangible asset to have economic value, it should possess certain additional attributes. Some of these additional attributes include the following:
1. It should generate some measurable amount of economic benefit to its owner; this economic benefit could be in the form of an income increment or of a cost decrement; this economic benefit is sometimes measured by comparison to the amount of income otherwise available to the intangible asset owner (e.g., the company) if the subject intangible did not exist.
2. This economic benefit may be measured in any of several ways, including net income, net operating income, or net cash flow.
3. It should be able to enhance the value of the other assets with which it is associated; the other …