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Despite all the corporate grumbling, early adoption of FAS 142 makes sense.
Step aside Spider-Man. Clarity on exactly how to implement the latest Financial Accounting Standard (FAS) 142 on goodwill and other intangible assets is proving more elusive than finding the Green Goblin. Based on annual reports over the past few years, it's clear that intangible assets are making up a larger proportion of the total value of many organizations. Thus, FAS 142, which aims to provide investors with a better understanding of intangible assets acquired in various transactions, makes eminent good sense.
FAS 142 has three basic requirements. First, goodwill and intangible assets with indefinite useful lives will not be amortized, but they require annual testing for impairment. Second, intangible assets with finite useful lives continue to be amortized over their useful lives. Third, impairment testing must take place at least annually using a three-step process: (1) estimate the fair value of each reporting unit, (2) screen the reporting unit for potential impairment, and (3) measure the amount of impairment, if any.
It's important to recognize and close the large gap that exists between a company's book value, which is calculated from accounting reports that are generally already months out of date, and the perceived value that the market attributes to the firm. The goal of FAS 142 is to provide better information that will make corporate financial statements more useful. The Financial Accounting Standards Board (FASB) announced FAS 142 as a first stage-in this case by splitting legally identifiable acquired intangibles from goodwill to the extent possible. The debate surrounding the capitalization of internally generated brands remains on FASB's "to-do" list being based in part on how the adoption of FAS 142 unfolds.
In many respects, FAS 142 in the United States follows Financial Reporting Standard (FRS) 10 in the United Kingdom, which has been compulsory since December 1998. FRS 10 requires the capitalization of acquired goodwill and amortization over the useful economic lives of various assets. The separation of the acquired brands and other acquired intangibles for balance sheet capitalization is permitted. There are specific rules for impairment reviews requiring write-downs where impairment is evident. These are similar to those contained in FAS 142.
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