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FASB Emerging Accounting Issue: "FAS 141 Business Combinations and FAS 142 Goodwill and Other Intangible Assets"

Tuesday, July 5, 2005

The Financial Reporting Committee of the Institute of Management Accountants is writing this letter to raise an emerging accounting issue related to the allocation of purchase price under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No 141, “Business Combinations,” (SFAS141) and SFAS No 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) to certain elements of an acquisition that do not provide significant incremental value to the acquirer. We are concerned that there is divergence developing among certain accounting and valuation firms, particularly with respect to customer relationships where the customer base of the acquired company overlaps with that of the acquirer. Specifically, it is our understanding that the emerging view is that all customer relationships result in assets that must be recognized under SFAS 141 and Emerging Issues Task Force Issue No. 02-17, “Recognition of a Customer Relationship Intangible Asset Acquired in a Business Combination” (“EITF 02-17”). This conclusion leads to an application of valuation methodologies prescribed by SFAS 142 that require incorporation of the assumptions “marketplace participants” would use. The result is recognition of an intangible asset that is not consistent with the economics underlying the purchase transaction.

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