Identifiable Intangible Assets

[sourdiesel]

My video for the M&A package has expired so I'm just going off of what I have in my notes and in the Pepsi/Molson M&A excel model. It seems the differentiating factor between Tax Deductible and Non-Tax Deductible Intangibles is whether the asset has a finite or infinite life. Separately, I was under the impression that for book accounting, the acquirer does not amortize the infinite life intangibles, but instead test them for impairment (this includes goodwill, and also perpetual rights and licenses). However, the model contradicts my understanding and I would like to confirm which way is correct. Which FASB rule supports this?

Secondly, I was taught that for tax accounting, under a stock deal, the acquirer does not amortize any type of intangible unless there is a Section 338 election. However, in the model, you amortize intangibles with finite lives. Which is correct? Which IRS code supports this?

Thanks

[wsthost]

1) FASB 141/142
However, tax deductibility is not a GAAP item, it is a tax-related item; as such you won't find info on it in the FASBs.
Impairment tests are for Goodwill. Don't confuse book vs tax!

2) Tax accounting for stock deal falls under Section 368, Tax-Free Reorg.
Intangibles are amortized for book purposes.
If you don't want to amortize for tax purposes, flick the switch to a zero under the Tax Deductibility section.

[sourdiesel]

(1) If i understand you correctly, you're saying that the differentiation between infinite/finite-lived intangibles as strictly a Tax thing, and that all intangibles except Goodwill are amortized under GAAP.

(2) I understand that I can simply turn off the switch for tax deductibility purposes. However, as the model stands, the switch is on for Tax Deductible Identifiable Intangibles under Tax Accounting, with a note to the right per Hamilton that reads "FINITE lives, hence considered to be tax deductible". I guess to be more specific, I am wondering if there are any circumstances where. in a NON-section 338 stock deal, intangibles are amortized for tax accounting purposes?

[wsthost]

1) yes
2) deal-specific issues as advised by tax attorneys on each deal might occur

[sourdiesel]

(1) I want to disagree with this. After looking through FAS142, it seems there is distinction between finite and infinite intangibles for GAAP, as such:

"Opinion 17 presumed that goodwill and all other intangible assets were wasting assets (that
is, finite lived), and thus the amounts assigned to them should be amortized in determining
net income; Opinion 17 also mandated an arbitrary ceiling of 40 years for that amortization.
This Statement does not presume that those assets are wasting assets. Instead, goodwill and
intangible assets that have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives, but without the constraint of an arbitrary
ceiling."
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820927971&blobheader=application%2Fpdf

Infinite-lived Intangibles include more than just Goodwill though, it also includes trademarks, licenses, rights, etc. I imagine this could be somewhat material to certain types of companies.

(2) Thanks! I tend to forget that there are tax experts that should be in charge of these things in deals.

[wsthost]

1) You the man! You win! Thank you for digging that up.


Forget naught that in addition to tax experts, you will have accountants on the job as well.
The short answer is that you need to know enough, but you don't need to master this.
Why not? Because you will NEVER get the right answer because the company has a full year to finalize these numbers from the closing date of the deal.

[sourdiesel]

Thanks! This was all very helpful guidance btw!

[wsthost]

No worries, and that's what we're here for.

Keep in mind that you want to focus on what's material.
It's more important to get your projection model and valuation correct than this very fine specific nuance on purchase price allocation. That doesn't mean we don't want to be correct, but sometimes it's not worth the brain damage. Now of course, for deals involving pharmaceuticals with a lot of intangibles, it IS material, etc.