Question: When one company buys another, the subsidiary is often holding rights to numerous intangibles. As
mentioned, acquisitions often take place to gain those rights. The parent places those assets that qualify on its
own balance sheet at fair value to show that a portion of the amount paid for the subsidiary was the equivalent
of an acquisition price for these items. That is a major reason why companies such as Microsoft and Procter &
Gamble report billions of dollars in intangible assets. They have probably purchased many of them by acquiring
However, according to U.S. GAAP, certain requirements have to be met before such intangibles are recognized
as assets on a consolidated balance sheet following a takeover. What rules must be satisfied for an acquiring
company to record an intangible (previously owned by an acquired company) as an asset? A new subsidiary could
very well have hundreds of intangibles: patents, copyrights, databases, smart employees, loyal customers, logos,
and the like. When the company is acquired, which of these intangibles are recognized on the consolidated balance
sheet produced by the new parent?
Answer: FASB has stated that a parent company must identify all intangibles held by a subsidiary on the date
of acquisition. For consolidation, the fair value of each of these intangibles is recorded by the parent as an asset
but only if contractual or other legal rights have been gained or if the intangible can be separated and sold. This
guideline serves as a minimum standard for recognition of intangible assets in a corporate takeover:
1. contractual or other legal rights have been gained or
2. the intangible can be separated from the subsidiary and sold.
Patents, copyrights, trademarks, and franchises clearly meet the first of these criteria. Legal rights are held for
patents, copyrights, and trademarks while contractual rights provide the right to operate franchises. By acquiring
the subsidiary, the parent now owns these same rights and should record them on the consolidated balance sheet
at fair value.
Other intangibles that can be separated from the subsidiary and sold should also be consolidated at fair value. For
example, an acquired company might have a database containing extensive information about its customers. After
purchasing the subsidiary, this information could be separated from that company and sold. Thus, on the date the
subsidiary is purchased, the parent should recognize this database as an intangible asset at fair value to reflect the
portion of the acquisition price paid to acquire it.