The value of a non-compete obligation can vary considerably depending on the industry, the size of the company and specific factors for the persons covered by the agreement. However, the valuation methods are similar, whether the agreement is measured for GAAP or tax compliance. Summary This summary is part of mcGladrey`s Guide to Accounting for Business Combinations and should be read in conjunction with this guide. Introduction Current accounting guidelines A non-compete obligation negotiated as part of a business combination generally prohibits former owners or key employees from competing with the merged company. The agreement usually covers a fixed period of time that begins after the date of acquisition or termination of the employment relationship with the merged company. A non-compete obligation negotiated as part of a business combination is usually initiated by the acquirer in order to protect the interests of the acquirer and the company resulting from the merger. Full recognition of all intangible assets under IFRS 3 It would be useful to take a closer look at the tax treatment of a non-compete obligation received by the selling owner or employee in connection with a share purchase and a joint choice share purchase under Section 338(h)(10). Existing employment contracts in the acquired company may also contain non-compete obligations. Such non-compete obligations may have value and should be valued separately as intangible assets where such contracts form part of a business combination.

For more information on non-compete obligations, see Non-compete obligations above. Example 2: The facts are the same as in Example 1, except that T is a subchapter S corporation and P and J agree on an election under section 338(h)(10) that treats the transaction as a purchase and sale of assets. The purchase contract stipulates that the parties agree on a distribution of the purchase price, which must be prepared by T and examined by P. Shortly after the closing of the transaction, a tax advisor is asked how to process the covenant and the corresponding value of $15 million attributed to the valuation for income tax purposes. Is the entire fair value of J$15 million taxable as compensation? Before concluding that J has a decent income of $15 million, the practitioner should review the applicable case law that may tell him otherwise. Compare this treatment to an article 338(h)(10) or an acquisition of assets where an assignment to a restrictive covenant offers the buyer the same tax treatment as an allocation to goodwill (i.e., a 15-year amortization). On the other hand, as we have seen below, a non-compete agreement entered into to effect a transfer of goodwill does not necessarily create a separate intangible Article 197. The recognition of subsequent research and development expenses differs according to IFRS 3, the costs of monitoring acquired projects that are in the development phase are capitalized subject to impairment tests if they meet the recognition criteria.

If they do not, the follow-up costs are recognised as expenses. Full recognition of all intangible assets IFRS 3 2. Include in the purchase agreement the wording that no separate consideration is paid for the agreement, but that the consideration for the non-compete agreement is the total consideration for the purchase paid for the company. It also confirms the intention that the non-compete obligation is not a separately negotiated netting agreement, but is inextricably linked to the goodwill acquired. By Laura Jean Kreissl, Ph.D., Assistant Professor of Accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Accounting, both from the College of Business, West Texas A&M University, Canyon, Texas. As a general rule, a customer list does not result from contractual or other legal rights and therefore generally does not meet the contractual legal criterion. However, customer lists can be rented or exchanged in another way and therefore meet the separability criterion. A list of purchased customers does not meet the severability criterion if confidentiality conditions or other agreements prohibit an acquired customer from renting or otherwise exchanging information about its customers. Restrictions imposed by confidentiality or other agreements on customer lists have no influence on the recognition of other intangible assets related to the customer that meet the contractual and legal criterion. In Schultz, both the Commissioner and the Finance Court concluded that the obligation not to compete, although set out separately in terms of value, was essential to the sale of the company`s goodwill and had no real economic value of its own.

The court was unable to establish that the pact did indeed have an independent basis so that reasonable people who were genuinely concerned about their economic future could negotiate such an agreement. 294 F. 2d to 55. In other words, for the pact to be treated as a waiver of future income, it must appear that potential competition from the seller would pose a significant economic threat to the buyer, so that the pact would not be seen as a mere tax trick. [emphasis added] Getting Merger and Acquisition Accounting Right Presented by: John Donohue, Partner and Fred Frank, Partner Professional Practice Group, Moss Adams LLP Agenda 1. Review of the company`s basic accounting Example 1: Buyer P acquires all of Target T`s interests from individual J for $200 million in cash. T has liabilities and assets of approximately $20 million and a fair market value of approximately $220 million. J is the sole shareholder of T and an important member of the Management Board.

As part of the agreement, J and P enter into a five-year non-compete agreement. J will continue to act as an employee of T after the takeover under a contract of employment that adequately compensates J. The purchase contract does not contain any agreement on the value or distribution of the consideration provided for in relation to the non-compete obligation. The valuation for the purposes of FAS 141R establishes a fair value of $15 million on the non-compete agreement and a fair value of $150 million on goodwill. In this scenario, a detailed assessment is required to determine whether these resources should be combined for accounting (and valuation) purposes or whether they are two separable assets. .