As consolidation partners pair off and plan their survival strategies, accounting rules may soon require them to assign some shelf life to brand names and other intangible assets that may be headed for the shredder.

The Emerging Issues Task Force of the Financial Accounting Standards Board has been wrestling with what entities should do with intangible assets acquired in a merger or acquisition that the acquiring company plans to bury. Dubbed “defensive” intangible assets, these might include brand names, trademarks, and other intangibles of a target company that the acquiring company wants to make disappear following a merger or acquisition. As an example, “what if ‘Coke’ bought ‘Pepsi?’” asked EITF member Jay Hanson, a partner with McGladrey & Pullen.

The accounting problem emerged with the intersection of new fair-value measurement rules and new business combination rules. Financial Accounting Standards No. 157, Fair Value Measurement, already in effect, requires entities to use more current market pricing from the perspective of hypothetical market players to establish fair values. Financial Accounting Standard No. 141R, Business Combinations, takes effect with the start of the 2009 reporting year to require entities to put more emphasis on fair value in establishing the values of acquired assets, including defensive intangible assets.

“Under the old guidance, if you bought a business and looked at all the assets, and there was an asset you didn’t intend to use, you probably put very little value to it,” said Hanson. “FAS 157 doesn’t let you do that, post 141R. So even for assets you don’t intend to use, you have to look at what a market participant would pay for that asset.”

FASB’s EITF studied the issues and determined it would be appropriate for entities to use their judgment to determine some kind of shelf life for such assets and write them down accordingly, said Hanson. EITF recommended the approach to FASB, and FASB ratified the idea at its regular weekly meeting. EITF and FASB published a draft abstract describing the proposal and are seeking comment.

“It’s a bit of a theoretical exercise, but as we’re now thinking about the consolidation of big banks that is going on, this will be an issue,” Hanson said. Wells Fargo, for example, in its quest to acquire Wachovia would have to use some judgment to determine how long of a life to assign to the Wachovia name and write it down over that lifetime, he said.

The EITF toyed with the question of whether an entity like Wells Fargo could reason that the value of the Wachovia name should be folded into the value of the Wells Fargo name as the Wachovia brand would disappear from the market. “We determined it is a separate, distinct intangible asset from the brand you’re hoping to enhance, so you have to account for them separately,” Hanson said.

Hanson said the EITF determined entities cannot reasonable conclude that defensive intangibles will disappear overnight, nor can they conclude they will live indefinitely. He acknowledges it will be difficult to assign a prospective lifespan to some such assets.

“Some of these brands have been around for a long time,” he said. “There is marketing that goes into keeping brands up, so when that goes away, what happens to the brand over time? … It’s going to be an operational challenge. How many years do I spread that cost over?”