Applying the New Accounting for Business Combinations and Intangible Assets to Partner Admissions

A long-standing partnership accounting issue is whether to recognize a bonus or goodwill (or other asset write-ups) upon a partner admission when the incoming partner's net asset contribution differs from his/her capital balance. Although extensively discussed in advanced accounting textbooks, that guidance is nonauthoritative, and the authoritative guidance in the FASB Codification makes almost no mention of partner admissions. This paper discusses how changes in GAAP since 2001 affect the accounting for partner admissions, especially the revised accounting for business combinations and intangible assets. It discusses the circumstances when partner admissions are business combinations. For most partner admissions that are business combinations, the partnership should recognize at fair value the net assets contributed by the incoming partner, including identifiable intangible assets and goodwill. For partner admissions that are reverse acquisitions, the partnership should revalue its own identifiable net assets and goodwill to fair value. Finally, for partner admissions that are not business combinations, the partnership should recognize the net assets contributed by the incoming partner, including identifiable and nonidentifiable intangible assets but not goodwill. Importantly, simple application of the bonus or goodwill methods that are illustrated in textbooks does not conform to GAAP for partner admissions that are business combinations.