Private Company GAAP Simplification: Here It Comes

Private Company GAAP Simplification: Here It Comes

These new accounting alternatives, available only to private companies, were recently authorized by the FASB. The related Accounting Standards Updates (ASUs) will be issued in January 2014. The simplification provided by these ASUs is elective, not mandatory, and will qualify for early adoption, retroactive to December 31, 2013, upon issuance. A private company may choose to adopt one ASU but not the other, both ASUs, or neither.

GOODWILL: MAY ELECT TO AMORTIZE

A private company may amortize existing goodwill on a straight-line basis prospectively over 10 years, or less, if it believes a shorter useful life is more appropriate. Because goodwill will become a dwindling asset, this ASU will also generally exempt private companies from performing impairment tests for goodwill. A pared-down impairment test would only be performed upon occurrence of certain triggering events. The streamlined test may be performed at the entity-wide level, or at the reporting-unit level, in a one-step exercise. The amount of goodwill impairment would represent the excess of the entity’s carrying amount over its fair value. We believe many private companies will appreciate the opportunity to amortize goodwill prospectively.

INTEREST RATE SWAPS: MAY ELECT TO APPLY SIMPLIFIED HEDGE ACCOUNTING

Private companies often find it difficult to obtain fixed rate borrowings. Consequently, many enter into interest rate swap agreements with financial institutions to convert their variable rate debt into fixed rate debt. The FASB believes many private companies lack the desire or expertise to comply with the complexities of hedge accounting. Therefore, they do not enjoy the primary accounting benefit of hedge accounting, and must flow the interest rate swap’s fair value changes through their income statement. The new ASU will offer a practical expedient for private companies, other than financial institutions. Election of this alternative will allow private companies to qualify for hedge accounting for certain interest rate swaps used to convert variable-rate borrowings to fixed-rate borrowings that meet certain criteria. Key features of the simplified hedge accounting for such swaps are:

• Existing and future swaps are eligible, on a swap-by-swap basis
• Interest expense will approximate the fixed rate payments under the swap (income statement)
• The swap may be valued at settlement value (or fair value) (balance sheet)
• The changes in swap value will go through other comprehensive income
• Relaxed hedge documentation requirements
• Reduced fair value disclosure requirements if the swap is the only derivative

TRANSITION AND IMPLEMENTATION

Each of these accounting standards are accounting policy elections eligible for private companies only. Neither is mandatory, and each may be elected separate of the other. Both permit early adoption retroactive to the year ending December 31, 2013. For example, a private company’s December 31, 2013 financial statements may amortize goodwill over 10 years beginning January 1, 2013. If a private company goes public in the future, it will lose the option to utilize the private company alternatives.

IN THE SIMPLIFICATION PIPELINE

The FASB is close to approving an accounting standard that would allow an exception to the consolidation of variable interest entities (VIE) for private companies. The exception would permit a private company to not consolidate a VIE that the private company rents their premises from, provided certain criteria are met. If this is issued as a final ASU, we will provide implementation guidance.

At WS+B, we are experts at assessing the impact of compliance with accounting changes. We would be pleased to discuss with you how these and other current developments would affect your business and financial reporting.

Our Accounting and Auditing Team at WS+B is prepared to provide you with information that may be helpful to you and your business.

Author: Margaret Gallagher, CPA | [email protected]

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