Alternative Accounting Approaches within U.S. GAAP Approved for Private Companies
On November 25, the FASB endorsed two Private Company Council (PCC) proposals to provide alternative accounting approaches within U.S. GAAP when private companies have goodwill and certain interest rate swaps that are reflected in their financial statements. With the FASB endorsement, the issuance of final Accounting Standards Updates (ASUs) on these two issues could be finalized by the end of December 2013.
The optional guidance related to accounting for goodwill will be available for use by private companies. As such, the guidance will not be available for use by public business entities, not-for-profit entities, or employee benefit plans. A similar scope applies to the guidance on interest rate swaps but, in addition to the entities precluded from using the goodwill guidance, financial institutions will not be permitted to use the new guidance associated with certain interest rate swaps.
The new guidance will be effective for fiscal years beginning after December 15, 2014, and interim periods thereafter, where earlier implementation will be allowed. As such, if the new ASUs are issued on a timely basis, the optional guidance could be used by private companies in calendar-year 2013 financial statements.
The Goodwill Accounting Alternative
The flexibility in accounting for goodwill subsequent to a business combination will allow private companies with an option to amortize goodwill on a straight-line basis over a period of 10 years, or a shorter period if the reporting entity can demonstrate that a shorter useful life is deemed to be appropriate. If the amortization alternative is not utilized so that the nonamortization, impairment approach is continued, the burden of the impairment testing will be reduced in that:
- Goodwill could be tested for impairment either at the entity or the reporting unit level rather than having to test goodwill for impairment at the reporting unit level.
- Goodwill could be tested for impairment only when a triggering event occurs, so that there would not always be the need to test goodwill for impairment on an annual basis.
- If a triggering event occurs, private companies still will have the option to first assess qualitative factors to determine whether quantitative impairment testing is needed.
- If the quantitative impairment testing is needed, there would be a one-step impairment test so that the amount of any impairment would be measured as the difference between the carrying amount of the entity or reporting unit, as applicable, and its fair value so that the currently-utilized hypothetical purchase price approach no longer would be required.
NOTE: If the optional guidance in accounting for goodwill is utilized, this alternative would need to be applied on a prospective basis. Essentially, private companies electing this alternative would begin amortizing existing goodwill as of the beginning of the reporting period where the optional guidance is adopted.
The Interest Rate Swap Accounting Alternative
The flexibility in accounting for certain interest rate swaps will provide optional guidance related to receive-variable, pay-fixed interest rate swaps. With this alternative accounting approach for plain-vanilla interest rate swaps, reporting entities will be able to assume no ineffectiveness for qualifying swap arrangements. The arrangements that will qualify for this accounting alternative will need to meet certain conditions that, essentially, indicate that the terms of the swap and the related debt are aligned.
If the simplified accounting alternative is used by private companies:
- An election will be available related to use of the simplified hedge accounting alternative on a swap-by-swap basis for both swaps existing at the date of adoption and those entered into subsequent to adoption of the alternative accounting guidance.
- There will be an extended period of time to complete the required documentation to use the alternative in that the documentation will not have to be completed until the financial statements are available to be issued.
- There will be an option of measuring designated swaps at settlement value rather than at fair value.
NOTE: If the optional guidance in accounting for qualifying interest rate swaps is utilized, this alternative would need to be applied on either a modified retrospective basis or a full retrospective basis. This election will be available on a swap-by-swap basis.
For more information on private company GAAP developments, and to explore how Brown Smith Wallace can assist you with these and other matters, please contact Daniel Ward at 314.983.1237 or firstname.lastname@example.org.