Good News from FASB: Changes to U.S. GAAP for Private Companies

By Tiffany Cavanaugh November 1, 2013

On October 1, 2013, the Private Company Council (PCC) approved its first U.S. Generally Accepted Accounting Principles (GAAP) exceptions for private companies.  On November 25, 2013,  the Financial Accounting Standards Board (FASB) endorsed these exceptions. These exceptions will be issued as final Accounting Standards Updates and will become the first GAAP approved exceptions created by the PCC.

The PCC was formed in 2012 by the FASB. The PCC determines alternatives to existing nongovernmental GAAP to better address the needs of users of private company financial statements. The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

Accounting for certain interest rate swaps

The first exception proposed by the PCC and endorsed by the FASB relates to hedge accounting for certain interest rate swaps (Accounting Standards Codification 815). For many private companies, difficulties can arise from the complexity of hedge accounting under current U.S GAAP.  As a result, many private companies do not elect to apply hedge accounting, which can result in income statement volatility as the fair value of the underlying derivative changes. The alternative proposed by the PCC will give private companies, other than financial institutions and employee benefit plans, the option to use a simplified hedge accounting approach to account for certain types of interest rate swaps that are entered into for the purpose of economically converting variable rate interest payments to fixed-rate payments.

In addition, this exception will exempt private companies from certain fair value disclosures if the only derivatives it enters into are swaps covered by this exception, as well as allow private companies to prepare required hedge documentation at any time during the year, rather than at the inception of the swap, as currently required.

This endorsed exception will take effect for fiscal years beginning after December 15, 2014, with early adoption permitted.  Private companies, with the exception of financial institutions, can also apply this simplified approach to existing swaps at the date of adoption.

Accounting for goodwill subsequent to a business combination

The second exception approved by the PCC and endorsed by the FASB relates to goodwill subsequent to a business combination (Accounting Standards Codification 350). Under this exception, a private company will be permitted to subsequently amortize goodwill acquired in a business combination.

This exception will allow a private company to amortize goodwill on a straight-line basis over 10 years, or less if the private company can demonstrate that another useful life is more appropriate based on specific facts and circumstances. Currently, U.S. GAAP does not allow for the amortization of goodwill.

The exception also allows private companies to opt to perform impairment testing at the entity level rather than by reporting units and to perform impairment testing only when there is a triggering event, instead of annually. The exception will further simplify the impairment testing by not requiring a hypothetical purchase price allocation but rather just use fair value compared to the goodwill balance.

This endorsed exception will take effect for fiscal years beginning after December 15, 2014, with early adoption permitted.  Private companies that elect the goodwill exception will have to apply it prospectively to all goodwill generated through future business combinations. Goodwill on the books at adoption can be amortized over ten years, or a shorter life if that can be demonstrated as more appropriate.

What’s next?

Depending on the timing of when FASB issues the final Accounting Standards Updates, the option may exist for private companies with calendar year ends to apply one or both of the accounting alternatives in their financial statements for 2013. Stay tuned for more information from BNN.

If you have questions about how these issues might impact you, please call Tiffany Cavanaugh at 1.800.244.7444.