FASB Issues Two Accounting Standards Updates for Private Companies
The Financial Accounting Standards Board (FASB) recently issued two Accounting Standards Updates (ASU) to provide alternatives for private companies on the subsequent accounting for goodwill and interest rate swaps. Both ASUs are consensuses of the Private Company Council and were endorsed by the FASB.
The FASB has defined a private company as the following: “An entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.” They also have defined a public business entity, which includes entities that are required by the SEC to file or furnish financial statements to the SEC and entities that meet various other criteria.
Entities that meet the definition of a private company may elect to adopt the following ASUs. Prior to making the election to adopt, companies should discuss with the users of the financial statements to ensure the users understand any potential impact of each of the ASUs adopted.
The following is a summary of each of the proposed ASUs:
ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill
This ASU permits a private company to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates another useful life is more appropriate. A company electing this accounting alternative is required to make an accounting policy election to test goodwill for impairment at the entity level or the reporting unit level.
Under the alternative, goodwill should be tested for impairment when an event or changes in circumstances occurs (a triggering event) that indicates the fair value of the entity (or reporting unit) may be below its carrying amount. Upon such an event or changes in circumstances, a company may assess qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying amount. Further testing is unnecessary when the qualitative assessment indicates it is not more likely than not that goodwill is impaired. Otherwise, a quantitative assessment is required. A company may elect to skip the qualitative assessment and perform the quantitative calculation. A goodwill impairment loss, if any, is recognized for the amount that the carrying amount of the entity (or reporting unit) exceeds the fair value.
Under current guidance, all companies are not allowed to amortize goodwill but are required to test for impairment at least annually. In addition under current guidance if it is determined the carry amount is greater than the fair value, a second step must be completed to determine the amount of the goodwill impairment loss. This second step has been eliminated for private companies adopting this ASU.
By allowing for the amortization of goodwill, the ASU is expected to reduce the likelihood of impairments and require private companies to test goodwill for impairment less frequently.
The ASU applies to all private companies, as defined, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. If elected, the accounting alternative should be applied prospectively to goodwill existing as of the beginning of the year of adoption, and any new goodwill recognized in periods beginning after Dec. 15, 2014.
ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach
Under accounting principles generally accepted in the United States, an interest rate swap is a derivative instrument and recognized on the balance sheet as either an asset or a liability at fair value. Companies may elect hedge accounting if certain requirements are met to reduce income statement volatility due to changes in the swap’s fair value.
This ASU provides an additional accounting alternative to private companies, the “simplified hedge accounting approach,” for certain swaps that are used to economically convert a variable-rate borrowing into a fixed-rate borrowing. Under this approach, an entity may assume no ineffectiveness provided that six criteria, which are specified in the ASU, are met. In addition, the ASU provides entities the option to measure the qualifying swap at settlement value instead of fair value.
Finally, private companies with less than $100 million in assets will not be required to include additional disclosures about the fair value of financial instruments not measured at fair value unless other derivatives are present. All other disclosures related to cash flow hedge accounting and fair value measurements still apply.
The ASU applies to all private companies other than financial institutions, as defined in the FASB Codification, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. Private companies can elect to apply this approach to an existing qualifying swap, as well as swaps entered into after the date of this ASU, on a swap-by-swap basis.
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Ron Smith is a partner in Katz, Sapper & Miller's Audit and Assurance Services Department. Ron has extensive experience in, and advises clients and firm members on, accounting, financial reporting, auditing, compliance and internal control matters. He also oversees the firm’s quality control system.