January 30, 2014
FASB Approves First Private Company Alternatives
As noted in our previous A&A article, The Private Company Council (PCC), which was established to ease the accounting for private companies, has voted to finalize the accounting for interest rate swaps as well as the accounting for goodwill that resulted from a business combination for private companies. Below is a summary of FASB standards update No. 2014-03-Derivatives and Hedging (Topic 815): "Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps-Simplified Hedge Accounting Approach" and Update No. 2014-2-Intangibles-Goodwill and other (Topic 350): "Accounting for Goodwill."
The interest rate swap amendment by the PCC would allow private companies, other than financial institutions, the option to use a simplified hedge accounting approach. The amendment will allow the use of the simplified hedge accounting to account for swaps that are entered into for the purpose of economically converting a variable-rate into a fixed-rate borrowing. Under this approach, the income statement charge for interest expense will be similar to the amount that would result if the entity had directly entered into a fixed-rate borrowing. Additionally, private companies in which the swap is the only derivative would be exempt from certain fair value disclosures.
The goodwill amendment would give a private company that is purchasing another private company an option to amortize goodwill over a period of 10 years or less. Additionally, the amendment will simplify the impairment model for goodwill. This will allow companies to test for impairment only when there is a triggering event that indicates that the fair value of a company (or a reporting unit) may be below its carrying amount. If a nonpublic company elects to apply the goodwill alternative, it will be required to apply all aspects of the alternative.
Effective date of adoption:
The FASB has endorsed the two accounting and reporting alternatives for private companies, marking the first standards to come from the efforts of the PCC. The effective date for these alternatives is fiscal years beginning after December 15, 2014, early adoption will be permitted.
What you should be aware of:
If you are a private company you have the option to continue accounting for interest rate swaps and goodwill as currently required under GAAP or you can adopt the alternative approach noted above. Please note if you are considering at any point to have your company become public we do not recommend that you adopt the alternative approach. If you adopt the alternative approach and subsequently your Company becomes public you will be required to adjust your financial statements to reflect the FASB approach and not this alternative approach. This can be costly to a Company.