The Private Company Council (PCC) has voted to finalize two alternatives within U.S. Generally Accepted Accounting Principles (GAAP) for private companies related to accounting for interest rate swaps and, separately, accounting for goodwill in a business combination.
The alternatives would permit a private company (i.e., a nonpublic entity) to apply simplified accounting treatments that will reduce cost and complexity in accounting and reporting.
The first proposed GAAP alternative—Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—would give private companies, other than financial institutions, 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. This alternative would allow the swap to be recorded at settlement value rather than fair value.
When utilizing a hedge accounting approach, the change in settlement value should be recorded as a component of other comprehensive income. Previously, companies not utilizing hedge accounting have recorded the change in fair value within the income statement. The alternative would also extend the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives.
This alternative represents a change from the original proposal. The original proposal enabled private companies to use both a simplified hedge accounting approach and a combined instruments approach to account for certain types of interest rate swaps. The PCC decided to separate the combined instruments approach from the revised proposal and directed the Financial Accounting Standards Board (FASB) staff to conduct more research on the combined instruments approach for further discussion at a future meeting.
The second proposed GAAP alternative—Accounting for Goodwill Subsequent to a Business Combination—would permit a private company to subsequently amortize goodwill over a period of ten years, or less under certain circumstances, and to apply a simplified impairment model to goodwill. This simplified model would require impairment testing only when an event occurs or circumstances change that would more likely than not reduce the fair value of the entity below its carrying value.
Additionally, in measuring the amount of any indicated impairment, the amount of the impairment would be determined by calculating the difference between the fair value and the carrying value of the entity. No hypothetical purchase price allocation (i.e., "step two") would need to be performed.
The FASB will discuss the proposed alternatives and also consider the applicability of these alternatives to publicly traded companies and not-for-profit organizations in the coming weeks. If the FASB decides to endorse the alternatives, they will be issued as final Accounting Standards Updates. PCC Chairman Billy Atkinson indicated that the PCC hoped to receive the FASB’s endorsement on the alternatives in the coming weeks so that 2013 implementation is possible.
The PCC also discussed Issue No. 13-01A—Accounting for Identifiable Intangible Assets in a Business Combination, which modifies the requirement for private companies to separately recognize fewer intangible assets acquired in a business combination.
The PCC considered comments received on the Exposure Draft and concluded that the proposed guidance would not accomplish the goal of reducing the cost and complexity of preparing financial statements under current GAAP. Therefore, the PCC directed the FASB staff to conduct more research for further discussion at a future meeting.
The next PCC meeting will be held on November 12, 2013.
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