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Focus on Private Company Financial Reporting: FASB Issues Accounting Standards Updates For Private Companies

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On January 16, 2014, the Financial Accounting Standards Board (FASB) issued two updates to U.S. Generally Accepted Accounting Principles that provide alternatives for private companies on accounting for goodwill and interest rate swaps. Both of these Accounting Standards Updates had been proposed by the Private Company Council and subsequently endorsed by the FASB.
January 17, 2014

On January 16, 2014, the Financial Accounting Standards Board (FASB) issued two updates to U.S. Generally Accepted Accounting Principles that provide alternatives for private companies on accounting for goodwill and interest rate swaps. Both of these Accounting Standards Updates had been proposed by the Private Company Council and subsequently endorsed by the FASB.

FASB Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, permits a private company to subsequently amortize goodwill on a straight-line basis over a period of ten years, or less if the company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill. Under this alternative, goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of a company (or a reporting unit) may be below its carrying amount. A private company that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the company level or the reporting unit level. An impairment loss, if any, represents the excess of the carrying amount of the entity or reporting unit over its fair value, which is a simplified impairment calculation over goodwill's implied value calculation.

The combination of the amortization method and the relief from the requirement to test goodwill for impairment at least annually is expected to result in significant cost savings for many private companies that carry goodwill on their balance sheets. This is because amortization should reduce the likelihood of impairments, and private companies generally will test goodwill for impairment less frequently.

All entities except for public business entities, not-for-profit entities and employee benefit plans can elect to utilize the accounting alternative provided in ASU No. 2014-02.

If elected, the accounting alternative should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted, including application to any period for which the entity's financial statements have not yet been made available for issuance.

Please click here to view the full text of ASU No. 2014-02.

FASB Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, gives private companies, other than financial institutions, the option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments. The swap agreement must meet a variety of criteria to qualify for the simplified hedge accounting approach. However, those requirements are generally present in most plain vanilla swap arrangements.

Under this alternative, when a private company applies the simplified hedge accounting approach, the income statement charge for interest expense will be similar to the amount that would result if the company had directly entered into a fixed-rate borrowing instead of a variable-rate borrowing and an interest rate swap. Furthermore, the simplified hedge accounting approach provides a practical expedient to measuring the fair value of swaps by allowing the use of settlement value, which removes the consideration of nonperformance risk, which is the risk that the counterparty to the swap agreement would fail to fulfill their obligations under the agreement. This represents a simplification as this element of fair value is difficult for the reporting entity to determine. In addition, the approach allows for hedge documentation to be completed up until the date on which the financial statements are available to be issued instead of requiring that the documentation be completed concurrently at the inception of the hedge. The accounting alternative also extends the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives.

All entities except for public business entities, not-for-profit entities, employee benefit plans and financial institutions can elect to utilize the accounting alternative provided in ASU No. 2014-03.

ASU No. 2014-03 is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. Entities utilizing the amendments in this ASU may use either a full retrospective approach or a modified retrospective approach.

Please click here to view the full text of ASU No. 2014-03.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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