February 6, 2014 – Financial Accounting Standards Board (FASB) has adopted certain recommendations from the Private Company Council (the PCC) and in January 2014 issued Accounting Standards Update (ASU) No. 2014-02, Intangibles – Goodwill and Other (Topic 350), Accounting for Goodwill a consensus of the Private Company Council (ASU 2014-02) and ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach (ASU 2014-3). The ASUs will be effective for fiscal years beginning after December 15, 2014 and interim periods thereafter, early adoption will also be permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance. This allows a private company to adopt the ASUs in their 2013 financial statements.
ASU 2014-02 allows private companies to adopt a simplified alternative for the subsequent accounting for goodwill that includes the following:
- Amortizing goodwill over a period not to exceed 10 years instead of not amortizing it
- Choosing to test goodwill for impairment at either the entity level or the reporting unit level instead of having to test goodwill at the reporting unit level
- Testing goodwill for impairment only when there is a triggering event instead of testing it every year
- Testing and measuring goodwill for impairment by comparing the fair value of the entity (or reporting unit) to its carrying amount instead of performing a two-step goodwill impairment test that requires hypothetical business combination accounting for purposes of measuring an impairment loss
ASU 2014-02 cannot be adopted piecemeal and must be elected in its entirety.
Prior to making the election, a private company needs to carefully consider the possibility of becoming, or being acquired by, a public business entity in the future and should be certain that the users of its financial statements will accept financial statements in which the accounting alternative has been applied.
ASU 2014-03 provides certain for-profit private companies with an option to apply a simplified hedge accounting approach for certain “plain vanilla” interest rate swaps that are used to convert variable-rate borrowings to fixed-rate borrowings. The benefits of electing the simplified approach include:
- The ability to make the election on a swap-by-swap basis and assume no ineffectiveness with the hedge relationship
- The ability to elect to measure the swap asset or liability at settlement value instead of fair value
- Documentation requirements to qualify for hedge accounting must be completed by the date on which the first annual financial statements are available to be issued after the hedge inception rather than concurrently at the hedge inception.
The PCC serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration by FASB. The PCC and FASB, working together, will mutually agree on a set of criteria to decide whether and when alternatives within U. S. Generally Accepted Accounting Principles (GAAP) are warranted for private companies. PCC will review and propose alternatives within U.S. GAAP to address the needs of users of private company financial statements.
About the Author
James A. Krupinski CPA
Jim has 25 years of experience providing audit and consulting services to clients from a diverse range of industries. In addition to his many audit management responsibilities, he currently serves as the leader of the Firm's risk management services group. He has assisted his clients with performing risk assessments, evaluating and improving internal controls, developing fraud prevention programs and complying with the requirements of Sarbanes Oxley's assessment of internal controls over financial reporting requirements.