During their meeting on November 25, 2013, in a much anticipated decision, the Financial Accounting Standards Board (FASB) endorsed two GAAP exceptions for private companies. These exceptions were proposed by the Private Company Council (PCC) in an effort to provide simpler, less costly rules for private companies while continuing to produce financial statements that reflect economic reality.
The exceptions will:
- Direct private companies to amortize goodwill over 10 years, or less than 10 years if the company can demonstrate that another useful life is more appropriate, allow a private company to make an accounting policy decision to perform its impairment testing at the entity level or the operating level, test goodwill for impairment only when a triggering event occurs that may reduce the fair value of an entity or reporting unit below its carrying amount, and eliminate Step 2 of the impairment test.
- Provide a simplified hedge accounting approach for accounting for certain interest rate swaps that private companies other than financial institutions enter into to convert variable-rate debt to fixed-rate debt and exempt private companies from fair value disclosures if these are the only types of derivatives. For companies using this approach, the periodic income statement charge for interest would be similar to the amount that would result if the company had entered into fixed-rate borrowing rather than variable-rate borrowing.
The final standards are expected to be issued by the end of 2013 and would be effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter with early adoption permitted.
The FASB also added a project to its agenda to determine whether changes to goodwill impairment accounting should be made for public companies and not-for-profits. However, at this time it is important to remember that these exceptions are only for private companies, which may lead to a major decision for larger private companies looking to go public in the near future. If they are more-likely-than-not to go public, a private company may decline to use the exception because it would be challenging to go back and reconfigure their historical accounting at a later date.
In addition to the two exceptions approved Monday, the PCC has sent to FASB for endorsement an exception to applying variable-interest entity (VIE) guidance to common-control leasing arrangements for private companies. FASB will also consider whether the VIE alternative should apply to public companies.
Stay tuned for more activity for private companies regarding rulings by the PCC and FASB. You can monitor these activities through the FASB’s website or stay tuned for more Schneider Downs Insights as events unfold.
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