Private company reporting

Accounting and reporting for private companies continues to evolve -- both through the efforts of the Private Company Council (PCC) and new guidance from the FASB.

  • The FASB issued ASU No. 2014-02, Accounting for Goodwill, on January 16, 2014. This standard provides private companies with an accounting alternative which is intended to simplify the accounting and reporting for goodwill. Under this alternative, a nonpublic entity is able to amortize goodwill on a straight-line basis over a period of ten years (or over a shorter period if the company demonstrates that another useful life is more appropriate). Goodwill would be subject to impairment testing only upon the occurrence of a triggering event. The impairment test can be performed at an entity-wide or reporting unit level, based upon the company’s accounting policy election. If a quantitative impairment test is required, a one-step impairment test would be performed. The amount of the impairment would be measured by calculating the difference between the carrying amount of the entity (or reporting unit, as applicable) and its fair value. A hypothetical purchase price allocation to isolate the change in goodwill (i.e., step two) would no longer be required.

  • Concurrently, the FASB issued ASU No. 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach. This standard provides private companies that are not financial institutions with an accounting alternative which is intended to make it easier for certain interest rate swaps to qualify for hedge accounting. Under this alternative, receive-variable, pay-fixed interest rate swaps that meet specific criteria would qualify for a simplified hedge accounting model, which would make it easier to qualify for and to apply hedge accounting and also extend the time companies have to complete the necessary documentation. Furthermore, it provides a simplified measurement model based on the settlement value of the swap rather than its fair value.

  • On March 20, 2014, the FASB issued ASU No. 2014-07, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. Under this standard, private companies can elect an exemption from the variable interest entity (VIE) consolidation model applicable to certain common control leasing arrangements when a specific set of criteria are met. A private company electing to adopt the alternative would no longer be required to consolidate certain entities it had previously consolidated under the VIE model. However, the private company would still need to consider whether it should consolidate the legal entity under a voting interest model. There are additional disclosure requirements for companies electing to apply the alternative.

  • These standards are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted.
     
  • Companies can elect the simplified hedge accounting alternative on a swap-by-swap basis, whether existing at the date of adoption or entered into after the adoption date. However, currently, companies must elect to adopt (or opt out of) the accounting for goodwill and applying the modified terms of the VIE guidance upon the effective date in the fiscal year beginning after December 15, 2014. Any subsequent election of the alternative would be considered a change in accounting policy, subject to preferability, and applied retrospectively as of the effective date.

  • In September 2015, the FASB issued an exposure draft on the effective date and transition provisions in the PCC alternatives. The proposal was based on a PCC proposal in response to concerns about the need for private company preparers to assess preferability when electing a private company alternative for the first time after its effective date. The FASB’s proposal removes the effective dates from the PCC alternatives and includes transition provisions that would result in private companies being able to forgo a preferability assessment the first time they elect one of the PCC alternatives. The FASB’s proposal also extends the transition guidance indefinitely for adoption of the alternatives related to goodwill and interest rate swaps.

    –     The goodwill alternative would be accounted for prospectively

    –     The interest rate swap alternative would allow for either a modified or full retrospective         application of the simplified hedge accounting approach to existing swaps the first time
            the election is made and then by election to subsequent new swaps

    Under the proposal, once elected, the accounting alternative must be maintained and any subsequent changes, other than due to meeting the definition of a public business entity, would be considered a change in accounting policy and subject to a preferability assessment. The comment period for the proposal ended November 16, 2015.
  • The final standards provide relief to nonpublic entities by offering simplified accounting models. For example:

    –     Under the new goodwill alternative, the previously required annual impairment
            assessment  is  now a trigger-based impairment assessment. In addition, companies
            have an opportunity to make an accounting policy election to perform the impairment
            test at an entity-wide level as  opposed to the previously required reporting unit
            level. Finally, any goodwill impairment loss is measured in a one-step test, so the         hypothetical purchase price allocation (i.e., step 2) is no longer required. 

    –     The new simplified hedge accounting alternative provides relief from existing hedge         accounting guidance by making it easier for a company to qualify its receive-variable,
            pay-fixed interest rate swaps for hedge accounting, as long as certain conditions are
            met, and also provides a simplified measurement model.

    –     The new alternative for common control leasing arrangements simplifies the
            consolidation model for private companies by providing them with an exemption from         applying VIE guidance for certain common control leasing arrangements.

  • Any accounting alternative approved by the PCC and endorsed by the FASB is optional for private companies to adopt. A private company always has the option to continue to follow existing GAAP.

  • Companies generally can make an election on a standard by standard basis. That is, when a private company elects to adopt a PCC-approved accounting alternative, it is not required to adopt other PCC-approved accounting alternatives unless specifically required to do so. In other words, this is not an “all or nothing” adoption requirement.

  • Before adopting the private company alternatives, an eligible private company should carefully weigh the impact of applying the standard on its key financial metrics and debt covenant compliance.

  • Additionally, if an eligible private company becomes a public business entity in the future, the company will need to retrospectively adjust its historical financial statements to remove the effect of applying the PCC alternatives for all prior periods presented. This could prove to be a time consuming and costly exercise for a private company that becomes a public business entity.

  • Finally, an eligible private company should consider the impact that adopting the PCC’s alternatives could have on its equity method investors that may file public financial statements. The public company investor’s equity method income would likely be different had the investee not adopted the accounting alternatives. The SEC staff has preliminarily indicated that it will require the impact of any private company accounting alternatives to be unwound in the public company investor’s determination of equity method income. 

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