Private company reporting
The Private Company Council (PCC) continues to make brisk progress toward improving financial reporting for private companies, proposing three modifications to U.S. GAAP at its May meeting. The FASB’s projects on the definition of a non-public entity and the private company decision-making framework continue.
- At its meetings held on September 30 and October 1, 2013, the Private Company Council 1 (PCC) reaffirmed its previous decisions related to alternatives for the accounting for goodwill and applying a simplified hedge accounting model for certain interest rate swaps. The decisions would permit a private company to apply simplified accounting treatments that would reduce cost and complexity in these areas. The FASB’s exposure drafts addressing these accounting alternatives were issued in July 2013, with comment periods ended in August 2013.
- The proposed alternatives are as follows:
– Accounting for goodwill: Goodwill would no longer be subject to a two-step impairment test. Instead, it would be amortized and subject to a trigger-based simplified impairment test performed at either an entity-wide level or at a reporting unit level.
– Simplified hedge accounting model: Receive-variable, pay-fixed interest rate swaps which meet a specific set of criteria would qualify for a simplified hedge accounting model, which would make it easier to apply hedge accounting, extend the time companies have to complete the necessary documentation, and avoid income statement volatility.
- The two alternatives approved by the PCC are now subject to a final endorsement vote by the FASB, which is expected to occur within the next few weeks. If endorsed, it is expected that final Accounting Standards Updates (ASUs) would be issued before the end of the year, which would leave open the possibility of early adoption in 2013 for those private companies that desire immediate relief.
- Other alternatives that the PCC are currently deliberating are:
– Intangible assets in a business combination: The recognition and measurement of intangible assets would be subject to new criteria that would potentially reduce the number of intangible assets recognized from that under the current standard. The proposed alternative was released for exposure in July 2013 and the comment period ended in August 2013. On October 1, 2013, based on concerns raised by respondents on the proposed ASU, the PCC concluded that the original proposal would not likely result in a significant reduction in cost or complexity when compared to existing GAAP. Accordingly, the PCC directed the FASB staff to conduct additional research with the goal of developing a revised accounting alternative to be redeliberated at a future PCC meeting. Consistent with the original proposal, the PCC is interested in exploring alternatives to the current recognition and measurement criteria for identifiable intangible assets in a business combination. Any proposed alternative will likely result in fewer intangible assets being recognized in a business combination.
– Interest rate swaps: Under the proposal, receive-variable, pay-fixed rate interest rate swaps that meet a specific set of criteria would be eligible to follow a “combined instruments” model which would eliminate the need for any derivative accounting. This proposed alternative was released for exposure in July 2013 and the comment period ended in August 2013. On October 1, 2013, based on concerns raised by respondents, the PCC directed the FASB staff to conduct additional research to explore whether or not modifications to the combined instruments model, as originally proposed, would be viable.
– Applying variable interest entity guidance to common control leasing arrangements: At its option, a private company would be exempt from applying the VIE model when it is a lessee in a leasing arrangement with a separate entity under common control, provided that substantially all of the activities between the lessee and the lessor are related to the leasing activity. The proposed alternative was approved by the PCC in July and endorsed by the FASB in August. Subsequently, the FASB issued an exposure draft with a comment period that ended on October 14, 2013. The PCC intends to redeliberate the proposal at its November 12, 2013 meeting.
- The FASB continues to move forward on two related projects, a private company decision-making framework (the "framework") and the definition of a nonpublic entity.
– The framework will be used by the PCC and the FASB to determine whether modifications to U.S. GAAP should be considered for private companies. The revised proposed framework released in April for public comment explicitly states that a company adopting a modification available to private companies would not be required to adopt all available modifications. Also, the FASB staff will remove the presumption that when industry-specific recognition and measurement guidance exists, it is relevant to users of both public and private company financial statements. The comment period for the proposed framework ended in June 2013 and a final framework is expected to be issued before the end of the year.
– The definition of a nonpublic entity project will determine which entities should be considered under the framework. An exposure draft of the proposed definition was released in August 2013 and the comment period ended in September 2013. A final proposed definition is expected to be finalized by the end of the year. Generally, the proposed definition will result in more companies being considered “public business entities” than under current definitions used in GAAP today and therefore not eligible for the accounting alternatives approved by the PCC and endorsed by the FASB.
1In 2012, the PCC was established by the Financial Accounting Foundation (the parent organization of the FASB) to advise the FASB on private company reporting matters. The PCC is to assist the FASB in determining if modifications to GAAP are appropriate for private companies.
- Efforts to modify U.S. standards for private companies may also result in modification of standards applied to other entities, including public companies. Accordingly, all companies should monitor the PCC's technical agenda and assess the impact of future potential changes as the direction of the technical agenda becomes clearer.
- If there are ways for private companies to address concerns over complexity, cost, and relevancy, public companies will be interested in exploring those solutions as well.
- Any changes to the current standard-setting structure that result from the FAF's plan could significantly affect the future of financial reporting for private companies. Any user of private company financial statements, including lenders, public company vendors to private companies, and analysts, will want to stay current on any differences in GAAP that could result.
- Public companies should monitor the FASB’s deliberations around what constitutes the definition of a public company. If the proposal is finalized as written, equity investee financial statements that are prepared under Regulation S-X Rule 3-09, as well as financial statements of businesses acquired required under Regulation S-X Rule 3-05 would not be able to apply PCC alternatives. Public companies will want to monitor these developments because conversion of an equity investee or acquired company’s private company statements to comply with public company standards could be costly and time consuming.
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