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.
Key developments for private company reporting
- 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 arrangement 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, which means that an eligible nonpublic entity could elect to apply one or more of the alternatives in financial statements that were not made available for issuance prior to the release of the final standard.
- 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.
What's next at the Private Company Council (PCC)
- The next PCC meeting is scheduled for December 11, 2014.
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