On November 25, the FASB endorsed the first two accounting alternatives previously approved by the PCC, which address the accounting for goodwill and interest rate swaps.
On November 25, 2013, the FASB endorsed the first two accounting alternatives (the "final standards") previously approved by the Private Company Council (PCC)1. The final standards will provide private companies with (1) an alternative accounting model for goodwill, and (2) a simplified hedge accounting approach for qualifying interest rate swaps.
Separately, the FASB voted to add a project to its technical agenda to consider alternatives to the existing goodwill impairment model for public companies and not-for-profit entities. Alternative views to be deliberated include an amortization model, a simplified impairment model without amortization, or a direct write-off of goodwill model.
Accounting for Goodwill Subsequent to a Business Combination
Under the goodwill alternative, a private company would be able to amortize goodwill on a straight-line basis over a period of ten years, or a shorter period if the company can demonstrate that another useful life is more appropriate.
Goodwill would be subject to impairment testing only upon the occurrence of a triggering event. Upon adoption, a company will need to make a policy election regarding whether it will assess goodwill for impairment at an entity-wide level or a reporting unit level.
Upon the occurrence of a triggering event, private companies will continue to have the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. 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.
The goodwill alternative would be applied on a prospective basis. A private company that elects to adopt this alternative would begin amortizing existing goodwill as of the beginning of the period of adoption.
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach
Under the simplified hedge accounting approach, a private company would be able to apply hedge accounting to its receive-variable, pay-fixed interest rate swaps as long as its swaps meet certain conditions that indicate that the terms of the swap and the related debt are aligned. If these conditions are met, a company that elects to apply this alternative would be able to assume the cash flow hedge is fully effective.
A private company will have until the issuance of their financial statements to complete the necessary hedging documentation. A private company will also be able to recognize the swap at its settlement value, which measures the swap without non-performance risk, instead of at its fair value.
The simplified hedge accounting approach will be applied on either a modified retrospective basis or a full retrospective basis, with such election to be made on a swap-by-swap basis.
The FASB and the PCC are also currently working on finalizing the definition of a public business entity. This definition will be used to determine which entities are eligible to apply the accounting and reporting alternatives approved by the FASB and the PCC.
Based upon the finalized definition, any nonpublic entity will be eligible to adopt the goodwill alternative. A nonpublic entity that is not a financial institution will be eligible to adopt the simplified hedge accounting approach to certain interest rate swaps.
Public companies should be mindful of these developments as well. For example, a public company may acquire or invest in a private company which has applied one or more private company accounting alternatives in its historical financial statements. When the public company is required to include the private company’s financial statements in a regulatory filing, the private company’s financial statements would need to be retrospectively adjusted to unwind previously elected accounting alternatives.
The final standards will be effective for fiscal years beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption will be permitted.
Accounting Standards Updates are expected for the final standards before the end of 2013. Since early adoption will be permitted, it is expected that qualifying private companies will be permitted, at their option, to adopt one or both of the final standards in 2013.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact Kirsten Schofield (1-973-236-4054) or John Stieg (1-973-236-7057) in the National Professional Services Group.
1See the Private Company Reporter - September 30 and October 1, 2013 for more information on the two alternatives approved by the PCC and subsequently endorsed by the FASB.