In the loop: How new accounting elections could affect your deal or IPO strategy

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In the loop 05/20/2014 by Assurance services
In the loop: How new accounting elections could affect your deal or IPO strategy

At a glance

In the loop is an executive-level series addressing important financial reporting and regulatory issues. Our first edition discusses how changes in private company accounting could affect future deal or financing strategies.

What you need to know

  • In 2012, the Private Company Council was formed to help identify ways to reduce the cost and complexity of financial reporting for private companies.
  • So far, three accounting alternatives have been finalized for private companies related to goodwill, interest rate swaps, and common-control lease arrangements.
  • Public companies that acquire an interest in a private company and private companies going public may have to “unwind” these accounting elections – an added cost and effort.

Buying a private company or considering an IPO? Be prepared for changes to private company accounting

Private company accounting is changing…and it could affect your deal or financing strategies. New accounting alternatives are now available for private companies and more are likely to follow. These alternatives are designed to simplify accounting for private companies. However, “unwinding” this accounting later – if the company is acquired by a public company or undertakes a public offering – won’t be as simple. Public and private companies considering a future transaction can avoid surprises by understanding the new alternatives and planning ahead for their implications.

How private company accounting could affect you

A public company that acquires an interest in a private company will be required to file historical financial statements of the acquired company with the SEC if the acquisition is significant. These statements cannot reflect the private company accounting alternatives. That means “unwinding” any alternatives elected in the past – a potentially time-consuming and costly exercise. Factors such as management turnover or incomplete accounting records could create additional challenges.

It could also be a bottleneck without advance planning. Public company buyers should keep these requirements in mind when negotiating with potential targets. The filing deadline is tight, and missing it means you are no longer “current” on SEC filings, affecting your ability to quickly access the capital markets in the future, among other consequences.

In addition, private companies planning a public equity or debt offering will be required to “unwind” any private company alternatives used in prior periods. This will be an added cost and effort in the public offering process.

Examples of “unwinding” the private company elections

Consider a private company that opts to amortize goodwill and either performs a simplified impairment test or no test at all. To apply the public company accounting rules, the company will effectively have to go back in time and perform annual impairment tests for all prior years.

A new interest rate swap accounting alternative also creates unique challenges due to the strict rules in place for public companies when applying hedge accounting. Unwinding this election will likely require mark-to-market accounting through the income statement in historical periods.

Keeping tabs on the changing landscape

We expect private company accounting to continue to evolve. Tracking these developments could help you plan for future transactions – whether you are a public or private company.

How PwC can help

To have a deeper discussion of how private company accounting might affect your company, please contact:

Elizabeth Paul
Partner
Phone: 1-973-236-7270
Email: elizabeth.paul@us.pwc.com

Neil Dhar
Partner
Phone: 1-646-471-3700
Email: neil.k.dhar@us.pwc.com

Angela Fergason
Director
Phone: 1-408-817-1216
Email: angela.fergason@us.pwc.com

Of further interest

You may also want to see Private Company Reporter. This periodic publication keeps you informed about the latest developments in private company financial reporting.