Private company accounting

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.


Key developments in standard-setting for private companies

  • The PCC has approved four accounting alternatives for private companies, all of which are effective immediately (refer to In brief US2016-07, FASB amends PCC alternative effective date and transition requirements, for further details):

    1) Accounting for Goodwill (ASU No. 2014-02) provides private companies the option to amortize goodwill over 10 years or less, and use a simplified, trigger-based impairment model that allows an accounting policy election of assessing impairment at either the entity-wide level or the reporting unit level. For more information, refer to our 2015 Private Company Reporter

    2) Accounting for Identifiable Intangible Assets in a Business Combination (ASU No. 2014-18) provides private companies the option not to separately recognize and measure (and instead subsume into goodwill) non-compete agreements and certain customer-related intangible assets in a business combination, such as most customer relationship intangibles. The adoption of this alternative would also require a company to adopt the goodwill accounting alternative. For more information, refer to our 2015 Private Company Reporter

    3) Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (ASU No. 2014-03) provides private companies with a simplified method to qualify for hedge accounting for “plain-vanilla” interest rate swaps when certain conditions are met. For more information, refer to our 2015 Private Company Reporter

4) Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (ASU No. 2014-07) provides private companies with an exemption from applying the variable interest entity (VIE) consolidation model to an affiliate from whom the private company leases an asset. Private companies that elect the alternative would not consolidate a qualifying VIE, but instead would account for the lease with the VIE (as either capital or operating) and account for any executory contracts between the lessee and lessor (that would have been eliminated if the VIE was consolidated). For more information, refer to our 2015 Private Company Reporter

  • The FASB also issued an exposure draft in June 2017 that would expand the alternative included in ASU No. 2014-07. Under the proposal, if certain conditions are met, private entities could choose not to apply the VIE consolidation guidance to entities under common control. Electing this accounting policy would require the entity to provide additional disclosures about its involvement with and exposure to each common control party. For more information, refer to In brief US2017-18, FASB proposal would amend related party consolidation guidance for VIEs

Why it's important

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  • The accounting alternatives provide relief to nonpublic entities by offering simplified accounting models.
  • 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.
  • 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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Beth Paul
US Strategic Thought Leader, National Professional Services Group
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IFRS & US Standard Setting Leader, National Professional Services Group
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