On January 16, the FASB issued final standards for goodwill and interest rate swaps, providing private companies with accounting alternatives to simplify existing GAAP.
On January 16, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-02, Accounting for Goodwill, and ASU No. 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach. These standards provide nonpublic entities with accounting alternatives which are intended to (1) simplify the goodwill impairment model and (2) make it easier for certain interest rate swaps to qualify for hedge accounting.
In December 2013, the FASB issued the Private Company Decision Making Framework–A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the “Guide”) and ASU No. 2013-12, Definition of a Public Business Entity–An Addition to the Master Glossary. The Guide is intended to assist the FASB and the Private Company Council in determining whether and in what circumstances accounting and reporting alternatives should be offered to nonpublic entities, as that term is described in ASU 2013-12.
Accounting for goodwill
Under the goodwill 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. 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, a nonpublic entity applying the alternative 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.
If a nonpublic entity elects to apply the alternative, it will be required to apply all aspects of the alternative (i.e., both amortization and the simplified impairment test).
Accounting for certain interest rate swaps — Simplified hedge accounting approach
Under the simplified hedge accounting approach, a nonpublic entity that is not a financial institution would be able to apply hedge accounting to its receive-variable, pay-fixed interest rate swaps as long as the terms of the swap and the related debt are aligned. If the conditions are met, a company would be able to assume the cash flow hedge is fully effective.
Those applying the simplified hedge accounting approach will have until the issuance of their financial statements to complete the necessary hedging documentation. A nonpublic entity 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 final standards provide relief to nonpublic entities by offering simplified accounting models.
The new standards may impact public companies as well. If a public company is required to include a nonpublic entity’s financial statements in a regulatory filing (e.g., an acquisition subject to Rule 3-05 or material equity investments subject to Rule 3-09 of Regulation S-X), the nonpublic entity’s financial statements would need to be retrospectively adjusted to unwind any previously elected private company accounting alternatives. Additionally, a public company would be able to apply the private company standards in the stand-alone financial statements of a subsidiary, as long as the subsidiary, on its own, meets the definition of a nonpublic entity.
The 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 both of the alternatives in its 2013 financial statements, as long as those financial statements have not been made available for issuance prior to the release of the final standards.
The goodwill alternative would be applied on a prospective basis, with amortization of existing goodwill commencing at the beginning of the period of adoption. 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 has separately added a project to its technical agenda to address the accounting for goodwill for public business entities and not-for-profit entities. Deliberations on this project are expected to commence in 2014.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the National Professional Services Group.