Accounting Alternatives for Private Companies – 2014

On January 16, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates No. 2014-02 and 2014-3. These updates proactively define a private company and set standards for accounting for goodwill and a simplified hedge accounting approach.

Definition of a Private Company

The FASB decided that it should proactively determine which entities would be within the scope of the Private Company Accounting Alternatives. Their aim was to minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice of what constitutes a nonpublic entity and public entity within U.S. GAAP. Generally speaking, a private company is defined as an entity other than a public business entity, a not-for-profit entity, or an employee benefit plan. A public business entity is generally defined as a business entity, other than a not-for-profit entity or an employee benefit plan, which would be required by the SEC or similar regulatory or administrative body to file or furnish financial statements, or is a conduit bond obligor for securities that are traded or quoted on an exchange or an over-the-counter market.

Accounting for Goodwill

ASU 2014-02 allows business entities which meet the new definition of a private company, to amortize goodwill on a straight-line basis over 10 years, or a shorter period if it is more appropriate. An entity may revise the remaining useful life of goodwill upon the occurrence of events and changes in circumstances that warrant a revision to the remaining period of amortization. However, the cumulative amortization period for any amortizable unit of goodwill cannot exceed 10 years.  If the estimate of the remaining useful life of goodwill is revised, the remaining carrying amount of goodwill shall be amortized prospectively on a straight-line basis over that revised remaining useful life.

In addition, the accounting alternative for goodwill allows a private company to subsequently revalue goodwill when a triggering event occurs.  Private companies can apply a simpler one-step goodwill impairment test either the entity level or the reporting unit level when a triggering event occurs that would indicate that the fair value of an entity (or reporting unit) may be below its carrying amount.  The alternative should reduce cost and complexity of performing current two-step goodwill impairment test as well as avoid the costly and complex process of identifying reporting units.

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach

ASU 2014-03 allows simplified hedge accounting for certain swaps that private companies other than financial institutions enter to convert variable rate debt to fixed rate debt.  The simplified hedge accounting also can reduce cost of applying traditional hedge accounting to certain swaps.

Effective Date

The above guidance will be effective for annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015.  Early adoption is permitted. Private companies can elect to apply the alternatives to your 2013 financial statements that have not been made available for issuance.