As discussed in the September newsletter article, AICPA—Special Purpose Framework, the Financial Accounting Standards Board (FASB) has designated a sub-committee (the Private Company Council or PCC) to be in charge of identifying specific areas in which financial reporting under the GAAP framework is particularly burdensome for private companies.
The PCC has made significant progress since August of this year by submitting four proposed Accounting Standard Updates (“ASUs”). On November 25th, two of those proposed ASUs were ratified by the FASB, which agreed to publish the final standards before the end of the year. Adoption of these proposed ASUs is elective and not mandatory. A summary of these proposed ASUs as compared to pre-existing GAAP is provided below:
|Category||PCC Proposed||Pre-Existing GAAP||Status/Expected
|Accounting for Goodwill||Private Companies will have the option to amortize goodwill on a straight-line basis over the useful life of the primary intangible asset acquired in a business combination, not to exceed 10 years. Goodwill is tested for impairment only if certain triggering events occur.||Goodwill is not currently amortized, but is evaluated for impairment on an annual basis. However, the FASB has agreed to explore whether the same method of accounting should be extended to public companies and not-for- profits.||Effective for annual periods beginning after December 15, 2014, with early adoption permitted.|
|Accounting for Certain Receive -Variable, Pay- Fixed Interest Rate Swaps||Allows for a simplified hedge accounting approach. Under simplified hedge accounting approach, the swap and related borrowing are accounted for as two separate instruments; however no ineffectiveness” is assumed if it meets the criteria. The result is that the periodic income statement charge for interest is similar to the amount that would be recorded if the entity had entered into a fixed-rate, rather than variable-rate borrowing. In addition, the entity may record the swap at settlement value rather than fair value (which factors non-performance risk).||Interest rate swaps and related borrowings are accounted for as two separate instruments. Borrowings are generally recognized at principal balance, while swaps are recognized at fair value as either an asset or liability, with changes in fair value recognized as a component of net income (loss) or other comprehensive income (“OCI”), depending upon the nature of the derivative. Determining how much should be recorded to net income vs. OCI can be complex.||Effective for annual periods beginning after December 15, 2014, with early adoption permitted.|
|Applying Variable Interest Entity (“VIE”) Guidance to Common Control Leasing Arrangements||Would allow for an entity not to apply VIE guidance for assessing whether it should consolidate a lessor entity when (1) the lessor entity and the private company are under common control, (2) the private company has a leasing arrangement with the lessor entity, and (3) substantially all of the activity between the two entities is related to the leasing activity. Additional disclosures about the lessor entity are required if election is applied.||Consolidation is required for entities with a controlling financial interest in another entity. A VIE model is applied when a controlling financial interest is achieved through arrangements that do not involve voting interests. Under the VIE model, consolidation may be required if it is determined than an entity is controlled by a “primary beneficiary” which controls less than 50% of the voting interests. Many currently existing common- control leasing arrangements result in consolidation of the lessor entity into the primary reporting entity.||On November 25, 2013, the PCC sent the proposed ASU to the FASB for final endorsement. The effective date, if ratified by the FASB, is not currently known.|
|Intangible Assets Acquired in Business Combinations||Would recognize separate from goodwill only those intangible assets that arise from non-cancelable contractual relationships or other legal rights (potential contract renewals or cancellations are not considered). Separately identifiable intangibles that are not recognized would be disclosed. The end result will be fewer intangible assets may be identified in business combinations, resulting in higher goodwill values.||Must recognize ALL intangible assets that are separable from goodwill based upon their relative fair values (i.e. customer lists and customer relationships), even if no contractual rights exist (developed technologies – even if unpatented, etc.).||The effective date, if ratified by the FASB, is not currently known.|
The next few months should provide a clearer landscape on the timing of the various PCC projects, so stay tuned! For continued up-to-date information on the PCC projects visit FASB.org or reach out to one of our financial reporting experts at Keiter.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.