FASB Updates for Private Companies: Accounting for Goodwill, Interest Rate Swaps

On January 16, 2014, the FASB issued two updates to U.S. GAAP that provide private companies with alternatives related to accounting for goodwill and interest rate swaps.

Private Company GAAP - Intangibles - Goodwill and Other

Accounting Standards Update (ASU) 2014-2 Intangibles-Goodwill and Other relates to the subsequent measurement of goodwill. If elected as a US GAAP alternative, private companies would no longer be required to test goodwill of a reporting unit at least annually for impairment. Instead:

  • Goodwill existing at the beginning of the period of adoption and new goodwill recognized should be amortized on a straight-line basis over 10 years (or less if another shorter useful life is appropriate).
  • Entities must elect an accounting policy to either test goodwill at the entity or reporting unit level. Currently, only the reporting unit level is allowed.
  • Goodwill should be tested for impairment when a triggering event occurs that indicates the fair value of the entity or reporting unit may be below its carrying amount. Currently, the impairment test is at least annually.
  • Upon a triggering event, the entity may first assess qualitative factors to determine whether a quantitative impairment test is necessary.
  • An impairment loss is measured as the difference between the fair value of the entity or reporting unit and the carrying amount of the entity or reporting unit, including goodwill. Currently, the impairment loss is calculated using a hypothetical application of the acquisition method, which is typically a costly exercise.

The goal, as with all alternatives proposed for private companies, is simplification in accounting and a reduction in application cost. The effective date of this ASU is basically for 2014 calendar year ends and beyond. However, earlier application is permitted including 2013 year ends that have not been made available for issuance.

View the complete FASB ASU here.

Private Company GAAP - Derivatives and Hedging

ASU 2014-3 Derivatives and Hedging: Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps-Simplified Hedging Accounting Approach provides the option for private companies other than financial institutions to use a simplified method of hedge accounting for interest rate swaps that are entered into for the sole purpose of economically converting variable-rate interest payments to fixed-rate payments. Presently, companies at the inception of the agreement must qualify/appropriately elect the use of hedge accounting for arrangements of this type to exclude the change in fair value of the swap from earnings.

This alternative:

  • Provides a practical expedient to allow the application of cash flow hedge accounting for interest rate swaps.
  • Allows the documentation of the cash flow hedge to be made by the time the first annual financial statements that include the hedge are available to be issued.
  • Accounts for the change in value to be included in other comprehensive income rather than net income, which will greatly reduce earnings volatility.
  • Allows the swap to be measured at settlement value, the difference in the present value of the future cash flows of the fixed and variable rate debt, rather than fair value.

View the complete FASB ASU on the GAAP alternative here.

View the FASB news release related to both ASUs here.

When considering whether your company should apply these accounting alternatives, consider consulting with the users of your financial statements to make sure they are comfortable with electing the alternatives. Also, keep in mind that if your company plans to go public or may be acquired by a public company, it is probably not a good idea to elect these alternatives.