To provide for accounting alternatives that certain private company reporting entities can use, the Financial Accounting Standards Board (FASB) has amended the Accounting Standards Codification.
The FASB issued three Accounting Standards Updates (ASUs) in consensus with the Private Company Council.
Specifically, the three updates provide alternatives within generally accepted accounting principles (GAAP) when:
- Accounting for goodwill acquired in a business combination,
- Using hedge accounting for certain interest rate swaps, and
- Applying variable interest entity guidance to certain common control leasing arrangements.
The optional guidance related to these Private Company Council alternatives is available only for use by private companies. The guidance is not available for use by public business entities, not-for-profit entities or employee benefit plans.
Simplified Accounting for Goodwill
In January 2014, the FASB issued ASU 2014-02, Accounting for Goodwill. It amends the guidance in FASB ASC Topic 350, Intangibles – Goodwill and Other, to provide private companies with a simplified amortization alternative that can be used in accounting for post-acquisition goodwill.
The ASU allows private companies an option to amortize goodwill on a straight-line basis over a period of 10 years, or a shorter period if it can be demonstrated that a shorter useful life is deemed to be appropriate. In addition, use of the alternative results in private companies having a simplified goodwill impairment testing model.
Simplified Hedge Accounting for Plain-Vanilla Swaps
Also in January, the FASB issued ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach. This guidance amends the guidance in FASB ASC Topic 815, Derivatives and Hedging, to provide private companies with a simplified accounting alternative that can be used in accounting for certain plain-vanilla interest rate swaps.
Note that the scope of this ASU is somewhat different from the two other ASUs in that it is available for use only by private companies other than financial institutions.
The accounting alternative allows for the use of simplified hedge accounting for swaps that are entered into for the purpose of economically converting variable-rate borrowings into fixed-rate borrowings. Using this alternative approach, the amount of interest expense charged to income will be similar to the amount that would have been charged to income if the reporting entity had entered directly into a fixed-rate borrowing rather than a variable-rate borrowing and receive-variable, pay-fixed interest rate swap.
If this alternative approach is elected, reporting entities may assume no ineffectiveness for qualifying swaps that are designated in a hedging relationship using FASB ASC 815 requirements. Certain criteria must be met to use the simplified hedge accounting alternative.
When the accounting alternative is used, as a practical expedient, receive-variable, pay-fixed interest rate swaps may be measured at settlement value rather than fair value. Also, to use the alternative, reporting entities have until the date that annual financial statements are available to be issued to complete the required hedge accounting documentation.
Guidance for Common Control Leasing Arrangements
In March 2014, the FASB issued ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. It amends the guidance in FASB ASC Topic 810, Consolidation, to provide private companies with an accounting alternative not to apply variable interest entity (VIE) guidance for common control leasing arrangements when certain conditions are met.
When this accounting alternative is elected, reporting entity lessees would not be required to evaluate lessor entities to determine whether they should be subject to consolidation under the guidance in the VIE subsections of FASB ASC 810 if the first three criteria and, in applicable circumstances, the fourth criterion below are met:
- The private company lessees (the reporting entities) and the lessor legal entities are under common control.
- The private company lessees have leasing arrangements with the lessor legal entities.
- Substantially all activities between the private company lessees and lessor legal entities are related to leasing activities (including supporting leasing activities) between those entities.
- If the private company lessees explicitly guarantee or provide collateral for any obligation of the lessor legal entities related to the asset leased by the private companies, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private companies from the lessor legal entities.
These three new ASUs contain disclosure requirements and effective date and transition provisions. Readers should refer to the full text of these ASUs for a complete understanding of the guidance.
Many private companies should benefit from these new Private Company Council alternatives and experience a reduction in both the cost and the complexity associated with accounting for goodwill, interest rate swaps and applying VIE guidance. – Bob Durak, CPA, CGMA, Director of AICPA Center for Plain English Accounting