New Accounting Alternatives for Private Companies on Goodwill and Interest Rate Swaps
The Financial Accounting Standards Board (“FASB”) recently endorsed the first two accounting alternatives proposed by the Private Company Council (“PCC”). These new accounting alternatives are expected to save private companies resources and costs when preparing for their annual financial statements. The FASB is expected to issue final guidance on these accounting alternatives in December 2013; the alternatives are expected to be effective for annual periods beginning after December 15, 2014 and may include option for early adoption.
Accounting for Goodwill Subsequent to a Business Combination
Goodwill represents the residual asset in a business combination after recognizing all identifiable assets acquired and liabilities assumed. Under current U.S. GAAP, goodwill is tested for impairment at least annually. Should a private company choose to adopt this new GAAP alternative, goodwill (existing and new) will be amortized on a straight-line basis over its useful life not to exceed ten years. The useful life is determined based on the primary asset, the most significant long-lived asset acquired in a business combination. In addition, goodwill would be assessed for potential impairment only when a triggering event occurs. Such assessment will be performed at the entity-wide level, as opposed at the reporting-unit level, and the amount of goodwill impairment would represent the excess of the entity’s carrying amount over its fair value.
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
Many private companies have difficulty obtaining fixed-rate borrowings, and, as result, enter into interest rate swap agreements to economically convert their variable-rate borrowings into fixed-rate borrowings. Under this new accounting alternative, private companies, except for financial institutions, have the option to utilize the simplified hedge accounting approach if certain criteria are met. This approach would assume no ineffectiveness and the interest rate swap would be recorded at settlement value, as opposed to fair value, and thus eliminate the earnings volatility as a result of changes in fair value of the derivative instruments.