FASB Issues GAAP Alternatives for Private Companies on Accounting for Goodwill and Interest Rate Swaps
On January 16, 2014, the Financial Accounting Standards Board (FASB) issued two GAAP alternatives for private companies that had been proposed by the Private Company Council. The first GAAP alternative relates to goodwill. It permits a private company to amortize goodwill on a straight-line basis over 10 years (or less in certain circumstances). It also permits a private company to test goodwill for impairment only when there is an indication that the fair value of the entity may be below its carrying amount (a “triggering event”) rather than annually. In addition, the current impairment test was simplified, eliminating the complex “Step 2” of the test. In order to use the accounting alternative, a private company must elect to utilize the alternative and must make an accounting policy election to test goodwill impairment at either the entity level or the reporting unit level.
The second GAAP alternative relates to interest rate swaps that are entered into for the purpose of converting variable-rate interest payments to fixed-rate payments. Under these circumstances, private companies have the option to apply a simplified hedge accounting approach to account for the swap. When a private company applies this approach, the income statement charge for interest expense will be similar to the amount that would have resulted had the company directly entered into a fixed-rate borrowing. This will mitigate the income statement volatility that can result from accounting for the transaction as a derivative. The accounting alternative allows the swap to be measured at its settlement value instead of the more difficult to determine fair value, thus alleviating some cost and complexity. This alternative accounting may be elected on a swap-by-swap basis.
Both accounting alternatives 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, including application to any period for which the entity’s financial statements have not yet been made available for issuance.
See the January 16, 2014 FASB In Focus publication for a more comprehensive summary of the provisions of the GAAP alternative accounting.
The two new accounting alternatives apply to all entities except for public business entities and not-for-profit entities as defined in the Accounting Standards Codification Master Glossary and to employee benefit plans as defined in the Accounting Standards Codification. The interest rate swap accounting alternative also excludes financial institutions.
The FASB has recently issued a definition of public business entities which can be found in the December 23, 2013 FASB In Focus.