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New Accounting Alternatives for Private Companies

The Financial Accounting Standards Board (FASB or Board) is expected to issue two accounting alternatives for private companies next week: Subsequent Accounting for Goodwill and Accounting for Interest Rate Swaps. The Private Company Council (PCC) approved the accounting alternatives in October, and both alternatives were endorsed by the FASB in November.

Subsequent Accounting for Goodwill
The PCC decided that a private company (that elects the alternative within U.S. GAAP) would amortize goodwill over 10 years, or less than 10 years if the entity can demonstrate that another useful life is more appropriate.  Goodwill would be tested for impairment if a triggering event occurs that indicates that the fair value of the entity may be less than its carrying value (or the fair value of the reporting unit may be less than the carrying value of the reporting unit).  A goodwill impairment would be the excess of the carrying amount of the entity or reporting unit over its fair value.
The PCC also decided that a private company could make an accounting policy decision to perform its impairment testing at the entity-level or the reporting unit level.
The PCC further simplified the goodwill impairment test by eliminating step two of the impairment test, which requires the application of a hypothetical purchase price allocation to calculate the goodwill impairment amount.  Under the accounting alternative, the goodwill impairment amount would represent the excess of the entity’s (or the reporting unit’s) carrying amount over its fair value as calculated in step one of the test.  Goodwill would not be reduced below zero.  Impairment charges would be allocated to individual amortizable units of goodwill pro-rata using their relative carrying amounts or could be allocated using another reasonable and rational approach.
The alternative would be available to entities that recognize goodwill in accordance with Topic 805, except for public business entities and not-for-profit entities.
It is expected that early adoption of the goodwill alternative accounting would be allowed.

In its December meeting, the FASB added a project to its agenda on the accounting for goodwill for public business entities and Not-for-profits.  The Board directed the staff to perform additional outreach and research on the following four alternatives:

• The PCC alternative
• Amortization of goodwill over its useful life not to exceed a maximum number of years
• Direct write-off of goodwill
• Simplified impairment test.
As the PCC issues more updates regarding goodwill, watch for updates from Frazier & Deeter.
Accounting for Interest Rate Swaps
The PCC also finalized an accounting alternative that would give private companies, other than financial institutions, the option to elect a simplified hedge accounting approach for certain types of interest rate swaps that economically convert variable rate interest payments to fixed-rate payments. The alternative would also extend the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives.  The simplified hedge accounting approach is a practical expedient to obtain hedge accounting under Topic 815 Derivatives and Hedging assuming no ineffectiveness.
The simplified approach provides a private company the option to measure the designated swap at settlement value instead of fair value.  Additionally, the approach allows for hedge documentation to be completed up until the date on which the financial statements are available to be issued.
Both of these alternatives are expected to be issued by the FASB in mid-January. If you have questions about the implications of either of these changes, please contact Frazier & Deeter.
This accounting update provided by Sean Lager, Partner in Frazier & Deeter’s Assurance practice. Sean is a member of the Technical Issues Committee of the American Institute of Certified Public Accountants. The Technical Issues Committee works with the Financial Accounting Standards Board, Auditing Standards Board and Governmental Accounting Standards Board to represent the views of accounting firms and their clients in the standards-setting process.

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