Private Company Accounting is Getting Simplified
After decades of attempts and debates on how to address private company financial statement issues and concerns (some of you may remember the “Baby – GAAP”, “Big GAAP-Little GAAP” terminology) we are now seeing the issuance of U.S. Generally Accepted Accounting Principles’ (“U.S. GAAP”) alternatives.
In 2012 the Private Company Council (“PCC”) was created by the Financial Accounting Standards Board (“FASB”) to determine whether exceptions or modifications to U.S. GAAP are needed to address the needs of users of private company financial statements. As stated by the FASB the PCC identifies, deliberates, and votes on proposed changes, which are then subject to endorsement by the FASB and submitted for public comment before being incorporated into U.S. GAAP.
U.S. GAAP Alternatives
So far in 2014 the FASB has issued three U.S. GAAP alternatives initiated by the PCC. The alternatives are issued as Accounting Standards Updates (“ASU”) and include “(a consensus of the Private Company Council)” in the ASU title.
The alternatives mean private companies can apply these standards to their U.S. GAAP basis financial statements and not have GAAP exceptions.
The first two GAAP alternatives initiated by the PCC were released by FASB in January. Those alternatives are:
ASU No. 2014-02 Intangibles – Goodwill and Other – A private company can elect this accounting alternative and:
Amortize goodwill on a straight-line basis over 10 years or less, not to exceed its useful life
Adopt an accounting policy to test goodwill for impairment at either the entity level or the reporting unit level.
If a triggering event occurs then Goodwill must be tested for impairment
ASU No. 2014-03 Derivatives and Hedging
Allows use of the simplified hedge accounting approach for certain interest-rate swaps that private companies other than financial institutions enter to convert variable-rate debt to fixed-rate debt.
The third GAAP alternative was issued in March 2014:
ASU No. 2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
If certain conditions are met a private company lessee may elect not to apply a requirement to consolidate variable-interest entities (“VIE”) in common-control leasing arrangements.
If this accounting alternative is elected the private company lessee would not be required to provide the VIE disclosures about the lessor entity. Instead the private company lessee would have less complex yet informative disclosure requirements.
Impact on Private Companies
These three U.S. GAAP alternatives provide accounting principles that may be less complex, less costly and more meaningful for many private companies who want or are required to prepare U.S. GAAP basis financial statements.
In all three of the above ASUs other requirements apply. Visit the FASB website for the full text: http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498