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FASB issues first new private company proposals for comment.

Less than seven months after the initial meeting of the Private Company Council (PCC), the Financial Accounting Standards Board (FASB) issued the first three PCC proposals on July 1 to address the complexity and cost of private company financial reporting. The three proposals, which have been issued for public comment as proposed Accounting Standards Updates (ASUs), include:

* PCC Issue 13-01A, Accounting for Identifiable Intangible Assets in a Business Combination, would allow private companies relief from the requirement to separately recognize certain intangible assets that are acquired in business combinations. The proposal addresses the concerns of private company stakeholders that the benefits of estimating the fair value of certain identifiable assets are outweighed by the cost and complexity of developing that information.

Under this proposal, a private company would have the option not to recognize an intangible asset separate from goodwill, unless that asset arises from a noncancelable contract or other legal right. However, the entity would have to disclose the nature of the identifiable intangible assets acquired but not recognized separately as a result of choosing the accounting alternative. If an entity elects this accounting alternative, it would apply it to all future business combinations.

The alternative guidance would typically result in fewer intangibles being recognized separately in a business combination, because intangibles that meet the current separabilty criterion in Accounting Standards Codification (ASC 805), Business Combinations, or that arise from cancelable contracts, would be included as a component of goodwill.

For instance, a noncontractual customer relationship, which is currently recognized as a separate intangible asset in many business combinations, would be subsumed into goodwill using the accounting alternative in the proposal.

Additionally, separate intangible assets that would be recognized under the alternative would be measured at fair value, but if the intangible asset relates to a noncancelable contract, only market participant assumptions about the remaining noncancelable term of the contract would be considered in the fair value measurement.

On the other hand, if the asset relates to a legal right, the fair value measurement would involve all market participant assumptions.

With some exceptions, comment letters have generally been favorable toward the proposal.

* PCC Issue 13-01B, Accounting for Goodwill Subsequent to a Business Combination, would allow private companies to amortize goodwill and to use a simplified goodwill impairment model. Specifically, a private company would amortize goodwill using the useful life of the primary asset acquired in the business combination for a period of up to 10 years.

Goodwill impairment would be tested at the entity-wide level rather than at the reporting unit level. In addition, goodwill would be tested for impairment only when a triggering event occurs that would more likely than not reduce the fair value of the company below its carrying amount. A quantitative test of goodwill impairment would be a single step test, with impairment equal to the excess of the company's carrying amount over its fair value.

If elected, these accounting alternatives for goodwill would be applied prospectively to existing goodwill balances and to all newly generated goodwill.

The proposal is the result of PCC outreach indicating that many private company financial statement users disregard goodwill impairment losses in analyzing a company's financial condition and operating performance. Based on this input, the PCC's proposed accounting alternative for goodwill is structured to reduce the cost and complexity of the current goodwill impairment test.

The proposed amortization of goodwill should reduce the number of situations in which goodwill impairment must be addressed because the goodwill balance reduces over time.

Additionally, the application of a single-step test as opposed to the currently required two-step test, as well as the testing of goodwill at the entity level rather than at a reporting unit level, should significantly reduce the complexity of the quantitative test and certain costs associated with it.

Some stakeholders that commented on the proposal indicated that greater clarity of how the primary asset should be identified was needed, and also questioned whether the amortization period for goodwill should be limited to a maximum of 10 years.

Additionally, several stakeholders expressed concern that application of the goodwill impairment test at the entity level could prevent an otherwise apparent impairment that would occur at the reporting unit level.

* PCC Issue 13-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps, would permit private companies to adopt a simpler approach to account for certain types of interest rate swaps. This proposal would allow a private company to use two alternative methods, identified as the "combined instruments" and "simplified shortcut" approaches, to account for certain interest rate swaps utilized on an economic basis to convert variable-rate borrowings to fixed rate.

The proposal addresses two concerns of private company stakeholders--that hedge accounting requirements are too complex and that the costs and relevance of fair value accounting of a receive-variable, pay fixed interest rate swap are questionable.

Under the combined instruments approach, provided certain criteria are met, the swap and the related borrowing would be accounted for as a single combined financial instrument. That is, the swap itself would not be recognized in the balance sheet, but an accrual for the next net cash settlement of the swap would be recognized.

An entity electing the combined instruments approach would have to apply the approach to all its swaps meeting the criteria for its use.

The simplified hedge accounting approach would give companies a practical expediency to qualify for hedge accounting--the swap and related borrowing would continue to be accounted for as separate financial instruments. However, the swap would be measured using its settlement value instead of fair value and the approach would assume no hedge ineffectiveness.

Under either approach, interest expense would be similar to the amount that would have been recorded if the entity had entered into a fixed rate borrowing instead of a variable rate borrowing and a swan.

Many stakeholders have objected to the combined instruments approach in comment letters, but there is general support for the simplified hedge accounting approach.

Next Steps

All three proposals exclude publicly traded companies and non-for-profit entities from their scope. Additionally, the proposal relating to interest rate swaps also excludes financial institutions and certain employee benefit plans.

Several stakeholders responded in their comment letters that the scope of the proposals should be expanded to include not-for-profit entities. Others observed that public companies with investments in private companies that are accounted for using the equity method would be impacted if the investee adopted the proposals and that guidance should be provided for these situations.

Finally, some stakeholders commented that the board should provide transition guidance for private entities that adopt the proposals and subsequently decide to become public entities.

Decisions reflected in the proposed ASUs could be changed in new deliberations by the board and PCC based on information received in comment letters and from other sources. Also, the proposals do not include effective dates that the board will conclude upon during new deliberations. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

Editor's Note: Financial Executive International's (FEI) Committee on Private Comment Standards noted its support for three proposals in August. Comment letters can be accessed in the Knowledge Center section of FEI's website.

L. Charles Evans ( is partner of accounting principles in the professional standards group of Grant Thornton LLP in Houston.
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Title Annotation:FINANCIAL REPORTING; Financial Accounting Standards Board
Author:Evans, L. Charles
Publication:Financial Executive
Geographic Code:1USA
Date:Oct 1, 2013
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