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Private Company Council Update

December 09, 2014

Sean L. Morse, CPA, MSAT
Manager

Back in May 2012, the Financial Accounting Foundation’s Board of Trustees approved the establishment of the Private Company Council (PCC), a new body to improve the process of setting accounting standards for private companies. The PCC has two principal responsibilities:

  1. The PCC and the Financial Accounting Standards Board (FASB), working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. Generally Accepted Accounting Principles (GAAP) are warranted for private companies. Based on those criteria, the PCC will review and propose alternatives within U.S. GAAP to address the needs of users of private company financial statements.
     
  2. The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

During 2014, the FASB issued the following three Accounting Standards Updates based on guidance from the PCC:

  • ASU 2014-02, Accounting for Goodwill (Issued on January 16, 2014) - This standard provides private companies with an accounting alternative which is intended to simplify the accounting and reporting for goodwill. Under this alternative, a non-public entity is able to amortize goodwill on a straight-line basis over a period of ten years (or over a shorter period if the company demonstrates that another useful life is more appropriate). Goodwill would be subject to impairment testing only upon the occurrence of a triggering event. When a triggering event occurs, an entity would have the option to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that it is more likely than not that goodwill is impaired, the entity would perform the quantitative test to compare the entity’s fair value with its carrying amount, including goodwill (or the fair value of the reporting unit with the carrying amount, including goodwill, of the reporting unit). If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, further testing would be unnecessary.
     
  • ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps–Simplified Hedge Accounting Approach (Issued on January 16, 2014) - This standard provides private companies that are not financial institutions with an accounting alternative which is intended to make it easier for certain interest rate swaps to qualify for hedge accounting. Under this alternative, receive-variable, pay-fixed interest rate swaps that meet specific criteria would qualify for a simplified hedge accounting model, which would make it easier to qualify for and to apply hedge accounting. In addition, this alternative extends the time companies have to complete the necessary documentation. Furthermore, it provides a simplified measurement model based on the settlement value of the swap rather than its fair value.
     
  • ASU 2014-07, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (Issued on March 20, 2014) - Under this standard, private companies can elect an exemption from the variable interest entity (VIE) consolidation model applicable to certain common control leasing arrangement when a specific set of criteria are met. A private company electing to adopt the alternative would no longer be required to consolidate certain entities it had previously consolidated under the VIE model. There are additional disclosure requirements for companies electing to apply the alternative.

The above standards are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted, which means that an eligible non-public entity could elect to apply one or more of the alternatives in financial statements that were not made available for issuance prior to the release of the final standard.

In addition to the above standards, the PCC also voted to finalize an accounting alternative related to accounting for identifiable intangible assets in a business combination. Under this alternative, private companies will not have to separately recognize and measure customer-related intangible assets in a business combination, unless those assets are capable of being sold or licensed independently from other assets of a business. In addition, certain non-compete agreements in a business combination would no longer need to be separately recognized as an intangible asset. The adoption of this alternative would also require a company to adopt ASU 2014-02. This approved alternative is still subject to final endorsement by the FASB.

For more information, please contact Sean Morse, smorse@blumshapiro.comor 860.570.6335.

Sean Morse is a manager in BlumShapiro’s Accounting and Auditing Department, Sean oversees audit engagements for a wide range of clients, including non-profit and healthcare organizations, manufacturers, distributors and educational institutions.

 

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