In 2014, the Financial Accounting Standards Board (FASB) issued updates specifically geared toward nonpublic companies in response to the profession’s concern about nonpublic companies being forced to comply with generally accepted accounting principles (GAAP) that were intended for public companies. Below is a summary of four FASB Accounting Standards Updates released by the Private Company Council (PCC) in 2014.
2014-18 Business Combinations, Accounting for Identifiable Intangible Assets in a Business Combination
This Update offers an accounting alternative to nonpublic companies by no longer requiring customer-related intangible assets (unless they can be sold or licensed independently) and non-compete agreements to be recognized separately from goodwill. If an entity elects this treatment, it must adopt the private company alternative to amortize goodwill as described in FASB Update 2014-02, Intangibles – Goodwill and Other (see below). The decision to adopt the accounting alternative in this Update must be made for the first qualifying transaction for fiscal years beginning after December 15, 2015. Early application is permitted.
2014-02 Intangibles – Goodwill and Other
This Update allows private companies to amortize goodwill over 10 years, or less, if appropriate. It also requires companies to make an election to test goodwill for impairment at either the entity or reporting unit level and to perform an impairment test when certain events occur. This differs from current U.S. GAAP which requires impairment testing annually with more complex methods of testing. If you adopt this Update, it should be applied prospectively to existing and new goodwill in annual periods beginning after December 15, 2014. Early application is permitted.
2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
This Update allows private companies to elect, when certain conditions are met, not to apply the existing variable interest entity (VIE) guidance. Instead, certain disclosures would be made about the lessor and leasing arrangement. The alternate election not to apply VIE guidance to a lessor can be made when:
- The lessee and lessor are under common control
- The lessee has a leasing arrangement with the lessor
- Substantially all of the activity between the two is related to leasing activities
Additionally, if the lessee explicitly guarantees or provides collateral for any of the lessor’s obligations on assets leased by the lessee, then the principal amount at the start of the obligation cannot exceed the value of the asset leased.
If you adopt this treatment, it should be applied to all leasing agreements meeting the conditions. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014. Early application is permitted.
2014-03 Derivatives and Hedging
If certain criteria are met this Update allows the use of the simplified hedge accounting approach for swaps that are entered into to convert variable-rate borrowing into fixed-rate borrowing. This approach results in interest expense similar to the amount if the entity had directly entered into a fixed-rate borrowing instead of a swap. The Update also gives an option to measure the swap at settlement value instead of fair value. The swap must meet certain criteria to qualify for the simplified hedge accounting approach.
This Update is effective for periods beginning after December 15, 2014 with early adoption permitted. Two approaches are offered to apply the amendment: modified retrospective approach (adjustments made to the opening balances of equity as of the current period) or the full retrospective approach (adjustments made to the earliest period presented).
To further discuss the impact of these Updates on your company or clients, please contact BSSF by calling 717.761.7171 (Camp Hill office), or 717.581.1040 (Lancaster office).
FASB Accounting Standards Updates 2014-02, 2014-03, 2014-07 and 2014-18.