FASB Makes Tweaks to Goodwill, Interest Rate Swap Standards

By Jason Bramwell, Staff Writer

The Financial Accounting Standards Board (FASB) on January 16 issued updates for two accounting standards – one on goodwill and the other on interest rate swaps – both of which FASB Chairman Russell Golden said address issues that “private company stakeholders have told us are priorities.”

The FASB, along with the Private Company Council (PCC), has been addressing concerns raised by stakeholders about the complexity of certain aspects of US GAAP. The PCC was established in 2012 by the Financial Accounting Foundation (FAF) to work with the FASB to determine whether and when to modify US accounting standards for private companies.

The two updates on Thursday provide alternatives for private companies on the subsequent accounting for goodwill and for interest rate swaps – specifically a simplified hedge accounting approach for certain types of swaps, according to the FASB.

“Both standards address private company stakeholder concerns by reducing the cost and complexity for preparers while still providing decision-useful information for lenders, investors, and other users of private company financial statements,” Golden said in a written statement.

The two accounting standards were finalized by the PCC in October 2013 and endorsed by the FASB in late November.

Summary of Updates and Alternatives
The first update, Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, permits a private company to subsequently amortize goodwill on a straight-line basis over a ten-year period – or less if the company demonstrates that another useful life is more appropriate.

It also allows a private company to apply a simplified impairment model to goodwill, which is defined as the residual asset recognized in a business combination after recognizing all other identifiable assets acquired and liabilities assumed.

Under the accounting alternative on goodwill, goodwill would be tested for impairment “when a triggering event occurs that indicates that the fair value of a company, or a reporting unit, may be below its carrying amount,” according to the FASB. “A private company that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the company level or the reporting-unit level.”

Private companies that carry goodwill on their balance sheets should see significant cost savings due to the combination of the amortization method and the relief from the requirement to test goodwill for impairment, the FASB noted, because “amortization should reduce the likelihood of impairments, and private companies generally will test goodwill for impairment less frequently.”

The second update, Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, gives private companies – other than financial institutions – the option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments.

Under the accounting alternative provided for interest rate swaps, “when a private company applies the simplified hedge accounting approach, the income statement charge for interest expense will be similar to the amount that would result if the company had directly entered into a fixed-rate borrowing instead of a variable-rate borrowing and an interest rate swap,” according to the FASB.

The FASB also noted the simplified hedge accounting approach “provides a practical expedient to measuring the fair value of swaps by allowing the use of settlement value, which removes the consideration of nonperformance risk.”

Could the Standards Affect Public Companies?
In an In Brief to clients, Big Four firm PwC stated the two standards may also impact public companies.

“If a public company is required to include a nonpublic entity’s financial statements in a regulatory filing (e.g., an acquisition subject to Rule 3-05 or material equity investments subject to Rule 3-09 of Regulation S-X), the nonpublic entity’s financial statements would need to be retrospectively adjusted to unwind any previously elected private company accounting alternatives,” PwC noted. “Additionally, a public company would be able to apply the private company standards in the stand-alone financial statements of a subsidiary, as long as the subsidiary, on its own, meets the definition of a nonpublic entity.”

The FASB recently added a project to its agenda on the subsequent accounting for goodwill for public companies and not-for-profit organizations, but did not give the same consideration to the interest rate swap alternative. However, the standard-setting organization said it would consider the accounting for such swaps as part of its broader hedge accounting project.

Both alternatives will be effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015, the FASB noted. Early adoption is permitted, according to PwC, which means that an eligible nonpublic entity could elect to apply one or both of the alternatives in its 2013 financial statements, as long as those financial statements have not been made available for issuance prior to the release of the final standards.

Related articles:

FASB OKs Standards on Goodwill and Interest Rate Swaps
PCC Finalizes Two GAAP Standards for FASB to Endorse

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