By Jason Bramwell
The Financial Accounting Standards Board (FASB) on June 10 endorsed three accounting proposals from the Private Company Council (PCC) in the hopes of addressing concerns raised by stakeholders about the complexity of certain aspects of US Generally Accepted Accounting Principles (GAAP) for privately held companies.
The FASB expects to issue the three proposals as exposure drafts for public comment later this month.
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 GAAP for private companies.
The three accounting proposals the FASB approved involve intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps.
"[The] decision by the FASB to endorse three PCC proposals represents significant progress in our joint effort to address concerns about the complexity and relevance of certain standards for private companies that prepare GAAP-based financial statements", FASB Chairman Leslie Seidman said in a written statement. "We encourage our stakeholders to review them and let us know whether they believe they will improve financial reporting for private companies."
The first proposal – derived from PCC Issue No. 1(a), Accounting for Identifiable Intangible Assets in a Business Combination – would not require private companies to separately recognize certain intangible assets acquired in a business combination.
The proposal enables private companies that elect the alternative within US GAAP to recognize only those intangible assets arising from noncancelable contractual terms or those arising from other legal rights. Otherwise, an intangible asset would not be recognized separately from goodwill, even if it is separable.
The second proposal – derived from PCC Issue No. 1(b), Accounting for Goodwill Subsequent to a Business Combination – would allow for amortization of goodwill and a simplified goodwill impairment model. This would enable private companies that elect the alternative within US GAAP to amortize goodwill over the useful life of the primary asset acquired in a business combination, not to exceed ten years.
Goodwill would be tested for impairment only when a triggering event occurs that would more likely than not reduce the fair value of a company below its carrying amount. Moreover, goodwill would be tested for impairment at the companywide level as compared to the current requirement to test at the reporting unit level.
The third proposal – derived from PCC Issue No. 3, Accounting for Receive-Variable, Pay-Fixed Interest Rate Swaps – would allow private companies the option to use two simpler approaches to accounting for certain types of interest rate swaps that are entered into by a private company for the purposes of economically converting its variable-rate borrowing to a fixed-rate borrowing.
Under both approaches, the periodic income statement charge for interest would be similar to the amount that would result if the private company were to have entered into fixed-rate borrowing instead of variable-rate borrowing. The two approaches would apply to all private companies except for financial institutions.
The FASB directed staff to conduct additional research during the comment period for the first two proposals to assess the applicability of these proposals to public companies and not-for-profit organizations. For the third proposal, the FASB directed staff to conduct outreach through its normal channels, including advisory groups and other meetings in which the FASB participates.
The PCC and the FASB plan to discuss PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements during a meeting on July 16.