Monday January 27, 2014
From our Friends at Padgett Statemann
The Financial Accounting Standards Board (“FASB”), the designated organization for establishing accounting principles generally accepted in the United States of America, (“GAAP”), issued two accounting standards updates on January 16, 2014. These updates, resulting from proposals by the Private Company Council (“PCC”), provide alternatives for private companies, within the framework of GAAP, related to accounting for goodwill and interest rates swaps. The PCC was established in 2012 to improve the process of setting accounting standards for private companies and to address the concerns of private company stakeholders regarding the perceived increase in cost and complexity of GAAP.
These updates generally apply to all entities except public business entities*, (see * below for definition) not for profits, and employee benefit plans. Additionally, the interest rate swap update does not apply to financial institutions.
It is important to note that these updates provide alternative treatment under GAAP, and that affected entities may continue to use existing GAAP.
Goodwill
Accounting Standards Update No. 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill is effective for annual periods beginning after December 15, 2014. Early application is permitted.
Overview
- Permits amortization of goodwill (the residual asset recognized after all other assets and liabilities are recognized in a business combination) on the straight-line basis over ten years or less.
- For companies electing to amortize goodwill, the update permits the application of a simplified impairment model, with testing for impairment conducted when a triggering event occurs that indicates impairment. The testing is to be conducted at either the entity level or the reporting unit level, as determined by the entity’s accounting policy decision.
Differences from Current GAAP
- Current GAAP requires that goodwill be tested for impairment at least annually or more frequently if certain conditions exist. There is no provision for amortization; however, impairment losses are recorded.
Reasons for Update
- The PCC recommended this alternative based on feedback from users of private company financial statements that indicated goodwill and goodwill impairment losses were generally disregarded in the evaluation of a private company’s financial condition and, therefore, the benefits of the existing goodwill accounting model did not justify the costs of application.
Interest Rate Swaps
Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rates Swaps-Simplified Hedge Accounting Approach is effective for annual periods beginning after December 15, 2014. Early application is permitted.
Overview
- The update allows simplified hedge accounting for those swaps whose purpose is to economically convert variable-rate interest payments into fixed-rate payments.
- Private companies may elect to record swaps on the balance sheet at settlement values rather than at fair value.
Differences from Current GAAP
- Under current GAAP, interest rate swaps are recognized on the balance sheet at fair value. To mitigate the resulting income statement volatility, companies may elect hedge accounting under certain circumstances.
Reasons for Update
- The update was issued in order to allow private companies to mitigate income statement volatility related to interest rate swaps without having to comply with the complex requirements for current hedge accounting. Under this alternative the interest expense recorded will be similar to that which would have been charged under a fixed-rate borrowing. In addition, the settlement values should be easier to determine than fair values.
*A public business is a business entity meeting any one of the criteria below.
a. It is required by the U.S. Securities and Exchange Commission (“SEC”) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
b. It is required by the Securities Exchange Act of 1934 (the “Act”), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
For more information or questions, please contact Padgett Stratemann at 210.828.6281.
