The Financial Accounting Standards Board (FASB) issued three proposals for public comment that offer alternatives to the U.S. GAAP for private companies, intended to reduce the cost and complexity of accounting for these companies. Now through August 23, companies have the opportunity to weigh in with their comments on the following proposals.
The Accounting for Intangible Assets in a Business Combination Proposal alleviates private companies from recognizing separately certain intangible assets acquired in a business combination. Only those identifiable intangible assets arising from non-cancelable contractual terms or other legal rights would be required to be separately recognized (for example, most trademarks, trade names, non-compete agreements, etc.). Any other intangible assets acquired would be permitted to be recognized as goodwill (for example, most customer lists and customer relationships).
This proposal would generally result in fewer intangible assets being recognized in a business combination for private companies. This proposal is expected to reduce the significant cost and complexity of valuing intangible assets when a business combination occurs.
The Accounting for Goodwill Subsequent to a Business Combination Proposal permits private companies to amortize goodwill and to use a simplified goodwill impairment testing model. This accounting alternative permits private companies to amortize goodwill on a straight-line basis over the useful life of the most significant long-lived asset that is acquired, not to exceed 10 years. Goodwill would only be tested for impairment when a triggering event occurs and would be tested for impairment at the Company-wide level (versus the current requirement to test on an annual basis at the reporting unit level). The complex and costly “Step Two” of the goodwill impairment test would also be eliminated; any impairment of goodwill would represent the excess of the Company’s carrying amount over its fair value.
For companies that have goodwill on their balance sheets, this proposal is expected to result in significant time and cost savings as an annual goodwill impairment test would no longer be required. For those entities that have goodwill impairment, the simplified goodwill impairment model is expected to significantly reduce the cost and complexity of determining the amount of the impairment.
The Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Proposal offers non-financial institution private companies the option of two simpler approaches to accounting for certain types of interest rate swaps. Under the first approach, companies would be permitted to account for qualifying swaps and variable-rate borrowings as one combined financial instrument. Under the second approach, companies would be provided with a practical expedient to qualify for hedge accounting if certain criteria are met. Under this method, no ineffectiveness would be assumed for qualifying swaps and the designed swap can be recorded at settlement value on the balance sheet (versus fair value).
For private companies with qualifying interest rate swaps, this is expected to reduce the cost and complexity of accounting for interest rate swaps. Proponents believe that these approaches will also result in more relevant financial reporting based on the economic purpose of entering into these interest-rate swaps.
The FASB is currently researching whether these proposals should also be considered for public and not-for-profit organizations. These proposals are out for public comment until August 23, 2013. The effective dates will be determined after review of the public feedback.
Last week, the Financial Accounting Foundation proposed another item for consideration that would exempt private companies from applying the consolidation guidance for variable interest entities under common control leasing arrangements. This fourth proposal will be issued in detail and discussed by the FASB before being issued for public comment.
Visit www.fasb.org to submit comments and stay tuned to RKL’s Working Capital for further updates on this topic.
Contributed by Sara C. Merrill, CPA, a supervisor in RKL’s Audit Services Group. Sara specializes in corporate audits for companies in a variety of industries, as well as employee benefit plan audits.