There’s good news for private companies. For more than two decades, they have have been required to comply with the same financial reporting standards as publicly held companies. However, the private-company framework, designed to augment existing financial reporting rules and overseen by the Financial Accounting Standards Board (FASB), will offer some alternate financial-reporting approaches. It also will create guidelines for the FASB and the Private Company Council (PCC) to begin reducing the complexity and costs created when private companies have to follow Generally Accepted Accounting Principles.
Once approved, the changes will become part of the Private Company Decision-Making Framework, which offers some significant benefits.
The FASB recently approved PCC decisions pertaining to two measures, and the final rules are expected to be issued before Dec. 31, 2013. Those two decisions affect the following:
Accounting for Goodwill Subsequent to a Business Combination
This standard allows for both the amortization of goodwill and creation of a simplified goodwill impairment model. Private companies will be able to elect to amortize goodwill over a period not to exceed 10 years. Goodwill would be tested for impairment only when a triggering event occurs, one that would likely reduce the fair value of the company below its carrying amount. Moreover, goodwill would be tested for impairment at the company level, compared with the current requirement to test at the reporting-unit level.
Accounting for Certain Interest Rate Swaps
Private companies will have the option of using a simpler approach in accounting for certain types of interest-rate swaps used to convert variable-rate borrowing to a fixed-rate debt. The “simplified hedge accounting approach” permits the swap to be recorded at settlement value, as opposed to fair value, on the balance sheet. Under this approach, the periodic income-statement charge for interest would be similar to the amount that would result if the private company had entered into a fixed-rate borrowing instead of a variable-rate borrowing. This approach would apply to all private companies except financial institutions.
Among the proposals currently awaiting final review by FASB are two measures that would also offer major benefits to family businesses and closely held concerns:
Daniel F. Morrill
Accounting for Identifiable Intangible Assets in a Business Combination
Private companies would be able to take an alternate approach to recognizing certain intangible assets acquired when businesses merge or are bought. The proposal enables private companies to recognize only those intangible assets arising from non-cancelable contractual terms or those arising from other legal rights. Otherwise, intangible assets — such as customer lists and customer relationships— would not be recognized separately from goodwill, even if separable.
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
Generally, this proposal would exempt private companies from applying the consolidation guidance for the variable-interest entities (in which a company owns less than a majority of an entity) under common control leasing arrangements. A variable-interest entity is an organization in which consolidation is not based on a majority of voting rights. For example, if certain criteria are met, a lessee that guarantees the mortgage for a lessor entity under common control would no longer have to consolidate the lessor entity.
Whatever the final form of these proposals, they demonstrate significant progress toward updating and improving financial reporting for private companies.
Daniel F. Morrill, CPA, is a principal at Wolf & Company in Boston. He has fourteen years of experience providing audit and other assurance services. He leads the firm’s audit and accounting committee, performs quality control reviews and conducts technical training and research.
