Private company GAAP exceptions get thumbs up from FASB

BY KEN TYSIAC
November 25, 2013

FASB endorsed two GAAP exceptions for private companies Monday, marking a milestone in the work to provide simpler, less costly rules for private companies while producing financial statements that reflect economic reality.

The endorsement by FASB of exceptions crafted by the Private Company Council (PCC) means exceptions for private companies will be written into GAAP. The final standards will be issued by the end of the year.

The exceptions will:

  • Exempt private companies from having to perform impairment tests for goodwill subsequent to a business combination.
  • Provide a simplified hedge accounting approach for accounting for certain interest rate swaps that private companies other than financial institutions enter to convert variable-rate debt to fixed-rate debt. Private companies whose only derivatives are such swaps also would be exempted from certain fair value disclosures.


FASB also added a project to its agenda to determine whether changes to goodwill impairment accounting also should be made for public companies and not-for-profits. The board acknowledged that this may create additional changes for private companies at a later date in what board members called a “double switch.”

But the board chose to offer private companies immediate relief rather than denying the relief in the interest of possible future consistency.

“Ideally it would have been substantially more effective and efficient to have done this holistically,” said FASB Chairman Russell Golden. “… I think there is a double-switch risk, but I think it can be mitigated by educating the private-company constituents and working expeditiously on private companies and not-for-profits.”

In addition to the two exceptions approved Monday, the PCC has sent to FASB for endorsement an exception to applying variable-interest entity (VIE) guidance to common-control leasing arrangements for private companies.

FASB also will consider whether the VIE alternative should apply to public companies.

The goodwill exception endorsed Monday directs private companies to amortize goodwill over 10 years, or less than 10 years if the company can demonstrate that another useful life is more appropriate. Under the exception, a private company will be able to make an accounting policy decision to perform its impairment testing at the entity level or the operating level.

A private company would test goodwill for impairment only when a triggering event occurs that may reduce the fair value of an entity or reporting unit (if elected) below its carrying amount. The exception also would eliminate Step 2 of the impairment test.

The guidance can be applied prospectively for goodwill existing as of the beginning of the period of adoption, and for goodwill generated from business combinations occurring in the first annual period beginning after Dec. 15, 2014, and interim and annual periods thereafter. Goodwill that exists at the beginning of the period of adoption can be amortized prospectively over 10 years, or less than 10 years if another useful life is more appropriate. Early adoption is permitted.

Small private companies are most likely to benefit from the exception, according to Greg Forsythe, the leader of Deloitte’s Center of Valuation Excellence .

“The [difficulty of] monitoring and tracking, continually, and performing this impairment analysis, the view is, outweighs the benefits of doing it,” Forsythe said. “That’s the arena where it’s going to be appreciated most.”

But larger private companies may face a difficult decision. If they have any inkling of plans to go public, they may decline to use the exception because it would be challenging to go back and reconfigure their historical accounting at a later date, Forsythe said.

The possible changes to public company accounting also could be significant, he said. Board members said the International Accounting Standards Board (IASB) also is considering changes to goodwill impairment.

“We’ve still got a lot of things that could happen and could change things radically in the public company market at some point,” Forsythe said.

The other exception approved Monday—the simplified hedge accounting approach—is a practical expedient that allows private companies to qualify for hedge accounting under Topic 815, Derivatives and Hedging. For private companies using 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 fixed-rate borrowing rather than variable-rate borrowing.

The approach will take effect for the first annual period beginning after Dec. 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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