New private company financial reporting alternatives have given financial statement preparers many issues to consider. Over the past year, the AICPA Center for Plain English Accounting (CPEA) has received several member inquiries related to whether an entity would have to establish preferability upon initial adoption of the private company accounting alternatives and whether future changes to that election would require the establishment of preferability.
According to FASB ASC Topic 250, Accounting Changes and Error Corrections, and more specifically ASC Section 250-10-45, once an accounting principle is adopted, it should not be changed in accounting for events and transactions of a similar nature, unless the use of an allowable alternate principle is justified on the basis that it is preferable. However, an objective basis for determining preferability among alternative accounting principles has not been established, so those determinations have to be made subjectively.
The enactment of a statute or the issuance of a professional pronouncement that creates, interprets, expresses a preference for, or rejects a specific principle is sufficient support for a change. However, with respect to accounting principles developed by the Private Company Council (PCC), it is unclear whether the issuance of the professional pronouncements (Accounting Standards Updates, or ASUs), which apply only to certain entities, is sufficient support for a change.
It is important to note that preferability only needs to be established after an ASU's effective date. Typically, entities that do not adopt a new accounting option provided by an ASU after the ASU's effective date are deemed to have made a decision to retain the current accounting policy. Therefore, if it elects to switch accounting policies in the future, the entity would need to establish preferability. There is a chance this could change in the future, as the PCC has asked FASB's staff to undertake research that could provide more flexibility with this issue. But currently, the preferability guidance applies.
ISSUES SPECIFIC TO THE GOODWILL ALTERNATIVE
As it applies to ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, if a reporting entity did not have goodwill reflected in the statement of financial position as of Dec. 31, 2014, there would be no existing policy established related to accounting for goodwill. Therefore, if the reporting entity entered into a business combination at a later date that resulted in the recognition of goodwill, adoption of the private company accounting alternative would not be considered a change in accounting principle. Based on the guidance in ASC Paragraph 250-10-45-1, initial adoption of an accounting principle in recognition of events or transactions occurring for the first time, or that previously were immaterial in their effect, would not be considered a change in accounting principle, as no accounting policy has been elected.
If an entity elects to apply the goodwill accounting alternative in its Dec. 31, 2015, financial statements and then elects to no longer amortize goodwill and go back to the nonamortization model at a later date, preferability would have to be established.
The "Basis for Conclusions" section of ASU No. 2014-02 indicates that some PCC members thought the amortization model (with impairment, if necessary) was a "better representation of the economics of goodwill than the current impairment-only model." One reason for this is the inherent bias the current impairment-only model has for acquisitive entities. Acquisitive entities can capitalize goodwill from acquisition. Nonacquisitive entities are not permitted to capitalize internally generated goodwill. Further, acquisitive entities can mask impairment of purchased goodwill, in some cases, with internally generated goodwill after the acquisition. Accordingly, it may be possible to establish preferability (when necessary) to switch to the amortization model for goodwill under ASU No. 2014-02.
ISSUES SPECIFIC TO THE VARIABLE-INTEREST ENTITIES ALTERNATIVE
ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, allows a private company to elect not to consolidate a potential variable-interest entity (VIE) when certain criteria related to common-control leasing arrangements are met. Entities that have qualifying common-control leasing arrangements will need to carefully consider whether to adopt ASU No. 2014-07, since these entities will need to establish preferability in periods after the effective date if they change their initial decision on applying ASU No. 2014-07.
The CPEA believes that it will be difficult to elect ASU No. 2014-07 (not consolidate a qualifying potential VIE) if preferability needs to be established, as, typically, consolidated financial statements are more useful to users of financial statements.
ISSUES SPECIFIC TO THE PLAIN VANILLA SWAP ALTERNATIVE
ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, is applied on an instrument-by-instrument basis, consistent with all hedge accounting. Therefore, preferability would not apply when electing this ASU on a new instrument.
About the author
Kristy Illuzzi (firstname.lastname@example.org) is a senior technical manager with the AICPA Center for Plain English Accounting, the Institute's national auditing and accounting resource center. More information is available at aicpa.org/CPEA.
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