PCC to ask FASB to endorse first private company GAAP exceptions

The Private Company Council (PCC) on Tuesday approved its first GAAP exceptions for private companies and will forward them to FASB for final endorsement.

If FASB endorses the exceptions, they will be written into GAAP. These would be the first GAAP exceptions approved by the PCC, which was formed last year by FASB’s parent body, the Financial Accounting Foundation, in part to create exceptions and modifications to GAAP for private companies.

The exceptions approved by the PCC would:

• Allow private companies to choose a simplified hedge accounting approach to their financial reporting when they enter into interest rate swaps to economically convert their variable-rate interest payments to fixed-rate interest payments.
• Give private companies the ability to amortize goodwill acquired in a business combination.

“The PCC was able to finalize two proposals addressing issues users, preparers, and public accountants of private company financial statements have told us are a priority,” PCC Chairman Billy Atkinson said in a news release. “We look forward to receiving the FASB’s endorsement on the alternatives in the coming weeks so that 2013 implementation is possible.”

Interest rate swaps

The GAAP exception approved for certain interest rate swaps, known as the simplified hedge accounting approach, would provide private companies with a practical expedient to qualify for hedge accounting under Topic 815, Derivatives and Hedging.

In addition, the alternative would extend the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives.

Private companies would be able to apply the approach when the following criteria are met:

• Both the variable rate on the swap and borrowing are based on the same index and interest rate.
• The swap is what is known as a “plain vanilla” swap, and there is no floor or cap on the variable interest rate of the swap unless the borrowing has a comparable floor or cap.
• The repricing and settlement dates for the swap and the borrowing match or differ by no more than a few days.
• The swap’s fair value at the time the simplified hedge accounting approach is applied is at or near zero.
• The notional amount of the swap is equal to or less than the principal amount of the borrowing.
• The term of the swap is equal to or less than the term of the borrowing.

One-time transition relief would be allowed, so that companies could apply the simplified hedge accounting approach to existing swaps that meet the criteria.

The exception would take effect for fiscal years beginning after Dec. 15, 2014, and early adoption would be permitted. Financial institutions would not be able to use the simplified hedging approach.

The PCC also will give further consideration at a future meeting to a second simplified method for these swaps known as the combined instruments approach. This would allow a private company to apply a scope exception from the Topic 815 guidance so that the swap and borrowing are accounted for as one combined financial instrument.

Business combinations

The other alternative the PCC approved would allow a private company to elect to amortize goodwill acquired in a business combination on a straight-line basis over 10 years, or less if an entity can demonstrate that another useful life is more appropriate based on specific facts and circumstances.

The impairment test for goodwill also would be simplified. It would be performed only upon a triggering event that indicates the fair value of the entity is below its carrying amount.

The update would take effect for periods beginning after Dec. 15, 2014, and early application would be permitted.

Outreach found that many financial statement users disregard goodwill and goodwill impairment in their analysis of a private company. Preparers are concerned about the cost and complexity of the current goodwill impairment test.

The PCC also discussed narrowing the intangible assets acquired in a business combination that private companies would be required to identify and recognize separately from goodwill and will continue that discussion at another time after further research by FASB’s staff.

In addition, the PCC and FASB announced that the final Private Company Decision-Making Framework, which would formalize criteria for deciding which standards can be evaluated for possible GAAP modifications and exceptions for private companies, is expected to be issued in November.

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