A new financial reporting standard issued by FASB on Monday will allow private companies to forgo a preferability assessment the first time they elect any of the four private company accounting alternatives.
The Private Company Council (PCC) was the impetus for the change in Accounting Standards Update (ASU) No. 2016-03, which eliminates the effective dates of the PCC alternatives that are contained in:
- ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill.
- ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach.
- ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements.
- ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination.
The PCC voted in favor of the change, which was endorsed by FASB, because of concerns that some private companies would not be able to elect the alternatives by their effective dates. Stakeholders were concerned that, previously, the alternatives would have been unavailable to private companies that experienced a change after the effective date that made the alternatives advantageous.
There also was a concern that private companies that were unaware of the alternatives until after the effective date would not have been able to elect them.
The new amendments make the private company alternatives effective immediately and remove their effective dates. They also include transition provisions that enable private companies to forgo a preferability assessment when they elect any of the accounting alternatives.
Any subsequent change to an accounting policy election requires justification that the change is preferable under ASC Topic 250, Accounting Changes and Error Corrections.
The amendments also extend indefinitely the transition guidance in the four private company alternatives.
—Ken Tysiac (email@example.com) is a JofA editorial director.