Two accounting alternatives within U.S. generally accepted accounting principles, issued by the Financial Accounting Standards Board on Jan. 16, 2014, should reduce the cost and complexity of complying with accounting standards for many private companies.
Those two alternatives were issued through Accounting Standards Update (ASU) 2014-02, Accounting for Goodwill, and ASU 2014-03, Accounting for Certain Receivable-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach.
The guidance in ASU 2014-02 amends the guidance in Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 350, Intangibles – Goodwill and Other. The new guidance provides private companies with a simplified amortization alternative that can be used in accounting for post-acquisition goodwill.
The guidance in ASU 2014-03 amends the guidance in FASB ASC Topic 815, Derivatives and Hedging. It provides private companies with a simplified accounting alternative that can be used in accounting for certain plain-vanilla interest rate swaps.
The optional guidance related to accounting for goodwill is available for use only by private companies. The optional guidance related to accounting for certain interest rate swaps is available for use only by private companies other than financial institutions.
To determine whether a reporting entity is considered to be a public business entity, the guidance in ASU 2013-12, Definition of a Public Business Entity, should be followed. In FASB ASC 942, Financial Services – Depository and Lending, the term “financial institutions” includes banks, savings and loan associations, savings banks, credit unions, finance companies and insurance entities.
The ASU 2014-02 amendments to FASB ASC 350 allow private companies an option to amortize goodwill on a straight-line basis over a period of 10 years – or a shorter period if it can be demonstrated that a shorter useful life is deemed to be appropriate.
In addition, use of the alternative should reduce the burden associated with goodwill impairment testing in that:
- Goodwill may be tested for impairment at either the entity or the reporting unit level rather than having to test goodwill for impairment at the reporting unit level.
- Goodwill may be tested for impairment only when a triggering event occurs, so there would not always be the need to test goodwill for impairment on an annual basis.
- If a triggering event occurs, private companies still have the option to first assess qualitative factors to determine whether quantitative impairment testing is needed.
- If the quantitative impairment testing is needed, a one-step impairment test is provided so that the amount of any impairment is measured as the difference between the carrying amount of the entity or reporting unit, as applicable, and its fair value, so use of the hypothetical purchase price approach no longer is required.
The ASU 2014-03 amendments to FASB ASC 815 allow for the use of simplified hedge accounting for swaps that are entered into for the purpose of economically converting variable-rate borrowings into fixed-rate borrowings.
Using this alternative approach, the amount of interest expense charged to income will be similar to the amount that would have been charged to income if the reporting entity had entered directly into a fixed-rate borrowing rather than a variable-rate borrowing and receive-variable, pay-fixed interest rate swap.
The simplified hedge accounting alternative serves as a practical expedient related to qualifying for use of cash flow hedge accounting. Using this approach, reporting entities may assume no ineffectiveness for qualifying swaps that are designated in a hedging relationship using FASB ASC 815 requirements.
The simplified hedge accounting alternative may be used in accounting for receive-variable, pay-fixed interest rate swaps when certain specific criteria are met. When the ASU 2014-02 accounting alternative for private companies is elected, it is effective prospectively for new goodwill recognized in annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015.
When the ASU 2014-03 accounting alternative for private companies is elected, it is effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015.
Early implementation of the guidance in both ASU 2014-02 and ASU 2014-03 is allowed for any annual or interim period for which financial statements of the reporting entity have not been made available for issuance. The ASU 2014-03 accounting alternative is implemented by following either a modified retrospective approach or a full retrospective approach.
It’s important to refer to the full texts of ASU 2014-02 and ASU 2014-03 for the complete provisions of those accounting alternatives, including disclosure requirements.