Welcome Little GAAP
Michele Bannon, Senior Consultant February 2014
For decades, small business owners and other proponents have argued for relief from the costly and complex standards issued by the FASB. Apparently, someone finally decided to listen. It’s time to pop the champagne and do your “happy dance” because relief is finally on its way!
On January 16, 2014, the FASB issued two updates to U.S. GAAP that provide alternative, simplified accounting rules to private companies for the accounting of goodwill and certain interest rate swaps. This new relief was made possible by recommendations from a small group within the larger board. The Private Company Council (aka the PCC) serves as the primary advisory body to the FASB on the appropriate treatment of technical issues for private companies. In contrast to the more bureaucratic AICPA’S “Financial Reporting Framework for Small and Medium-Sized Entities”, once the PCC’s recommendations are endorsed by the FASB, they are codified and become imbedded in U.S. GAAP. Among other issues, The FASB is currently deliberating on PCC proposals on treatment of Identifiable Intangible Assets in a Business Combination, as well as, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. Sure, to the non-accountants among us that may sound like a cure for insomnia but these are tangible fixes to tangible small business problems and that is a win-win anyway you look at it. Some highlights from this recent good news:
Accounting for Goodwill Subsequent to a Business Combination
This standard permits private companies to elect to amortize goodwill on a straight-line basis over a period of up to ten years. It also permits private companies to apply a simplified impairment model. Instead of the requirement to test for goodwill impairment annually, the simplified impairment model requires testing only when a triggering event occurs that may indicate that the fair value could be below carrying value.
Accounting for Certain Interest Rate Swaps
This alternative permits private companies that are not financial institutions to more easily qualify certain interest rate swaps for hedge accounting. This approach applies to interest-rate swaps intended to convert variable-rate debt into fixed-rate debt. It results in a periodic interest expense charge similar to the amount that would have been recorded if the private company had entered into fixed-rate debt instead of variable rate debt.
The effective date for both of these FASB Accounting Standards Updates is for fiscal years beginning after December 15, 2014. Early adoption is permitted now for annual and interim financial statements that have not yet been issued.
Please contact us if you would like help evaluating and implementing new guidance. Before electing any accounting treatment alternatives, our private company clients should consider the needs and requirements of financial statement users especially lenders and regulators. Consider the impact of existing loan agreements and debt covenant calculations. Lenders may require approval of changes in accounting principles and waivers may be needed.