FASB and PCC issued the Private Company Decision- Making Framework: A Guide for Evaluating Financial Accounting and Reporting
For Private Companies. This framework will be used by the FASB and PCC in making user-relevance and cost- benefit evaluations for private companies aimed at proposing alternative treatments under US GAAP. An important source of input in developing this framework was the identification of key differences between public and private companies, such as:
- Number of primary users and their access to management
- Investment strategies of primary users
- Ownership and capital structure
- Accounting resources
- Learning about new financial reporting guidance
In addition, the framework identified five crucial areas where accounting guidance might differ:
- Recognition and measurement
- Disclosures
- Presentation
- Effective date
- Transition method
The expectation is that this framework will help identify cost-effective alternatives
for private companies and also benefit the standard setting activities for other organizations.
FASB Endorsed PCC Alternatives
On November 25, 2013, the FASB endorsed two PCC alternatives, followed by the release of two Accounting Standards Updates (ASU) in January 2014:
- FASB ASU 2014-02, Accounting for Goodwill, (previously PCC Issue No. 13-01B) allows a private company to amortize goodwill over 10 years, or shorter, if appropriate. Furthermore, a private company can make an accounting policy decision to perform its impairment testing at the entity-level or the reporting unit level. Previously under US GAAP, impairment testing was always performed at the reporting unit level. The alternative would be applied prospectively to any new or existing goodwill.
- FASB ASU 2014- 03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps— Simplified Hedge Accounting Approach, (previously PCC Issue No. 13-03A) allows a private company a practical expedient to obtain cash flow hedge accounting treatment for swaps that meet certain conditions. This approach assumes the hedge is fully effective, allows a private company to complete its hedge documentation up until its financial statements are issued, rather than immediately, and allows for the recording of the swap at settlement value instead of fair value. The alternative would be applied on either a modified retrospective or full retrospective basis, with an election made on a swap-by- swap basis.
Both of the above are effective for fiscal years beginning after December 31, 2014, with early adoption permitted. Companies should also review the FASB’s December 2013 issuance of ASU No. 2013-12, Definition of a Public Business Entity, which will have an impact on determining which entities are eligible to apply the alternatives, as well as future alternatives approved by the FASB and PCC.
Other Projects Currently on the PCC Agenda
As of its January 28, 2014 meeting, the PCC has two other projects that are on the drawing board or for which research is currently being conducted.
- An alternative to accounting for identifiable intangible assets in a business
- An alternative for applying variable interest entity (VIE) guidance to common control leasing arrangements, which could eliminate the consolidation requirement for private
Private and public companies should monitor the PCC’s technical agenda as modifications to US GAAP for private companies may result in modifications of standards applied to other entities. All companies should benefit from ways to address concerns over cost, complexity, and relevance.
Craig B. Evans can be reached at Email or 215.441.4600.
Related: