FASB Adjusts Standards on Goodwill and Interest Rate Swaps for Private Companies

The Financial Accounting Standards Board issued a pair of updates Thursday to U.S. GAAP to provide alternatives for private companies on the subsequent accounting for goodwill and for interest rate swaps.

The updated accounting standards offer a simplified hedge accounting approach for certain types of swaps, along with a way for private companies to amortize goodwill on a straight-line basis for up to a decade. Both updates come out of proposals last year from the Private Company Council, which like FASB operates under the auspices of the Financial Accounting Foundation. The proposals were subsequently endorsed by FASB in November (see FASB Endorses Changes in Accounting Standards for Goodwill and Interest rate Swaps).

FASB Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, permits a private company to subsequently amortize goodwill on a straight-line basis over a period of 10 years, or less if the company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill. Goodwill is the residual asset recognized in a business combination after recognizing all other identifiable assets acquired and liabilities assumed.

FASB Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, gives private companies—other than financial institutions—the option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments.

“These two accounting standards address issues that private company stakeholders have told us are priorities,” said FASB chairman Russell G. Golden in a statement. “Both standards address private company stakeholder concerns by reducing the cost and complexity for preparers, while still providing decision-useful information for lenders, investors and other users of private company financial statements.”

Under the accounting alternative on goodwill, goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of a company (or a reporting unit) may be below its carrying amount. A private company that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the company level or the reporting unit level.

The combination of the amortization method and the relief from the requirement to test goodwill for impairment at least annually is expected to result in significant cost savings for many private companies that carry goodwill on their balance sheets. This is because amortization should reduce the likelihood of impairments, and private companies generally will test goodwill for impairment less frequently.

FASB also recently decided to add a project to its agenda on the subsequent accounting for goodwill for public companies and not-for-profit organizations.

Under the accounting alternative provided for interest rate swaps, when a private company applies the simplified hedge accounting approach, the income statement charge for interest expense will be similar to the amount that would result if the company had directly entered into a fixed-rate borrowing instead of a variable-rate borrowing and an interest rate swap.

In addition, the simplified hedge accounting approach provides a practical expedient to measuring the fair value of swaps by allowing the use of settlement value, which removes the consideration of nonperformance risk.

FASB said it did not extend this alternative to public companies and not-for-profit organizations at this time, but will consider the accounting for such swaps as part of its broader hedge accounting project.

More information on the standards, including a video and FASB In Focus document, is available on FASB’s Web site and the PCC’s Web site.