The Financial Accounting Standards Board has endorsed three proposals from the Private Company Council that would simplify the accounting for privately held companies.
The Private Company Council was established last year in response to demands to ease the requirements for private company accounting. Like FASB, the PCC operates under the auspices of the Financial Accounting Foundation. Last month, it issued a set of proposals to modify specific U.S. GAAP accounting standards for private companies, involving accounting for intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps (see Council Proposes Accounting Standards Modifications for Private Companies).
FASB’s announcement Monday came in response to those proposals. FASB expects to issue an exposure draft late this month on the three proposals and solicit comments from the public. FASB issued its announcement on the same day that the American Institute of CPAs released its own streamlined set of non-GAAP accounting rules for small and midsize private companies, the Financial Reporting Framework for Small and Medium-sized Entities, or FRF for SMEs (see AICPA Releases Non-GAAP Reporting Framework).
“Today’s decision by the FASB to endorse three PCC proposals represents significant progress in our joint efforts to address concerns about the complexity and relevance of certain standards for private companies that prepare GAAP-based financial statements,” said FASB Chairman Leslie F. Seidman in a statement. “We anticipate issuing the proposals for public comment later this month, and encourage our stakeholders to review them and let us know whether they believe they will improve financial reporting for private companies.”
The first proposal—which derives from PCC Issue No. 13-01A, Accounting for Identifiable Intangible Assets in a Business Combination—would not require private companies to separately recognize certain intangible assets acquired in a business combination. The proposal would enable private companies that elect the alternative within U.S. GAAP to recognize only those intangible assets arising from noncancelable contractual terms or those arising from other legal rights. Otherwise, an intangible asset would not be recognized separately from goodwill even if it is separable.
The second proposal—derived from PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business Combination—would allow for amortization of goodwill and a simplified goodwill impairment model. This would enable private companies that elect the alternative within U.S. GAAP to amortize goodwill over the useful life of the primary asset acquired in a business combination, not to exceed 10 years. Goodwill would be tested for impairment only when a triggering event occurs that would more likely than not reduce the fair value of a company below its carrying amount. Goodwill would be tested for impairment at the company-wide level as compared to the current requirement to test at the reporting unit level.
The third proposal—derived from PCC Issue No. 13-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—would allow private companies the option to use two simpler approaches to account for certain types of interest rate swaps that are entered into by a private company for the purposes of economically converting its variable-rate borrowing to a fixed-rate borrowing. Under both approaches, the periodic income statement charge for interest would be similar to the amount that would result if the private company were to have entered into fixed-rate borrowing instead of variable-rate borrowing. The two approaches would apply to all private companies, except for financial institutions.
For the first two proposals, FASB directed its staff to conduct additional research during the comment period to assess the applicability of these proposals to public companies and not-for-profit organizations. For PCC Issue No. 13-03, the Board directed the staff to conduct outreach through its normal channels, including advisory groups and other meetings in which the FASB participates.
In a meeting next month, the PCC and the FASB plan to discuss PCC Issue No. 13-02, “Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements.”
More information on the PCC Issues can be found on the PCC projects site.