The Financial Accounting Standards Board (FASB) recently issued two optional financial reporting alternatives under U.S. GAAP that are only applicable for private companies. These alternatives pertain to the accounting for goodwill and certain interest rate swaps. We believe for many companies, the financial statements will become easier for users to understand and for companies with goodwill, the cost and complexity of the audit should decrease.
Currently, goodwill is required to be evaluated annually for impairment and the value of the goodwill remains on the balance sheet at its original cost until such time as that goodwill is adjusted for impairment. The goodwill reporting alternative permits private companies to amortize goodwill on a straight-line basis over a period of 10 years or less. Upon adopting this alternative goodwill approach, the company will need to elect whether to test for goodwill impairment at the entity level or reporting unit level. Companies are still required to test goodwill for impairment upon the occurrence of certain triggering events, as defined. If a company elects this goodwill reporting alternative, it must apply these guidelines to all current and future goodwill.
This is expected to result in significant cost savings for many private companies that carry goodwill on their balance sheets. Private companies who adopt this method will likely have to test goodwill for impairment less frequently; as the recording of goodwill amortization should reduce the likelihood for impairment.
CLICK HERE for more details on the accounting standards update related to goodwill.
Interest Rate Swaps
This financial reporting alternative gives private companies (other than financial institutions) a simplified hedge accounting option to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments. In other words, 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 agreement instead of a variable-rate borrowing agreement and an interest rate swap. Additionally, companies are no longer required to estimate the fair value of these interest rate swap contracts, rather, companies can look to the settlement value. As a result, most companies will no longer need to record an asset or liability for the estimated fair value of the interest rate swap.
Both changes came about based on issues that private company stakeholders brought up with FASB. They were addressed through the Private Company Council (PCC), which operates under the auspices of the Financial Accounting Foundation just like FASB does. The purpose of the PCC is to determine alternatives to existing nongovernmental U.S. GAAP to address the needs of users of private company financial statements.
CLICK HERE for more details on the accounting standards update related to interest rate swaps.
What Do You Need to Do Right Now?
Whenever an accounting change is enacted, there is a transition period. Right now, as a business owner, you have options:
This is where DGC comes in. We can help companies weigh their options in order to determine which approach works best for them. We encourage you to contact your DGC representative with any questions or concerns related to these new updates and discuss your options.