FASB ISSUES TWO UPDATES FOR PRIVATE COMPANIES ON ACCOUNTING FOR GOODWILL,
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 ten
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
Norwalk, CT, January 16, 2014—The Financial Accounting
Standards Board (FASB) today issued two updates to U.S. generally accepted
accounting principles (GAAP) that provide alternatives for private companies on
the subsequent accounting for goodwill and for interest rate swaps—specifically
a simplified hedge accounting approach for certain types of swaps. Both updates
are consensuses of the Private Company Council (PCC) that were endorsed by the
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.
accounting standards address issues that private company stakeholders have told
us are priorities," said FASB Chairman Russell G. Golden. "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.
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.
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.
The FASB 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
More information on the standards, including a video and FASB
In Focus, is available on the FASB
website and on the PCC website.
About the Financial Accounting Standards Board
1973, the Financial Accounting Standards Board has been the designated
organization in the private sector for establishing standards of financial
accounting and reporting. Those standards govern the preparation of financial
reports and are officially recognized as authoritative by the Securities and
Exchange Commission and the American Institute of Certified Public Accountants.
Such standards are essential to the efficient functioning of the economy because
investors, creditors, auditors, and others rely on credible, transparent, and
comparable financial information. For more information about the FASB, visit our
website at http://www.fasb.org/.
About the Private Company Council (PCC)
determines alternatives to existing nongovernmental U.S. GAAP to address the
needs of users of private company financial statements, based on criteria
mutually agreed upon by the PCC and the FASB. Before being incorporated into
U.S. GAAP, PCC recommendations will be subject to a FASB endorsement process.
The PCC also serves as the primary advisory body to the FASB on the appropriate
treatment for private companies for items under active consideration on the
FASB´s technical agenda.