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Thursday, November 5, 2015

Private Companies: Possible Shortcut to Adopt Accounting Alternatives

Soon it may be easier for private companies to adopt specified alternatives to U.S. Generally Accepted Accounting Principles (GAAP). A recent proposal would provide a one-time option for these entities to elect an accounting alternative without having to conduct a test known as the “preferability assessment.”

Timing is critical
For many years, private companies and their stakeholders complained that the Financial Accounting Standards Board (FASB) catered too much to large, public companies and ignored the needs of smaller, privately held organizations that have less complex financial reporting issues. So, in 2012, the Financial Accounting Foundation (the FASB’s parent organization) established the Private Company Council (PCC). Its role is to amend areas of GAAP that are particularly difficult for private companies and advise the FASB on how to make them simpler.

So far, the FASB has issued only a handful of special alternatives for private firms. (See “Four accounting alternatives for private companies.”) Companies that don’t elect an alternative on or before its effective date are required to assess the preferability of the alternative as described in Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections. While businesses said the preferability test isn’t necessarily onerous, in some cases it could block a private company from using the PCC’s simplified alternatives.

Proposal remedies missed cutoffs
In some cases, auditors might give private companies that miss the window of opportunity a hard time about justifying the use of private company accounting alternatives. But members of the PCC felt that there may be valid reasons for a company to miss the cutoff dates for these alternatives.

For example, a private company may not be aware of private company accounting alternatives when they become effective. Or a private company might not choose to elect the private company alternatives because it’s contemplating an initial public offering or merger with a publicly held business.

In the latter situation, public company stakeholders would want to see prior years’ financial statements prepared under GAAP. But, if these plans fall through and the private company has missed the effective date of the private company accounting alternatives, it could face a challenge trying to adopt the breaks after the window of opportunity has passed.

On September 30, 2015, the FASB released for public comment a proposal to make it easier for private companies to adopt special accounting alternatives if they missed the window for the effective dates of the alternatives.

If finalized, the guidance in Proposed Accounting Standards Update (ASU) No. PCC-15-01, Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance, would let private companies have an unconditional one-time option to elect a private company accounting alternative without having to conduct a “preferability assessment.”

“Forgoing an initial preferability assessment could allow private companies to adopt a private company accounting alternative within the scope of this proposed update when the private companies experience a change in management’s strategic plan or circumstances,” the proposal says. “It also would allow private companies that were unaware of an accounting alternative to adopt the alternative without having to bear the cost of justifying preferability.”

Effective dates would be erased
The proposal would make the guidance in the PCC’s accounting alternatives effective immediately by removing their effective dates. In addition, the proposal would indefinitely extend the transitional guidance provided in the alternatives. Any subsequent change to an accounting policy election, however, would require justification that the change is preferable under Topic 250. Comments to the FASB’s proposal are due by November 16.

Four accounting alternatives for private companies
The Private Company Council (PCC) has approved the following four alternatives to U.S. Generally Accepted Accounting Principles (GAAP) for private companies:

  1. Accounting Standards Update (ASU) No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This alternative exempts private companies from recognizing certain hard-to-value intangible assets when they buy or merge with another company.
  2. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This option simplifies the consolidation reporting requirements of lessors in certain private company leasing transactions.
  3. ASU No. 2014-02, Intangibles – Goodwill and Other (Topic 350), Accounting for Goodwill. Here, private companies may elect to amortize goodwill over a period not to exceed 10 years, rather than test it annually for impairment. The PCC’s proposal to allow the preferability test to be skipped in certain circumstances (see main article) would also allow private companies that voluntarily elected this alternative to initially apply it on a less costly, prospective basis. (As it currently stands, a change in accounting principle must be applied retrospectively.)
  4. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach. This allows nonfinancial institution private companies to elect an easier form of hedge accounting when they use simple interest rate swaps to secure fixed-rate loans.

Check with your accountant before electing any of these alternative reporting options. Regulators, lenders and other stakeholders may require a private company to continue to apply traditional GAAP accounting standards. Moreover, the use of an alternative reporting method could create future headaches for companies that are large enough to consider going public or merging with a public company.


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