An Update on the Rise and Quick Effectiveness of FASB’s Private Company Council
To simply the financial reporting requirements of small and medium-sized companies, the Financial Accounting Standards Board (FASB) commissioned an advisory Private Company Council (PCC) in May 2012. This PCC was tasked with improving how accounting standards are established for and apply to private companies. Decisions in its first three years both simplified some challenging financial accounting treatments and reduced reporting requirements, offering much-appreciated relief for small and medium-sized companies.
Part III – Quick Relief from Complexities
The Private Company Council (PCC) has been widely praised for successfully representing the perspectives of private company stakeholders and addressing concerns private companies had regarding the constantly-evolving U.S. Generally Accepted Accounting Principles (GAAP). By demonstrating a willingness to engage for substantive change, further improvements to financial reporting appear viable.
Accomplishments thus far have likely wrapped the PCC’s efforts at revisiting existing accounting standards in order to develop helpful alternatives for private companies. Many believe the council’s future works will contain advocacy elements – communicating effects on private companies for all standards being discussed on the Financial Accounting Standards Board’s (FASB) official agenda.
To date, the PCC’s primary achievements involve five accounting standards recently passed by the FASB. Four are accounting alternatives passed in 2014; the fifth clarifies when private companies can elect those four alternatives.
Eliminating Effective Dates
Because of concerns that some private companies were hand-cuffed by the effective dates tied to the four accounting alternatives, in March 2016, the PCC recommended amending. Some private companies were simply unaware of the accounting alternatives before the time to elect them had expired. Others became confused by the suggested performing of preferability assessments when electing.
Nonetheless, with Accounting Standards Update (ASU) No. 2016-03, FASB eliminated the effective dates for any of the four accounting alternatives passed in 2014 – all four became immediately effective and available for election. Private companies would not be required to perform preferability assessments the first time they elected any of these, as well.
Simplifying Accounting and Reporting for Goodwill
With ASU No. 2014-02, Accounting for Goodwill, private companies gained an option for simplifying the accounting and reporting for goodwill on their balance sheets. The accounting alternative passed in January 2014 and permitted non-public entities to amortize goodwill on a straight-line basis over ten years or less. Evaluating for impairment would occur only following the occurrence of a triggering event, in this case, and either entity-wide or at the reporting level. Application is prospective, and to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in interim periods after December 15, 2015.
By electing to amortize goodwill, private companies can effectively condense their balance sheet by one less intangible asset. Some entities could see gains on certain financial ratios or look more attractive to prospective buyers. Previously, goodwill could only be trimmed by applying the two-step impairment tests – an infrequent action for successful companies.
Easier Hedge Accounting
Also in January 2014, FASB approved ASU No. 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach. Private companies that were not financial institutions were provided an accounting alternative improving how certain interest rate swaps could qualify for applying hedge accounting. This lengthened the time by which private companies could complete the required documentation.
The larger relief results from applying a simplified measurement model based on the (often expressed) settlement value of the interest rate swap, rather than its fair value. Application is retrospective, and either modified or fully applied.
Separating from Variable Interest Entities
Perhaps the most-applicable accounting alternative for private companies was passed in March 2014 – ASU No. 2014-07, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements. Over time, many private companies had indicated to FASB that the benefits of applying variable interest entities (VIE) guidance to a lessor entity under common control did not justify the related costs. Lessor and lessee relationships existing under common ownership had become frequent, either for tax, estate-planning or legal liability purposes. However, such lessors and lessees usually qualified as variable interest entities, requiring them to present consolidated financial statements and disclosures. One common complaint was that stakeholders evaluating the lessees were forced to wade through extra information about the lessors, which could skew or confuse.
Rather than gather and present all data consolidated, the PCC and FASB made available in March 2014 an accounting alternative for lessors and lessees meeting certain criteria. This large shift enabled private companies (and their preparers) to condense the presented financial data and disclosures submitted to stakeholders. Those entities meeting the qualifying criteria could set aside the extra information about lessors under common ownership, and solely report on the lessee.
Clarified Measurements of Intangibles
The final accounting standard update passed in 2014 offered qualifying private companies a choice for intangible assets acquired in a business combination. ASU No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination targeted customer-related intangible assets unable to be sold or licensed independently and non-compete agreements, and allowed private companies to treat them as part of goodwill in transactions accounted for under the acquisition method. If this election is chosen, the private company must amortize goodwill over ten years or less.
The PCC was conceived as a body to develop remedies for private companies wishing to continue presenting their financial information compliant with U.S. GAAP. So far, their pushes have resulted in four significant accounting standards updates and their immediate availability. The praise has been widespread, as the private companies and those preparing and reading their statements have benefited from more efficient and more relevant information.