FASB Issues Final Standards Related to the Private Company Accounting for Goodwill and Interest Rate Swaps

On Jan. 16, 2014, the Financial Accounting Standards Board (FASB) issued two Accounting Standards Updates (ASUs) which provide accounting alternatives within U.S. generally accepted accounting principles (GAAP) for private companies as follows:
  • ASU 2014-02, Accounting for Goodwill, provides a simplified amortization alternative that can be used in accounting for post-acquisition goodwill.
  • ASU 2014-03, Accounting for Certain Receivable-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach, provides a simplified alternative that can be used in accounting for plain-vanilla interest rate swaps.
What does this mean for reporting entities?
  • The Goodwill Accounting Alternative
With this alternative accounting approach reporting entities will have the option to amortize goodwill over 10 years or a shorter period if it can be demonstrated that another useful life is more appropriate. In addition, impairment testing can be performed at the entity level or the reporting-unit level and is required only when a triggering event occurs. This accounting alternative, if elected, needs to be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.
  • The Interest Rate Swap Accounting Alternative
With this alternative accounting approach for plain-vanilla interest rate swaps, private companies that currently have adjustments running through the income statements as a result of changes in the fair value of the swaps will have the option, if they choose to apply the accounting alternative, to run these changes through equity. The arrangements that qualify for this accounting alternative need to meet certain conditions which indicate that the terms of the swap and the related debt are aligned.

This accounting alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015, with early adoption permitted.

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