This article is brought to you by Dixon Hughes Goodman.
On Jan. 16, 2014, the Financial Accounting Standards Board (FASB) issued two Accounting Standards Updates that provide private companies with accounting alternatives for goodwill and simplified hedge accounting for certain qualifying interest rate swaps. They are the first standards proposed by the Private Company Council (PCC) that have been endorsed by the FASB. This represents a significant step in providing relief to private companies within U.S. GAAP (Generally Accepted Accounting Principles) while still providing users with decision-useful information.
The new standard allows all entities except public business entities, nonprofits and employee benefit plans to simplify the accounting for goodwill after initial measurement and recognition. The main provisions are as follows:
- Allows amortization of goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates another useful life is more appropriate.
- Provides an alternative model for evaluating and testing goodwill for impairment:
- Accounting policy election to test for impairment at the entity level or reporting unit level.
- Impairment testing only required with a triggering event
- Quantitative impairment model is reduced to a one-step model from the current two-step model.
- Impairment is recorded when the carrying value of the entity (or reporting unit) exceeds its fair value. This standard is effective prospectively for the first annual period beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for any annual or interim period for which an entity’s financial statements have not yet been made available for issuance (e.g. 2013 financial statements not yet made available for issuance). Also, all provisions of the alternative must be elected. For example, the entity cannot elect the impairment alternatives without electing the amortization alternative.
Brad Newkirk serves as the Regional Managing Partner of Dixon Hughes Goodman’s Triad North Carolina and is a lead partner in the firm’s Private Equity Services line, providing services to private equity funds and portfolio companies.