Continuing an occasional series of guest posts, today's post is contributed by Mike Rodrigues, CPA, Senior Audit Manager, WithumSmith+Brown

In January 2014, two new accounting standards were issued providing accounting alternatives specifically for private companies. The simplification provided by these standards is elective, not mandatory. A private company may choose to adopt one standard but not the other, both standards, or neither.

Goodwill: May elect to amortize

The new goodwill accounting standard allows a private company to amortize goodwill on a straight-line basis prospectively over ten years, or less, if it believes a shorter useful life is more appropriate. Existing goodwill is eligible for this election. Because goodwill will become a dwindling asset, the new accounting standard will also generally excuse private companies from performing impairment tests for goodwill. A pared-down impairment test would only be performed upon occurrence of certain negative, triggering events. The streamlined test may be performed at the entity-wide level, or at the reporting-unit level, in a one-step exercise. The amount of goodwill impairment would represent the excess of the entity's carrying amount over its fair value. We at WS+B believe many private companies will appreciate the reduced cost and complexity that the election to amortize goodwill offers.

Interest rate swaps: May elect to apply simplified hedge accounting

Private companies often find it difficult to obtain fixed-rate borrowings. Consequently, many enter into interest rate swap agreements with financial institutions to convert their variable-rate debt into fixed-rate debt. The Financial Accounting Standards Board (FASB) believes many private companies lack the desire or expertise to comply with the complexities of hedge accounting. Therefore, many private companies do not enjoy the primary accounting benefit of hedge accounting, and must flow the interest rate swap's fair value changes through their income statement. The new accounting guidance for interest rate swaps will offer a practical expedient for private companies, other than financial institutions. Election of this alternative will allow private companies to qualify for hedge accounting for certain interest rate swaps used to convert variable-rate borrowings to fixed-rate borrowings that meet certain criteria. Key features of the simplified hedge accounting for such swaps are:

  • The changes in swap value will go through other comprehensive income, not the income statement.
  • Relaxed hedge documentation requirements.
  • Reduced fair value disclosure requirements if the swap is the only derivative.

These revised standards will be of use to many private companies, including franchisees and franchisors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.