Overview

ASU 2016-03, Effective Date and Transition Guidance – a consensus of the Private Company Council, amends all existing Private Company Council (PCC) alternatives by (1) eliminating their effective dates and (2) indefinitely extending their transition guidance. In combination, these two changes allow a private company to initially adopt an accounting alternative in the future without first establishing preferability. Any subsequent change to that accounting policy election requires justification that the change is preferable under the guidance in ASC 250, Accounting Changes and Error Corrections. The following PCC alternatives were amended by ASU 2016-03:

  • ASU 2014-02, Accounting for Goodwill
  • ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach
  • ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
  • ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination

Elimination of effective dates

New accounting standards include guidance regarding when reporting entities may or must initially adopt the new standard, known as the standard's "effective date." Because the adoption of a PCC accounting alternative is optional, an entity was considered to have elected, in substance, not to adopt the alternative once the period in which a private company was initially eligible to adopt a PCC accounting alternative had passed. Accordingly, prior to the issuance of ASU 2016-03, a private company deciding to adopt a PCC alternative after it was initially eligible would have had to demonstrate that the alternative is preferable to other methods of accounting, pursuant to ASC 250.

ASU 2016-03 eliminates the effective dates for the extant PCC alternatives noted above so that a private company may initially adopt an alternative without justifying that the use of the accounting alternative is preferable.

These changes are effective immediately.

Subsequent changes in accounting policies

Although the initial adoption of a PCC alternative does not require an assessment of preferability, subsequent changes in accounting policy will require an assessment of preferability. For instance, a private company that initially elects a PCC alternative but later chooses to change to a different accounting method is required to demonstrate that the new method is preferable to the PCC alternative. If that private company in the future decides to change its accounting method back to the PCC alternative, the entity would be required to demonstrate preferability of re-adopting the alternative. The transition guidance in each of the four extant PCC alternatives, as amended by ASU 2016-03, is clear that foregoing a preferability assessment is for first-time adoption only.

Extension of transition guidance

The four amended PCC alternatives include specific transition guidance, for example, whether application is prospective or retrospective and is applicable as of the beginning of a reporting period. ASU 2016-03 "indefinitely extends" that guidance so that each alternative's transition may be applied when the alternative is first elected. ASU 2016-03 also amends the transition guidance in ASU 2014-02 and ASU 2014-03 as follows:

  • ASU 2014-02 is amended to permit private companies electing the PCC alternative for the first time to apply the alternative prospectively, that is, the beginning of the fiscal year in which the alternative is adopted for existing goodwill at the date of adoption.
  • ASU 2014-03 is amended to allow private companies electing the PCC alternative to apply the simplified hedge accounting approach to existing swaps upon initial election of the simplified hedge accounting approach. However, after initial election, no additional retrospective application is permitted for other existing swaps.

The following table summarizes the transition guidance for PCC alternatives as amended by ASU 2016-03. These changes are effective immediately.

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.