Co-Authored by Eric Goodman
On July 1st, the Financial Accounting Standards Board (FASB) issued for public comments three proposals that address private company stakeholder concerns raised about the relevance and complexity of three aspects of U.S. Generally Accepted Accounting Principles (GAAP). The three proposals involve accounting for intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps. The three proposals were derived from issues raised by the Private Company Council (PCC).
The first proposal, Accounting for Identifiable Intangible Assets in a Business Combination, modifies the requirement for private companies to separately recognize intangible assets acquired in a business combination. Under the proposal entities within the scope would recognize separately from goodwill only those identifiable intangible assets arising from contractual rights with noncancelable contractual terms, or that arise from other legal rights, whether or not such intangible assets are transferable or separable. The entity would be required to disclose qualitatively the nature of the intangible assets acquired but not recognized. Identified intangible assets would be measured using fair value measurement principles except that the measurement would only consider market participant assumptions and therefore not consider any potential renewals or cancellations. The proposal generally would result in entities recognizing fewer intangible assets. The main difference from current GAAP is that intangible assets that are separable (but not contractual) will no longer be recorded.
The second proposal, Accounting for Goodwill Subsequent to a Business Combination, would permit amortization of goodwill and a simplified goodwill impairment model. Under the proposal entities within the scope would amortize goodwill on a straight-line basis over the useful life of the primary asset acquired in a business combination, not to exceed 10 years. A primary asset is the long-lived asset that is the most significant asset of the acquired entity. Goodwill would be tested for impairment only when a triggering event occurs that would indicate that the fair value of an entity may be below its carrying amount and would be tested at the entity wide level. The difference from current GAAP is that goodwill is not currently allowed to be amortized but instead is tested for impairment annually. The impairment testing can be completed using a qualitative assessment or a two step test at the reporting unit level.
The third proposal, Accounting for Certain Receive-Variable, Pay Fixed Interest Rate Swaps, would give private companies, other than financial institutions and not-for-profit entities, the option to use two simpler approaches to accounting for certain types of interest rate swaps that are entered into for the purpose of economically converting its variable-rate borrowing to a fixed-rate borrowing. The first Combined Instruments Approach would allow for an accounting policy election to account for the swap and the borrowing as one combined financial instrument. The swap itself would not be recorded on the financial statements and the fair value disclosures would no longer apply. This election would need to be applied to all qualifying swaps. The second Simplified Hedge Accounting Approach would provide qualifying entities a practical expedient for hedge accounting. While the fair value disclosures would still apply, the swap would be permitted to be recorded at settlement value instead of fair value. As a result of hedge treatment, income statement volatility would be avoided.
Comments can be provided to the FASB by August 23, 2013.