Finance and accounting officers will soon have GAAP reporting alternatives to simplify troublesome areas of financial reporting.  On Thursday, December 12, Private Company Council (PCC) member and Barnes Dennig Accounting & Audit Director, Tom Groskopf, CPA, shared his insights into the coming changes and how best to prepare for them.  He examined new, meaningful GAAP simplifications produced by the PCC and Financial Accounting Standards Board (FASB) in areas such as goodwill, interest rate swaps, variable interest entities and intangible assets–GAAP simplifications that could impact businesses as soon as this fiscal year end.  Tom also provided an update on international convergence.

Areas of Consideration for 2014 Financial Reporting

Tom cited the following as key areas for 2014 financial reporting:

  1. Revenue Recognition: when the project goal is to consolidate and unify revenue recognition guidance globally
  • Core principle: recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
  • What will this significantly impact?
    • Long-term contracts (i.e. Contractors and others in the Construction Industry) and/or installment payments
    • Bundled services and/or goods
    • Warranties
    • Licenses
    • Loyalty points and/or discounts
    • Training and installation after purchase

2.  PCC Issue 13-01A: Identifiable intangible assets in a business combination

  • Relates to the cost and complexity of estimating fair value of intangible assets (i.e. customer relationships).
  • An intangible asset is identifiable if it:
    • Arises from contractual or other legal rights regardless of whether rights are transferrable or separable from entity or other rights and obligations;
    • Arises from contractual or other legal rights regardless of whether rights are transferrable or separable from entity or other rights and obligations; or
    • Is capable of being separated or divided from entity and sold, transferred, licensed, rented or exchanged.
  • Available to a company that is required to apply the acquisition method under Topic 805: business combinations
  • Does not apply to publicly traded companies and not-for-profit organizations

3.  PCC 13-01B: Accounting for goodwill

  • Current requirements provide limited benefits to users; businesses should disregard goodwill and goodwill impairment losses in analysis of financial condition and operating performance.
  • Applied prospectively for existing goodwill and new goodwill recognized in the first annual period beginning 12/15/14, and interim annual periods thereafter.  Early adoption is permitted.
  • Who’s affected?
    • Applicable to entities that recognize goodwill in a business combination.  Does not apply to publicly traded companies or not-for-profit organizations.

4.  PCC Issue 13-02: Applying Variable Interest Entity (VIE) Guidance

  • Current GAAP requires a company to consolidate a VIE when it is considered primary beneficiary of the VIE.
  • Proposed changes:
    • Alternative not to apply VIE guidance in assessing whether a lessor entity should be consolidated when ALL of the following conditions exist:
      • Lessor entity and private company lessee are under common control
      • Private company lessee has leasing arrangement with lessor entity
      • Substantially all activity between two entities is related to leasing activity of lessor entity
  • Who’s affected?
    • Applicable to all leasing arrangement that meet the requirements for application.  Does not apply to publicly traded companies or not-for-profit organizations.

5.  PCC Issues 13-03a and 13-03b: accounting for certain receive variable, pay fixed interest rate swap

  • It’s difficult for private companies to obtain fixed rate borrowing, so they must enter into swaps to economically convert variable rate borrowing to fixed rate borrowing.  Furthermore, private companies lack the expertise to comply with hedge accounting.
  • Current GAAP:
    • Income statement: there is volatility in interest expense as a result of changes in future value (FV) or interest expense that approximates that of fixed rate debt
    • Balance sheet: asset or liability at fair value
    • Other comprehensive income: no impact, or includes changes in the fair value of the effective portion of a hedge
  • Proposal (dependent on whether combined instruments method or simplified hedge accounting is used):
    • Income statement: interest expense approximates that of fixed rate debt
    • Balance sheet : only disclosure of settlement value or asset/liability at settlement value (or FV)
    • Other comprehensive income: no impact or includes changes in the settlement value (or FV) of the swap
  • Transition: private companies may apply either the modified retrospective approach or the full retrospective approach upon adoption
    • Existing swaps as of the date of the adoption may qualify for the simplified hedge accounting approach

For a deeper dive into these GAAP simplifications and how they will affect your financial reporting, contact us today.