Accounting for Goodwill and Interest Rate Swaps
Accounting Standards Updates (ASUs 2014-02 and 2014-03)
By Sharon Bradley, Audit Partner, Daszkal Bolton LLP
In mid-January 2014, the Financial Accounting Standards Board (FASB), the organization that establishes U.S. accounting and reporting standards, approved and released two new optional reporting alternatives for private companies.
The Accounting Standards Updates (ASU’s 2014-02 and 2014-03) are aimed to reduce the reporting burden of private companies. The alternatives were drafted by the Private Company Council (PCC) to provide alternatives to U.S. GAAP rules to address the needs of the users of private company financial statements while still producing accurate financial statements under generally accepted accounting principles. The two recently approved and released alternatives are effective for year ends beginning after December 15, 2014, with early adoption permitted.
ASU 2014-02, Accounting for Goodwill, amends the guidance in the FASB Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other, to provide a simplified amortization alternative that can be used in accounting for post-acquisition goodwill.
ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach, amends the guidance in FASB ASC Topic 815, Derivatives and Hedging, to provide a simplified alternative that can be used in accounting for plain-vanilla interest rate swaps.
The optional guidance related to accounting for goodwill is available for use by private companies. As such, the guidance is not available for use by public business entities, not-for-profit entities, or employee benefit plans. A similar scope applies to the guidance on interest rate swaps but, in addition to the entities precluded from using the goodwill guidance, financial institutions are not permitted to use the new guidance associated with certain interest rate swaps.
The new guidance is effective for fiscal years beginning after December 15, 2014, and interim periods thereafter, where earlier implementation is allowed. As such, since it would be very rare to have calendar-year 2013 financial statements released at this point, the optional guidance for private companies can be incorporated into the preparation of those statements.
The Goodwill Accounting Alternative
The flexibility in accounting for goodwill subsequent to a business combination allows private companies an option to amortize goodwill on a straight-line basis over a period of 10 years, or a shorter period if the reporting entity can demonstrate that a shorter useful life is deemed to be appropriate. In addition, use of the alternative should reduce the burden associated with goodwill impairment testing in that:
· Goodwill could be tested for impairment either at the entity or the reporting unit level rather than having to test goodwill for impairment at the reporting unit level.
Goodwill could be tested for impairment only when a triggering event occurs, so that there would not always be the need to test goodwill for impairment on an annual basis.
If a triggering event occurs, private companies still have the option to first assess qualitative factors to determine whether quantitative impairment testing is needed.
If the quantitative impairment testing is needed, a one-step impairment test is provided so that the amount of any impairment is measured as the difference between the carrying amount of the entity or reporting unit, as applicable, and its fair value so that use of the hypothetical purchase price approach no longer is required.
Note: If the optional guidance in accounting for goodwill is utilized, this alternative needs to be applied on a prospective basis. Essentially, private companies electing this alternative should begin amortizing existing goodwill as of the beginning of the reporting period where the optional guidance is adopted.
The Interest Rate Swap Accounting Alternative
The flexibility in accounting for certain interest rate swaps provides optional guidance related to receive variable, pay-fixed interest rate swaps. With this alternative accounting approach for plain vanilla interest rate swaps, private companies are able to assume no ineffectiveness for qualifying swap arrangements. The arrangements that qualify for this accounting alternative need to meet certain conditions that, essentially, indicate that the terms of the swap and the related debt are aligned.
If the simplified accounting alternative is used by private companies:
An election is available related to use of the simplified hedge accounting alternative on a swap-by-swap basis for both swaps existing at the date of adoption and those entered into subsequent to adoption of the alternative accounting guidance.
There is an extended period of time to complete the required documentation to use the alternative in that the documentation will not have to be completed until the financial statements are available to be issued.
There is an option of measuring designated swaps at settlement value rather than at fair value.
Note: If the optional guidance in accounting for qualifying interest rate swaps is utilized, this alternative needs to be applied on either a modified retrospective basis or a full retrospective basis. This election will be available on a swap-by-swap basis.
There are two additional proposals that the PCC and FASB are currently reviewing that will streamline the financial reporting needs of private companies. One has to do with exempting companies from consolidating variable-interest entities (“VIE’s”) when there is a common control lease arrangement and the second relates to do with indentifying and recording a fewer number of intangible assets from business combinations.
For years, the management of private companies has cried out that certain accounting rules are too cumbersome for smaller, private companies. Over the past year, the FASB and AICPA have listened and released a number of accounting changes that are aimed to help the financial reporting process of small to midsized private companies. To determine which are right for your company, it is recommended that you speak with your external accounting professional to discuss your options and determine the best course of action.