The private companies that suffer through the same accounting procedures as large public companies are now experiencing some level of relief. That relief is due to the FASB issuing Accounting Standard Updates (ASUs) that provide simplified accounting alternatives. The FASB defines private companies as entities other than a public business entity meeting any one of these criteria:
a.) It is required by the SEC to file financial statements
b.) It has issued securities that are traded, listed or quoted on an exchange or an over-the-counter market, or
c.) Has one or more securities that are not subject to contractual restrictions on transfer, and is required by law, contract, or regulation to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis
The accounting alternatives reflect decisions reached by the Private Company Council (PCC) and endorsed by the FASB. The following is a list of the ASUs issued thus far with private company accounting alternatives:
a.) ASU 2014-02, Intangibles-Goodwill and Other Intangibles: Accounting for Goodwill
b.) ASU 2014-03, Derivatives and Hedging; Simplified Hedge Accounting Approach
c.) ASU 2014-07, Consolidation: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
d.) ASU 2014-18, Business Combinations: Accounting for Identifiable Intangible Assets in a Business Combination
In this article we review the new simplified accounting rules for goodwill and other intangibles. In future articles, we will review the other accounting pronouncements.
On January 16, 2014, the FASB issued ASU 2014-02, Goodwill and Other Intangibles, Accounting for Goodwill. The new rule introduces an accounting alternative for private companies that simplifies and reduces the costs associated with the subsequent accounting for goodwill. The effects of a private company electing the accounting alternative as its accounting policy for goodwill include:
a.) Amortizing goodwill over a period not to exceed 10 years instead of not amortizing it
b.) Choosing to test goodwill for impairment at either the entity level or the reporting unit level instead of having to test goodwill at the reporting unit level
c.) Testing goodwill for impairment only when there is a triggering event instead of testing it every year
d.) Testing and measuring goodwill for impairment by comparing the fair value of the entity to its carrying amount instead of performing a two-step goodwill impairment test that requires hypothetical business combination accounting for purposes of measuring an impairment loss
If the accounting alternative is elected, all aspects of it must be elected.
These new private company goodwill accounting rules are not effective until annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015; early adoption is permitted. Private companies may elect the accounting alternative to account for goodwill in their 2013 financial statements as long as those statements have not yet been made available for issuance.
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