Initial election of private company accounting alternatives
FINANCIAL REPORTING INSIGHTS |
In 2014, the Financial Accounting Standards Board (FASB) started issuing Accounting Standards Updates (ASUs) that provide simplified accounting alternatives for some or all private companies. Concerns have been raised about the required assessment of preferability when electing a private company accounting alternative for the first time after its effective date. Private company stakeholders were concerned about scenarios in which it may be suboptimal for a company to elect a private company accounting alternative by its effective date because of the facts and circumstances of that company or because that company is unaware of that private company accounting alternative until after its effective date.
To address these concerns and other matters, the FASB recently issued ASU 2016-03, Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council),which made the guidance in the following ASUs effective immediately by removing their effective dates:
- ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council)
- ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach (a consensus of the Private Company Council)
- ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council)
- ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)
The ASU also includes transition provisions whereby private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of the ASU. However, any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections.
The ASU also addresses certain matters related to transition guidance. Currently, private companies are not permitted to apply the goodwill accounting alternative prospectively after the original effective date of ASU 2014-02. In general, retrospective application could be costly and diminish the relief provided by the alternative. The ASU permits private companies that voluntarily elect the goodwill accounting alternative provided in ASU 2014-02 to apply it prospectively.
Private companies currently are not permitted upon initial election of the simplified hedge accounting approach after the original effective date of ASU 2014-03 to apply the simplified hedge accounting approach to existing swaps (transition exception). The amendments in the ASU permit transition provisions that extend the transition guidance in ASU 2014-03 indefinitely. However, the transition exception does not apply to subsequent elections of the simplified hedge accounting approach.
See Simplified accounting alternatives for private companies for our summaries about the accounting alternatives within the scope of the ASU.