PCC Accounting Standard Updates

February 12, 2014

PCC Accounting Standard Updates breakdown:

2014-02 Accounting for Goodwill

  • Provides a simplified amortization alternative that can be used in accounting for post-acquisition goodwill for private companies (not available to public business entities, not-for-profit entities, or employee benefit plans).
  • Effective for fiscal years beginning after December 15, 2014, but early implementation is permitted so this can be used for 12/31/13 year end reports.
  • Under the goodwill alternative, a nonpublic entity is able to amortize goodwill on a straight-line basis over a period of ten years or over a shorter period if the company demonstrates that another useful life is more appropriate.
  • If the optional guidance in accounting for goodwill is utilized, this alternative needs to be applied on a prospective basis - companies should begin amortizing existing goodwill as of the beginning of the reporting period where the optional guidance is adopted.
  • Upon adoption, a company will need to make a policy election regarding whether it will assess goodwill for impairment at an entity-wide level or a reporting unit level
  • Goodwill would be subject to impairment testing only upon the occurrence of a triggering event – no longer need to test on an annual basis.
  • A nonpublic entity applying the alternative will continue to have the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. If a quantitative impairment test is required, a one-step impairment test would be performed. The amount of the impairment would be measured by calculating the difference between the carrying amount of the entity (or reporting unit, as applicable) and its fair value. A hypothetical purchase price allocation to isolate the change in goodwill (i.e., step two) would no longer be required.
  • If a nonpublic entity elects to apply the alternative, it will be required to apply all aspects of the alternative (i.e., both amortization and the simplified impairment test).

ASU 2014-03 Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach

  • Provides a simplified alternative that can be used in accounting for plain-vanilla interest rate swaps (receive-variable, pay-fixed interest rate).
  • For private companies only (not available to public business entities, not-for-profit entities, or employee benefit plans, or financial institutions).
  • Simplified hedge accounting can be applied as long as the terms of the swap and the related debt are aligned. If the conditions are met, a company would be able to assume the cash flow hedge is fully effective.
  • Election to use this alternative can be made 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.
  • Those applying the simplified hedge accounting approach will have until the issuance of their financial statements to complete the necessary hedging documentation.
  • There is an option to recognize the swap at its settlement value, which measures the swap without non-performance risk, instead of at its fair value.
  • 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.
  • Use of this approach will reduce disclosure requirements.

These changes have been approved by FASB and final implementation guidance has recently been released.