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Private Company Council Backs Proposal to Ease Adoption of Accounting Alternatives

The FASB’s Private Company Council (PCC) sent to the FASB a proposal that would make it easier for private companies to adopt special accounting alternatives if they missed the window for the alternatives’ effective dates. The proposal would give companies a one-time option to elect a private company accounting alternative without having to conduct a test in U.S. GAAP known as the “preferability assessment.”

The FASB’s Private Company Council (PCC) on July 21, 2015, agreed to fast-track a proposal to make it easier for private companies to adopt special accounting alternatives in U.S. GAAP.

The council, which advises the FASB on private company accounting issues, agreed that private companies would have an unconditional one-time option to elect an accounting alternative without having to conduct a test in U.S. GAAP known as the “preferability assessment.”

In U.S. GAAP, if a private company does not elect a private company alternative before its effective date, it must assess the preferability of the alternative using the guidelines in Topic 250, Accounting Changes and Error Corrections . While businesses said the preferability test is not necessarily onerous, it could in some cases result in a company not being able to use the breaks from four recent accounting amendments developed by the PCC.

A privately held company acquired by a private equity firm that wants to take it public in a few years may be denied use of the alternative in one scenario. With an initial public offering on the horizon, the private company would not elect to use the accounting alternatives because its potential shareholders would want to see prior years’ financial statements prepared under U.S. GAAP for public companies. If the public offering falls through, however, and the private company has missed the effective date of the private company accounting alternatives, it would have some difficulty adopting the alternative, PCC Chairman Billy Atkinson told Accounting & Compliance Alert .

“It’s recognizing that things change in private companies, and we didn’t want to be constrained by something that was unintended,” Atkinson said of the proposal.

The council sent the recommendation to the FASB to refine, release for public comment, and consider for final approval. Normally, the PCC works through the details of its recommendations before sending them to the FASB, but the group wanted to get this proposal out quickly because some of the private company alternatives the PCC has helped the FASB develop will be in effect for 2015 financial statements.

The PCC members said they supported some flexibility in allowing private companies to use the accounting measures tailored for them.

“It just seems to defeat the purpose to have a short window where the timing for the constituents to obtain that relief has to line up perfectly, or else there is going to be a potentially costly and complex arm wrestling with auditors ‘is this preferable or is it not preferable,'” said PCC member Larry Weinstock, vice president of Mana Products Inc. in Long Island City, New York.

The PCC also asked that the FASB consider whether the option should be extended to other private company accounting alternatives developed by the FASB. In addition, it recommended that the FASB consider providing more guidance on assessing preferability under Topic 250.

The Financial Accounting Foundation, the parent organization of the FASB, established the PCC in 2012 after years of complaints that the FASB catered too much to large, public companies and ignored the needs of smaller, privately held organizations that have less complex financial reporting issues. The council set out to pick particularly difficult areas of U.S. GAAP for private companies to follow and advise the FASB on how to make them simpler.

The council has since helped publish four updates to U.S. GAAP:

  • Accounting Standards Update (ASU) No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination , exempts private companies from recognizing certain hard-to-value intangible assets when they buy or merge with another company,
  • ASU No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements , eases consolidation reporting requirements of lessors in certain private company leases,
  • ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill, a consensus of the Private Company Council , simplifies accounting for goodwill, and
  • ASU No. 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 , gives private companies an easier form of hedge accounting when they use simple interest rate swaps to secure fixed-rate loans.

The council also agreed to extend transition guidance indefinitely for the goodwill alternative in ASU No. 2014-02 and interest rate swap alternative in ASU No. 2014-03.

The transition guidance under existing PCC alternatives is only available if a private company chooses to follow the accounting alternative during the effective date window associated with the update to U.S. GAAP, FASB staff members told the PCC.

Topic 250 could be interpreted to require a private company that chooses a PCC alternative subsequent to the effective date to apply the accounting alternative retrospectively, which would force it to adjust results from prior reporting periods to reflect the new accounting method.

“In general, retrospective application of a PCC alternative could be costly and diminish the relief provided by the accounting alternative as compared to the transition guidance provided in two of the PCC-derived ASUs,” according to a FASB memo prepared for the meeting.

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