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Proposal Aims to Ease Adoption of Private Company Accounting Alternatives

The FASB released for public comment a proposal to make it easier for private companies to adopt special accounting alternatives if they missed the window for the alternatives’ effective dates. The proposal erases the effective dates for the four existing private company alternatives and also allows the companies a one-time option to elect an accounting alternative without having to conduct a test in U.S. GAAP known as the “preferability assessment.”

The FASB on September 30, 2015, released a proposal to make it easier for private companies to adopt special private company accounting alternatives to traditional U.S. GAAP.

If finalized, the guidance in Proposed Accounting Standards Update (ASU) No. PCC-15-01, Intangibles—Goodwill and Other (Topic 350) Business Combinations (Topic 805) Consolidation (Topic 810) Derivatives and Hedging (Topic 815) Effective Date and Transition Guidance a proposal of the Private Company Council, will let private companies have an unconditional 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.”

Comments are due by November 16.

Under existing U.S. GAAP, if a company does not elect an accounting standard on or before its effective date, it must assess the preferability of the alternative as described in Topic 250, Accounting Changes and Error Corrections . While businesses said the preferability test is not necessarily onerous, it could in some cases block a private company from using the breaks laid out in four recent accounting amendments developed by the FASB’s Private Company Council (PCC).

This could happen, for example, if a large company buys a private business and wants to make it public. With an initial public offering on the horizon, the private company would choose not to elect the private company accounting alternatives because its potential shareholders would want to see prior years’ financial statements prepared under traditional U.S. GAAP. If the public offering falls through, however, and the private company has missed the effective date of the private company accounting alternatives, it could face a challenge trying to adopt the breaks. In some cases, members of PCC said auditors might give private companies a hard time about justifying the use of private company accounting alternatives.

In other cases, a private company may not be aware of private company accounting alternatives when they become effective and therefore miss the window to use them.

“Forgoing an initial preferability assessment could allow private companies to adopt a private company accounting alternative within the scope of this proposed update when the private companies experience a change in management’s strategic plan or circumstances,” the proposal says. “It also would allow private companies that were unaware of an accounting alternative to adopt the alternative without having to bear the cost of justifying preferability.”

The proposal makes the guidance in the four private company accounting alternatives the FASB has issued for the PCC effective immediately by removing their effective dates. In addition, the proposal indefinitely extends the transition guidance in the four alternatives.

Any subsequent change to an accounting policy election would require justification that the change is preferable 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 amend areas of U.S. GAAP that were particularly difficult for private companies and advise the FASB on how to make them simpler.

The council approved four accounting alternatives for private companies that were published by the FASB.

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 leasing transactions.

ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill, a consensus of the Private Company Council , simplifies accounting for goodwill.

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.

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