Will the PCC’s goodwill alternative affect valuation analysts?

BVWireIssue #136-3
January 22, 2014

The Financial Accounting Standards Board has released the first two GAAP alternatives created by the Private Company Council (PCC). These alternatives provide private companies with (1) an alternative accounting model for goodwill; and (2) a simplified hedge accounting approach for qualifying interest rate swaps.

The goodwill alternative, Accounting for Goodwill Subsequent to a Business Combination, allows a private company to amortize goodwill over a period of up to 10 years and to apply a simplified impairment model to goodwill. Step 2 of the impairment test would be eliminated and replaced with a simpler calculation. Companies that choose the alternative will have to test for impairment only when a triggering event occurs that would indicate that the fair value of an entity may be below its carrying amount.

Impact: Although the goodwill alternative is designed to cut the cost of compliance for private companies, they may elect not to adopt it. That’s because if they are acquired by a public company, they would have to undo the election and restate financial statements. So there may be little impact on valuation analysts—for now.

The FASB also voted to add a project to its technical agenda to consider similar alternatives to the existing goodwill impairment model for public companies and not-for-profit entities. Of course, if this is approved, private companies would have less risk of restatements, so more of them may adopt the alternative. This would have a greater impact on valuation analysts.

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