BVWire reports that 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.
Learn more: Speaking of the PCC, there will be a webinar on February 4, Private Company Considerations in Measuring Fair Value featuring Mark Zyla (Acuitas Inc.). This is part of BVR’s 2014 Online Symposium on Fair Value Measurement and will look at potentially game-changing proposals by the Financial Accounting Foundation’s Private Company Council (PCC) to make changes and exceptions to GAAP for private companies. Join Symposium curator Zyla to find out how these alterations, subject to FASB endorsement, could affect valuation, fair value measurement, and GAAP standards