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Journal Entry — PCC Makes Tentative Decisions on Alternatives for Private Companies

Published on: May 14, 2013

On May 7, 2013, the Private Company Council (PCC) met to consider certain alternatives to U.S. GAAP for private companies. At the meeting, PCC members tentatively decided to:

  • Provide relief from separate recognition of certain intangible assets acquired in a business combination.
  • Allow goodwill to be amortized, and permit a simplified goodwill impairment model.
  • Give private companies two alternatives to use in accounting for certain types of interest rate swaps.

These tentative decisions are a first step in developing U.S. GAAP alternatives to guidance for private companies in these subject areas. The PCC asked the FASB staff to begin drafting exposure drafts (EDs) on the tentative decisions, after which it will seek FASB endorsement. Once endorsed, the EDs will be exposed for public comment. The PCC hopes to receive comments on the EDs before its October 1, 2013, meeting.

Intangible Assets and Goodwill Acquired in a Business Combination

ASC 8051 requires entities to recognize identifiable intangible assets acquired in a business combination separately from goodwill if the intangible asset meets either the contractual-legal criterion or the separability criterion. The PCC tentatively decided that private companies could elect separate recognition of intangible assets when they satisfy the contractual-legal criterion only (e.g., trade name, patented technology, or customer contracts). Therefore, intangible assets that satisfy the separability criterion in ASC 805 (e.g., customer lists, noncontractual customer relationships, or unpatented technology) but not the contractual-legal criterion would be recognized as part of goodwill. If a private company elects this alternative, it would be required to qualitatively disclose the nature of the intangible assets not separately recognized.

In addition, the PCC tentatively decided that private companies could elect to amortize goodwill acquired in a business acquisition over the estimated useful life of the primary asset2 acquired, not to exceed 10 years. If a private company determines that a triggering event occurred to cause goodwill to be more likely than not impaired, it would perform a one-step impairment test at the entity level (rather than at the reporting unit level as required in U.S. GAAP) and record an impairment loss equal to the excess of the carrying amount over the fair value.

Accounting for Certain Types of Interest Rate Swaps

The PCC also discussed two approaches private companies could use to account for certain pay-fixed, receive-floating interest rate swaps that are entered into only to economically convert variable-rate debt to fixed-rate debt. Under the first approach, referred to as the “combined instruments method,” private companies would account for the interest rate swap and the debt as a combined instrument (i.e., as a synthetic fixed-rate debt instrument) rather than as a swap at fair value and a debt instrument at amortized cost. Under the second approach, referred to as the “simplified shortcut method,” a private company would continue to recognize and measure the interest rate swap at fair value separately from the debt instrument but would be permitted to apply the “shortcut” method outlined in ASC 815-20 to its hedging relationship, thereby achieving the same income statement impact as if it had issued fixed-rate debt. The PCC also discussed the disclosure and transition provisions that would apply to each of the two approaches.

Either alternative would be acceptable and could be used by private companies other than financial institutions in accounting for interest rate swaps used to convert variable-rate debt to a fixed rate.

[1]    For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."

[2]    The Issue Summary for PCC Issue No. 1 indicates that a “primary asset would be defined as the long-lived asset that is the most significant asset from which the reporting unit generates its cash-flow-generating capacity (similar to the concept of recoverability under Topic 360, Property, Plant, and Equipment).”

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