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Goodwill Counting: 2 Alternatives Make Reporting Easier for Private Companies

Jonathan LaMantia 02.28.2014 | Long Island Business News

Private companies have called for simplification in the way they are permitted to report financial statements, and it appears regulators are listening. The Financial Accounting Standards Board, an organization charged with creating accounting rules for U.S. companies, has endorsed two changes that offer private companies alternatives to current accounting rules.

The changes, which were first proposed by the Private Company Council – a body formed in 2012 to address the needs of private companies – were endorsed by FASB on Jan. 16, allowing private companies alternative methods to account for goodwill and interest rate swaps. They are the first proposals to be enacted by the standards board.

“These two accounting standards address issues that private-company stakeholders have told us are priorities,” FASB Chairman Russell Golden said in a statement. “Both standards address private-company stakeholder concerns by reducing the cost and complexity for preparers, while still providing decision-useful information for lenders, investors and other users of private-company financial statements.”

Goodwill, an intangible asset that results from the purchase of a business for more than its fair value, can now be amortized, reducing the value of the intangible asset on the books.

The amortization will occur on a straight-line basis over 10 years, or fewer if deemed appropriate. The accounting alternative also creates a new model for recognizing goodwill impairment, or a reduction in value.

Companies are now only required to test for impairment when a triggering event occurs, such as a change in the profitability of a business, after previously being required to perform impairment tests each year.

“It streamlines the number of hours that a company will have to spend preparing its financial statements and doing the analysis,” said Dominick Kerr, a Melville-based senior manager in PricewaterhouseCoopers’ national professional services group. “(It will) save time and money on getting outside experts to help them with these assessments.”

The Private Company Council, which holds town hall and roundtable meetings around the country to gain input from financial statement users and preparers, intends to further simplify the way private companies report their financial statements.

“(The changes are) bringing awareness to the complexity of accounting, and maybe in certain areas it doesn’t need to be that complex,” Kerr said. “The PCC is doing a great job in addressing that.”

The change in the reporting of interest rate swaps deals with one of the “very much nerdier” areas of accounting, Kerr said.

Under the new alternative, private companies can use an approach, called hedge accounting, to convert from variable-rate interest payments to a fixed rate.

Using the method makes it easier for companies to project future cash flows by removing the variability in interest payments.

Certain private financial institutions, including banks and insurance companies, will not be allowed to enact the change.

The interest rate swap changes allow companies to measure the fair value of swaps at settlement value, which should expedite the hedge accounting process, according to a FASB statement.

Grace Singer, a partner at Berdon in Jericho, said the interest rate alternative would likely be the less popular of the two changes, as companies can pick and choose which ones to adopt.

“I don’t know if it’s enough of a change that it will definitely have private companies running to it,” Singer said. “But it’s definitely better than what we’ve got.”

Simplifying the accounting procedures for goodwill and interest rate swaps are likely to save private companies money, but these alternatives are not right for every company.

Singer said she will caution certain clients to avoid the alternatives, including private companies that plan to go public or be acquired by a public company in the near future.

Those companies would have to retroactively issue financial statements that comply with generally accepted accounting principles for public companies.

The standards board said it would evaluate whether these alternatives are appropriate for public companies and nonprofits in the coming months.

Other factors to consider when adopting the changes include examining the users of financial statements, such as lenders and private-equity firms, and whether they are opposed to the alternatives.

Private companies expecting to refinance debt could run into problems if a prospective lender wants to see financial statements without the exceptions.

Woody Goldstein, a senior manager at Mayer CPAs in Syosset, said he is unsure about what effect the changes will have on the cost of financial statement preparation.

“Obviously, if we’re spending less time, the client would expect to be charged less,” Goldstein said. “I don’t know what the pitfalls will be until we start applying these two recent releases to the current-year engagements.”

Goldstein said he expects his firm to begin talking with clients about the alternatives within the next 90 days.

Overall, Singer said, the changes are steps in the right direction for private-company reporting. Private companies must be sure that the alternatives blend well with their future plans, though.

“Will it save money? Yes. Will it cost less to do this? Yes,” Singer said. “If you’re going to stay a private company and your lender agrees to it and everybody’s happy with it, it will cost less.”

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