Proposed Changes to U.S. GAAP for Private Companies

August 26, 2013 by Jason Frick
Copeland Buhl

Private companies face significant challenges in applying U.S. generally accepted accounting principles (GAAP) to their financial statements due to the complex accounting and disclosure requirements that have been introduced over the past decade. Many of these were implemented in response to the high profile accounting scandals that occurred during that timeframe (i.e. Enron). Luckily, there finally appears to be some good news on the horizon for the accounting and financial reporting for private companies.

In 2012, the Financial Accounting Foundation (FAF), which is responsible for the Financial Accounting Standards Board (FASB), voted to create a Private Company Council (PCC), which works with the FASB and is primarily responsible for addressing financial reporting concerns for privately owned companies. While there was a consensus that there should not be a separate GAAP for private companies, there are distinct areas in which the requirements under GAAP are cumbersome and not beneficial to the readers of the financial statements.

Over the summer, there have been four different proposals issued for public comment relating specifically to accounting challenges of private companies. One of the proposals affects numerous private companies as it pertains to variable interest entities. In many instances, private companies are structured as an operating entity that leases its facilities from a related real estate entity. This structure, which is often formulated for tax considerations, resulted in either consolidation of the two entities or required a modification in the related accountants’ or auditor’s report accompanying the financial statements due to a departure from GAAP. The proposal would allow most private companies to be exempt from consolidating these entities.

A second proposed change involves requiring goodwill to be amortized over a 10-year period. Currently, GAAP requires goodwill to only be adjusted if it is considered to be impaired, which can be a lengthy and expensive determination for many private companies to make. For tax purposes, intangibles such as goodwill are generally amortized over a 15 year period, so the final standard may take this into consideration.

The other two proposals that have been exposed for public comment pertain to more specific accounting scenarios that are less common amongst private companies. One item allows private companies to be exempt from identifying and valuing intangible assets (i.e. trademarks) acquired in a business combination. As tax rules generally allow all intangibles including goodwill to be amortized over a 15 year period, the cost of valuing these other intangible assets exceeds the benefit in most cases. The fourth item simplifies the accounting treatment of interest rate swaps for private companies. In some instances, banks require public companies to enter into interest rate swaps as a means for fixing the interest rate of a debt agreement. Currently these swaps, which often mirror the terms of the debt agreement, fall under complex accounting standards for derivatives. Under this proposal, private companies could account for these transactions as if the debt agreement was at a fixed rate, instead of treating them as two separate instruments.

These four items are currently at the proposal stage and it is unknown whether any of them will be effective for financial statements as of December 31, 2013. The goal of these proposals, as well as other items to be covered on future PCC agenda is to simplify the accounting and financial reporting for private companies.

Please contact us if you have any questions regarding these forthcoming changes or require other assistance with your accounting and financial reporting needs.

Jason Frick