Question

QUESTION -1.5 An accounting alternative is available within the goodwill topic of the codification. (ASC 350-20) specifically as it relates to to the subsequent measurement of goodwill. Locate this alternative and explain:

1)what measurement approach does the accounting alternative permit? 2) was types of companies are eligible to apply this accounting alternative, and where did you locate this information? 3) how does the accounting alternative differ from the measurement requirements for companies that do not (or cannot) elect this treatment? 4) was was the effective date for this guidance, and where did you locate this information?

Answer 1

FASB issued ASUs which offer eligible private companies simplified alternative approaches to account for goodwill and interest rate swaps, respectively. These alternatives were initially developed by the Private Company Council (PCC) and ultimately endorsed by the FASB. Entities can early adopt the accounting alternatives and apply them in any period for which financial statements have not yet been made available for issuance.

Goodwill Accounting Alternative

To alleviate the cost and complexities associated with the goodwill impairment test under ASC 350,ASU 2014-02 offers private companies a simplified accounting alternative for goodwill. The ASU explains that during outreach performed by the PCC, “users of private company financial statements indicated that the goodwill impairment test performed today provides limited decision-useful information because most users of private company financial statements generally disregard goodwill and goodwill impairment losses in their analysis of a private company’s financial condition and operating performance.” Not-for-profit entities are not within the scope of the new guidance.

private company that elects the accounting alternative under ASU 2014-02 would be required to apply it to all existing goodwill and new goodwill recognized after the effective date. In addition, a private company would be required to comply with related subsequent measurement and disclosure requirements in the accounting alternative.

Private companies that elect the accounting alternative are required to amortize goodwill attributable to equity method investments. Although goodwill associated with the equity method investment would not be tested for impairment under the guidance in ASU 2014-02, the equity method investment itself must still be assessed for impairment in accordance with ASC 323-10-35-32.

Simplified Hedge Accounting Approach

At times, private companies find it difficult to issue fixed-rate debt because of cost or other constraints. As a substitute, they may choose to issue variable-rate debt and then enter into a pay-fixed, receive-floating interest rate swap to achieve the desired economic result.

Under current U.S. GAAP, public entities must account for the issued debt separately from the interest rate swap and generally must measure the debt at amortized cost and the interest rate swap at fair value. The result is an accounting measurement mismatch that gives rise to volatility in the income statement unless the strict criteria for cash flow hedge accounting in ASC 815 are met and such treatment is elected.

Under this approach, qualifying private companies may assume that there is no ineffectiveness in a cash flow hedging relationship involving a variable-rate borrowing and a pay-fixed, receive-variable interest rate swap.