Relief is finally here for private nonpublic entities who prepare GAAP financial statements. Over the past year the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) have worked together to establish an acceptable and simplified alternative within GAAP for private nonpublic entities. These new alternatives are modifications to U.S GAAP. Current U.S GAAP has many financial statement and disclosure requirements that are very complex and not easily understood by many small to medium-sized nonpublic owners and their targeted financial statement users (i.e. bankers and other financial institutions).
Although the PCC has initiated several alternatives over the past year, ASU 2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements and ASU 2014-02 Intangibles – Goodwill and Other, are the most anticipated revisions for nonpublic entities.
Under the current GAAP standards, an entity is required to consolidate a variable interest entity (VIE) under Fin 46 R when that entity is deemed to be the primary beneficiary of the VIE. Complying with this standard has been very time consuming and costly for many private entities whose primary and in many cases only VIE relationship relates to rental activity. Under ASU 2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, a private nonpublic entity may elect to not consolidate the lessor entity when the private entity (lessee) and the lessor are under common control and the activity between the private entity (lessee) and the lessor substantially consists of leasing activities conducted under a leasing agreement. In the case where the private entity (lessee) guarantees the lessor obligations, the election to not consolidate is still available as long as the obligation being guaranteed does not exceed the value of the asset leased.
Practical Consideration: Although the new GAAP alternative for consolidation is the answer many CPA’s have been waiting for, you may want to consider meeting with your client and their respective banker or financial institution to renegotiate the “financial reporting” terms of any agreements if they call for “GAAP consolidated financial statements”.
Similarly under the current GAAP guidance, the accounting for Goodwill has been a complex and expensive calculation for many private nonpublic entities with no benefit since many users of private entity financial statements disregard goodwill and any applicable impairment when evaluating their financial condition. Under ASU 2014-02 Intangibles – Goodwill and Other, a private nonpublic entity may elect to amortize existing and any new goodwill on a straight-line basis over a useful life of 10 years or less if the entity is able to demonstrate that a shorter useful life is more appropriate.
Additionally, under ASU 2014-02, private nonpublic entities are required to test goodwill for impairment only when a triggering event occurs (such as fair value being lower than the carrying cost) versus performing the test annually. If a triggering event occurs, impairment testing has been simplified by (1) allowing entities to perform the impairment test at the entity level rather than the reporting-unit level and (2) requiring a less extensive analysis to measure impairment which is a single step approach that compares the carrying amount of the entity or (reporting unit) to its fair value.
If a private entity elects to adopt an accounting alternative, it should be applied retrospectively to all periods if comparative financial statements are being presented. The alternatives are effective for annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015. Early adoption is permitted.
Financial Statement Tip: Implementation of any of the GAAP alternatives should be disclosed in the financial statement as a “Change in Accounting Policy”. If the exception not to consolidate has been met, the related party leasing arrangement must still be disclosed in the financial statement as required under Current U.S. GAAP.