Update on Accounting for Goodwill and Derivatives

By Norbert Dietrich, CPA

In the fall of 2013, the Private Company Council (PCC) reached a consensus to provide an elective accounting alternative in two areas, goodwill and interest rate swaps. In January 2014, the Financial Accounting Standards Board (FASB) released Accounting Standards Codification (ASC) updates on those two topics, which are 2014-02 Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill and 2014-03 – Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps. These two releases apply to all entities, except for public business entities and not-for-profit entities, who adopt the pronouncements.

The PCC determined that a more simplified accounting approach for certain interest rate SWAP contracts needed to be implemented. This simplified method of accounting will result in the ease of accounting and disclosures in the financial statements. There are several criteria which must be met in order to elect this method of accounting which we believe most of our clients will meet.

The FASB update on Goodwill is an alternative method of accounting that can be made by any entity that falls within the scope of the ASC. If elected, an entity can amortize goodwill over a period of 10 years, or less than 10 years, if the entity can demonstrate that another useful life is more appropriate. The following is an outline of the other accounting requirements under the new alternative method:

1. An entity that elects the accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level, whenever a triggering event occurs.
2. An entity has the option to first test goodwill using qualitative assessment factors.
3. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the entity must perform the quantitative test to determine the entity’s fair value. If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, no further testing is necessary.
4. The goodwill impairment loss, if any, represents the excess of the carrying value of the entity, including goodwill, over the fair value. The goodwill impairment loss cannot exceed the entity’s carrying value of goodwill.
5. The disclosure requirements under this alternative are similar to existing U.S. generally accepted accounting principles. If the alternative method is elected, the entity is not required to present changes in goodwill in a tabular reconciliation.

Both pronouncements are effective for annual reporting periods beginning after December 15, 2014. However, early adoption is permitted for both pronouncements. Both pronouncements are an electable method that should be discussed to determine whether it would be beneficial for the company.

If you have any questions on these updates, feel free to contact us.

Volume 1, Issue 2
Spring 2014