The FASB recently endorsed two GAAP exceptions for private companies. The first exception permits private companies to amortize goodwill and implements a simplified model for goodwill impairment testing. The second exception offers a practical expedient that allows private companies to qualify for hedge accounting under ASC Topic 815. Final standards for each are expected to be issued by the end of the year.
As previously discussed in this space, the new rules for goodwill accounting allow for amortization of goodwill on a straight-line basis, for a period not to exceed ten years. Testing for impairment is performed at the entity-level at the occurrence of certain triggering events. Determination of any impairment charges, however, would still require measurement of the fair value of the entity in order to calculate the amount of the charge.
What are the implications of these changes?
- For smaller private companies, the new exceptions may indeed reduce the cost and complexity of producing financial statements.
- For larger private companies, however, the decision to adopt the new exception may be more difficult. If a private company has plans to become public in the future, it may be challenging to go back and reverse historical financial statements at a later date. There could also be pressure from private company sponsors and investors to maintain a “quasi-public” level of accounting rigor and compliance.
Mercer Capital is experienced in helping both public and private companies of all sizes understand the accounting and valuation issues involving goodwill and business combinations.
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