© 2014 KSM Business Services, Inc.

Private Company AlternativesDecember 11, 2014

John Henne, CPA, CFE, CISA, MPA

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▪ ASU 2014-07: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements

▪ ASU 2014-02: Accounting for Goodwill

▪ ASU 2014-03: Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

(Simplified Hedge Accounting Approach)

Accounting Standard Updates Covered

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▪ Annual periods beginning after December 15, 2014; early application permitted

▪ These updates apply to private company financial statements

▪ Private companies must elect to use the alternatives

Effective Date for Accounting Standard Updates

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Why You Should Care

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▪ Most popular ASU issued impacting privately held businesses

▪ Impact is significant for private companies▪ Allows private companies to deconsolidate certain variable

interest entities▪ Accomplishes what the user needs through disclosure of

leasing arrangements versus consolidation

ASU 2014-07

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Entities Impacted by ASU 2014-07▪ Real Estate ▪ Leasing

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Common Control

Leasing Arrangement

Leasing Activity

Guarantee/Collateral

Four Criteria

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▪ Common Control - Not defined by guidance; intuitive in nature; target is exact same ownership

▪ Leasing Arrangement – Leasing an asset (real estate and equipment); employees are excluded

▪ Leasing Activity – Substantially all the activity between the private company/lessee and the VIE/lessor are related to leasing activities

▪ Explicit Guarantee or Collateral - Provide a guarantee or collateral for the VIE/lessor related to the asset leased by the private company - Principal amount of the debt cannot exceed the value of the asset leased by the private company from the VIE/lessor

Four Criteria

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▪ Removal of VIE from the consolidated financial statements▪ Prepare comparative financial statements and footnote

disclosures▪ A note would be added to the notes of the financial

statements discussing the change in accounting principle▪ The notes to the financial statements would also need to

be updated for related party rent or lease expense, future minimum rentals and any guarantees

▪ If an audit, emphasis of a matter added in the auditors’ report

Impact on Financial Statements and Disclosures

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▪ Allows private companies to amortize goodwill over a 10 year period

▪ Saves time and money by eliminating the two-step impairment test

▪ Satisfies the users of the financial statements needs as it removes an asset that a bank would not allow a company to borrow against

ASU 2014-02

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▪ Number that was agreed upon by the PCC▪ Tax law requires goodwill be amortized over a 15 year

period

10 Year Amortization Period

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▪ Still would apply but is not required▪ Required only in instances where there are indicators of

impairment (trigger-based impairment test)▪ Some indicators of impairment would include the following: - Significant downturn in the economy - Internal issues such as the loss of key personnel or customers▪ If indicators identified, apply one-step test▪ Need to test goodwill impairment at the reporting unit level

or entity level

Impairment Test

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▪ A disclosure would be added to the notes of the financial statements discussing the change in accounting principle

▪ No need to adjust prior year financial statements ▪ If an audit, emphasis of a matter added in the auditors’

report

Impact on Financial Statements and Disclosures

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▪ Applies to plain vanilla interest rate swaps that are receive-variable, pay-fixed swaps.

▪ This type of hedging arrangement allows the private company to swap a variable interest rate loan for a fixed interest rate loan to hedge the risk of rising interest rates.

▪ Typically swap arrangements are embedded within the loan agreement with the bank.

ASU 2014-03

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Private Company – Pays Fixed

Interest Rate

Bank – Receives

Variable Interest Rate

Counterparty – Plays the Float Between the

Fixed and Variable Interest

Rates

Parties Involved In An Interest Rate Swap Arrangement

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1. Debt and the swap have to be based on the same interest rate index and same reset period

2. There is no floor or cap on the variable rate amount3. The repricing and settlement dates on the swap and debt are the

same date or do not differ by more than a couple days4. The fair value of the swap should be at or near zero at inception5. The notional amount of the swap should match the principal being

hedged6. All interest payments occurring on the borrowings during the term

of the swap are designated as hedged whether in total or in proportion to the principal amount of the borrowings being hedged

Six Conditions for Application

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▪ The borrower has until the date the financial statements are issued to document the hedge relationship

▪ Hedge effectiveness is assumed▪ Private company can assume that settlement value equals

fair value▪ Private company can value the derivative without taking

into account non-performance risk on the part of the counterparty

▪ Private company still books the derivative with the offset to other comprehensive income as an unrealized gain or loss

Simplified Hedging Approach

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▪ Entity will still have all the disclosures it would normally have with any derivative

▪ Notes to the financial statements will still include the tabular format with Level 1, Level 2 and Level 3

▪ Only difference is that settlement value can be assumed to be fair value

▪ Essentially there is no disclosure relief▪ Change in accounting policy would be added to the notes

to the financial statements▪ If an audit, emphasis of matter added in the auditors’ report

Impact on Financial Statements and Disclosures

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▪ Accounting for Identifiable Intangible Assets in a Business Combination

- Only recognize and measure assets capable of being sold or licensed independently - Two assets not meeting the principle include non-compete agreements and customer related intangibles - Final ASU has not been issued yet

PCC Issue No. 13-01A