Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International.

ASC 805 and ASC 350 Changes for Private Companies

Steven J. Siefert, CFA, ASA-BV/IA

Baker Tilly Virchow Krause, LLP

Founded in 1931, Baker Tilly Virchow Krause, LLP is one of the top 12 largest accounting and advisory firms in the U.S.

Baker Tilly Virchow Krause, LLP employs approximately 2,500 professionals across 29 cities in the US with annual revenues of approximately $475 million.

Baker Tilly Virchow Krause is an independent member of Baker Tilly International, the eighth largest accountancy and business advisory network of independent members.

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Steven J. Siefert, CFA, ASA-BV/IA Bio

Financial and Valuation Manager for Baker Tilly Virchow Krause, LLP’s Milwaukee office.

Performs a variety of business valuation engagements for a variety of purposes such as financial reporting, gift and estate tax, S corporation elections, etc.

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Overview

In recent years, there has been a push for reduced complexity (cost) with audited financial statements for private companies.

One significant burden for private companies is accounting related to purchase transactions. Before the creation of the private company council, no difference in GAAP requirements for public and private companies.

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History of Private Company Council

In 2006, FASB created the PCFRC in an effort to improve ability of incorporating views of private company constituents in the standard-setting process.

In 2009, the FAF board of Trustees did a “listening tour” where it met with constituents. Big concern was the cost and complexity of standards for nonpublic entities. Key concern was no exceptions or modifications to US GAAP for private companies.

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History of Private Company Council (Con’t)

In December 2009, the AICPA, the FAF, parent of FASB, and the NASBA established a blue-ribbon panel to address how accounting standards can best meet the users of U.S. private company financial statements.

During May 2012, FASB approved the establishment of the Private Company Council (“PCC”), a new body to improve the process of setting accounting standards for private companies.

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How Accounting Standard Updates Are Determined

PCC and FASB work jointly to mutually agree on a set of criteria to decide whether and when alternatives within GAAP are warranted for private companies.

Based on the criteria, the PCC reviews and proposes alternatives within U.S. GAAP to address needs of users of private company financial statements.

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How Accounting Standard Updates Are Determined (Con’t)

First, PCC will conduct a review of existing GAAP and identify standards to require consideration.

PCC will vote on proposed alternatives, which must be approved by a two-thirds vote of all PCC members.

Proposed modifications or exceptions to GAAP approved by the PCC are submitted to FASB for a decision on endorsement. If endorsed by majority of FASB members, the proposed modifications are exposed for public comment.

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How Accounting Standard Updates Are Determined (Con’t)

Following receipt of public comment, PCC considers changes to the original decision and takes a final vote. If approved, the final decision then will be submitted to the FASB for a final decision on endorsement.

If FASB does not endorse a proposed or final modification or exception, the FASB chair will provide feedback on the reason for non-endorsement and possible changes the PCC could consider to receive FASB endorsement.

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How Adoption Works

Companies have the option of elections of the alternatives under GAAP. Companies are allowed, but not required, to make the elections.

This is critical for companies that plan to go public as there is no exception for SEC filing companies.

Due to costs, if a company plans to go public, it is generally best not to elect the private company exemptions.

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ASU Updates

ASU 2014-03 – Accounting for Certain Swaps

ASU 2014-02 – Accounting for Goodwill

ASU 2014-07 – Variable Interest Entities Under Common Ownership

ASU 2014-18 – Accounting for Intangible Assets in a Business Combination

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ASC 350

ASC 350 refers to indefinite lived asset impairment testing. Generally, ASC 350 is associated with goodwill impairment testing.

Under GAAP, companies are required to test for goodwill impairment at least annually, or more frequently when certain conditions exist.

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ASC 350 (Con’t)

Goodwill impairment under ASC 350 is estimated in a two step process:

1) Determine fair value of the reporting and comparing to its carrying value.

2) Revalue all assets and compare the fair value of goodwill to its carrying value, and record impairment for the difference.

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ASC 350 (Con’t)

In 2011, the FASB issued a “Step 0” test for assessing potential goodwill impairment, which allows the user to perform a “qualitative test” to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value.

Step 0 was supposed to lower the cost and complexity of testing, however, due to the subjective nature of the test, virtually no one uses the Step 0 test.

Most people skip Step 0.14

Changes to ASC 350 for Private Companies

In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-02. Primary amendments in this update for ASC 350 were:

Goodwill is amortized straight-line over ten years, or another useful life if demonstrated.

Testing can be done at a Company or reporting unit level.

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Changes to ASC 350 for Private Companies (Con’t)

The impairment amount applied to goodwill does not require Step 2, instead determining impairment as the difference between the fair value and carrying value of goodwill.

Goodwill must be tested when a triggering event occurs. Goodwill is no longer to be analyzed at least annually.

Early adoption of ASU 2014-02 was permitted with many companies early adopting.

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ASC 805

ASC 805 is related to purchase accounting.

In a business combination, all assets and liabilities acquired must be fair valued, including all identifiable intangible assets.

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Changes to ASC 805 for Private Companies

In December 2014 (Day before Christmas Eve) the FASB issued ASU 2014-18. Primary amendments in this update for ASC 805 were:

Non-competes were no longer required to be valued and separated from goodwill.

Customer relationships were no longer required to be valued and separated from goodwill (in general).

ASU 2014-02 must also be adopted if ASU 2014-18 is elected.

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Changes to ASC 805 for Private Companies (Con’t)

Assets that can be licensed or sold still must be valued (items like technology and trademarks). In addition, contingent consideration must still be valued.

No change for real and personal property requirements.

Early adoption of ASU 2014-18 was permitted. However, due to the requirements, many private companies did not elect unless there was less than one transaction in the prior year.

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Current Challenges

Concerns regarding “Big” GAAP and “Little” GAAP

GAAP divergence with IFRS

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Own Observations

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Questions?

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