Little GAAP: Private Company Alternatives to GAAP

For years, many private businesses have complained that the FASB catered to large, public companies. In 2012, the Private Company Council (established by the FASB’s parent organization) began recommending ways to adapt the rules to fit the simpler financial reporting needs of small business stakeholders.

Making life easier

In 2014, the FASB issued four alternative reporting options:

1. Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. It allows private companies to elect to amortize goodwill over a period not to exceed 10 years, rather than leave it unadjusted but subject to annual tests for impairment.

2. ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. It gives private non-financial-institutions an easier form of hedge accounting when using simple interest rate swaps to secure fixed-rate loans.

3. ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. It eliminates the consolidation reporting requirements applicable to certain related party lessors in private company lease.

4. ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. It exempts private companies from recognizing certain hard-to-value intangible assets — such as noncompete agreements and customer lists — when they combine with another company.

Switching over

In March, the FASB published ASU 2016-03, Intangibles — Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance. It removes the effective dates from the reporting alternatives.

It also exempts private companies from having to make a “preferability assessment.” Under the previous rules, one was required to assess whether an alternative method was preferable to the existing accounting policy before adopting an optional alternative.

Discuss your options

These options (and there are more coming) are part of generally accepted accounting principles (GAAP) for privately-held companies - they are not GAAP alternatives, so they should be acceptable to lenders. But their use is not recommended for companies contemplating a public offering.

We can answer your questions about how to make financial reporting simpler for your private business without compromising the integrity or relevance of your financial statements.

A Closer Look at Materiality

The concept of “materiality” helps management identify what’s important enough to a company’s financial well-being to warrant additional disclosures in the financial statements. Unfortunately, the FASB doesn’t currently define what information should be considered “material” under Generally Accepted Accounting Principles.

Investors don’t generally view materiality in terms of rule-of-thumb percentages. Instead, they see it as a qualitative, legal concept. The U.S. Supreme Court’s description of materiality is a “substantial likelihood” that omitting the information would be viewed by a reasonable investor or creditor as having “significantly altered” the total information available to make a decision.

Proposals Attempt Clarity

In late 2015, the FASB released two related proposals to guide businesses on when to include information in a footnote disclosure and when to omit it. Under the proposals, businesses would be required to assess whether investors will find the information useful and whether the information fits the legal concept of materiality.

Concerns Mount

Many businesses are concerned that the Supreme Court’s definition of materiality could evolve over time — and potentially morph into something that’s overly prescriptive or otherwise undesirable from a financial reporting perspective. So, the FASB is considering omitting any specific references to the Court’s definition.

To further complicate matters, if the FASB adopts these proposals, its definition of materiality could differ somewhat from the definition set forth by the International Accounting Standards Board.

Materiality is a Gray Area

The proposed changes to the materiality framework are designed to help facilitate management’s decision-making process. They aim to eliminate unhelpful, boilerplate information in the footnotes that makes it harder for investors to get at important facts.

During a March 2016 meeting, the FASB reviewed comments letters on its proposals. Now the project is back in the re-deliberation phase. contact us" target="_blank">Contact us for the latest information about this fundamental financial reporting concept.