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September 2013 Essential Briefings Private Companies Get Another Reporting Model Choice
regulatory reporting ____________________________________________________________ Proposed Accounting Standards Update on the Definition of a Public Business Entity
financial reporting ____________________________________________________________ FASB Issues Private Company Council (PCC) Proposals
Contents September 2013
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essential briefings 2 P r i vat e C ompa n ie s G e t A n o t he r R e p or t i ng Mod e l C ho ic e In recent years, as Generally Accepted Accounting Principles (GAAP) in the United States continued to grow new levels of complexity, there has been a lot of discussion about developing private company standards.
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regulatory reporting 4 P rop o se d Acc oun t i ng S ta n da r d s Up dat e o n t he D e f i n i t io n of a P ubl ic Bus i n e s s E n t i t y In August 2013, the FASB issued an exposure draft of a proposed Accounting Standards Update which clarifies the definition of a public business entity.
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financial reporting 6 FASB I s sue s P r i vat e C ompa n y C ou n c il (P C C) P rop o s a l s The PCC in a joint effort with the FASB recently issued two proposals to address private company stakeholder concerns raised about the relevance and complexity of two U.S. Generally Accepted Accounting (“U.S. GAAP�) Principles, which are as follows...
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September 2013
Essential Briefings
Private Companies Get Another Reporting Model Choice By GALE MOORE | partner
GMoore@SingerLewak.com | 949.261.8600
In recent years, as Generally Accepted Accounting Principles (GAAP) in the United States continued to grow new levels of complexity, there has been a lot of discussion about developing private company standards. Many believe that a large segment of private companies do not need the robust accounting disclosures and complex accounting that is embedded in current principles. The Financial Accounting Standards Board (the “FASB”) has embraced these thoughts and formed a council to address private company reporting needs. That council (since its formation last December) has issued several proposals that would allow private companies to deviate from current reporting and accounting standards. The American Institute of CPAs (the “AICPA”) through its Private Companies Practice Section also has new ideas for private companies. It has developed the Financial Reporting Framework (FRF) for Small and Medium Sized Entities (SMEs). This framework can be utilized immediately for compilations, reviews or audits
set of financial statements issued under this framework meets their needs. The AICPA believes that many private companies have very few financial statement users. For example, companies that need audited financial statements to meet debt covenants (but no other purpose) might be good candidates for a set of financial statements under the new framework.
and is comprehensive (covering all aspects of the financial statements). It takes a huge step towards simplifying accounting and reporting for private companies. There are catches, though (of course). This reporting framework is not considered GAAP. It is a Special Purpose Framework. The term Special Purpose Framework replaces OCBOA (Other Comprehensive Basis of Accounting). You may be familiar with other types of OCBOA such as Cash Basis financial statements or Tax Basis financial statements. Users of the financial statements, therefore, will need to agree that a
The AICPA believes that this framework may be ideal for closely held businesses that have the following characteristics: • For profit • Without regulatory reporting requirements • Do not intend to go public • Not in an industry that requires highly specialized accounting • Is not involved in highly complicated transaction • Does not have foreign operations • Key financial statement users have direct access to management
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The framework makes some important deviations from GAAP. Including: • Historical cost is the primary measurement basis (say good bye to those crazy fair value measurement standards and disclosure requirements). • Disclosures are streamlined (management can tailor additional disclosures to meet needs) • Financial statements will more closely align with income tax returns (goodwill, for example, amortizes over the same life as tax and is not subject to impairment testing).
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• Options on accounting policies allow management to tailor accounting to their needs, such as: • Subsidiaries can be consolidated or accounted for on the equity basis • Equity or proportionate consolidation is available for joint ventures • Internally generated intangible assets can be capitalized (or expensed) • Fair value is still utilized by the framework in business combinations and certain types of investments, for example.
September 2013
The framework, which is available for free from the AICPA’s website, is comprehensive covering all aspects of the financial statement and classes of transactions. Though it is over 200 pages long, it is easily navigated and written with user friendly (plain English) terms.
gale moore can be reached at gmoore@singerlewak.com or 949.261.8600
r e g u l ato ry r e po r ti n g
Proposed Accounting Standards Update on the Definition of a Public Business Entity BY ELBERTA NIZZOLI | PARTNER
ENizzoli@SingerLewak.com | 310.477.3924
Summary: In August 2013, the FASB issued an exposure draft of a proposed Accounting Standards Update which clarifies the definition of a public business entity. This proposed Update would amend the Master Glossary of the FASB Accounting Standards Codification to include one definition of a public business entity for use in U.S. generally accepted accounting principles (“GAAP”), and it would identify the types of business entities that would be excluded from its scope. This proposed Update clarifies which nonpublic entities are within the scope of the guide for which the Board and the Private Company Council (“PCC”) would consider potential alternative accounting and reporting guidance within U.S. GAAP. The proposed definition also defines which entities would not be included in the scope. P ur p o s e o f Th e Prop o s e d A SU a nd Wh o I t
Af f ects: The Board has received inquiries from stakeholders about which entities will be within the scope of the draft Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies once it is finalized. Stakeholders have also inquired about the inconsistency and complexity of having different definitions within U.S. GAAP related to a nonpublic entity and a public entity. The definition of a public business entity would be used in determining the scope of new accounting and reporting guidance and would identify whether
the guidance would or would not apply to public business entities. Entities that are within the scope are those for which the Board and the PCC would consider potential accounting and reporting alternatives within U.S. GAAP. The proposed definition would exclude NFPs or employee benefit plans within the scope of Topics 960 through 965 on plan accounting and would not affect existing requirements. The Main Prov isions : A public business entity would be defined as a business entity that meets any one of the following criteria: • It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish (or does file or furnish) financial statements with the SEC, • It is required by the Securities Exchange Act of 1934, as amended, or rules and regulations promulgated under the Act, to file or furnish financial
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statements with a regulatory agency, • It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for the purpose of issuing securities, • It has or is a conduit bond obligor for unrestricted securities that are traded or can be traded on an exchange or an over-thecounter market, or • Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement. The guidance excludes NFPs or employee benefit plans within the scope of Topics 960 through 965 on plan accounting. 5 | SingerLewak
Dif f e re nce from Cu rre nt U.S. GAA P
W he n It Would Be Effe ctiv e :
Currently, the Accounting Standards Codification includes different definitions of the terms nonpublic entity and public entity. This proposed Update would provide one single definition of a public business entity for use in future accounting and reporting guidance. The proposed Update would not affect existing guidance.
The Board would not finalize the amendments in the proposed Update until the new definition of a public business entity is used in an amendment to a Topic in the ASC. The effective date of the amendments would be established concurrently with the first Update that uses the definition of a public business entity.
This proposed Update would provide one single definition of a public business entity for use in future accounting and reporting guidance
ELBERTA nizzoli can be reached at enizzoli@singerlewak.com or 310.477.3924
September 2013
financial reporting
Private Companies Get Another Reporting Model Choice By navneet dhaliwal | manager
NDhaliwal@SingerLewak.com | 310.477.3924
Ov e r v i e w :
Intangible s
The PCC in a joint effort with the FASB recently issued two proposals to address private company stakeholder concerns raised about the relevance and complexity of two U.S. Generally Accepted Accounting (“U.S. GAAP”) Principles, which are as follows:
The first proposal, PCC Issue No. 13-01A, Accounting for Identifiable Intangible Assets in a Business Combination, modifies the requirement for private companies to separately recognize fewer intangible assets acquired in a business combination.
• Accounting for intangible assets acquired in business combinations, and • Accounting for goodwill The PCC received significant input from private company stakeholders, who stated that the benefits of the current requirements under U.S. GAAP do not justify the related costs. Many of these stakeholders also expressed concern about the cost and complexity of estimating the fair value of certain assets and the current goodwill impairment test. In fact, the PCC learned that the current accounting for goodwill impairment provides limited benefits to users because users often disregard goodwill and goodwill impairment losses
Under current U.S. GAAP: in their analysis of a private company’s financial condition and operating performance. Likewise, users of private company financial statements told the PCC that the requirement for separate recognition and measurement of certain intangible assets from goodwill did not necessarily provide them with decision-useful information. The proposed accounting alter¬natives would be available to a company that is required to apply the acquisition method under Topic 805, Business Combina¬tions, except for publicly traded companies and not-for-profit organizations.
• Acquirer of business is required to identify and recognize separately from goodwill the fair value of intangible assets that (a) are separable or (b) arise from contractual or other legal rights. Under proposed private company alternative: • Acquirer of business would recognize only those intangible assets arising from noncancellable contractual terms or those arising from other legal rights. • For example, private company would not recognize fair value of customer-related intangible asset that are noncontractual, such as customer lists.
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• Fair value of intangible assets arising from noncancellable contract terms would be measured on contract’s remaining noncancellable term (regardless of potential contractual renewals). • Financial statements would continue to disclose nature (but not fair value) of all intangible assets that are identifiable. G o o dwi l l The second proposal, PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business Combination, would permit amortization of goodwill and a simplified impairment model. Under current U.S. GAAP: • Goodwill, which represents
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the residual asset in a business combination after recognizing all identifiable assets and liabilities of an acquired entity, is not amortized but is subject to impairment testing at least annually. • Impairment tested at the reporting unit level.
The second proposal would permit amortization of goodwill and a simplified impairment model Under proposed private company alternative: • Acquirer of business would amortize goodwill over the
September 2013
useful life of the primary asset acquired in a business combination, not to exceed ten years. • Primary asset is the most significant long-lived asset acquired in the business combination. • Goodwill testing for impairment only when triggering event occurs that would more likely than not reduce the fair value of a company below its carrying amount. • Goodwill testing for impairment at entity-wide level. • Step two of the current impairment test, which requires the application of a hypothetical purchase price allocation to calculate the good¬will impairment amount, would also be eliminated. Instead, the
goodwill impairment amount would represent the excess of the company’s carrying amount over its fair value.
The effective dates will be determined after the FASB and PCC consider stakeholder feedback on the Exposure Drafts (which was due by August 23, 2013). • Goodwill existing as of effective date would be amortized prospectively over its remaining useful life (not to exceed 10 years) or 10 years if remaining useful life cannot be reliably estimated.
Wh en would the accou nting alte rnativ e s be effe ctiv e ? The effective dates will be determined after the FASB and PCC consider stakeholder feedback on the Exposure Drafts (which was due by August 23, 2013). All feedback will be discussed at the September 30 to October 1, 2013 PCC meeting. The PCC will then consider changes to the original proposals and take final vote before submitting to the FASB for a final decision on endorsement.
to work with the FASB to determine whether and when to modify U.S. GAAP for private companies. For more information on the PCC, please visit the FAF’s website at AccountingFoundation.org.
navneet dhaliwal can be reached at ndhaliwal@singerlewak.com or 310.477.3924
Note on the PCC : The PCC was established by the Financial Accounting Foundation (“FAF”) Board of Trustees
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