Spring 2014 issue of Horizons

Simplified Hedge Accounting FASB Accounting Standards Update 2014-03, Derivatives and Hedging (Topic 815) gives private companies, other than financial institutions, the option to use a simplified hedge accounting approach to account for certain types of interest rate swaps that are entered into for the purpose of economically converting variable rate interest payments to fixed-rate payments. The swap agreement must meet a variety of criteria to qualify for the simplified hedge accounting approach. However, those requirements are generally present in most “plain vanilla” swap arrangements. Under this alternative, when a private company applies the simplified hedge accounting approach, the income statement charge for interest expense will be similar to the amount that would result if the company had directly entered into a fixed- rate borrowing instead of a variable-rate borrowing and an interest rate swap. Furthermore, the simplified hedge accounting approach provides a practical expedient to measuring the fair value of swaps by allowing the use of settlement value, which removes the consideration of nonperformance risk, which is the risk that the counterparty to the swap agreement would fail to fulfill its obligations under the agreement. This represents a simplification as this element of fair value is difficult for the reporting entity to determine. When utilizing a hedge accounting approach, the change in settlement value should be recorded as a component of other comprehensive income. Previously, companies not utilizing hedge accounting have recorded the change in fair value within the income statement. In addition, the approach allows for hedge documentation to be completed up until the date on which the financial statements are available to be issued instead of requiring that the documentation be completed concurrently at the inception of the hedge.

These characteristics are not all-inclusive and are not presented as a list of required characteristics an entity must possess in order to utilize the FRF for SMEs.

Three Updates to GAAP for Private Companies Subsequent to the AICPA’s release of the FRF for SMEs, the FASB issued three updates to GAAP that provide alternatives for private companies on accounting for goodwill, certain interest rate swaps and certain common control leasing arrangements. Each of these Accounting Standards Updates had been proposed by the PCC and subsequently endorsed by the FASB. These three updates incorporate into GAAP, alternative accounting treatments for private companies, should they choose to elect them. Goodwill Accounting FASB Accounting Standards Update (ASU) 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill , permits a private company to subsequently amortize goodwill on a straight-line basis over a period of ten years, or less if the company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill. Under this alternative, goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of a company (or a reporting unit) may be below its carrying amount. A private company that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the company level or the reporting unit level. An impairment loss, if any, represents the excess of the carrying amount of the entity or reporting unit over its fair value, which is a simplified impairment calculation over goodwill’s implied value calculation.

www.RubinBrown.com | page 27