Wichita State University
FASB Update – Private Company
Michael Cheng
FASB Project Manager, PCC Coordinator
WSU Accounting & Auditing Conference
May 20, 2014
The views expressed in this presentation are of the presenter. Official
positions of the PCC and the FASB are reached only after extensive due
process & deliberations.
What We Will Discuss Today
The Private Company Council
Private Company Decision-Making Framework
Definition of a Public Business Entity
PCC Activities to Date
2
3
Private Company Key Events
FASB creates
Private Company
Financial Reporting
Committee (PCFRC)
2006
FAF creates
Standard-Setting
Process Oversight
Committee
FAF works with
AICPA & NASBA to
create Blue-Ribbon
Panel
2009
2010
FAF undertakes
nationwide
“listening tour”
FAF appoints
Trustees and staff
to “Working
Group”
Jan. 2011
Blue-Ribbon Panel
submits report to
FAF Trustees
FAF seeks public
comment on plan
to create PCSIC
Oct. 2011
May 2012
FAF establishes the
Private Company
Council (PCC)
4
Private Company Council (PCC) . . . Structure
FAF oversight
Private company
practitioners (4), users
(3), preparers (3)
Advisory body to FASB
Identifies, deliberates &
votes on proposed GAAP
alternatives for private
companies
5
PCC… Agenda Process
Identification
of potential
GAAP
alternatives
Pre-agenda
research on
potential
modification
Staff
analysis Private
Company
Decision
Making
Framework
PCC vote
on agenda
topics
(Supermajority)
6
PCC… Process
PCC Agenda
Decision
FASB final
endorsement
Deliberation of
staff analysis
and vote
PCC
re-deliberates
FASB
endorsement
Exposure Draft
FASB issues
final Standards
7
Endorsement Process and Voting
 PCC proposes GAAP alternatives
- Two-thirds vote required
 FASB endorsement by simple
majority
- FASB act within 60 days
- If FASB does not endorse, must
provide written notification to PCC
indicating changes that would result
in endorsement
8
9
Private Company Decision-Making Framework
Tool for PCC and FASB
ID & provide alternatives based on differential factors
 Number of users and access to management
 Investment strategies of primary users
 Ownership & capital structure
 Accounting resources
 Learning about new guidance
10
Private Company Decision-Making Framework
Tool for PCC and FASB
Where guidance differ between public & private (modules)
 Recognition & Measurement
 Display (Presentation)
 Disclosures
 Effective Date
 Transition Method
Apply to PCC look-back projects & ongoing FASB projects
11
PCDMF…Fundamentals
Assist in user-relevance and cost-benefit evaluations for
private companies under the existing conceptual framework
Intended to facilitate decisions & drive consistency
Fundamental approach retains or improves information
relevant to typical users
Reduce cost & complexity, but not adversely affecting
reporting of relevant information
12
13
Public Business Entity…Current GAAP
Definition: A Business Entity That Meets Any One:
Files or furnishes financial statements with the SEC (or is included in a
filing)
Securities Exchange Act of 1934 required to file or furnish financial
statements with a regulatory agency, other than the SEC
Required to file financial statements with a foreign or domestic regulatory
agency for the sale of securities that are not subject to contractual
restrictions on transfer
Has issued, or is a conduit obligor for, securities that are traded, quoted, or
listed on an exchange or an over-the-counter market.
14
Public Business Entity…New to GAAP
Definition: A Business Entity That Meets Any One:
It has one or more securities that are not subject to
contractual restrictions on transfer, and it is required to
prepare U.S. GAAP financial statements and make them
publicly available on a periodic basis.
15
16
PCC…Meetings
Previous Meetings
•
•
•
•
•
•
•
•
12/6/12
2/12/13
5/6/13
7/15/13
9/30/13-10/1/13
11/12/13
1/28/14
4/29/14
Upcoming meetings
• 7/15/14
• 9/16/14
• 12/11/14
17
PCC…Specific Projects
Goodwill (completed)
Interest Rate Swaps (completed)
Common Control Leases (completed)
Identifiable Intangible Assets (in process)
Pre-agenda research areas
Advising the FASB
18
19
Goodwill. . . Problem?
Stakeholder Concerns
Limited benefits to users
Users disregard goodwill
& impairment losses in
financial condition &
operating performance
Cost & complexity of
current goodwill
impairment test
20
Goodwill. . . Solution
Current U.S. GAAP
Final Alternative
 Do not amortize goodwill
 Test for impairment at
least annually or more
frequently
 Goodwill impairment test
 Amortize goodwill
 Test for impairment upon
occurrence of triggering
event
- At reporting unit level
- Two-step test
- Optional qualitative
assessment
 Goodwill impairment test
- At entity level or reporting
unit level
- One-step test
- Optional qualitative
assessment
21
Goodwill… Solution
Transition
 Amortize existing goodwill prospectively over 10 years
or less if the private company can demonstrate that
another useful life is more appropriate.
Effective Date
 Applied prospectively for existing goodwill and new
goodwill recognized in the first annual period beginning
after December 15, 2014, and interim and annual
periods thereafter. Early adoption is permitted.
22
Goodwill. . . Benefits of Alternative
Significant cost savings for many
private companies that carry
goodwill on their balance sheets
Amortization reduces likelihood of
impairments, private companies will
test goodwill for impairment less
frequently
23
Interest Rate Swaps . . . Problem?
Stakeholder Concerns
Difficult to obtain fixed-rate borrowing
Must enter into swaps to economically convert variablerate to fixed-rate borrowing
Lack expertise to comply with hedge accounting
Question relevance/cost of determining & presenting fair
value of swap for converting to fixed-rate borrowing
24
Interest Rate Swaps
Impact of
interest rate
swap
Current GAAP
PCC Alternative
No hedge
accounting
Hedge
accounting
Combined
instruments
(Not Finalized)
Simplified
hedge
accounting
(Final)
Income statement
Volatility in
interest expense
as result of
changes in FV
Interest expense
approximates
fixed rate debt
Interest expense
approximates
fixed rate debt
Interest expense
approximates
fixed rate debt
Balance sheet
Asset or liability
at fair value
Asset or liability
at fair value
Only disclosure
of settlement
value
Asset or liability
at settlement
value (or FV)
Other
comprehensive
income
No impact
Includes changes
in fair value of
effective portion
of hedge
No impact
Includes changes
in settlement
value (or FV) of
the swap
25
Interest Rate Swaps – Simplified Hedge
Accounting
Transition
 Private companies may apply either the modified
retrospective approach or the full retrospective approach
upon adoption.
 Existing swaps as of the date of adoption may qualify for the
simplified hedge accounting approach.
Effective Date
 Effective for the first annual period beginning after December
15, 2014, and interim and annual periods thereafter. Early
application is permitted.
26
Common-Control Leasing . . . Arrangements
Typical private company arrangement:
Owner
100% Interest
Manufacturing
Company
Debt
Bank
100% Interest
Pays Rent
Leases Land & Building
Leasing
Company
Mortgage
Bank
27
Common Control Leasing… Solution
 Lessees may elect alternative not to apply VIE
guidance when certain conditions are met.
 Not require VIE disclosures – instead require specific
information on Lessor entity.
Important Note – Not meeting the criteria above does not automatically
result in consolidation.
28
Common Control Leasing… Solution
Transition
 Full retrospective approach.
Effective Date
 Effective for the first annual period beginning after
December 15, 2014, and interim and annual periods
thereafter.
 Early application is permitted.
29
Common-Control Leasing . . . Solution
The “VIE Alternative” . . .
Reducing costs & complexity for
private company lessees that apply
VIE guidance
Useful lessor-related information for
users of private company financial
statements
30
31
Identifiable Intangible Assets . . . Problem?
Business Combination
 Some question that the requirement for separate
recognition & measurement of certain identifiable
intangible assets from goodwill does not provide users
with decision-useful information
 Cost & complexity:
- estimating fair value of certain assets, including some
identifiable intangible assets, e.g. customer relationships
32
Identifiable Intangible Assets . . . Solution?
Next Steps
 At April 29 meeting, PCC discussed
various alternatives, including:
‒ Recognizing & measuring only intangible
assets capable of being sold or licensed
independently
‒ Principle-based vs rules-based approach
 Directed staff to perform more analysis
and outreach
33
Definition of Public Business Entity (Phase 2)
. . . Problem?
Concerns
 Codification includes 5 definitions of a nonpublic entity,
3 definitions of a public entity, and 2 definitions of a
publicly traded company
- Resulting in a total of 7 unique definitions
 Could be confusing to identify scope
34
Definition of Public Business Entity (Phase 2)
. . . Solution?
Results of April 29, 2014 Meeting:
 Added definition of a public business entity to the PCC
agenda.
35
PCC . . . Other Issues
 Uncertain Tax Positions
 Development stage entities
- Prior research resulted in FASB
standard currently being issued
 Stock-based compensation
- Research on valuation concerns
36
PCC… Advising on FASB Projects
 Revenue Recognition
 Leases
 Accounting for Financial Instruments
 Going Concern
 Disclosure Framework
 Government Assistance
 Reporting Discontinued Operations
37
38
Staying in Touch . . . Providing Input
 Submit comment letters on proposals
 Email PCC on issues affecting you:
comments@privatecompanycouncil.org
 Outreach meetings
 Attend/watch upcoming PCC and FASB
meetings. Next PCC mtgs: 7/15, 9/16, 12/11
 Subscribe to the FASB Outlook
— www.fasb.org/fasboutlook
39
Questions?
40