As financial statement preparers approach the end of 2015, they should be aware of accounting rule changes and their effects on how to prepare 2015 financial statements.
For most professionals, the headlining changes for this year will likely be the standards issued by the Private Company Council (PCC). The PCC standards provide options for an alternative way of accounting under GAAP that are available to private companies. Three standards have been issued to date that are effective for the first time for calendar year 2015. Although standard setters are considering relaxing this rule, if the three standards are not voluntarily adopted by private companies before issuing 2015 financial statements, it will become much more difficult to transition to them going forward.
- Accounting for Goodwill – The first PCC standard (ASU 2014-02) addresses accounting for goodwill. Previous GAAP required companies to perform an annual impairment test of goodwill and record an impairment loss when there was a decline in fair value below carrying value. The PCC standard allows companies to amortize goodwill going forward over 10 years and avoid the impairment test (unless a significant change in the business leads you to believe the goodwill is impaired). This PCC alternative is applicable to existing goodwill as of the date of adoption of the standard as well as future goodwill.
- Hedge Accounting and Interest Rate Swaps – The second PCC standard (ASU 2014-03) simplifies the requirements for hedge accounting when a company has an interest rate swap on variable rate date. Lenders will frequently require companies to enter into a swap to “fix” their variable rate. The PCC standard is relevant when companies seek hedge accounting treatment for those swaps – that is, to record the change in the value of those swaps as an equity change rather than as income. Under the PCC alternative, the criteria to obtain this hedge accounting treatment are loosened and companies have a longer time frame in which to establish their hedge accounting policies.
- Related Party Leasing – The third PCC standard (ASU 2014-07) allows private companies to remove related party leasing entities from their consolidated financial statements. Previous GAAP often required a related party to be consolidated with an operating company when its purpose was to lease a building to that operating company. The PCC standard, if applied, would allow that operating company to remove that related party leasing entity from its consolidated financial statements (assuming certain criteria were met), leaving only the operating entity’s financial results to be reported on.
Another change for 2015 that will be relevant to all companies is the new accounting rule for reporting discontinued operations (ASU 2014-08). Standards setters noted the diversity in practice in reporting for discontinued operations, and also that some companies that went through routine disposals of business units were “tripping” into discontinued operations reporting when it was not decision-useful for investors. As a result, the new standard only requires discontinued operations reporting for disposals and planned disposals of operations that both represent a strategic shift for the company and will have significant impact on operations (measured by income, cash flows, total assets, or other relevant metrics).
Assessing Going Concern
Although it isn’t effective for 2015, financial statement preparers should also be aware of the new standard on assessing going concern (ASU 2014-15). Previously, the responsibility for determining whether a company would continue in operations for the foreseeable future was put upon the financial statement auditor. Under the new standard, management must assess the likelihood of whether the company will continue operations for the 12 months following the financial statement issuance date. This means that companies generally have a longer window to consider future liquidity events (i.e. debt refinancing and balloon payments) and their overall ability to meet financial obligations. New disclosures are required when there is substantial doubt about this ability.
In summary, there are opportunities available for financial statement preparers to reduce the complexity of their company’s accounting if they take advantage of them. And as always, there are new reporting rules to be aware of—consulting with your Machen McChesney advisors early and often will help the transition.
For more information on audit and assurance services, please contact Aaron K. Waller, CPA, at (334) 887-7022 or please feel free to leave us a message below.