In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-03: Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815). The FASB issued this ASU to address concerns raised by The Private Company Council (PCC) as to how recent accounting standards were impacting private companies that were electing a private company accounting alternative for the first time subsequent to the effective date.
There were concerns among private companies that if electing a private company accounting alternative at the effective date in an ASU could negatively impact the company. In addition, there was concern that some private companies may not be aware of the private company accounting alternative in an ASU until after its effective date, and could therefore miss out on the benefits of the private company accounting alternative.
ASU No. 2016-03 amends ASU No. 2014-02 (intangibles and goodwill), 2014-03 (derivatives and hedging), 2014-07 (consolidation and variable interest entities) and 2014-18 (intangibles in business combinations) to make each of the ASUs effective immediately by removing the effective dates in each ASU. In addition, it allows private companies to implement the ASU without assessing whether the private company accounting alternative is preferable under Topic 250, Accounting Changes and Error Corrections. This means private companies that were unaware of an accounting alternative will now be able to adopt the alternative without having to justify the preferability, which can provide significant cost savings. However, if a subsequent change is made to a private company accounting policy election, the company must follow Topic 250, and show justification that the change is preferable.
Prior to ASU No. 2016-03, private companies may not have applied the goodwill accounting alternative (ASU No. 2014-02) because they would have been required to apply the change retrospectively. However, this new update not only removes the effective date, but also provides provisions to allow private companies that elect the goodwill accounting alternative to apply the accounting alternative prospectively.
Additionally, private companies were not able to apply the simplified hedge accounting approach (ASU no. 2014-03) to existing swaps prior to ASU No. 2016-03. However, this new update not only removes the effective date, but also provides provisions to allow private companies to apply the simplified accounting approach to existing swaps upon initial election of this approach, but not for subsequent elections.
The amendments in ASU No. 2016-03 are effective immediately.
If you have any questions, concerns, or would like additional information on the aforementioned, please contact your HW&Co. executive.