The accounting and finance worlds seem to become more complex every day, whether that complexity is generated by government or industry standard setters, new products, or new markets. To combat this ever-increasing complexity, the Financial Accounting Standards Board (FASB), established the Private Company Council (PCC) in 2012.
The PCC was created to amend and simplify areas of accounting principles generally accepted in the United States (GAAP) that are considered challenging for private companies and that provide little value to readers of private company financial statements. These amendments are commonly called PCC alternatives.
The simplification of GAAP through PCC alternatives achieves two primary purposes. First, it makes GAAP much easier to understand for the readers of private company financial statements.
Second, the FASB recognizes that the value of this information to private companies is outweighed by the cost of implementing the rules. A necessary byproduct of the simplification is cost savings because less time is spent to understand and implement the rules, whether by private company staff or external accountants.
Current PCC Alternatives
Currently, four PCC alternatives have been codified:
- Accounting Standards Update (ASU) No. 2014-02, Intangibles – Goodwill and Other (Topic 350), Accounting for Goodwill. Private companies may elect to amortize goodwill over a period not to exceed 10 years rather than test it annually for impairment. The PCC’s proposal to allow the preferability test to be skipped in certain circumstances (discussed later in this article) would also allow private companies that voluntarily elected this alternative to initially apply it on a less costly, prospective basis. (Currently, a change in accounting principle must be applied retrospectively.)
- ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach. This allows nonfinancial institution private companies to elect an easier form of hedge accounting when they use simple interest rate swaps to secure fixed-rate loans.
- ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This option simplifies the consolidation reporting requirements of lessors in certain private company leasing transactions.
- ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This alternative exempts private companies from recognizing certain hard-to-value intangible assets when they buy or merge with another company.
One of the hurdles to implementation of PCC alternatives is the concept of “preferability,” which requires that private companies assess whether the PCC alternative is preferable to regular GAAP. Practically speaking, preferability is really as simple as asking the question, “Does it make sense for our organization?” The glitch in the current system is that there are specific windows for adopting these alternatives. If those effective dates are missed, Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, says that a company could be blocked from using the PCC alternatives.
In December, the PCC voted to remove the effective dates from the ASUs. The FASB then approved the PCC’s proposal, paving the way for an update to GAAP that would allow private companies to skip the preferability assessment the first time they elect a PCC alternative. It is anticipated that this update will occur in early 2016.
Implementation of PCC Alternatives
There are four key questions to ask when considering whether or not to implement a PCC alternative:
- Does the company fit the criteria in question? Generally speaking, all private companies can elect one of these simplified alternatives; however, there are still specific criteria for the facts and circumstances that will not apply to all companies. If a company’s staff is not comfortable interpreting GAAP, a certified public accountant who regularly works in this area should be consulted.
- Are there unintended consequences to the company that implementation might cause? At first glance, implementation seems like a great fit for all private companies. However, there are certain situations when implementation may actually be a detriment. One example might be future problems for private companies that are large enough to consider going public or merging with a public company. The private company would then have to roll back the PCC implementation in order to comply with regular GAAP. Other examples might include changes to the calculation of loan covenants, reduced share prices when considering private company value, or a narrower view of a set of companies that are owned by an individual or group.
- Who are the users of the financial statements? The focus here is on the external users such as financial institutions, sureties, potential investors, or current owners. Those users have the power to determine how the financial statements are presented because of the information they need. Are those users comfortable with the changes to the information presented in the financial statements, or will they balk at them or require additional information?
- Does implementation benefit the company’s accounting staff? Regular GAAP can require significant recordkeeping responsibilities. Implementation of a PCC alternative, while requiring a little more time on the front end, may create significant time savings through reduced recordkeeping. In addition, regular GAAP’s complexity may require assistance from an external accountant. Implementation may produce cost savings by reducing the time needed by an external accountant to perform attest services.
Once those factors have been considered, it is time to decide whether the PCC alternative in question should be implemented. Making the decision is an iterative process requiring the consideration of different people and groups.
Your external accountant should prove to be a good sounding board because he or she is likely to have experience with the PCC alternatives through work with other clients. Discussions should also be held with the known users of the company’s financial statements to determine whether they have objections or concerns about implementation. Dialogue with your company’s staff is also important to verify management’s understanding of the impact of this decision.
Overall, there is an investment of time and energy on the front end, but successful implementation should provide benefits that outweigh the upfront costs.
Companies that go through the steps outlined above should find implementation much simpler than if they make a snap decision. Once the decision is made to implement a PCC alternative, it is advisable to complete the process well ahead of when the users will need the financial statements. As with most things, preparation reduces complexity, lessens the stress of change, and also reduces the potential for incorrect implementation. An external accountant should verify correct implementation of the PCC alternative prior to issuance of the financial statements.
It is an encouraging sign to see simplicity in an accounting environment that seems to grow more complex all the time. The PCC alternatives provide private companies with the ability to simplify their accounting and reporting. While simplification can be beneficial, care should be taken to consider all of the consequences of implementing one of these alternatives. Communication is important throughout the decision and implementation processes. Enjoy the simplicity!