Accounting standards in the United States continue to be overly complex and costly to comply with; they are often specifically geared to address the risks and needs of public companies. This has been the feedback provided by many private companies, including those in the restaurant industry, for the past few years. As a result, the private company community urged the Financial Accounting Standards Board to provide some sort of relief for private companies.
The initial step was the formation of a “Blue Ribbon Panel” in December 2009 to address how accounting standards can best meet the needs of users of private company statements with the ultimate goal of providing guidance to FASB on the standard setting process for private companies. After much diligence and deliberation, their recommendation was for FASB to continue to govern the standard setting process but to provide special consideration for private companies where appropriate. To assist with these efforts, the Financial Accounting Foundation, which is the parent organization of FASB, formed the Private Company Council (PCC) in May 2012 to work with FASB to determine whether and when GAAP alternatives are warranted and to provide recommendations on how to address. In addition, the PCC will advise FASB on the appropriate accounting treatment for private companies under active consideration. The PCC is currently in the process of conducting a review of existing GAAP to identify standards that should require reconsideration for private companies. This process includes various public hearings that are ongoing as well as reviewing various opinion letters prepared by practitioners and other users of private company statements. FASB is very involved throughout the process and provides specific comments to the PCC as to why a recommendation was not approved, in addition to any possible changes that may overturn the initial decision. FASB is eager to simplify the standard setting process, which is a welcomed change to the international convergence projects that consumed their agenda for the past several years.
The PCC and FASB have embraced this process including the issuance of three Accounting Standards Updates (ASU) through June 2014, which provide for specific private company exceptions. The ASUs are written into GAAP and thus the application of the private company guidance would not be considered a GAAP exception. A brief summary of the three issues standards follow:
FASB Accounting Standards Update No. 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. The simplified impairment model allows for testing at the entity or reporting level.
Interest Rate Swaps
FASB Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, gives private companies—other than financial institutions—the option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments. For qualified swaps, hedge accounting is automatically applied without having to comply with the many provisions of the derivative guidance which allows mark to market adjustments to be recorded through OCI, thus eliminating the volatility in the income statement.
Variable Interest Entities
FASB Accounting Standards Update No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, is based on a consensus reached by the PCC. The new guidance allows a private company to elect, when certain conditions exist, not to apply the consolidation guidance to a lessor under common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement. These types of arrangements are very common in the private community whereby the owner has a leasing company that leases property exclusively to the operating entity.
The PCC is currently deliberating a number of other proposals, with the most pressing being accounting for identified intangible assets. Under this proposal, the PCC states that an intangible asset should only be recorded if there is a discernible cash flow which would indicate the asset is capable of being sold or licensed independently. Under this definition, certain assets that are currently being treated separately (i.e., customer relationships, non-competes) would not qualify and would be included in goodwill. Other projects in which the PCC is actively involved are as follows: leases, stock-based compensation, and pension plans, among others.
Both the PCC and FASB have been very active and effective with this initiative over the past several months and we commend their efforts to address the needs of private companies. The issued standards clearly reduce the complexity in complying with the applicable guidance and therefore may reduce valuation and other compliance costs. It’s important for restaurants to understand these alternatives to determine if they are applicable and a viable option for their financial reporting needs. With so much consolidation happening within the restaurant industry, the private company exceptions should allow for a much more efficient process—a welcomed change for most.
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